Final pubs code: Triggers, waivers, costs and timescales

The Government has set out its response to the pubs code consultation.

Among the changes to the draft code are the clarification of a “significant” amount that could be invested into a pub by the pubco in return for a waiver of the publican’s right to opt for the Market Rent Only option.

The Government has also clarified its position on franchised pubs and set out the fees for arbitration. Introducing the long-awaited Government response, small business minster Anna Soubry said she had been forced to make “some tough decisions” and accepted that “parties on different sides of the debate will find they disagree with some of the conclusions”.

She added: “It is my job to strike a balance which ensures that tied tenants of the largest pub-owning businesses are no worse off than free-of-tie tenants, that there is fair and lawful dealing between pub-owning businesses and their tied tenants and that all this takes place without placing undue burdens on businesses.

“I hope all parties will agree that, on balance, this package of measures works to the benefit of our pubs sector and represents a fair outcome for all. I ask everyone in the pub business to get behind the Pubs Code, and work with the Pubs Code Adjudicator, so we can ensure that this country’s pubs continue to thrive.”

Kate Nicholls, chief executive of the Association of Licensed Multiple Retailers, welcomed the report, saying: “Uncertainty about the details of this important piece of legislation has had a significant and adverse impact on business planning and investment across the sector. The Government’s response brings some very welcome clarity which will give operators the confidence to make the decisions they need and allow the sector as a whole to move forward.”

The Government’s response says:

Costs

The Government has set the fee for arbitration at £200 with the maximum cost the tied tenant would pay to a pubco set at £2,000.

The maximum financial penalty the Adjudicator would be able to impose following an investigation is 1% of the annual UK turnover of all group undertakings. The Government said it did not expect the maximum penalty to be levied unless there had been “a serious or persistent breach of the code”.

Parallel rent assessments

As set out in part two of the consultation, the Government has ruled out including a parallel rent assessment in the code but has incorporated elements of it into MRO.

The Government said the code “now ensures the tenant can consider tied and MRO offers in parallel”. It will state that the tenant has no obligation to accept the outcome of a tied rent assessment until they have a result of any parallel MRO process and vice versa. No deadline will be placed on the conclusion of the rent assessment to allow the tenant to compare offers.

Regulation 21(10) specifically provides for the recovery of rent where the new tied rent is agreed after the rent review date. The tenant can however elect to remain tied or chose to accept the MRO offer at any point in the process.

Rent increases

The Government has also scrapped its initial policy of allowing tenants to request MRO at rent review only if their rent had gone up. Tenants will instead be able to request an MRO offer whatever happens with their rent.

Waiver in return for significant investment

The code will allow for pubcos and tied tenants to agree to defer the point at which MRO is available at a rent assessment and renewal, in cases where the pubco makes a “significant qualifying investment”. The minimum threshold for this has been set at 200% of the pub’s dry rent and deferred period to a maximum of seven years.

The Government has clarified the criteria for a qualifying investment, removing the need for it to require a structural change or planning permission. However, the pubco must demonstrate to the tenant a link between the investment and an increase in trade and profit. Contractual obligations are excluded.

Triggers

The Government’s response sets out what it considers a “significant increase in price” and therefore a trigger for MRO.

This will be defined as when the annual percentage increase in the price paid by the tenant exceeds the annual percentage point change in the relevant ONS Price Index by a tolerance specified in the Pubs Code. The tolerances are:

For beer - 3%

For alcoholic drinks - 6%

For other tied products and services - 20%

The Government said: “These changes lengthen the price comparison period (from 6 months to 12 months) and reduce tolerance percentages, compared to the consultation proposal. The measurement of the price increase will be against goods and services purchased by the tenant, as the calculation of the impact of prices on the tenant should not be influenced by items the tenant has no interest in. The cost comparison will be on a like-for-like unit cost basis and based on the prices paid by the tenant for the same items a year apart.”

Tenants will also have the ability to request an MRO offer following a “significant impact on trade”. This arises when the pubco is presented with written analysis of trading forecast for 12 months or more which demonstrate a trigger event has occurred.

The Government has made changes to the significant impact test to define the trigger event as one that either:

a) has an impact only the tenant’s pub; or

b) if it has an impact on more than one pub: i)

has a local but not a national impact; (Changes to local infrastructure; changes to local employment long-term changes to the local economic environment; local environmental factors)

ii) or can be shown to be a direct consequence of a change in the tie imposed by the pub-owning business – e.g. the removal of a popular product.

Timescales

The Government found there was no consensus among those who replied to the consultation as to whether MRO-compliant should provide for five-yearly rent reviews. Consequently, the code has been revised to provide that an MRO-compliant tenancy must be for at least the remainder of the existing tenancy in relation to all MRO events save renewal. A maximum duration is not specified.

The time frame for a pubco to provide a tenant with a rent review has been extended from 14 days to 21 upon receipt of the request.

The time for parties to appoint an independent assessor will be extended from 14 to 28 days.

The period for the Pubs Code Adjudicator to appoint the independent assessor will be extended from 7 days to 14 days.

The deadline for tenants to provide evidence to the independent assessor will be extended from 14 days to 28 days and will apply to both the tenant and the pub-owning business.

The 70- day negotiation period will reduce to 56 days.

Referral to the independent assessor will be allowed from 28 days after the start of the negotiation period in relation to the MRO rent only.

On the subject of the information that would be required to be given to an independent assessor to work out the MRO rental figure, the Government said trading history for the preceding three years should be provided from both parties. There will be no requirement for pubcos to provide comparisons with other tied pubs in the area or local commercial or property values. Pubcos will have to describe, but are not required to quantify, SCORFA.

Information requirement

The code will require pubcos to ensure that a tenant has received independent advice before preparing a business plan but does not specify the qualifications of those providing the advice.

Non-arbitrable provisions

The training of BDMs and the duties to appoint a compliance officer and produce an annual compliance report will both be parts of the code that will be non-arbitrable.

Franchises

The Government has set out the following as confirmed on exemptions for franchise agreements:

- The definition of reasonable piloting with respect to franchises is piloting in more than one outlet for at least a year.

- Some information requirements for pub franchise agreements that ordinarily apply to rent proposals (from which pub franchise agreements are exempt) are required to be supplied to the franchisee.

- Pub franchises will not be exempt from pubs entry training and business plan requirements.

- We have retained the criteria that: (i) the franchisor is required to teach the business format to the franchisee and (ii) the franchisee should have the right to sell the franchise.

- Stepping of the turnover share is permitted as long as it is clear at the beginning of the agreement and the tenant’s share cannot drop below the initial level specified in the agreement.

- Pub-owning businesses in franchise arrangements with their tied tenants will be able to make separate charges for goods and services provided to the franchisee. This is a change from the consultation positon to make sure that franchisees and pub companies can benefit from any new products or services developed after they had signed the agreement. The franchisee is free to decide whether or not to receive these new products and services.

The following is confirmed on exemptions for short agreements:

A consecutive series of tenancies-at-will or short agreements that cumulatively add up to less than 12 months are taken together for the purpose of the Code exemption. This is consistent with the commitment to exempt TAWs and short term agreements from the rent provisions of the code.