The introduction of the pubs code, and crucially the Market Rent Only (MRO) option, represents the biggest shake-up of the leased and tenanted pub sector in a decade. But, as the Government begins to search for a suitable candidate for the £130k-a-year pubs code adjudicator, how is the sector preparing for the reality of legislation? James Wallin talks to industry experts to ask if MRO will stand for Meltdown or Real Opportunity.
Six months ago they were the only three letters on the lips of anyone in the tenanted and leased sector – but as the dust settles around the MRO debate, is it any clearer what impact it will have?
On both sides of the debate frustration is boiling to the surface that the finer details of the pubs code have yet to be revealed. This week the Government launched its search for a pubs code adjudicator but the crucial legislation they will oversee remains undefined. The Government promised the industry a consultation on the draft code by the autumn but with Parliament now in recess and the race on to implement the legislation by next June, there are concerns about adequate time for discussion.
In the meantime the industry continues to prepare for a period defined by the pubs code and the Market Rent Only option. Free-of-tie estates, franchises and a host of innovative agreements are being trialled and evaluated with keen interest.
The future of the tenanted sector will be examined in forensic detail at M&C Allegra’s Tenanted Pub Summit on 10 November at the May Fair Hotel, London, when we will ask the question – does MRO stand for Meltdown or Real Opportunity.
Ted Kennedy, chief executive of 170-strong tenanted pub group GRS, is adamant that the end of the beer tie is long overdue. The GRS estate is now around 75% free-of-tie and no new tied leases are offered.
He said: “Finally the sector is evolving. The tie is ridiculous. It’s a feudal system that just makes no sense in the modern market.
“The free-of-tie relationship is a much more adult relationship. The conversation is about commerciality – making that pub as profitable as it can be. We are not trying to flog them beer they don’t want or spoonfeed them.
“Ultimately I think the MRO will prove to have been a positive thing for the tenanted sector because it has forced companies to act. What you will probably see is that a lot of people who are saying ‘we’re under the 500 threshold so we’ll keep on doing what we have always done’, will be forced to adapt because the best operators won’t look at them. All the good operators will go where they get the best deal and the best site. It won’t take them long to see they are best off with free-of-tie and the whole sector will have to catch up with that.”
However, Brigid Simmonds, chief executive of the British Beer & Pub Association, thinks the demand for taking up MRO has been overplayed.
She said: “It’s more the threat of it being there that is the destabilising bit of this legislation because it creates what no one wants - uncertainty.”
She agrees with Kennedy that longer leases in the tenanted market were already beginning to disappear.
She said: “Since the mid- 2000s the money being made selling on those leases has declined. They work in the right pub and right situation but we’ve already seen in community pubs that they aren’t really suitable and that the shorter term tenancy or an alternative agreement suits that situation better. “
On the impact of free-of-tie leases, Simmonds said: “I’m not sure that under free-of-tie there really will be a relationship between the company and the licensee. You won’t have the support that currently exists. If you look at Wellington, it’s a commercial lease just like it would be with a shop. The lessee will need more money in advance, have to pay rent quarterly and be operating under a proper commercial lease.”
For Kate Nicholls, chief executive of the Association of Licensed Multiple Retailers, the pubco model is already showing signs of becoming “more nuanced rather than the one size fits all”, but says the long-term lease still performs a function.
She said: “In the short term, we are seeing brakes being put on discussions around investment and a move to shorter length agreements and I think that will remain a defining feature of the market going forward - in the same way that the last couple of decades have been defined by the long lease. But we do not believe that will be the entire story. There will still be a place for long term leases for multiple lessees with a proven track record - simply because they will be able to deliver good returns for the landlord. Enterprise’s new venture with Rupert Clevely is a case in point.”
She added: “There are significant overheads and complexity in the running of a managed business and while this will be a feature of the market longer term, this is part of a cyclical change within the sector. Many of the major pub companies have already reviewed their estates to identify those which can be taken into management and it will not suit every pub in every location. So we don’t foresee a wholesale transfer of assets.”
Simmonds said: “The way Marston’s franchise model works you can see that it works much better for the bigger pubs because with any kind of managed agreement there are much greater costs so you need to ensure the bigger returns. Franchises will become attractive and they are an element of dealing with the skills base you have out there.
“But what MRO will do is make it more difficult for those entrepreneurial licensees who want to become multiple operators to find their way in the industry. The tie has been very effective for that.”
Simmonds has said she does not consider it vital for the pubs code adjudicator to have knowledge of the sector.
She explained: “It’s absolutely vital that the adjudicator is independent and I think if you insist that they have knowledge of the pub and brewing industry and they know something about valuation of pubs, you are limiting your field. I think someone with a surveyor’s background would be well suited to this role but I don’t think it’s essential they are familiar with the pub sector.”
Nicholls said: “It is vital that that person is not only independent but seen to be independent. They need a good understanding of rents, property law and the context of the landlord tenant relationship.”
Limited information is available about the role but the Government has already made clear that the adjudicator will be responsible for suggesting to the Secretary of State the amount of levy pub companies will pay.
Kennedy said: “That’s a ridiculous situation. For the same person to be in charge of telling the pub companies how to behave and then deciding how much they need to pay for that privilege is a very odd situation.”
Simmonds said: “I don’t think there’s a conflict in the adjudicator setting the budget but I do think the Government needs to be clear with industry on how much this is going to cost, as it is now going to be funded by five companies.
“As an industry we are seeing conditions improve but this is a fragile recovery and the last thing we need is an exorbitant cost imposed on us. This is all at a time when the industry can point to practical examples of how it has worked to reform itself.”
The debate over the future of the tenanted and leased sector will continue at our Tenanted Pub Summit. We will be examining the plethora of operating agreements being trialled the sector, taking a closer look at how Enterprise, Punch and Greene King are preparing for the future and discussing how the tied tenancy investment model is likely to evolve. We will also highlight some of the best operators you’ve never heard of.
For more information contact Emily Croft on 01293 846578 or emily.croft@mcallegra-fs.com
