The Government has today officially launched the first part of a consultation into the pubs code, focussing on the market rent only (MRO) option.
The Department for Business, Skills and Innovation wants responses by 14 December on one of the two key principles of the code – that a tied tenant should be no worse off than a free-of-tie tenant.
The document reveals the Government’s stance on a waiver from the MRO option for pub companies that invest significantly in their estate.
It says the Government “does not discern a consensus among pub-owning businesses on whether investments in their tied pubs generally see a return within five years or whether they expect larger investments to have a longer return on investment period”.
The consultation document sets out the Government’s view that for investment periods of five years the pubco would be able to offer to invest in a tied pub and in return vary the terms of the term of the agreement.
It says: “The effect of such a deal is that the right to an MRO option would not then be available to the tenant until the next rent assessment, as provided for in their amended or new agreement, unless one of the other eligibility criteria for MRO is met (a significant increase in price, or an event beyond the tenant’s control which has a significant impact on the level of trade).”
The report also suggests that the pubs code should allow the maximum period between a tied tenant’s entitlement to a rent assessment – at which point they are also entitled to an MRO offer – to be extended beyond five years, by agreement, if there is a significant investment.
In this case the Government is suggesting providing a qualifying criteria for the investment, imposing a limit on the length of the waiver period, and requiring other conditions to be met. Where an investment meets the qualifying criteria there would then be no entitlement for the tenant to a time–linked rent assessment until the waiver period ends, and therefore no right to be offered an MRO option until then.
The report says it does not appear appropriate to specify a fixed minimum amounts for investments but instead that the amount that qualifies as significant would be an amount relative to each pub. The draft code has used the figure of 100% or 200% of the total amount payable by the tenant to the pubco, taking into account wet and dry rent.
The consultation document also discusses the proposal to require pubcos to offer parallel rent assessments.
It says: “Having considered the provisions of the Act and the options for implementation, the Government has now concluded that there is no need for PRA. PRA was always envisaged as a method of delivering transparency that provided an alternative to a compulsory right to go free of tie.
“Requiring pub-owning businesses to provide both PRA and MRO assessments would add complexity to the operation of the Code and would impose significant additional burdens. Nor would it be a simple task to merge the two procedures – as PRA works on a ‘bottom up’ basis, demonstrating the value of various tied benefits to the profitability of the pub; whereas MRO involves a straightforward ‘top down’ assessment of the commercial rentable value of the pub.”
The consultation also seeks comments on what should class as a significant increase in price – one of the triggers for MRO. The Government has proposed that definition would be five percentage points above any increase in the wholesale price.
The document also makes it clear that both tenants and pubcos should be allowed to refer MRO disputes to the adjudicator.
Reaction
The Parliamentary Save the Pub group called the consultation document “deeply flawed”.
It accused the Government of redefining the concept of MRO “in a way that is not what the House of Commons voted for on 18 November 2014”.
It said: “The triggers which Fair Deal For Your Local campaigners managed to get inserted into the Act have been removed so MRO is only triggered if the dry rent is increased beyond inflation at rent review.
“The Save the Pub group has also said that, in line with the campaign that saw the Small Business Bill amended on 18th November, the market rent could and would only be established by an independent assessor, not the pubco, and on the basis of a free of tie rent in current trading conditions in that location.”
Chairman Greg Mulholland said: “This is an attempt to make the concept of market rent only something which it is not and which is not what the House of Commons voted for. The draft code will need to be substantially changed so the proper definition of MRO is understood and the right to trigger it is based on the trigger points set out in the Small Business Act. There is clearly still a lot of work before we get a code that hardworking publicans will welcome.”
Brigid Simmonds, chief executive of the British Beer & Pub Association, said: “There is a large amount of detail to be studied in these proposals, but I do welcome that the Government appears not to be proceeding with parallel rent assessments, which we always argued strongly would be too costly and complex to operate.
“We also welcome proposals to allow for an MRO waiver in return for a significant capital investment. Over £200m is invested by BBPA members in their leased and tenanted pub estates, each year. It is essential that this investment continues.
“We will be responding in detail as we do need to work very closely with Department of Business, Innovation & Skills, and tenants’ representatives to make the legislation work in practice.”
Association of Licensed Multiple Retailers chief executive Kate Nicholls said: “This has been a polarising debate and the ALMR has continually emphasised a pragmatic and moderate approach. We have been working closely with BIS over the summer to ensure a workable solution for businesses and to secure investment across the sector, from both landlords and other sources, to secure funding for lessee investment and will continue to make the case in these consultations. Following this we hope that Government will set out the details of the Code implementation in a timely fashion to provide the sector with some degree of certainty going forward, particularly for those going ahead with rent reviews.”
Business Minister Anna Soubry said: “Pubs are the lifeblood of so many of our towns, villages and high-streets, playing a vital role supporting our local economies. It’s not right that some tied pub tenants are unfairly overcharged by their landlords and the Pubs Code will help ensure they get a fair deal.
“I’m looking forward to hearing from pub companies and tenants on these important proposals to put the industry on the strongest possible footing.”
Breakdown
The remit of this section of the consultation covers the following:
- describes the circumstances in which a rent assessment under the terms of the Code will occur;
- sets out the circumstances that will trigger the MRO option, how the MRO option will work and how disputes in relation to the procedure will be resolved;
- explains how the Government proposes to permit a tenant to waive (or postpone) their right to a rent assessment – and therefore the right to request an MRO offer – in return for a significant investment in their pub;
- explains why the Government has decided not to introduce the right for a tenant to receive a parallel rent assessment.
The second part of this consultation – to be published next month – will cover the remaining elements of the Pubs Code.
It will seek views on :
- the type, timing and frequency of information to be provided to tenants by their pub -owning businesses – including the provision of rent proposals to prospective tenants and tenants who are renewing their agreements;
- repair and maintenance obligations under the Pubs Code;
- the types of agreement, such as genuine franchises, tenancies at will and short-term agreements of a defined length that will be outside the scope of some or all of the Code;
- what happens to terms in agreements that are inconsistent with the provisions of the code;
- enforcement of the Code – including the Government’s proposals for the fee to take a case to the Adjudicator, how costs should be apportioned and which provisions will be arbitrable by the Adjudicator
- the maximum financial penalty that may be imposed following an investigation;
- the way that companies related to a landlord company (eg subsidiaries and parent
companies) may be treated for the purposes of enforcement;
- when a tenancy ends or when the rent assessment is concluded, how extended Code protection works when a pub is sold to a company outside of the Code
To read the consultation, click here.
