A Fair Deal For Your Local – The MRO Way

Fair Deal for Your Local campaign set out how the market rent only option would be operated and how this shows it is the simple, moderate & gradual way to a fair split of pub profits

The Fair Deal for Your Local campaign has written to BIS Ministers setting out exactly how the BIS Select Committee solution to pubco overcharging, the ‘market rent only’ option would work in practice – and explaining that this shows that is it not only the only clear solution, but also a moderate, gradual solution that as well as leading to a fairer split of pub profits, would also allow the pubcos time to adjust their model, as it would come in practice over a number of years.

The letter, to Vince Cable, Secretary of State and to Jo Swinson, Minister for Consumer Affairs at the Department of Business, Innovation and Skills Department defines and details the market rent only option in practice setting out the process and the clauses that would be added to leases. This has not been done before, including by BIS officials who it seems may have been misunderstanding how the concept would be introduced and how it would work.

The letter sets out in detail exactly how the market rent only option (the solution proposed by the BIS Select Committee) would work in practice, activated at various ‘trigger’ events, including rent review, lease renewal, a significant alteration to the price of products and the sale of a pub. (The latter would insure that developers and others cannot exploit tied terms to evict a licensee, which is something that has proved a problem – which is why a market rent only option would also protect more pubs from closure by providing greater protection from development/change of use as well as increased profit to the pub business).

What this means is that the provision of a market rent only option, as well as being the only clear solution to the serious problem of pub owning companies overcharging tenants through high rents and beer prices, is also a moderate, gradual solution that would be brought in over a number of years.  

This means that the large pub owning companies will be able to change their business model – and crucially that they would then have to offer attractive, fair tied options to persuade their tenants to carry on buying beer through them – which as well as stamping out the current overcharging would also allow the large companies to adapt. Ironically, the market rent only option would also be the only option that would make ‘the tie’ work as it should. With the market rent only option available to licensees at rent review, renewal or another ‘trigger – the pubcos would offer attractive, fair tied options where rent really is lower and that included genuine partnership.

The letter also points out that the market rent only option means that the Adjudicator is only required to oversee breaches of the market rent only process, not to try to decide rental levels. So the market rent only option would be simple, effective and cheap – unlike expecting the Adjudicator to decide on rent levels without this being in place.

The letter has been signed by all ten organisations signed up to the campaign. These include the Campaign for Real Ale, the Federation of Small Businesses and the Forum of Private Business.

Commenting Simon Clarke, Fair Pint, said:

“The Market Rent Only option is the most simple solution, it is phased, it is self policing, the cost would be apportioned to the parties, as already provided for in the existing leases, saving the industry as a whole money, and, as referral to the Adjudicator would only be necessary in the event of failure by the parties to agree, it saves time and money.”

Clive Davenport, FSB Enterprise and Innovation Chairman, said:  

“FSB research shows that nearly 90% of publicans want a market rent only option, in other words being able to buy product free-of-tie with an independently assessed fair rent”.

“The letter to the Business Secretary sets out the practicalities of how this will work, providing more freedom for publicans and lower prices for consumers.  Our research project also demonstrated the economic boost, new jobs and training that would ensue, and we hope the Government listens and comes up with a strong statutory code that includes the market rent only option.”

Commenting Steve Kemp, GMB National Union, said:

“GMB members working in the pub industry are relying on the right decision to be made by Government. A decision hopefully which ensures that the days of exploiting publicans comes to an end and that publicans who run pubs can do so without fear of losing their livelihoods. It is time for true social justice for British publicans and the pub industry as a whole.”

Commenting Greg Mulholland, Coordinator of Fair Deal for Your Local and Chair of the All Party Parliamentary Save the Pub Group, said:

“It is clear that the obvious, simple solution to the longstanding and ongoing problem of pubco overcharging remains the BIS Select Committee solution, the market rent only option.

“What still does not seem to be grasped by BIS Ministers and officials is that this is also gradual and market based solution that as well as actually making the pubco tied model work as it should, would also be the least disruptive and cheapest.

“The Government needs to understand that the Select Committee were right and the market rent only option is not just the only solution to the pubco problem, but the only deliverable one. They must not avoid it on the basis on pubco misinformation and must do the right and commonsensical thing and introduce the market rent only option to rebalance pub profits and to make the beer tie work as it should.”

Commenting Val Spenser, Licensees Supporting Licensees, said:

“On behalf of all our members and tied licensees past, present and future the Licensees Supporting Licensees group completely endorse the principle and definition of a Market Rent Only (MRO) option.

“MRO presents a huge opportunity available for the current Government, where previous Governments have failed, to put financial life and social stability back into the Communities and local economies that Pubs support on a national scale.

“LSL implore this Government to endorse the MRO option as to be absolutely clear anything less would be seen as a failure of the consultation.  Failure would permit the continuation of the complete betrayal by Pubcos of the many hard working Licensees that we represent.  Licensees have suffered for far too many years the wholesale Pubco abuses that the present system has allowed unfettered throughout this industry. It needs to stop.”

Rt. Hon. Vince Cable MP
Secretary of State for Business, Innovation and Skills
1 Victoria Street
London
SW1H 0ET

25 October 2013

Dear Vince,

CC: The Chair of the Business Innovation and Skills Select Committee, Adrian Bailey MP

As you might expect there has been much effort put into confusing the relatively straightforward solution to the pub industries problems – a Market Rent Only option.

Even now some Ministers, MPs and officials seem to be working under the illusion that the Market Rent Only option is a complex and radical idea.

A “tied licensee” is obliged to acquire products from the company that owns the pub, such as beer, in addition to paying rent. The idea is that if the price of ‘tied’ products are higher than the open market price then the tied rent is lower, to ‘countervail’ the disadvantageous pricing structure, i.e. the tied licensee should be no worse off than if they were free of tie.

Put simply, the Market rent Only means a tied licensee can choose whether to remain in the same tied agreement, paying extra for tied products and a lower rent to compensate for them or swap on to an agreement under which they simply pay a market rent and acquire products from any source if they consider the tied rent is not fairly reflecting the tied product prices.

Quite the contrary to opening a potential floodgate of applicants, it is proposed that this ‘option’ could be activated at various trigger events – not, as has been suggested, at any time during the agreement period, for example:

(a) at rent review or lease renewal;

(b) if the Pub Company makes a significant alteration to the price at which it supplies tied products to the licensee;

(c) if a pub owning company obliged to honour the Statutory Code propose a sale of their property interest (ensuring developers cannot exploit tied terms to evict a licensee).

Dispute on interpretation of any of these events should be capable of referral to the proposed industry Adjudicator.

The tied model is in itself regulatory, placing a burden and red tape upon the tied licensees, if it is to remain and survive, along with our nation’s pubs, a mechanism needs to be in place curtailing the abuse the model and encouraging it to operate fairly.

It is too naive to expect this to be delivered by a periodic formula simply comparing a pub licensee’s profitability both on a tied and free of tie basis. The difficulty is that rent assessments are usually at 5 yearly intervals whereas tied product price increases can be more than one a year. A 5 yearly reassessment allows a party, of a mind to abuse the opportunity to manipulate the dominant position afforded to them by the tied agreement and simply increase product prices, to gain on the swings what they lost on the roundabout.

One question the Government sought responses on is whether their commitment of ‘fairness’ and ‘a tied tenant being no worse off than if they were free of tie’ could be delivered by offering tied licensees a free of tie option, a recommendation originally put forward by the Business and Enterprise Select Committee in 2009 and re endorsed by the Business and Innovations committees of 2010 and 2011, chaired by Adrian Bailey.

The free of tie option proposed by four successive All Party Parliamentary Select Committees is the Market Rent Only option, not some spurious forced property interest swap but simply an option for lessees, not pubcos, to determine and consider their tied agreement and sever it if it is not fair.

HOW IT WORKS

The tied licensee’s requirement to purchase products from the pub owning company are called ‘Purchasing Obligations’. It is perfectly simple to sever these provisions from the main document leaving the remainder in force. The possible eventuality of just such an event as being proposed in the Governments Public Consultation – a Market Rent Only option – has been pre-considered by the pub owning companies and their agreements already contain provisions triggering a rent review (rent recalculation to reflect changing circumstances) to open market rental value if the tied terms are rendered unenforceable. Given the latter there is no necessity to alter lease or tenancy agreements in any way.

A typical provision would read:

(Example provision from a pubco lease – summary)

Changes in the Tie

We may give you notice in writing at any time (and more than once) to:

(a) release you from all or any of your purchasing obligations under clause 18.1(Purchase of Drinks) ; or

(b) vary any of Your purchasing obligations in clause18.1 (Purchase of Drinks) in order to take into account any law which may make the relevant obligations unenforceable; with effect from the date in that notice and We may then choose to review the Rent to the Market Rent by serving a Review Notice on You and if any Rent Concessions are still applicable at that time they will cease to apply from the date of Our notice to You releasing or varying Your purchasing obligations.

(Example provision from a tenancy – summary)

The pub owning company may vary the provisions of the Purchasing Obligations in order to take into account any enactment whereby any of the provisions might be or become, in whole or in part unenforceable or restricted in scope or effect in the event of such a variation the rent firstly reserved shall be reviewed in accordance with the agreement terms.

There is no call for unnecessary red tape, in fact a licensee choosing the market rent only option releases the pub owning company from red tape. The Governments statutory code can have a simple to understand clause indicating that any pub owning company, it is proposed with more than 500 pubs, must offer their tied licensees the option to have a market rent only agreement.

PRACTICAL APPLICATION

There is a misguided view that a whole new process would be necessary. adding cost and complication, this is quite incorrect. MRO can ‘piggy back’ existing legal mechanisms and frameworks. Most of the necessary procedures are in place, either in the existing leases or legislation (Landlord and Tenant Act 1954 Part II). All that is needed is a right to the MRO option, which can be in the statutory code at certain trigger points, and a form of appeal, beyond what exists, to the Adjudicator, should there be any doubt over the proper application of the statutory code or the principle that a ‘tied tenant should be no worse off than if they were free of tie’.

As an example of procedure:

At rent review, the tenant would indicate they wish to consider MRO, either party could make a rent proposal, both parties would establish their own rental value, in exactly the same way they do now under the current rent review mechanism. Either party at this point might offer terms on a MRO and tied basis. The parties would negotiate (market rent) and if they can not agree the issue can be refer to a third party, again all this is already set out in the existing lease including the appointment of a third party surveyor. If there is still dispute following the third party decision, on application of the statutory code and its spirit, then the Adjudicator would be a final authority of appeal (this is a provision that statutory code has to offer). With the complication of tied product pricing as compared to free trade pricing removed from the equation the whole valuation process is simplified, thereby shortening the review process, saving time and money. The spectre of an appeal to Adjudicator (outside the influence of the pubcos) ensures it is absolutely in the interests of the parties to agree without having to refer.

For renewal – again the procedure is already laid out in the Landlord and Tenant Act 1954 Part II – either party can serve notice of the lease renewal, the practical procedure is much the same as above only the matter is referred to court (rather than a third party surveyor) in the event the parties can not reach agreement. Again the opportunity to appeal to the Adjudicator needs to be incorporated into the statutory code as a final level of appeal.

This is how the system can operate using existing procedures and mechanisms. Timing, court procedures, appointment of third parties and apportionment of costs are all present in existing leases and/or legislation. All that is needed is the right to an MRO option and a right to appeal to a superior authority – the Adjudicator – where the application of the statutory code is in question.

Should a tied licensee choose to implement the option they would be selecting to no longer be subject to purchasing obligations of any form and therefore the sum paid to the pub owning company would be Market Rent Only like the majority of other normal commercial agreements in high street bars, restaurants, shops, hotels, offices and warehouses.

Once effective, and the rent established either by agreement, independent third party or Adjudicator, just as it is in the usual way through rent review terms already contained within the agreement or in lease renewal terms already contained in legislation (Landlord and Tenant Act 1954 Part II), the pub owning company would issue a deed of variation (see draft attached), as they are already required to do under the existing agreements to record the rental variation, but with the additional provision stating that the licensee is no longer bound by the Purchasing Obligations of the original agreement.

CUTTING RED TAPE

Currently, there is a certain amount of administration involved in operating the tied model for pub owning companies, establishing orders, purchasing, collecting, storing and delivering products. Should a licensee choose to opt for a market rent only option the pub owning company would be released from their administrative obligations – thereby reducing their red tape.

The current proposal by Government deliberately seeks to ensure that smaller pub owning companies, like the regional family brewers, are not directly affected by the statutory code unless they expand to ownership of over 500 pubs.

Most pub companies and brewers claim that their tied rents balance the higher tied beer and product prices. All the Market Rent Only option seeks to achieve is that licensees are able to monitor that claim themselves and opt out if it proves untrue. Ironically, the existence of such an option ensures that the tied agreements can continue to exist if operated fairly and reasonably as was first intended.

With the exception of the Market Rent Only option, no solution has been tabled that will so effectively restrain manipulation of the tied model and stops the inevitable continued destruction of the country’s pub estate. Whilst we have undoubtedly lost some 10,000 pubs in the last 10 years, the Freehold owner occupied sector has actually grown, demonstrating that, if given a chance, previously tied pubs can be viable.

Yours sincerely,

Fair Deal for Your Local

Mike Benner, Chief Executive, Campaign for Real Ale (CAMRA)

Clive Davenport, Enterprise and Innovation Chairman, Federation of Small Businesses

Alex Jackman, Head of Policy, Forum of Private Business

Steve Kemp, GMB National Office

Paul Naylor, Unite The Union

Simon Clarke, The Fair Pint Campaign

Val Spencer, Licensees Supporting Licensees

Inez Ward, Justice for Licensees

Chris Wright, Pubs Advisory Service

Bill Sharpe, Guild of Master Victuallers

Greg Mulholland MP, Co-ordinator of the Fair Deal for Your Local Campaign and Chair of the Parliamentary Save the Pub Group

CC: Chair of the BIS Select Committee, Adrian Bailey MP

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