10th February 2010
A response from the Fair Pint Campaign to the BBPA's; 'UK Pub Industry Framework Code of Practice for Tied Tenanted and Leased Pubs'.
1. The Business and Enterprise Select Committee’s report on Pub Companies published in May last year found alarming evidence indicating there may be serious problems caused by the dominance of the large pub companies. The committee highlighted the imbalance in bargaining power between pub owning companies and tenants as one of the major causes of the problems in the tenanted pub sector.
2. The BBPA promised to respond to the concerns of the Committee with what they claimed would be a robust code of practice.
3. The details of the BBPA’s framework code of practice, which BBPA members will be expected to incorporate into their own codes of practice have now been published. . It does nothing to rebalance the economic relationship between tied tenants and their landlords. As the Select Committee showed in their report last year, the abuse of this relationship has led to tenants facing unsustainable costs for tied products combined with levels of rent, and a means of reviewing it, which make it practically impossible for tenants to make a profit from their businesses.
4. Pubcos already have codes of practice and these were promised to be strengthened in response to the criticisms of the industry in the 2004 Trade and Industry Select Committee report. However, these codes of practice have not prevented the kind of exploitative behaviour which was highlighted by the Businesses and Enterprise Select Committee’s report last year.
5. The BBPA code is therefore a wholly inadequate response to the criticisms of the sector made by the Select Committee given that it totally ignores the key areas of the Committees’ concern. The fact that the BBPA has chosen to respond to the Select Committee with a set of proposals which would more or less leave the status quo untouched shows that the BBPA’s biggest pubco members are totally unwilling to consider any meaningful change in the structure of the industry. Their primary concern appears to remain their ability to extract short-term income from their pub estates in order to meet their debt obligations.
6. Even in the limited number of areas where the framework does seek to improve on the status quo the value of the commitments are limited because the framework and the codes of practice of which it will form part are not independent, not enforceable, and have no meaningful sanctions in place to deal with transgression. .
Commentary on the Framework
7. Rather than a new code of practice this is merely a framework which members of the BBPA will be expected to incorporate into their existing codes of practice. Most of the bigger pub owning companies have codes of practice which, as the Select Committee’s report highlighted, have not effectively protected the rights of tied lessees. Even now there is continuing evidence that pubcos 'disown' their codes of practice whenever it suits them to do so.
8. The BBPA document states that because the code of practice will be agreed by both lessee and landlord the code will be binding and may be used in evidence in court. We are concerned about the lack of clarity on this point. Rights and obligations between lessees and their landlords are set out in the lease, which will remain the primary agreement. We therefore believe that any change to the legal obligations of either party should be enforced by a deed of variation to the lease.
9. As well as setting out obligations for landlords, the framework seeks to impose obligations on tenants. For example, those related to the assignment of leases. By restricting the freedom of lessees to sell their interests, the framework seeks to impose new onerous conditions on lessees. In return the lessee gets nothing from the landlord apart from the promise to fulfil obligations which they should be doing anyway. Because of these additional, and onerous, obligations on tenants it is likely that many will be advised not to sign the code and as such the BBPA's members will be able to step away from their obligations. This is a step backwards.
10. The BBPA document states that the code of practice is not capable of being altered unilaterally and that future revisions will be carried out after consultation with representatives of tenants and lessees. The obligation is only to consult and it is clear that tenants’ representatives will not have a veto. The two groups mentioned in the document, the British Institute of Innkeeping (a training provider) and the Federation of Licensed Victuallers Associations are not representative of all tenants and are financially linked to BBPA members. It is highly questionable as to whether they should be in a position to agree things which might place new obligations on tenants.
11. The BBPA framework might only be changed after consultation, but there is nothing in the document which suggests that individual company codes of practice, of which the framework will form a part, cannot be changed without consultation.
12. We are very concerned that as the framework code of practice will absorbed into each company’s individual code of practice, there is a risk that companies will include other onerous obligations on tenants as part of their codes. Lessees will have to consider very carefully what they are agreeing to and would be wise to seek legal advice before signing the new codes of practice. However, if lessee refuses to agree to sign the code of practice the landlord will not be obliged to fulfil his obligations, which would undermine the effectiveness of the BBPA framework still further. (repeat of earlier but worth leaving in to reiterate this key point.).
13. We believe that any code of practice should be fully independent. It should be mandatory on all pub owning companies and not on tenants and should include meaningful sanctions for those who breach it. The BBPA framework meets none of these requirements.
14. Improving the training of people of people entering the tied pub sector forms a key part of the framework document. We agree that people should only enter any business agreements once they have attained a good understanding of what is required to run that business and a full understanding of what they are committing themselves. For too long the BBPA and its members have marketed their business model as a 'low cost entry' scheme. Experience and cost normally form sensible barriers to entry to any normal, commercial sector.
15. However the Select Committee’s Report highlighted that the major problems faced by tenants were due to the imbalance of the relationships between pub companies and their tenants not the knowledge and capability of tied publicans. A focus on the training required for those entering the industry seems to be a long way from addressing the key concerns of the Select Committee which was the way in which pub companies run their businesses. We say that training is important in any sector but fear that it is being used cynically in this case as a distraction from the main issues.
16. The problem that most tied publicans face is that they enter an agreement with a pub company where the implication is that agreement will be one of partnership. Only when they have signed up to the agreement do they realise that the power of pub companies to increase the price of tied products almost at will, and to manipulate the rent valuation system, means that their business becomes unviable. Pre-entry training, honestly and comprehensively delivered, might persuade some people not to take a tied pub, but it will not bring to an end the power of pub companies to use the tie to increase their profit from beer and other product sales after agreements have been entered into - forcing once viable businesses into failure.
17. The requirements on pre-entry training are of little value because the requirements can be waived at the company’s discretion. The criteria set down for waiving the requirements, which are if the pub company believes that the potential tenant is in a position to rely on their own judgement seems broad enough to potentially include most new entrants into the market.
Terms of Business
18. The framework sets out requirements about the information pub companies are obliged to supply about terms of business.
19. Pub companies are obliged to supply a price list and to explain which products are tied and which are free of tie, as well as the discounts which will be available to tenants. These seem to be requirements which are so basic as to be meaningless as it is difficult to consider how companies could have a commercial relationship with their tenants without providing this basic information .
20. The framework obliges pub companies to price match like for like any insurance policies, which are identified by the tenant/lessee.
21. We don’t believe that this will prevent pub companies overcharging for cover. Getting a comparable lower quote will be difficult for tied tenants as brokers will know that tied tenants are not free to purchase cover. There is also scope for companies to make the requirements of insurance so restrictive to make it impossible for tenants’ to find cheaper quotes.
22. We believe that tenants should be able to purchase their own cover with the only restriction that the cover fulfils a number of basic requirements set down by the landlord and that the landlords interest in the property is noted in the policy.
23. The framework document states that pub companies need to provide basic information about AWP machines. The document sets out that details of how the landlord/tenant share of the machine income will be assessed should be provided to the tenant.
24. The fact that BBPA member companies have not even being willing to consider getting rid of the AWP tie, which can’t be justified for any other reason other than it affords pub owning companies the opportunity to extract more income from their estates, is disappointing. It shows that pub companies are unwilling to even make the smallest changes to the relationships with their tenants which could in anyway improve the fairness of the division of pub profits.
25. We believe that the machine tie should be scrapped. This was the recommendation of both the Trade and Industry Select Committee Report in 2004 and the Business and Enterprise Select Committee report last year. We believe, that the AWP market is an area of the pub sector which believe could easily operate in a free and fair way.
26. The document states that companies’ codes of practice need to describe their policy with regard to opportunities for improvements and refurbishment and the implications for rent, but sets out no obligations about what these polices ought to be.
27. The requirement simply lays out the legal principles which are clearly accepted in property law. It is not a concession. Even at the present time, with the BBPA promising changes, Fair Pint continues to receive evidence of BBPA members trying to 'land grab' at rent review, regardless of the law and regardless of the clarification that has been issued recently by the RICS.
28. Companies will be required to develop a protocol setting out the terms under which flow-monitoring equipment may be installed and any further prima facie evidence available
Protocol on Flow Monitoring Equipment.
29. Annex A to the document sets out in general terms what pub company protocols on flow monitoring equipment could contain. These are only suggestions, as there seems to be no requirements for protocols to address each of the issues or requirements about how companies should go about ensuring fairness in the use of such equipment.
30. The Select Committee’s report and a report conducted by an independent laboratory for Fair Pint have made it clear that the accuracy of flow metering equipment is questionable. Despite the claims of pub companies, it was made clear that the flow meter could not distinguish between beer and water used to cleanout lines.
31. The BBPA's members use flow monitoring equipment as evidence for where a breach of the tie is suspected and to levy charges on tenants. We believe that this use of the equipment falls under the definition of use in trade and therefore should comply with weights and measures legislation with its accuracy being certified by Trading Standards. If not it should be removed from tenants' premises or used only for information purposes for the operation of the premises by the tenant.
32. Pub Companies should acknowledge the fact that leases do not give them the power to levy fines on publicans for alleged breach of supply contracts. Charges should not be taken from tenants’ bank accounts in contravention of the rules governing the Direct Debit scheme. Oral and written evidence to the Committee confirms that the Brulines system is certainly inaccurate, possibly unlawful and certainly being used to intimidate pub tenants.
33. The framework sets out obligations for landlords to provide basic information about the pub premises and the obligations under repairing leases, but this is meaningless as the obligations go no further than things that competent landlords would be expected to provide anyway.
34. The document describes the role of the RICS in drawing up guidelines for rent assessments. Surprisingly, the document seems to seek to place obligations on RICS which is not a party to the agreement.
35. The agreement states that the rental assessment ought to be based on the law and that the tenant ought to be told how the rent is assessed. We believe that it is reasonable to assume that rent assessments should be carried out in a lawful way and that basic information ought to be supplied to lessees in any case. Therefore, this is no change from the status quo
36. In response to the 2004 Trade and Industry Select Committee Report, pub companies promised to update their codes of practice to ensure the assumptions used in rent calculations where realistic, but, as the Business and Enterprise Select Committee discovered in their report last year, this didn’t happen. The lack of sanctions to this framework means that there is every reason to believe that these promises will be not be ignored again.
The position of AWP income in rental valuations
37. Whilst the fact that the code of practice makes it clear that AWP income ought to be above the divisible balance. This would end the totally unfair practice of
38. tenants being forced to surrender up 50% of the AWP profit to their landlord as part of the machine tie and 50% again of that remaining profit given that the income is included in the divisible balance. We believe that the only fair way to deal with AWP income is to end the machine tie entirely, which was the recommendation of both the 2004 Trade and Industry Select Committee and the Business and Enterprise Select Committee last year.
Taking account the cost of tied products
39. The framework creates an obligation on companies to use the relevant tied price for products when assessing the fair maintainable trade and the divisible balance, should ensure that rent assessments take account of the cost of tied beer when assessing rents. However, the lack of detail on how other costs are calculated means that rent assessments will still be open to manipulation. The agreement makes no mention of the principle that the tied tenant should be no worse off than a free of tie tenant. This should be the legal basis for assessing tied rents and has been accepted by the RICS. The failure to include this principle in the framework to be adopted as part of pub companies’ codes of practice leaves the possibility open for pub companies to overcharge for rents. This will mean that tenants will have to bear the cost of dispute resolution by a Chartered Surveyor if their pub company chooses to ignore this principle.
40. We welcome the removal of upward only rent clauses, but we believe that these clauses should be removed by deed of variation rather than simply a pledge not to enforce it. In this way tenants can be sure that the arrangement will be binding on a pubco's successors in title. It has come to our attention recently that some pubco leases include provisions whereby only the pubco can initiate a rent review. It is meaningless of pubcos to offer an end to upwards only rent reviews if the effect of other clauses that are not amended is that a rent review does not have to take place at all.
41. We believe that RPI indexation should also be removed from leases. Apart from the exceptional period last year, RPI tends to increase. The increase in general consumer prices is totally unrelated to the performance of pub businesses. We believe that all rents should be allowed to rise and fall depending on an accurate assessment of the profitability of the pub and the application of the principle that tied tenants should be no worse off than if they were free of tie.
42. There is nothing in the agreement which makes it clear that when rents are set the costs of running a pub should include the right of tenants to earn a salary from their pub businesses or the right for them to pay a salary to a manager if they don't run the pub themselves, the cost of either being rightly deductible from the divisible balance.
Disclosure and Transparency
43. The framework document states that the pub company will provide a shadow profit and loss account in all good faith based on reasonable assumptions and drafted by a properly competent individual.
44. There is a lack of clarity about what responsibility the pub company bears if the assumptions used by the pub company turn out to be inaccurate.
45. We welcome the suggestion that tenants’ attention ought to be drawn to benchmarking reports. Whilst this might help some inexperienced tenants, this information is already freely available to all tenants.
46. The document states that the same kind of profit and loss account should be provided at rent reviews and lease renewals, as well at the commencement of new tenancies. However, as explained above a clear outline of the assumptions used for setting rents were promised in response to the Trade and Industry Select Committee Report in 2004, but this didn’t seem to change the behaviour of pub companies and the way in which they set rents.
47. We welcome the fact that the document makes it clear that rent review clauses will be capable of upward and downward reviews. However, the document isn’t clear that this should mean the removal of RIP indexation in rent reviews, which are upward only rent review clauses in all but name.
48. The pledge to ensure that goodwill is disregarded in line with RICS guidance and most contractual arrangements is welcome, but this is a basic requirement which should be accepted already. This is not a concession.
The Pub Independent Rent Review Scheme
49. We have welcomed the principle of the PIRRS scheme, but it is important that the scheme is fully independent and has the trust of tenants.
50. The fact access to the PIRRS scheme will be made available to tenants is welcome, but we are concerned that the PIRRS scheme is already being subverted by pub companies with the addition of a new appeal mechanism which pub companies can use if they are unhappy with the outcomes. The current drafting in relation to the PIRRS scheme makes it clear that the pubco will retain an option to revert to arbitration if unhappy with the outcome of the PIRRS scheme but that would not be an option for the tenant. See below:
22. Irrespective of the terms of the lease the landlord grants the tenant/lessee the right to elect for a referral to the PIRRS scheme and agrees to be bound by the expert valuation delivered through the PIRRS scheme. This will not remove the right to arbitration but the tenant/lessee will waive such a right if the option to refer to the PIRRS is taken.
51. The idea of the PIRRS scheme is to give quick and affordable resolution for tenants who are in dispute with their landlords. We are concerned that the new powers of pub companies to appeal findings against them will means extra costs for tenants and many will be unable to afford to challenge these appeals.
52. The framework sets out a number of examples of business support which can be available to tenants, such as access to training, licensing advice, business management advice, brand promotion, maintenance of dispensing equipment, outlet promotion and signage, procurement benefits, rating advice. A footnote to the document makes it clear that these are just examples and pub companies are not bound to provide the support listed.
53. In most cases the support has to be paid for and could be purchased on the open market at a lower cost. Some of the examples of support are available to free of tie tenants at no cost from drinks suppliers who are keen to market their products in pubs.
54. We believe that so called countervailing benefits cannot be counted as such unless they are agreed explicitly to by the landlord and lessee as part of the lease, and the value of the support is quantifiable. In most cases, examples of support are of little value to tenants or are actually onerous conditions especially where publicans are obliged to purchase suport from their landlord which is freely available elsewhere.
Material Changes/Exceptional Circumstances
55. The document sets out the requirement that company codes will establish as protocol for dealing with requests for assistance from any competent tenant or lessee arising from business difficulties beyond their control.
56. Most pub companies already include this in their codes of practice, but it is still very difficult for tenants to access meaningful support in these circumstances. The requirement sets out no obligations for companies to provide support or any definition of what a competent tenant might be. This gives pub companies plenty of leeway to ignore these requirements.
Assignment of Leases
57. Surprisingly, this section seeks to impose obligations on tied tenants who are not party to the agreement. The agreement is between the BBPA, the BII and the FLVA. These bodies only represent a small proportion of tied tenants. We do not believe that this agreement should place obligations on publicans.
58. The framework seeks to impose a new duty on lessees when the wish to assign their lease. The intentions behind this is to ensure that all entrants to market can be said to have demonstrated an understanding of how tied pub businesses work. However, the requirements on the assignor will come at a cost. This has the effect of skewing the economic imbalance between tied tenants and pub owning companies yet further against the interests of publicans as their freedom to leave the sector by assigning their leases will be restricted.
59. The document requires that the assignor must ensure that the assignee has complied with pre-entry training and has obtained qualified professional advice. Whereas the document allows pub companies to ignore these requirements at their digression, it is unclear that assignors will have the same rights.
60. The proposals conflict with contractual obligations and common law. The landlord has an obligation not to unreasonably withhold or delay license to assign. The current view of the Court is that once a proper application for license to assign has been received then the landlord should give a decision in days rather than weeks. It will only be reasonable to withhold consent for reasons recgonised readily in the Court or stipulated in the lease. If the license is withheld unreasonably then the tenant may apply to the Court for a declaration and the damages may be awarded against the landlord if the tenant has suffered a loss due to the landlord's unreasonable delay.
61. The document states that pub companies will have to provide an early breakdown of dilapidations to lessees who are seeking to assign or surrender their lease, and advise whether fixtures and fittings will be purchased.
62. This seems to be a pretty basic requirement and it should be expected that this would happen as a matter of course. There are no requirements on pub companies to ensure that calculations of the cost of dilapidations are fair and reasonable.
63. Current experience in the market shows that pubcos may be inappropriately seeking to use the assignment process, and the necessity for them to give consent, to secure works to the premises that would not be considered in law to be dilapidations. Where the original term of the lease is 7 years or more and 3 years remain unexpired the tenant can seek relief against the effect of an interim schedule of dilapidations.
64. The document states that companies will set out how it will deal with any request for surrender of leases, but sets out no requirements about how the companies should go about this.
Business Relationship/Development Managers
65. The framework states that company codes will have to set out provisions and commitments governing the competence and future progression for BRM/BDMs. However, it sets out no requirements about what these ought to be.
66. Companies will be obliged to have a procedure to deal with complaints and an mechanism to deal with disputes. In most cases companies claim to have these mechanisms already. There are no details about what these procedures ought to be and whether they will be independent.
67. In the same way, the document states that codes of practice will set out the role of BRM/BDMs and the support and professional guidance they will provide, but there are no further requirements about what kind of support this might be.
68. Companies will be obliged to make their ‘policy on restrictive covenants clear’. This is meaningless as there are no requirements about what company’s policies should be or for them to provide any explanation of their policy.
69. There is a requirement that company codes of practice should explain procedures for complaints and dispute resolution and states that resolution of complaints should be at a higher managerial level than the initial decision. Most pub companies already have a mechanism for complaints to be taken to regional managers, so this requirement is simply describing what most companies claim to do anyway.
70. It is clear from the document that the there will be no effective sanctions and no independent dispute resolution mechanism for complaints from tenants.
71. The framework states that the adoption of codes by each company ‘provides an adequate procedure for the resolution of differences’. This is clearly not the case as the mechanisms within existing codes of practice have been shown to be inadequate in dealing with disputes.
72. The framework does set out a mechanism for lessees to complain to the BII if they feel that they have not being treated fairly by the mechanisms within the company codes. It explains that the “BII or the FLVA will pass on this information to the company concerned and use its good offices to ensure, as far as possible, that there has been no misunderstandings, or personality issues, that are standing in the way of a more fruitful dialogue between the company and the lessee or his representative.”
73. It is therefore clear that there will not be any effective mechanism for dealing with disputes between companies and their tenants. Given the instances of bullying and intimidation in the relationships between companies and their tenants highlighted in the Select Committee’s report last year, it is highly unlikely that the a tenant would complain to the BII or the FLVA. This is because it would mean having their identity exposed to the company they are complaining about in the knowledge that neither the BII of the FLVA has any sanctions at its disposal if the company wishes to ignore the complaint.