Scottish Pubs Code Consultation 2: analysis report

Executive summary

Background

The Tied Pubs (Scotland) Act 2021 requires the Scottish Government to create a Scottish Pubs Code for 'tied pubs'. Tied pubs are pubs which are owned by a pub-owning business and leased to a tenant. The Scottish Pubs Code will govern the relationship between tied pub tenants and their pub owning businesses. The Scottish Government is currently consulting with stakeholders to develop the Scottish Pubs Code for tied pubs. A written consultation was issued in two parts, to provide the sector with early certainty on key aspects of the code. The first written consultation covered the Market Rent Only lease and guest beer agreement aspects. The purpose of this report is to present the findings from the second written consultation. This consultation covered a range of aspects of the code as follows:

• pre-entry requirements,
• rent review process,
• repairs and dilapidations,
• flow monitoring devices,
• gaming machines,
• arbitration, and
• financial penalties for non-compliance.

The second consultation was hosted online on Citizen Space and was live from 17 March to 12 May 2022.

Consultation response and sample

Thirty responses were received in total, including 16 from organisations and 14 from individuals. Respondent types included:

• 6 tied pub tenants (5 with one tenancy, 1 where the number of tenancies was unclear)
• 6 pub-owning businesses
• 1 brewery
• 7 representative organisations
• 1 other organisation
• 5 consumers

Four did not provide an answer regarding respondent type.

Findings

As in the first consultation, there was some divergence in views between pub-owning businesses and tied pub tenants. Pub-owning businesses' main concerns were around proposed triggers for rent reviews. They often felt these were not well enough defined and posed a potential risk to their business in terms of certainty around future rental income.

For tied pub tenants, concerns were mainly around fees and expenses in relation to disputes. The key challenge that emerged was pitching expenses at a level that discourages vexatious claims but not genuine ones and is acceptable to tenants and businesses alike.

Pre-entry requirements

• Respondents of all types agreed that pub-owning businesses should be required to provide information about pre-entry training to tenants. The key concern was that information provided to new tenants about the pub's past and prospective future performance should be genuinely impartial and accurate. A past tendency was noted for pub-owning businesses to provide over-optimistic forecasts.
• Most proposals in the consultation relating to tenant business plans were supported across respondent types. The exception was around taking into account the tenant's business plan when negotiating the lease. Some pub-owning businesses strongly disagreed (three out of six). Some felt that tenant business plans should not supersede what they viewed as long-standing industry practice whereby profit and loss reports for new tenants are prepared in accordance with the Royal Institute of Chartered Surveyors (RICS) guidelines. Also they wanted clarity on liabilities and obligations that might arise for the business if they had to take into account the tenant's plan for example if the plan forecast a loss in the first year, would the pub-owning business have a responsibility to mitigate that?
• From the tied pub tenants' point of view, the priority was access to impartial, consistent and accurate information and advice around drawing up a business plan. It was felt this would benefit everyone by enabling plans to be based on realistic and reliable information. Financial information provided to tenants needed to be detailed and quite granular in the view of some tenants, covering items such as accurate sales data, historical rents, any previous financial support, utility costs, staffing costs (broken down to each staff role) and photographic evidence of the condition of premises on entry to provide clarity in any future disputes.

Rent review process

• The profit and loss forecast emerged as an issue on which tied pub tenants and pub-owning businesses took different views. For tenants and their representatives, they wanted the forecast to be fully transparent (including the pub-owning business's projected profit based on the proposed rent) and based on actual figures as far as possible. Pub-owning businesses however were not keen to guarantee profit and loss forecasts and stressed the difficulty of making forecasts.
• Tied pub tenants felt there was a need for more information on industry benchmarking and how it is used to calculate the rent. Some were concerned about the quality of industry data. They wanted actual sales and costs data to be used if possible and felt over-reliance on industry data risked a 'one size fits all' approach to reviewing and setting rents.
• Overall, most respondents supported the proposal to require RICS guidance to be taken into account when preparing the rent assessment statement. Some tied pub tenants however felt that RICS surveyors were sometimes too closely linked to pub-owning businesses.
• Overall, most respondents supported proposals regarding circumstances where a rent review can be requested. However, pub-owning businesses were more likely than others to have reservations. Their main concern was that including the proposed potential triggers for rent reviews sought to introduce a non-contractual obligation without evidence or an impact assessment.
• Most agreed with the proposed changes in circumstances that would trigger the right to request a rent review, but again pub-owning businesses were more ambivalent. They wanted to see clear definitions around some of the changes for example what exactly would count as a 'change to local employment' significant enough to trigger the right to request a rent review?
• Most across all respondent types agreed that tenants should be able to request a rent review for existing leases, but pub-owning businesses were less supportive than tied pub tenants regarding new leases.
• Tied pub tenants agreed that a legal right to request rent review was workable alongside contractual rent review rights, but pub-owning businesses tended to disagree. Tenants felt the legal right was necessary to counter a perceived imbalance of power in the landlord's favour. Pub-owning businesses were put off by the potential cost and complexity they felt this would entail for them.
• Most agreed with the proposed time periods for rent reviews (rent assessment statement should be provided within 4 weeks of a request, and the statutory rent review process should take no longer than 12 weeks). Tied pub tenants were especially supportive as they were keen to prevent the processes from being drawn out by landlords, which they felt was a risk.
• Views were mixed on when to allow disputes to be referred to the Adjudicator. Some felt that other avenues should be exhausted first in order to avoid the risk of overburdening the Adjudicator with cases, whereas others felt that not allowing early access to arbitration risked building in long delays to the dispute resolution process.

Repairs and dilapidations, Flow Monitoring Devices and gaming machines

• Dilapidations was generally acknowledged as a long-running source of tension between tenants and landlords that needed to be addressed. Pub-owning businesses were keen that the arbitration process should safeguard against cases where unscrupulous tenants are potentially looking to avoid their obligations around dilapidations and repairs. Tied pub tenants, on their part, highlighted instances of dilapidations bills being used unfairly, in their view, against tenants by landlords in the past.
• Flow Monitoring Devices were viewed with reservations across respondent types. There was a general recognition that they were not always accurate and it was generally felt that action should not be taken against tenants purely on the basis of their readings.
• It was mostly felt that gaming machines should be covered by the Code. Tied pub tenants especially did not want to see rents proposed that included gaming machines, citing concerns about refusal to accept landlords' machines being used as an excuse to increase rent. Pub-owning businesses were less likely to report that this was an issue.

Arbitration and financial penalties, fees and expenses

• Half of respondents did not think that 1% of turnover should be the maximum penalty for a pub-owning business or group that has failed to comply with the Code. Those who disagreed felt it should be higher in order to be more of a deterrent. Some tied pub tenants stressed it should not be linked to turnover as pub-owning businesses could theoretically arrange their accounts in a way that divided their turnover streams, thus reducing liabilities. They also wanted stricter penalties for repeat violations.
• For pub-owning businesses operating across jurisdictions, the preference tended to be that penalties should be based strictly on the turnover of the relevant part of the business only i.e. the division running the pub business in Scotland, not the turnover of the organization as a whole.
• The proposed £250 fee for submitting a dispute to arbitration was broadly acceptable across respondent types. For most, the key was to have a fee that discouraged vexatious cases but not genuine ones.
• Regarding tenant expenses where arbitration results in an award in favour of the landlord, views were split along respondent lines. Pub-owning businesses were most in agreement that tenants should be required to pay towards arbitration expenses, tied pub tenants less so. Regarding a limit to expenses payable by the tenant, again the issue was striking a balance between discouraging vexatious cases and encouraging genuine ones.
• The picture was similar regarding views on whether tenants should be required to pay expenses in excess of any ordinary limit where an arbitrator has decided that the pub-owning business has no liability on account of the dispute having been submitted for arbitration by the tenants deliberately to cause annoyance. Pub-owning businesses tended to believe they should as a deterrent, whereas tenants were less supportive.