Scottish Pubs Code and related regulations: business and regulatory impact assessment

2. Purpose and Intended Effect

Background to the Scottish Pubs Code Regulations 2024

2.1. Tied pubs are owned by a pub-owning business and leased to a tenant. It is estimated at May 2023, that there are just under 700 tied pubs in Scotland^[1] and at least 10 pub-owning businesses^[2]. For the purposes of modelling in this BRIA we have assumed that there are 700 tied pubs in Scotland. Based on estimates and industry data, tied pubs represent 16% of Scotland’s total licensed premises [3].

2.2. Tied pub tenants must buy some or all of their products and services ("the tie") from the pub-owning business or someone nominated by the pub-owning business. Ties can include, for example, beer and spirits, and tied products and services are often charged at a higher cost than on the open market. Income from tied drinks is often referred to as ‘wet-rent’ and forms part of the pub-owning businesses’ income from a tenanted pub, with the other part being normal rental income (known as the ‘dry rent’). In return, tenants sometimes pay lower ‘dry rent’ than the market rate and receive other support from the pub-owning business which can include providing business support for tenants, training to licensees and their staff, and investment in maintaining or improving pubs.

2.3. The tie can also be viewed as a profit and risk-sharing mechanism. Broadly, the tenant will pay more ‘wet rent’ when demand and sales of beer are strong and will pay less ‘wet rent’ when demand is weaker. For the tenant this means operating a pub has lower entry costs, lower fixed costs and less downside risk compared to alternative models. For the pub-owning business the risk sharing element of the tie makes getting new tenants easier by reducing upfront cost, whilst not necessarily reducing their overall rental income depending on the success of the business. Crucially, under the tie, both the pub-owning business and the tenant has an incentive to increase sales of beer and other tied products.

2.4. Concerns about fairness in the relationship between tied pub tenants and their landlords led to the UK Government creating a Pubs Code and a Pubs Code Adjudicator for tied pubs in England and Wales in 2016. The UK Government identified that there were issues with, for example, some pub-owning businesses not informing tenants of their rights. The UK Government also found that the tie itself gives more control to the pub-owning business, as they are able to maintain profits, in the context of market fluctuations, through making frequent changes to the beer prices to protect ‘wet rent’, whilst the ‘dry-rent’ remains more consistent. The UK Government pointed to the asymmetry of information and resources between tenants and pub-owning businesses as a possible factor contributing to an unfair relationship between tenant and landlord. The legislation applies to pub-owning businesses owning 500 tied pubs or more, as concerns were concentrated on the larger pub-owning businesses and their tenants in England and Wales.

2.5. Similar concerns about fairness were raised in Scotland despite a Scottish voluntary code of practice being in place and signed up to by a majority of pub-owning businesses. In 2020, the Tied Pubs (Scotland) Bill (“the Bill”) was introduced by Neil Bibby MSP as a Member’s Bill. The aim of the Bill was to regulate the relationship between tied pub landlords and tenants through the introduction of a statutory Scottish Pubs Code and the appointment of a Scottish Pubs Code Adjudicator.

2.6. The Scottish Government agreed to support the Tied Pubs (Scotland) Bill in December 2020. This was in response to the evidence put forward at Stage 1 of the Bill, the UK Government’s review of the Pubs Code and Pubs Code Adjudicator in England and Wales, and the likelihood that legislation would be required at some point to implement the Economy, Jobs and Fair Work Committee’s recommendations on the Bill. The Tied Pubs (Scotland) Act 2021 was passed unanimously by the Scottish Parliament on 23 March 2021 and became an Act on 5 May 2021^[4].

2.7. The purpose of the Tied Pubs (Scotland) Act 2021 (“the Act”) is to regulate the relationship between tied pub landlords and tenants through the introduction of a statutory Scottish Pubs Code and the appointment of a Scottish Pubs Code Adjudicator. The Adjudicator will oversee and enforce the code. The legislation promotes fairness and equitable treatment within tied pub lease agreements. It covers all tied pubs and pub-owning businesses in Scotland, regardless of the size of the pub-owning business.

2.8. Implementation of the Act was due to be completed by 6 May 2023, but this was delayed because of legal challenge to the Act by initially three and then two pub-owning businesses by way of judicial review. The challenge was on the basis that the Act was not within the legislative competence of the Scottish Parliament. Alongside the legal challenge, the pub-owning businesses successfully sought an interim interdict order preventing the Scottish Ministers from making or laying any SSIs under the Act. Lord Harrower’s Opinion was published on 9 December 2022 and found that the Act was within competence. This judgement was subject to appeal, which was refused by the Inner House of the Court of Session on 7 July 2023. A further request to appeal to the UK Supreme Court was also refused by the Inner House on 14 November 2023.

2.9. On the 8 March 2024 the UK Supreme Court refused permission to hear an appeal on the Act, thereby allowing these regulations to be laid before the Scottish Parliament.

Objectives

2.10. The objective of the Scottish Pubs Code is to improve the position of tied pub tenants through creating a statutory framework to govern the relationship between pub-owning businesses and their tied pub tenants. The Scottish Government supports the principle of fair and equitable treatment within tied pub lease agreements and has a desire to see a vibrant tenanted pub sector in Scotland. The Scottish Government recognises that pub-owning businesses, tenants, and brewers all have a vital role to play in the health of the tied pubs sector. The investment by pub-owning businesses in the tied pub system supports our hospitality sector, which is for the benefit for the wider community, and pub-owning businesses and tenants must have the ability to determine how their business works, underpinned by a fair and transparent regulatory framework set out in the Scottish Pubs Code. Moreover, the Scottish Pubs Code supports achievement of the Scottish Government's National Strategy for Economic Transformation through tackling inequality.

2.11. The outcomes that the regulations should achieve, in addition to the fulfilment of the regulatory principles (specified below), are as follows:

• A fairer tied pub sector in terms of the share of risk and reward between tenants and pub-owning businesses, through Market Rent Only (MRO) leases, rent reviews and assessments, information requirements and guest beer agreements.
• All pub-owning businesses have a standard level of minimum requirements towards tied pub tenants, supported by an effective arbitration regime.
• Tenants in Scotland are afforded at least similar rights to their counterparts in England and Wales.
• Information asymmetry between tied pub tenants and pub-owning businesses is reduced, giving tenants the information to make more informed choices and providing pub-owning businesses with clarity about what is expected from them by Government.
• Guest beer agreements can create further market space for a range of beers, including locally produced beers.
• Penalties, fees and expense provisions encourage good practice and compliance with the Scottish Pubs Code.
• Effective arbitration in cases of dispute.

2.12. The Act provides for the Scottish Pubs Code Adjudicator to be a source of expertise on arbitration and on the tied pub sector. This should provide reassurance to tied pub tenants that there is a process to resolve disputes and should encourage compliance with the code by all parties (tenants and pub-owning businesses).

2.13. The Scottish Pubs Code has been developed consistently with the three regulatory principles as set out in the Act:

• Fair and lawful dealing by pub-owning businesses in relation to their tied pub tenants.
• Tied pub tenants should not be worse off than they would be if they were not subject to a product tie or a service tie.
• Any agreement between a pub-owning business and a tied pub tenant should fairly share the risks and rewards amongst the parties.

2.14. The code should be fair for both parties, and it should be straightforward and easy to use for both pub-owning businesses and tenants.

2.15. The code will help to rebalance the relationship by creating arrangements for tenants to be able to request MRO leases (at market rent rates, which are free of ties), and to request guest beer agreements (enabling the tenant to sell at least one beer of their choice).

2.16. The code sets out arrangements, processes and information requests for other aspects of the tied tenant-landlord relationship. The regulations on fees and financial penalties will support compliance with the code whilst the regulations on arbitration will ensure effective arbitration in cases of dispute.

2.17. These regulations are complemented by other secondary legislation needed to implement the Act, for example commencement regulations for the office of the Scottish Pubs Code Adjudicator.

Rationale for Government Intervention

2.18. The Policy Memorandum for the Tied Pubs (Scotland) Bill stated that with the establishment of a tied pubs code and Adjudicator for England and Wales, tied pub tenants in Scotland did not have equivalent statutory rights and protections to their counterparts in England and Wales. The Memorandum stated that this also meant that pub-owning businesses which operated in Scotland as well as England and Wales were operating in very different statutory environments north and south of the border. The Bill would therefore help to ensure that tied pub tenants in Scotland were no worse off than their colleagues in England and Wales.

2.19. During the final debate on the Bill on 23 March 2021, the Minister for Business, Fair Work and Skills noted that the legislation would promote fair and equitable treatment in tied pub leases and would help to rebalance the relationship between pub-owning businesses and tied pub tenants.

2.20. The Minister had listened carefully to views and concerns from across the industry. He had heard about the support provided to many tenants by their pub-owning businesses, especially during Covid, which showed the value of the tied pubs model. Tied pubs also provided a low-cost entry point for people looking to take their first steps into business. However, the Minister noted that the picture across the sector was not uniform and said, “I have also heard from some tenants that they have not had that level of support and believe that change is required.”^[5]

2.21. The Minister confirmed that “whether we would support the Bill’s progress was a balanced decision”^[6] and Ministers had “sought to ensure that the Bill is fair and balanced for both landlords and tenants”^[7]. He wanted “to preserve the benefits of the tied pubs system” but also “to ensure that there is a better balance in landlord-tenant relationships, and a proportionate approach”^[8]. He said that he wanted “a level playing field for tenants and landlords. I want tenants to be treated fairly and landlords to be able to see a return for their investment”^[9].

2.22. The Act went further than the legislation in England and Wales by introducing the right for all tenants to request an MRO lease at any time, except in specified circumstances, to make the MRO process less complex. The Act assumes that an MRO lease will be made through a deed of variation, rather than through a new lease, unless the tenant consents to a new lease. The other key difference with England and Wales is that the Act requires the Scottish Pubs Code to include a guest beer agreement, which is the ability for a tenant to request a beer of their choice from any supplier. There is no guest beer agreement within the English and Welsh code. Neil Bibby MSP, in evidence to the Economy, Energy and Fair Work Committee 01 September 2020, said that the “guest beer right is about giving publicans the opportunity to stock more beers and to stock the beers that they want to stock. It will also allow consumers the opportunity to demand more choice at the bar.”^[10]. Allowing tenants more autonomy could potentially increase profits for certain tenants and potentially support smaller brewers, bolstering the wider community of tied pubs.

2.23. Section 1 of the Act requires Scottish Ministers, by regulations, to impose requirements and restrictions on pub-owning businesses in connection with tied pubs.

2.24. Section 4 of the Act requires Ministers to lay before the Scottish Parliament a draft Scottish statutory instrument containing regulations under section 1. This set of regulations is the Scottish Pubs Code.

2.25. Section 10(3) and section 17(1) of the Act require Ministers to define permitted maximum penalties for failure of pub-owning businesses to comply with the code and also to provide for fees that may require to be paid by a tied pub tenant. Ministers may also make provision for payment by tenants of Adjudicator expenses in certain situations.

2.26. The Tied Pubs (Scottish Arbitration Rules) Amendment Order 2024 has been prepared because Ministers consider there to be value in making provision to treat the Arbitration (Scotland) Act 2010 (“the 2010 Act”) as commenced for the purposes of statutory arbitrations under the Act, so that the Scottish Arbitration Rules (SARs) and processes set out in the 2010 Act could apply to cases brought to the Adjudicator. The Order enables the Adjudicator to choose that arbitration should be carried out in accordance with the SARs.

2.27. The regulations that are the subject of this impact assessment will support the implementation of the Act and contribute to our economic national outcomes, particularly towards the vision to “ensure the benefits of economic growth, wealth and opportunities are fairly shared”^[11].