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

3. Consultation

Within Government

3.1. The following Scottish Government Directorates have been involved in the development of the regulations:

• Directorate for Agriculture and Rural Economy
• Directorate for Equality, Inclusion and Human Rights
• Directorate for Fair Work, Employability and Skills
• Directorate for Justice
• Directorate for Legal Services (Solicitor to the Scottish Government)
• Directorate for Economic Development
• Directorate for Tackling Child Poverty and Social Justice
• Directorate for Environment and Forestry

3.2. This dialogue has contributed to policy development. For example, following discussion with island officials it became clear that a guest beer option focused on a geographical distance from a tied pub, as was suggested by some stakeholders, could disproportionally impact on island communities, so this was not progressed. Also, discussions with Justice Directorate helped with consideration of the approach to take on arbitration rules. Furthermore, analytical staff in the Directorate for Environment and Forestry provided valuable assessments of the Scottish Pubs Code policy options and costs.

Public Consultation

3.3. During summer 2021, four workshops were run with key stakeholders. This included the Scottish Licensed Trade Association (SLTA) (representing tenants' views), the Scottish Beer and Pub Association (SBPA) (representing some pub-owning businesses) together with other pub-owning business representatives. In addition, further consultation meetings took place with the Royal Institution of Chartered Surveyors (RICS), individual pub-owning businesses who are not members of SBPA, Pubs Advisory Service, SIBA (the Society of Independent Brewers) and CAMRA (the Campaign for Real Ale).

3.4. Two workshops were also run with tied pub tenants^[12]. These consisted of 5 tenants in total.

3.5. A public consultation on the MRO and guest beer aspects of the Scottish Pubs Code, including a partial BRIA, ran from 8 November 2021 to 17 January 2022. A further public consultation on other potential aspects of the code, including financial penalties, fees and expenses, ran from 17 March 2022 to 12 May 2022. Full analyses of the first and second consultations were published on 13 April 2022^[13] and 15 August 2022^[14] respectively.

3.6. For the first consultation, respondents generally had mixed views on the proposals. Tenants broadly welcomed the proposals around MRO leases and guest beer agreements. However, pub-owning businesses had a number of concerns, especially on the unintended consequences of the proposals. Where possible and appropriate we have sought to address these consequences as identified by the changes made to the legislation as set out in paragraphs 3.17 to 3.42.

3.7. Respondents had mixed views on the proposal to exempt tenants which had received a significant level of investment from being able to receive an MRO lease for 5 years; tied pub tenants tended to disagree with the proposal whilst pub-owning businesses agreed.^[15]

3.8. On guest beer agreements, some participants felt that the focus in terms of eligible products should be on the type of brewery rather than on the production level of brands of beer. The Tied Pubs (Scotland) Act 2021 sets out that a guest beer agreement must allow a tenant to sell at least one beer of their own choice, regardless of who produces it. This means we cannot use the code to restrict guest beer agreements to any particular type or category of producer, such as small brewers.

3.9. As a result of the findings from the first consultation, changes to the draft code on MRO included:

• Making the MRO negotiation period separate from the MRO offer time period.
• Having a single investment exemption whereby pub-owning businesses do not need to offer an MRO lease.
• Continue to exempt short-term leases from MRO but provide that short-term leases cannot be continually renewed as a way of preventing access to MRO.

3.10. On guest beer agreements, as a result of the first consultation, further work was carried out to refine the appropriate production level. Additionally, cans were added to the draft code as being eligible for a guest beer and most of the exemptions from the draft code were removed to keep arrangements straightforward.

3.11. On the second consultation, there was general support for most of the proposals around providing information and advice to new and renewing tenants.

3.12. On rent review, pub-owning businesses had concerns about the proposed triggers for the proposed rent reviews, which they felt were not clearly defined. As a result, we removed the right to a rent review in response to changing material circumstances and focused the rent review arrangements on those tenants in a longer lease who might not have the opportunity to assess their rent.

3.13. Further discussions took place with the SBPA, their pub-owning businesses and the SLTA towards the end of 2022.

3.14. A short, focused consultation was carried out on the MRO process from 19 July 2023 to 21 August 2023. Four responses were received from two pub-owning businesses and two representative organisations. There was general agreement on most of the proposals. There were however mixed views on certain topics. For example, on whether a process for considering if a valid MRO request has been received should be included in guidance rather than legislation. The feedback from the consultation was considered and this has not been included in the code to help keep the MRO process simple and provide flexibility.

3.15. A short, focused consultation on the arbitration rules that should apply to disputes brought to the Scottish Pubs Code Adjudicator under the Tied Pubs (Scotland) Act 2021 ran from 17 May to 7 June 2022. The one response that directly addressed the question in the consultation was supportive of the proposal. No respondent opposed the proposal.

3.16. The results of the consultations, and further discussions with stakeholders, have been carefully considered in the ongoing development of the code and corresponding secondary legislation. Some of the changes made in response to stakeholders’ feedback are detailed below.

Scottish Pubs Code

MRO Leases: Unreasonable Terms

3.17. In the first written consultation there was disagreement with some of the unreasonable terms. Five out of six responding pub-owning businesses disagreed with the following unreasonable terms that have since been removed or amended:

• Deposit requirements which are more onerous than in the existing lease (amended) so that any increase is proportionate to any increase in rent and for tenants to be able to agree to any further increase in deposit.
• Paying rent in advance more onerous than in the existing lease (removed).
• A term triggering dilapidations requirements in the existing lease or imposing dilapidations requirements more onerous than in the existing lease (removed).
• Tenant repairing liabilities more onerous than in the existing lease, except where the MRO lease offered is for a period of 5 years or more, or with the consent of the tied-pub tenant (removed).

MRO Leases: Investment

3.18. In the first written consultation 19 respondents (eight out of 11 tied pub tenants and four out of six pub-owning businesses) disagreed that an MRO lease need not be offered for 7 years when agreement has been reached for a pub-owning business to invest 10 times the annual rent of the pub or more. This was removed resulting in a single-tier investment exemption (£35,000 or 1.5 times annual rent) being included in the code.

MRO Leases: Circumstances

3.19. All pub-owning businesses and breweries responding to the consultation agreed that an MRO lease need not be offered for short-term tenancies (one year or less). Tied pub tenants had mixed views, six agreed and five disagreed. To reduce concerns raised that this could become a loophole with 1 year tenancies being renewed annually, this exemption has been changed so it would not apply to tenants whose initial lease term of one year or less has been renewed automatically or by negotiation with their landlord, or where the tenant has been given a new one year lease, as a result of which they have occupied the same pub premises for longer than a year.

3.20. A further circumstance where an MRO lease should not be offered has been added to the code, as suggested by a pub-owning business. This is when either side has served a notice to bring the lease to an end (as both parties should have the right to end the contractual relationship).

MRO Leases: MRO Process

3.21. Following on from suggestions of what else the MRO offer should include the items below have been added:

• A draft of the deed of variation/new agreement (where the latter has been agreed to by the tenant) and an explanation of how the new rent has been calculated and any other assumptions, information or sources of information relied on to assess the proposed rent.

3.22. Following on from a suggestion from a pub-owning business that there should be information about what a written MRO request should contain, we have included the requirement that a request should include the tenant’s name, postal address, email address (if any), telephone number and the name of the tied pub which an MRO request is being made for (as tenants sometimes lease more than one pub).

3.23. Pub-owning businesses generally said the time period of negotiation set out in the consultation was too short. The negotiation period was kept the same (8 weeks, extendable by up to 4 weeks by mutual agreement), but this will be additional to the time period within which an MRO offer must be made. In other words, the negotiation period would follow on from 4 weeks from an MRO request.

3.24. Some pub-owning businesses said in the first consultation that they would like clarification on when each step of the MRO process ends. In the short, focused July 2023 consultation, we proposed that when the rent assessment process ends the MRO process ends. All respondents to the 2023 focused consultation agreed with this proposal. Further, all respondents agreed that the code should set out that the tenant can end the MRO process at any point.

Guest Beer: Characteristics

3.25. In the first written consultation several respondents suggested focusing on the nature of the brewer and specifically using the definition used in small brewers relief. This was not possible. The Tied Pubs (Scotland) Act 2021 sets out that a guest beer agreement must allow a tenant to sell at least one beer of their own choice, regardless of who produces it. This means we cannot use the code to restrict guest beer agreements to any particular type or category of producer, such as small brewers.

3.26. Twelve respondents (including five out of six pub-owning businesses and three tenants) to the first written consultation disagreed that 60,000 hectolitres (hL) was the appropriate small production level for beer brands. Some thought this level was arbitrary and possibly too high, others thought a higher production level should be used. We therefore commissioned research into the sales data of brands of beer (as a proxy for production, given production data is not available). The data informed the options on guest beer brands and the code includes a much smaller production level of 5,000hL for eligible guest beers. One representative organisation also raised the issue that it would be difficult for tenants to identify what qualifies as a guest beer. Keeping the guest beer threshold at 5,000hL might also make it easier for tenants and pub-owning businesses to identify which beers qualify as a guest beer.

3.27. The code states that guest beer agreements can cover cans alongside casks, kegs, bottles, following this suggestion being raised at the first consultation.

3.28. In the first consultation the SLTA suggested that charges by pub-owning businesses to maintain equipment and beer lines used by guest beer should be a simple technical expenses charge at cost price. The requirement for the charge to be reasonable has been included in the code.

Guest Beer: Circumstances

3.29. The written consultation proposed four circumstances where guest beer agreements should not be provided, these were as follows:

• The remaining term of the lease is less than 6 months.
• There is already a guest beer agreement in place which matches the definition set out in paragraph 4(3) of Schedule 1 to the Act.
• The tenant has been offered a guest beer agreement within the last 2 years. (This does not apply to agreements offered prior to the code being created.)
• The tenant is currently involved in MRO negotiations.

3.30. The code does not include these apart from where there is a guest beer agreement already in place which matches the definition of a guest beer in the code. Tenants tended to disagree with the inclusion of these circumstances and although pub-owing businesses tended to agree with these exemptions, they did not envisage the circumstances where they applied. Some anticipated that every tied pub tenant would request a guest beer agreement when the code comes into force, so it would become a standard part of the lease. Removal of these exemptions was also made to keep the process as simple as possible.

Guest Beer: Enforcement

3.31. In the consultation, a respondent highlighted difficulties in both tenants and pub-owning businesses being able to identify whether a brand qualifies as a guest beer and what happens when a brand exceeds the maximum production level. The code sets out a process for requiring tenants to change a guest beer brand in that situation and that the timescale must be fair and reasonable.

Tenant’s Business Plan

3.32. In the second consultation, three out of six responding pub-owning businesses strongly disagreed with the proposed requirement in the code that they should take into account a tenant’s business plan when negotiating the lease. One pub-owning business elaborated that a business plan can be used to negotiate commercial terms such as rent, but it wouldn’t be used initially to set the rent and terms and conditions. As a result, the code has been changed so that pub-owning businesses are required to “have due regard to” the tenant’s business plan where it is available, to clarify that it should be considered alongside other information during the negotiation process.

Information to be provided to Tenants

3.33. In response to suggestions about what other information should be provided to tenants to ensure there is a fair share of risk and reward, two additional requirements on pub-owning businesses have been added:

• To provide information on any initial repairs required at the start of the lease and whether the pub-owning business or tenant are responsible for these, as well as completed repairs during the previous tenancy.
• To provide the volume of alcohol, including the number of barrels purchased through the pub-owning business or its agents over the past 3 years.

3.34. These were to provide transparency on repairs, and the requirement for barrelage figures are available under the English and Welsh Pubs Code.

Rent assessment

3.35. Following on from feedback from RICS, this section clarifies that pub-owning businesses, or someone preparing a rent assessment statement on their behalf, should take into account professional standards, rules and guidance of the Royal Institution of Chartered Surveyors.

Rent reviews

3.36. There were mixed views on the proposals for rent reviews contained within the second consultation. Some pub-owning businesses strongly disagreed with the proposals to allow any lease longer than 12 months to be able to request a rent review or when changes in material circumstances allow^[16]. They raised concerns about how a non-contractual rent review would sit alongside a contractual rent review and thought there was no evidence for this. For UK pub-owning businesses in particular the impact of the rent review proposals depends on how much they would vary from arrangements in England and Wales and the existing voluntary code for Scottish tied pubs. One identified that the proposals as they stood would lead to continued uncertainty, impacting on ability to invest and possibly moves away from tied pubs to other pub arrangements.

3.37. Given there was general support for most respondents on rent review^[17], the code keeps a rent review option. However, this has been modified so that it will only apply to tenants who do not have a contractual rent review and who have not previously had a rent review or rent assessment within the past five years and have a lease which is longer than 12 months, to reduce the impact on pub-owning businesses. This helps support fair and lawful dealing by pub-owning businesses by providing some uniformity on rent reviews, as well as allowing both parties to check if there is a fair share of risk and rewards through a rent review at an appropriate interval. There are also similar rights in England and Wales for tenants to be able to request a rent assessment.

3.38. Four out of six responding pub-owning businesses disagreed with the time-frame to prepare a rent assessment statement in relation to a rent review, identifying this should be longer. One pointed to the administrative burden of dealing with a number of requests as soon as the regulations come into effect, and they would have a much longer time frame for planned rent review.

3.39. In response, the timeframe to provide a rent assessment proposal has been extended. Where the rent review has been requested by a tenant, they now have 6 weeks to prepare the proposal and the ability for this to be extended by 4 weeks on agreement by both parties. Where it relates to a contractual rent review, the rent assessment must be provided 6 months before the rent is due to change as a result of the rent review.

3.40. The second consultation proposed that the rent review process take 12 weeks in total. Some pub-owning businesses in particular felt this was too short given their business workload, the unexpected nature of rent review requests, and the need to carry out the process thoroughly in terms of gathering information, making a site visit and so on around other ongoing business activity. In response, the code now includes that the rent review process either ends where both parties have mutually agreed a new rent or after a period of 6 months from when the tenant has received the rent assessment statement.

3.41. One consultee also suggested that the code needed to be clearer about when the new rent following from a rent review should be payable. The code confirms that it applies the day after the new rent has been agreed.

Repairs and Dilapidations

3.42. The proposals to require pub-owning businesses to act fairly and reasonably when enforcing any repairs and dilapidation clauses in the Act was removed from the code following concerns raised in the consultation. For example, one pub-owning business raised the concern about how this would interact with clauses in the existing lease. However, tenants and other respondents to the consultation, and in an earlier focus group, raised concerns about dilapidations. As a result of considering both tenants and pub-owning businesses’ concerns and in accordance with the principle of fair and lawful dealing the code has been drafted to include a requirement for pub-owning businesses to provide a copy of the tied pub dilapidations report for the previous tenancy to prospective tenants.

Business

3.43. We have spoken with key representative organisations: the SLTA and the SBPA. Additionally, individual businesses have taken part in the public consultation and as mentioned above, we have also run workshops with pub-owning businesses.

3.44. The SBPA ran a short survey with their pub-owning business members on the impacts of the code and provided this data in May 2022.

3.45. During 2022, we also spoke with six businesses through separate meetings as part of the Scottish Firms Impact Test. Four businesses were small businesses (fewer than 50 employees), one business was a medium business (with 50 to 249 employees) and the remaining business was a large business (with 250 or more employees). The business types were as follows:

• Brewer
• Three tied pub tenants
• Two pub-owning business

3.46. We also approached four other pub-owning businesses (these included small, medium and large businesses) and four tenants (these were tenants who responded to the written consultations and gave their consent to be contacted) and one large brewer, however they did not want to take part or did not respond to our invitation.

3.47. Throughout the policy development process, it has been difficult to get independent, publicly available data specific to Scotland. The Scottish Firms Impact Test section refers to some of the ways that we have sought to access more information. Specifically, it has been challenging to hear from tenants directly and get evidence which is representative of all tenants. That is why in 2021 we commissioned workshops with tenants, with nominees from both pub-owning businesses and the SLTA. We also worked with the SLTA to help shape a tenants’ survey which they undertook.

3.48. On guest beer, it was challenging to get accessible information on the production levels of beer brands. Scottish Government library service ran a literature search of relevant academic and grey literature but didn’t find enough to do a review of the literature. We spoke with sector experts. Ultimately, we resolved to commission CGA/Nielsen IQ to give us access to information they held on the volume of beer sales by brands to inform the options for a guest beer agreement. Helpful information on the beer sector was also gathered from the British Beer and Pub Association (BBPA) in their annual statistical handbook.

3.49. It has also been difficult to get sector wide verifiable quantitative information about the impact of our proposals. Both consultations asked for information about the impact of the proposals on the sector, but much of this was organisation specific or anecdotal. The SBPA helpfully provided some information about possible impacts in 2022, through a survey of their pub-owning business members. To fully understand the impact and to inform the BRIA, we had tried to commission economic modelling on the options in 2022 and went out to tender three times unsuccessfully.

3.50. After the Scottish Firms Impact Test meetings, it became clear that we needed further focused information and asked for this from the SBPA. Their members were able to provide some information, but the exercise was limited by the ongoing legal action. We tried to get pub-owning businesses who were not members of the SBPA to take part in the Scottish Firms Impact Test, but the ones that were contacted did not wish to take part.