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

7. Summary and Recommendation

7.1. Tables 3 and 4 summarise the annual costs and benefits identified in this BRIA associated with the options to deliver the key features of the Scottish Pubs Code – MRO Leases (A), guest beer agreements (B) and rent reviews (C) – for tenants and pub-owning businesses respectively. The options that are included in the Scottish Pubs Code are highlighted in blue.

7.2. For MRO leases, Option 3 – limited code, is the preferred policy option for the code. This provides some tenants with the opportunity from day one of the code to check that they are no worse off than they would be if they weren’t subject to any ties (regulatory principle 2). However, option 3 recognises that pub-owning businesses have a right to enter into lease agreements and that there is an expectation that the business will make a return on their investment(s) in the tenant’s pub(s) over a reasonable period of time. Option 4 – maximum code, would have been possible under the Act but may have unintended consequences for the tied-pub model, such as possibly a substantial reduction in the number tied pubs. Option 4 would have created substantial uncertainty for pub-owning businesses and an unfair share of risk and reward Option 2 – minimal code, whilst delivering similar benefits to tenants in the long-term, was not selected, given it would take several years for tenants to realise the benefits and it creates a strong incentive for pub-owning businesses to turn tied pubs into other types of pubs, reducing the ability for the code to deliver benefits to tied pub tenants.

7.3. For guest beer agreements, Option 2 – minimal code, is the preferred policy option for the code. This option enables tenants to select the vast majority of beer brands as a guest beer and source this from any supplier. By partly removing one tie it supports regulatory principle 2. It also allows for a fair share of risk and reward between the parties. Risk for tenants is increased, but so is the potential reward for tenants and guest beer providers. Risk is also increased for pub-owning businesses in so far as achieving returns through guest beers and reward in the short-term is reduced. To minimise this impact and achieve a fair balance, the lowest intervention (Option 2) was selected for the code, as there should be a lower impact on sales of tied beer compared to other options. Importantly, this is also the most practical option, as it should be easier for the whole community to identify whether a beer brand qualifies.

7.4. For the options on Rent Review, Option 3 – limited code, is the preferred policy option for the code. Whilst the option “do nothing” exists for rent reviews, a limited code provides comparable rights and arrangements for tenants and pub-owning businesses as currently exists in England and Wales, where tenants can ask for a rent assessment where a rent assessment hasn’t occurred for the past 5 years^[37]. It delivers increased bargaining power for tenants in rent negotiations, leading to potentially lower rents and greater transparency for tenants with regard to the rent review process, which is in accordance with the overall objective of the code. To address pub-owning businesses concerns about the interaction between an existing rent review under a lease agreement and the statutory rent review under the code, we have narrowed the requirement to offer a rent review to where a lease agreement doesn’t contain a rent review clause and further, where a rent review or a rent assessment hasn’t taken place in the past 5 years. Tenants of short-term leases which are less than a year are also disqualified from being able to request a rent review, recognising the effort and time involved in producing rent reviews. This provides eligible tenants with the opportunity to check that there is a fair share of risk and reward in respect of their dry rent.

Financial penalties, fees and expenses

7.5. The table overleaf summarises the costs and benefits of the options outlined above for the Tied Pubs (Fees and Financial penalties) Regulations 2024. Given the analysis above and the summary, we recommend financial penalties and fees Option 3: define the maximum financial penalty using a methodology, set a fee for arbitration at £250. For expenses, we recommend Option 1, do nothing, and leave it to the Adjudicator’s discretion when to require a tenant to make payment for the Adjudicator’s expenses. On setting a fee at £250 we consider this best meets the need to make the arbitration system accessible, but also discourage vexatious disputes. On financial penalties, we recommend Option 3 as we believe this will ensure the Adjudicator has the discretion to set a penalty that is proportionate to the business size and supports the Adjudicator in enforcing the code. The Act already provides for the Adjudicator to be able to use their discretion to make the tenant liable for all or part of the arbitration fees and expenses when the pub-owning business requests this and the arbitrator finds in favour of the pub-owning business in the dispute.

Arbitration rules (G)

7.7. The table below summarises the costs and benefits of the options outlined above for the Tied Pubs (Scottish Arbitration Rules) Amendment Order 2024. Given the analysis above and the summary, we recommend Option 2: take action to enable Scottish Arbitration Rules (SARs) and processes set out in the Arbitration (Scotland) Act 2010 to apply to cases brought to the Adjudicator. The ability to choose the SARs would mean that the Adjudicator could select the SARs and apply these rules to arbitrations under the Tied Pubs (Scotland) Act 2021. The application of SARs, if selected, would ensure that the forum for the arbitration is in Scotland and that any appeal would be dealt with by the Scottish courts.