Scottish Pubs Code for tied pubs: consultation 3

Consultation Proposals

Market Rent Only leases

1. Market Rent Only (MRO) leases are provided for in Schedule 1 of the Act. This requires that the landlord must, in certain circumstances, offer a tenant a lease which does not include any product or service ties. The exceptions to the requirement to offer MRO leases are set out in Part 4 of the Scottish Pubs Code.

Circumstances where Market Rent Only leases might not be offered

Notice to end the lease

2. In the Scottish Pubs Code, there are a number of exemptions where pub-owning businesses are not required to offer MRO leases to tenants. These exemptions were included following earlier consultation on the content of the code.

3. One of the exemptions is that MRO need not be offered by a pub-owning business where either the tenant or the pub-owning business has served a valid notice to bring the lease to an end. It is recognised that both parties should have the right to end the contractual relationship.

4. There has been concern from some stakeholders that this exemption could lead to notices to quit being issued very early upon entering an agreement, allowing almost the whole lease length to be exempt from MRO. It has also been suggested that there are only specific circumstances when a notice to quit can be served by pub-owning businesses, i.e. in relation to substantial breaches of lease agreements, and so this is a function of the lease rather than an issue for the code.

5. The draft code contains protection for the tenant in the form of regulation 3:

"A pub-owning business must not subject a tied-pub tenant to any detriment as a consequence of the tenant exercising, or attempting to exercise, any right under this code."

6. We are proposing to amend this regulation to make it clearer that the MRO exemption only applies where a pub-owning business or tied pub tenant has not served a notice to bring the lease to an end before a specified period of time before the end date of the lease.

Question 1: Do you agree or disagree with the following statement: in the case of a notice to quit, MRO exemption only applies where a pub-owning business or tied pub tenant has not served a notice to bring the lease to an end before a specified period of time before the end date of the lease.

Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Please explain your answer.

Question 2: If a timeframe were to be specified, should that be:

A period of less than 3 months

3 months

A period of more than 3 months

Please explain your answer.

First half of the lease: earlier application process

7. The sector previously proposed an exemption that an MRO lease need not be offered in the first half of the lease. This is included in the current code. This supports the third regulatory principle of a fair share of risk and reward, by providing pub-owning businesses with some confidence of return upon entering an agreement.

8. This exemption was proposed at a time when 5-year leases were common. We understand from tenants and pub-owning businesses that shorter leases are now being offered, for example for 3 years or less. If an MRO lease need not be offered in the first half of the lease, shorter leases mean that MRO will be an option for tenants for a shorter period of their lease than was originally envisaged.

9. Given the use of shorter leases and the fact that the MRO process could take a few months to complete, it is proposed that the process of MRO should start before the half-way point of any lease, to allow the process to get underway in good time. The new lease date could then start at the half-way point of any lease. MRO leases are not required to be longer than the remainder of the existing lease and so this would give any tenants who chose to go MRO more time to realise any benefits of going MRO.

10. Tenants can still choose to remain tied following any MRO process, once they have assessed the risks and rewards.

Question 3: Do you agree or disagree with the following statement: the Market Rent Only process should be able to start before the half-way point of a tenancy?

Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Please explain your answer

Question 4: If the Market Rent Only process were to start before the half-way point of a tenancy, how soon should it start?

Less than 6 months before the half way point of the tenancy

6 months before the half way point of the tenancy

More than 6 months before the half way point of the tenancy

Please explain your answer

Question 5: What would be the costs and benefits, if any, on your business and the sector?

Market Rent Only process: right to appeal

11. The code sets out that where the parties cannot agree the rent for the MRO lease, they would be able to seek an independent rent assessment either jointly or, where they disagree, the Adjudicator can appoint a rent assessor. The rent assessor will determine the market rent. The code requires the independent rent assessor to be a member or fellow of the Royal Institution of Chartered Surveyors (RICS).

12. Representatives of pub-owning businesses suggested that there should be a process to appeal the rent assessor's result if there is a clear error. An appeals process is in place in England and Wales (regulation 38 of their Pubs Code^[3]) and this allows tenants or pub-owning businesses to refer the market rent assessment to the Adjudicator within 14 days of finding out what the market rent is, if they do not agree that this is the market rent or where the independent assessor has failed to have regard to documents set out in the legislation or guidance issued by the Adjudicator.

13. We understand from pub-owning businesses operating in England and Wales that this appeals route has been used in a few situations.

14. During the previous consultation, a key concern for tenants was around delays in the MRO process. While we want to ensure that processes are fair and clear, we also want to avoid further delays. It is therefore proposed that we introduce an appeals process, to enable parties to appeal the rent assessment if there is a clear error. To address concerns about delays, it is proposed that this appeal process should occur within the MRO offer process. In other words, appeals can be raised with the Adjudicator within 14 days of the rent determination, i.e. to run concurrently with the period in which pub-owning businesses are preparing the MRO offer when the rent assessor has confirmed the rent assessment. The appeal could be made by the pub-owning business or the tenant.

Question 6: Do you agree or disagree with the following statement: there should be a process to appeal the result from the independent rent assessor?

Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Please explain your answer

Question 7: Do you agree or disagree with the following statement: 14 days is the right amount of time for either party to appeal the result?

Strongly agree

Agree

Neither agree nor disagree

Disagree

Strongly disagree

Please explain your answer

Question 8: Should the time period for the appeal be included in the 4 week period to create a MRO offer or should it be additional to this?

Included

Additional

Don't know

Please explain your answer