Tied pubs - Scottish Pubs Code - part 1: consultation

Chapter 2: Proposals – Market Lease Only leases

10. The Tied Pubs (Scotland) Act 2021 ("the Act") gives the Scottish Ministers a power to impose requirements and restrictions on pub-owning businesses in connection with tied pubs and set outs topics which must be covered by the Scottish Pubs Code. This includes the right for tenants to request a Market Rent Only (MRO) lease. An MRO lease is a lease where the rent is set at an amount agreed between the tenant and the landlord or, failing agreement between them, at the market rate for the property. It does not include any product or service ties, complies with any requirements of the code and contains no unreasonable terms.

11. The Scottish Pubs Code for tied pubs must require pub-owning businesses to offer an MRO lease where a tenant requests it, except in specified circumstances. The code can also provide more information on the process for negotiating an MRO lease.

12. The Scottish Government wishes to create an MRO lease process which is straightforward, flexible and easy to use. Draft code provisions on MRO are in Annex A.

Characteristics of an MRO lease

13. The Act sets out that the default way to offer an MRO lease is through modifying an existing lease, only to the extent necessary to become an MRO lease. The lease would be changed through a deed of variation.

14. The code can set out circumstances in which a pub-owning business can offer other types of MRO leases, such as a new lease or a substantially altered lease. There may be some circumstances where a new lease or a substantially changed lease may be of benefit to both parties, for example where a longer lease is being offered. In view of the default position in the Act and in order to ensure leases change only as far as is necessary to support an MRO lease, the Scottish Government proposes that a new or substantially changed lease should be offered only where both parties agree.

Question 1. Should MRO leases be offered as new or substantially altered leases (instead of variations of the existing lease) only when both parties agree?

Yes

No

I don't know

Please explain your answer:

Question 2. Are there any other situations where an MRO lease should be offered by way of a new or substantially altered lease?

15. The code can specify terms that would be unreasonable to include in an MRO lease. In the main, the Scottish Government proposes that these are terms which would be more onerous than the existing lease. Drawing upon our discussions with pub-owning businesses, tied pub tenants and groups representing their interests, and the experience of MRO in England and Wales^[4], the following terms are proposed:

Question 3: Do you agree or disagree that the following terms would be unreasonable for an MRO lease?

Unreasonable terms in a MRO lease

a break clause only exercisable by the pub-owning business (unless such a term is already included in the existing lease)

• Agree
• Disagree
• Don't know

a lease period shorter than the remaining period of the existing lease

• Agree
• Disagree
• Don't know

a stocking requirement other than as defined in section 20(2) of the Act^[5] (and carried over into the regulations)

("stocking requirement" means a contractual obligation which—

(a) requires that some of the beer or cider (or both) that is to be sold in the pub is produced by the landlord,

(b) does not require the tenant to procure that beer or cider from a particular supplier, and

(c) neither prevents the tenant from, nor penalises the tenant for, selling in the pub beer or cider that is produced by a person other than the landlord (although a contract term may impose restrictions on such sales).

• Agree
• Disagree
• Don't know

deposit requirements more onerous than in the existing lease

• Agree
• Disagree
• Don't know

requirements to pay rent in advance more onerous than in the existing lease

• Agree
• Disagree
• Don't know

a term triggering dilapidations requirements in the existing lease or imposing dilapidations requirements more onerous than in the existing lease

("dilapidations requirement" means a lease term under which a landlord may require their tenant to carry out repairs or other works falling within the tenant's repairing obligations under the lease)

• Agree
• Disagree
• Don't know

personal guarantee requirements more onerous than in the existing lease, except with the consent of the tied-pub tenant

• Agree
• Disagree
• Don't know

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

• Agree
• Disagree
• Don't know

Question 4: Do you have any other comments or suggestions on unreasonable terms for an MRO lease? You could use this box to explain why you agree or disagree with any of the proposals above, or to explain why you think other terms in an MRO lease should be unreasonable.

Circumstances where MRO leases might not be offered

16. The Scottish Government is keen to encourage investment in the sector and recognises that pub-owning businesses need to have certainty to be able to recoup investment in tied pubs, without the prospect of a lease being converted into an MRO lease. Amendments were made during the Bill's passage so that an investment exception could be created.

17. The Scottish Government proposes that investment agreements are one of the circumstances where MRO leases might not be offered. During our discussions with the industry, we heard that an investment of £35,000 or 1.5 times annual rent (whichever is greater) was considered to represent a substantial investment. It is proposed that this threshold is used and that an investment exception would apply for 5 years.

18. The draft regulations define investment agreements as "written agreement between the pub-owning business and their tenant for the pub-owning business to invest in capital improvement works to the pub". This excludes routine maintenance, works carried out under repairing obligations or dilapidation requirements or to comply with health and safety requirements before the pub is let.

19. Sector representatives identified that there may be times where there are major investments, such as a hotel development, that may warrant a longer time frame to recoup investment. For that reason, a longer investment exception for 7 years is proposed for investments which are 10 times the annual rent or more. Your views are invited on this, especially on the timeframes and the thresholds.

Question 5: Do you agree that an MRO lease need not be offered for 5 years when agreement has been reached for a pub-owning business to invest £35,000 or 1.5 times annual rent, whichever is higher?

Yes

No

I don't know

Please explain your answer:

Question 6: Do you agree 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?

Yes – Please go to Q 8

No

I don't know

Please explain your answer:

Question 7: If you have a suggestion for different investment levels and/or periods of time, please provide it here and explain why.

20. In line with the third regulatory principle, businesses should be able to enter agreements with some confidence of return and the Scottish Government recognises creating or amending leases will take time and effort. For those reasons, we propose that short-term tied tenancies (those less than 12 months) and the first half of any tied tenancy (which is longer than one year) should be exempt from the requirement to offer an MRO lease. We also propose that tenants would only be able to request an MRO lease at 2 yearly intervals to reduce uncertainty and also the administrative impact on pub-owning businesses.

Question 8: Do you agree or disagree that an MRO lease need not be offered in the following circumstances?

Short-term tenancies (one year or less)

• Agree
• Disagree
• Don't know

First half of any tenancy longer than one year

• Agree
• Disagree
• Don't know

Where the tenant has previously requested an MRO lease within the past two years.

• Agree
• Disagree
• Don't know

Please explain your reasons for agreeing or disagreeing with the proposals.

Question 9: Are there any other circumstances where MRO leases should not be offered?

Process for offering an MRO lease

21. The Act says that the code must require pub-owning businesses to use their "best endeavours"^[6] to enter into an MRO lease as soon as possible following the tenant's request.

22. It is proposed that an offer of an MRO lease should set out any changes to the terms of the existing lease, including to the rent of the pub, and explain the legal steps to change the lease to an MRO lease.

23. The Scottish Government propose that timescales for the MRO process should be included in the code to provide some certainty to both parties about maximum time-limits, but these would be extendable by mutual agreement. The general principle, however, should be to achieve an MRO lease as soon as possible. It is proposed that pub-owning businesses should be required to offer an MRO lease within 4 weeks of receiving a request from the tenant. A negotiation period follows on from this but negotiations must conclude within 8 weeks of the date the request was received (extendable by up to 4 weeks by mutual consent).

Question 10: Which of the following should an MRO offer include (select as many as appropriate)?

The new rent

How the terms of the existing lease will need to change

The legal steps required

Anything else

If anything else – please state what else should be included

Question 11: Should the code require that an MRO lease be offered within 4 weeks of a pub-owning business receiving a request from a tenant?

Yes

No

I don't know

Question 12: Should the code set out a time period for negotiation?

Yes

No

I don't know

Question 13: What are your views on the proposed time period for negotiation (8 weeks, extendable up to 4 weeks by mutual agreement)?

Question 14: Do you have any other comments or suggestions on the process for offering an MRO lease?

Assessing the market rent of an MRO lease

24. Following the negotiation period, where the parties cannot agree the rent for the MRO lease they would be able to seek 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 costs of a rent assessor are to be split equally between the tenant and the pub-owning business.

25. The rent assessor will have one month to determine the rent, following their appointment. The tenant will have two weeks after this to accept the revised MRO lease offer with the market rent.

26. The adjudicator would be able to set criteria for rent assessors and the Scottish Government proposes as a minimum they should be a member or fellow of the Royal Institution for Chartered Surveyors (RICS)^[7]. The aim would be for rent assessment to be accessible to tenants across all parts of the country.

Question 15: Should the rent assessor be a member or fellow of the Royal Institution for Chartered Surveyors?

Yes

No

Don't know

Question 16: Do you agree with the arrangements for rent assessment for an MRO lease?

Yes

No

I don't know

Question 17: If you have any suggestions or comments on the rent assessment process, please provide these here.

Referring failure to agree MRO lease to the adjudicator

27. After the negotiation period and rent assessment, if both parties have not agreed the terms of an MRO it is possible to refer this to the adjudicator for arbitration. This could only take place if there were a question about whether the pub-owning business had complied with the code. The timescales for arbitration are set out in the Act.

28. The proposed code would also require pub-owning businesses and tenants to use their best endeavours to resolve such disputes informally.

Question 18: If you have any comments on arbitration for MRO leases, please provide these here.