Tied pubs - pubs code consultation: workshops with tenants

10. Conclusions

Tenants have high hopes for the Scottish Pubs Code. They believe it has the potential to be transformative for the industry, driving investment, quality of tenants, recruitment, long-term careers, bolstering its status as a profession and rebalancing the relationship between tenants and pub-owning companies.

The MRO lease obligation was seen as the key tool in rebalancing that relationship from which all the other benefits would flow. Respondents felt it would give them real leverage in negotiations with the pub-owning company, forcing them to bring better deals to the table. This was the aspect of the Code that tenants most wanted to talk about. Getting it right is in their view absolutely crucial to ensuring the Tied Pubs Act fulfils its promise. In the short term, firming up how the MRO lease obligation will work in practice was also a priority, in order to end the current period of damaging uncertainty in the industry.

It should be noted, however, that the most enthusiastic supporters of MRO leases in the workshops were small operators already on FRI leases. The multiple operators were more conscious of the pitfalls of MRO leases for inexperienced operators especially and warned they would not be a panacea.

Relationships with pub-owning companies have suffered in recent times. Larger multiple operators blamed uncertainty over the new Scottish Pubs Code, in particular the MRO lease obligation, for fuelling the decline in relationships. They reported a reluctance amongst pub-owning companies to offer new tenancies, a preference for offering short tenancies, and even tenancies being withdrawn. Smaller operators took a more cynical view that pub-owning companies were using the Tied Pubs Bill as an excuse to tilt relationships in their favour and hold back on spending.

Most tenants agreed, however, that relationships had been changing for the worse for tenants since before the Tied Pubs Bill and the pandemic.

Churn in tenants is a major problem that they hoped the Code would address. All the tenants in the research commented on how the turnover of tenants has increased in recent years. They cited poor practice and short-termism by some pub-owning companies. They said that rather than negotiating rents with incumbent tenants at the end of a lease, it was common for offers to be presented on a 'take it or leave it' basis, resulting in the old tenant leaving and a new tenant being taken on, regardless of how successful the old tenant had been.

MRO leases were seen as the key to stopping the churn and introducing stability, but the obligation must be correctly set out in the Code. In order for MRO leases to deliver on their promise, the following requirements must be included in the Code, according to tenants:

• Automatic lease renewal. Leases must always roll over automatically providing the tenant has been compliant with it. Without this assurance, tenants who take on a MRO lease may be more reluctant to invest if they think that in several years the business could be taken away from them regardless of compliance or performance.
• Ability to apply for MRO lease before the rent review. Tenants generally didn't see why the right to request and be granted a MRO lease should be restricted to the rent review. Once every five years was seen as too restrictive. Apart from a period of a few months after the start of a lease, the option should be available at any point, reflecting the fact that material circumstances can change at any time.
• Avoid rigid exemption periods after a MRO lease request has been turned down. Again, material circumstances can change at any time, and tenants felt that the ability to try again for a MRO lease should be tied to that rather than to a set time period.
• MRO leases are not for everyone. Larger operators pointed out that taking on a pub without the backing of a company can be hard especially for the inexperienced. It may be that thought should be given in the Code to ensuring that applications for a MRO lease are backed up with a credible plan and awareness of costs and responsibilities.
• The negotiation period must be strictly time limited. Tenants had a fear of protracted negotiations and legal involvement, which they had seen destroy businesses before, and which they believed was happening in England and Wales now. The Code in their view must set out a strict timetable for all the steps in the application process within an overall timeframe (no more than six months).

Substantial investment by the pub-owning company was viewed as the only valid reason for an exemption to the MRO lease obligation. Tenants were aware that companies needed a period of time, generally three to five years, to realise a return on their investment, so an exemption of up to five years after a substantial investment in the business was deemed reasonable by most. However, there was debate around two points that tenants felt needed to be bottomed out in the Code.

• What counts as a substantial investment? While tenants had views on the amounts of money usually involved in a transformative or substantial investment, they felt that the definition depended more on the nature of the investment and its impact on the business. 'Substantial' was defined by them as something that changes the nature of the business and aims to bring in more revenue – a new eating area or outdoor space for example. General maintenance and fixing wear and tear, while often very expensive, would not count as substantial as it does not add another dimension to the business.
• The nature of the exemption and how long it should last. Tenants were generally against a blanket, rigid exemption period and felt it should be tied to the performance of the investment and have some flexibility. If the expected return on investment happens in a shorter than anticipated timeframe, this should correspondingly shorten the exemption period. In a way this amounts to treating the investment more like a loan.

Guest beer agreements need to be about supporting local small brewers. The main attraction of guest beer agreements for tenants was about supporting local brewers and the wider local economy, rather than the financial benefit to their business. They felt the spirit of guest beer agreements was about supporting microbrewers and felt this should be honoured in the Code. Three key points emerged in relation to this.

• They did not want a situation whereby the big brewers used guest beer agreements as a tool to expand their market share.
• In order for the guest beer agreements to be available to all, some tenants stressed that it needed to include keg as well as cask beers, noting that small brewers are increasingly moving into keg products as they are pasteurised and last longer.
• Guest beer agreements should not affect the rent. Tenants felt this would be outwith the spirit of the guest beer agreements, and also the overall spirit of the Code which they saw as about rebalancing the relationship and financial benefits between the tenants and pub-owning companies.

The wording of the Code needs to make it clear that the guest beer agreement is not at the company's discretion. There was concern over the use of the word 'allow'. Some tenants believed it needed to be clear in the Code that the guest beer agreement was not a matter for negotiation but something that tenants had a right to. Moreover, there was concern about the specification of a minimum of one guest beer. Some worried that some companies would therefore only allow one guest beer, and felt that rather it should be stated as a percentage of the beer sold free of tie. They acknowledged that monitoring this would be challenging.

Arbitration needs to be binding. The Adjudicator role and arbitration process were welcomed. Some were keen to stress the importance of making sure the decisions of the Adjudicator are binding on both parties. Again, tenants were very keen to avoid anything that could lead to protracted legal disputes which tend to favour the party with the most resources.

Clarity is needed in the Code on what can and cannot be dealt with via arbitration. Some operators were concerned that the arbitration process needed to be protected from frivolous use particularly over issues that are clearly dealt with in leases and that some tenants, having signed a lease, decide they don't like, e.g. responsibility for certain repairs. Some tenants suggested a fee for tenants to use the arbitration system, carefully calibrated to not put off those with genuine reasons for using it. Dilapidations was seen as very important to take to arbitration if necessary, as the dilapidations report at the end of a lease is often a source of dispute.

Strong provisions for Business Development Managers (BDMs) are needed in the Code. Tenants raised concerns about the requirements for BDM training in the voluntary code which states they need to receive training within two years of taking up the role. They felt that this is too long especially for experienced operators for whom a young, untrained and inexperienced BDM may offer little added value. Training needs to be sooner, more detailed and in-depth, and the requirements need to be set out in the new Code.