Tied pubs - pubs code consultation: workshops with tenants

3. Executive summary

3.1 Current relationship with pub-owning company and initial thoughts on the Code

Current relationship with pub-owning companies

Tenants reported that relationships with pub-owning companies have become less favourable for them in recent years. They reported a high turnover of tenants, lack of genuine negotiation over rents, and removal and reduction of tenancies, making it more difficult for new entrepreneurs to enter the business. Some blamed this on uncertainty over the Tied Pubs Bill and the proposed Market Rent Only (MRO) lease obligation in particular, whilst others felt that the relationship had been changing since before the Bill and the pandemic. Overall, relationships were felt currently to be out of balance in favour of pub-owning companies.

Current sources of information and advice

Business Development Managers (BDMs) were felt to be useful regarding issues related to promotion, marketing, regulation and licencing. However they were seen by smaller operators in particular as the face of the pub-owning company. This meant there was a limit to what they felt able to discuss with them, for example concerns about rent arrears. They tended instead to look for support outwith the pub-owning company e.g. SLTA, hospitality bodies, online forums for people in the industry.

General views on the Scottish Pubs Code

Smaller operators especially believed the new Code could be transformational for the industry, especially the MRO lease obligation. This was seen as the key tool in rebalancing the relationship between tenants and the companies as it would provide tenants with real leverage in negotiations around rent and leases. This would set off a chain of positive developments in their view, bringing stability to the industry, encouraging investment, increasing the status of hospitality as a profession and drawing in new talent.

The main concern was around lease renewal. Tenants felt that for the new Code to live up to its promise, there had to be a requirement for automatic renewal of leases providing the tenant had been compliant with the terms of the lease. Otherwise tenants on MRO leases would be reluctant to invest if there was a chance their tenancy may not be renewed regardless of their compliance and performance.

3.2 Market Rent Only (MRO) leases

Overall views, concerns, benefits and drawbacks

As they discussed spontaneously above, smaller operators were very enthusiastic about MRO leases and their potential to transform the sector. Larger operators were concerned however that MRO leases would not be a panacea and may not always work out well for small concerns. They worried that the reality of taking on responsibility for potentially large repair costs, for example, without the backing of a pub-owning company may be too much for the smallest and least experienced operators, and that they may find it hard to access the best deals for products. It should also be noted that the smaller operators we spoke to were very experienced and already had FRI (Full Repairing and Insuring) leases.

Smaller operators felt strongly that the opportunity to apply for a MRO lease should not be tied to the five-year rent review and should be available more frequently than once every five years. In particular, returning to the concerns around automatic rollover of leases, they felt that a MRO lease request should always be an option at the end of a lease period, providing the tenant has been compliant.

Exceptions to the obligation to offer a MRO lease

A substantial investment by the pub-owning company was generally felt to be the only circumstance where an exemption from the obligation was always justified. Tenants recognised that companies needed time (up to five years was felt to be reasonable) to see a return on their investment. Some did feel however that there should be flexibility built in to this exemption, so that if a return on investment was realised sooner that anticipated, this should shorten the exemption period.

'Substantial' was mainly felt to refer to any work that materially changed the business by enabling it to increase revenue. By that token, routine repairs and replacement of items due to wear and tear were not felt to be substantial, even though they could be very expensive.

Other potential exceptions

Regarding uninvested sites, tenants were generally against exempting these for experienced operators, although they could see why an exemption would make sense for the less experienced. Some felt that exceptions on very short term tenancies might be justified as a way of seeing how the tenant and the business perform over perhaps the first 12 months. However, there was also a concern that there would be an incentive for companies to offer only short term tenancies as a way of avoiding the MRO obligation.

Information required prior to requesting a MRO lease

Tenants listed a number of things they would need to know in advance relating to the nature of the lease and the previous performance and viability of the business. Two essential pieces of information were an assurance that they would be completely free of a beer tie, and an understanding of what the market rent should be, preferably based on a source of information other than the pub-owning company.

Timescale for negotiating a MRO lease

All tenants were very clear that timescales had to be covered in the Code to avoid negotiations dragging on and damaging businesses, as they believed had happened in England and Wales in some cases (tenants overall were very wary of anything that could result in a protracted legal process). Six months between application and conclusion of the process was seen to be the maximum reasonable timeframe. Some believed that a key requirement to stop the process taking too long was to include a requirement for MRO leases to be offered via a deed of variation on the existing lease rather than by negotiating a completely new lease. Some highlighted this as a root cause of the problems mentioned in England and Wales.

3.3 Guest beer agreements

General views

Tenants broadly welcomed the proposal. All felt strongly that the main point of guest beer agreements ought to be to help local small-scale brewers, especially microbreweries, and that this needed to be set out in some way in the Code. It should not be a way for rival big brewers to increase their market share.

Tenants felt that the key benefit was to the local economy rather than just to their businesses, although some highlighted a current and growing demand from a wide range of clientele for local products, in which context guest beer agreements focused on local microbreweries made good sense.

Selecting a guest beer

It was felt to be important that the guest beer agreement as set out in the Code should specifically include keg beers. Some tenants pointed out that many pubs were unable to serve cask beers whilst almost all could serve keg beers. Moreover, it was highlighted that microbreweries were increasingly moving towards keg products. The tenants we spoke to on FRI leases were both already free of tie regarding cask beers – another reason why guest keg beers were attractive to them.

Some were concerned that setting out the guest beer agreement in the code in terms of 'a minimum of one' guest beer could mean that some companies in practice would not allow more than one, and that less experienced operators may struggle to negotiate above one beer. Some wondered if the requirement could be worded in terms of a percentage of beer allowed to be sold free of tie, but it was acknowledged that monitoring this in pubs would be difficult.

Effects of guest beer agreement on rent and Flow Monitoring Equipment

Tenants were on balance against the idea that the guest beer agreement should be allowed to impact rents. The spirit of the guest beer agreement in their view was to rebalance the relationship between the tenant and the company and to support the local economy. Others however thought it was perhaps inevitable that flows of guest beers and tied beers would be monitored. Companies would be able to see if a guest beer was impacting sales of tied beers, possibly providing them with an argument for increasing the rent.

3.4 Arbitration

General views

Access to independent arbitration was universally viewed as important in order to prevent rent and lease negotiations dragging on. Tenants thought that tenant fees for using arbitration should be capped, but that pub-owning companies' fees should not, reflecting their far greater resources. That said, a tenant fee was felt to be required, and set at a level that would prevent the system being tied up with frivolous claims but not deter genuine claims.

Tenants' greatest concern was very much that the system could be abused by tenants looking to challenge things in their signed leases that they happened not to like. In terms of genuine need for arbitration, tenants were particularly keen that disputes over dilapidations should be covered. Most were keenly aware of the potential for protracted legal dispute in this area, and how damaging it could be for tenants financially.

Setting out the scope of the arbitration process in the Code

Tenants wanted to see costs and fees clearly detailed, and the process set out clearly and in plain English. Some also felt that case studies and practical examples of where arbitration has been used and what happened would also be useful for them. They also wanted to see a requirement for pub-owning companies to be totally transparent in the arbitration process, with the requirement to provide information on request to the Adjudicator.

The general feeling was that the Adjudicator's decision should be final. Again, it was seen as important for tenants to avoid drawn-out legal processes. If the Adjudicator's decision could be challenged legally, it should at least have weight in that legal process.

3.5 Scope of the new Scottish Pubs Code

Views on the existing voluntary code

The voluntary code was seen as comprehensive and useful for new and inexperienced tenants. However for the larger, multiple operators it was felt to be unfair that they had to go through the same processes set out in the code whenever they took on a new lease. They felt a fast track system for taking on a new business would be a welcome addition to the new Code.

Scope of the new Code

Tenants generally did not mention areas outwith the scope of the current voluntary code that need to be included in the Scottish Pubs Code. However they did feel that the requirements for training of BDMs needed to be strengthened. The voluntary code specifies that they must receive training within two years of starting the role, but this was felt by some to be too late, and that the new Code needed to require training before or very soon after taking up the role. Otherwise the value of new BDMs to experienced operators would be limited.

One concern that emerged spontaneously among the multiple operators was whether there was a lower limit in terms of number of premises owned below which the new Code need not apply. They felt that making the Code obligatory for the smallest companies (e.g. someone who has purchased three or four pubs as part of their pension plans) could be too onerous for them.

3.6 Impact of the Scottish Pubs Code on the business

Overall, the new Code was seen as potentially transformative, bringing stability and security to the sector, stemming the churn of tenants, forcing pub-owning companies to act more fairly, encouraging investment and generally raising the status of hospitality and the quality of the people in the business. The MRO lease obligation in particular was seen as offering vital leverage for tenants in their relationships with pub-owning companies, and the guest beer agreement was envisaged as a way to help the local economy.

There were concerns in the short term over bureaucracy and red tape. In general there was an urgent desire to have proposals firmed up so that tenants and pub-owning companies alike could adjust to the new realities and move forward.

3.7 Conclusions

Tenants believe the Code 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.

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. Most tenants agreed, however, that relationships had been deteriorating 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.

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 and include the following requirements:

• Automatic lease renewal.
• Ability to apply for MRO lease before the rent review.
• Avoid rigid exemption periods after a MRO lease request has been turned down.
• Recognise MRO leases might not be for everyone, especially inexperienced operators.
• The negotiation period must be strictly time limited.

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. A substantial investment was defined by tenants as something that changes the nature of the business and aims to bring in more revenue. General maintenance and fixing wear and tear, while often very expensive, would not count as substantial.

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.

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 did not want a situation whereby the big brewers used guest beer agreements as a tool to expand their market share. Some tenants stressed that it needed to include keg as well as cask beers.

The wording of the Code needs to make it clear that the guest beer agreement is not at the company's discretion. 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.

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.

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. Dilapidations was seen as very important to take to arbitration if necessary.

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 training needs to be sooner, more detailed and in-depth, and the requirements need to be set out in the new Code.