Tied pubs - pubs code consultation: workshops with tenants

4. Research findings: Current relationship with pub companies and initial thoughts on the Code

This chapter addresses the nature of pub tenants' current relationships with their landlords (i.e. their pub owning company), where they currently look for advice and guidance, and their general views on the proposed Scottish Pubs Code.

4.1 Current relationship with the pub-owning company

Larger operators tended to report better relationships overall with their landlords than smaller operators, although all operators noted that relationships had become more difficult recently. Key sources of tension were the perceived uncertainty around the Tied Pubs Bill and the content of the new Scottish Pubs Code (especially MRO leases), and for smaller operators especially, the ongoing pandemic and the way pub-owning companies had responded to it.

"If we have obstacles or problems both landlords take a fairly pragmatic approach… dealt with others in the past, can be a bit prickly… comes down to the individual… policy and procedures have changed dramatically at the moment."– Pub tenant

These issues appeared to have negatively impacted even previously good relationships. The uncertainty over the Code was felt to be hampering investment and reducing the number of tenancies available, with operators reporting a drawing back of investment and withdrawal of tenancies.

"We had a great relationship with our landlord for years now, had planned investment, a five-year lease on a new site. Then uncertainty on the Code came in, had to refurbish the pub ourselves in the last lockdown. It's hard at the moment, getting back open with all the restrictions."– Pub tenant

"I mean there are a lot of pubs out there that need a lot of investment, they're not willing to invest and everything is hinged on the pub code… taking pubs back from tenants that have done a fantastic job for 10-15 years."– Pub tenant

Smaller operators suspected that the pub-owning companies might not always be acting in good faith regarding the uncertainty around the Code and using it as an excuse to bolster their own position. They felt that the approach of pub-owning companies had started changing before the Tied Pubs Bill and the pandemic, and appeared to be increasingly driven by a short-term model of high tenant turnover and a focus on maintaining rent levels. Partnership and negotiation around rents was seen as lacking nowadays, and the relationship generally balanced away from tenants and towards pub-owning companies.

"They've been very commercial… they've become a property company, it was a case of churn the tenants, if they're not happy with the rent we're not going to negotiate, we're just going to churn them out, replace them. Invest in pubs, turn them over. No negotiation, no real partnership – it's changed over last few years."– Pub tenant

"They're stalling on basic maintenance and they're blaming it on the Tied Pub Bill. A fast turnover of tenants; they're investing not for tenants but to keep the pub at a level whereby they can get the next tenant in and move it on. It's corporate business but against the spirit of UK and Scottish pubs. They claim it's the bill but this has been happening pre-pandemic, since 2003."– Pub tenant

Smaller operators noted that rent reviews seemed to be the trigger for tenants leaving their businesses, and that being able to get by with a tenanted pub business alone was becoming more difficult. This could be making the business less attractive to younger entrepreneurs as even successful tenants, in their view, were often finding their tenancies were not being renewed.

"For new people coming in the relationship is all singing, all dancing but further down the line especially when they get to their first rent review that's when you notice there's a lot of tenants coming out, and when they give the keys back they lose everything. Common for people is to have businesses other than the pubco tenancy because we couldn't sustain it on its own."– Pub tenant

Where leases and renewals are offered, they increasing tend to be short according to some of the tenants involved in the research.

"Even successful businesses aren't getting lease renewals – 1-3 years at most is offered. Pubcos are blaming it on the Tied Pubs Bill uncertainty, using it to manage people out of the business." – Pub tenant

The overall picture, then, was of a changing, somewhat unbalanced relationship. For smaller tenants especially, these changes could not be put down simply to the pandemic or the Tied Pubs Bill, although these are factors. Rather, they felt that the relationship has been tilting away from tenants and in favour of pub-owning companies for some time.

4.2 Sources of advice and guidance

Who tenants would approach currently depended to an extent on the type of advice or guidance required. For help on the promotional side, or around licencing and regulation, Business Development Managers (BDMs) were viewed by some as helpful. However, for the smaller operators in particular, BDMs were very much seen as the face of the pub-owning company so there was a limit to what they would be willing to discuss with them.

"BDMs are good if you're asking for promotional help for the business. Anything business-related I'd go to my solicitor, SLTA or an accountant, not the pub company." – Pub tenant

There was some concern that sharing concerns with BDMs could result in negative consequences for the tenant rather than help.

"The way rent arrears was handled in the pandemic where we were given only six weeks to pay back a lot of money – you're reluctant to share concerns with BDMs because alarm bells start ringing and they put you on cash with order meaning you have to pay for beer from the company up front." – Pub tenant

Generally, advice and guidance was sought outside the pub-owning companies. Tenants mentioned the SLTA, hospitality bodies, and also online forums for tied tenants that have emerged during the pandemic and provide a space for them to share concerns and advice in confidence.

"A positive thing about the pandemic is that a number of forums have emerged online for tied tenants and other types of landlord, and they provide support, advice, you can double check facts and what you've been told. Many forums try to ensure there's no-one from the pubcos on them." – Pub tenant

4.3 General views on the Scottish Pubs Code

Smaller operators in particular strongly welcomed the code and looked forward to it being transformational for the industry. Larger operators were more cautious, with much of this caution centred on the current uncertainty and need for resolution. The view was that the proposal for MRO leases was the key driver of uncertainty that pub-owning companies were reacting to. This is discussed in more detail in the next chapter.

Those welcoming the Code looked forward to a rebalancing of the relationship with pub-owning companies and a recognition of publicans as professionals, businesspeople and contributors to the economy. This in turn could make the industry more attractive to young people and foster longer-term, stable careers in hospitality.

"The Tied Pub Bill will be great for everyone in the industry in the long term, but the pubcos just need to learn to cut their cloth a bit differently… To attract in young people who really want to go long term in the business you need to be able to be free to buy your beer where you want. They forget we're the customer, we pay tax, employ people, contribute to the economy, so there needs to be a professional relationship with the pubco and BDM." – Pub tenant

The right to request a MRO lease was seen as the key tool in rebalancing the relationship, providing tenants with real leverage. This is discussed in more detail in the next chapter, but it is worth noting that it emerged spontaneously as highly important early in the discussion.

The office of the Adjudicator was also viewed as highly significant. Tenants looked forward to fairer rent negotiations with pub-owning companies and better deals being offered.

"We'll have someone to listen to us and to approach if we have an issue with rent." – Pub tenant

Longer term, they believed that the greater stability afforded by a fairer relationship with pub-owning companies would release them to invest more, including in training staff and raising the status of hospitality as a true profession.

"In France hospitality is seen as a profession – with the new Pub Code it frees us up to invest in staff. Getting a fair deal on rent and costs and levelling up between pubcos and tenants means we can invest in staff as professionals. Hospitality is a profession, people stay in it a lifetime." – Pub tenant

"It will swing the balance of negotiations and will mean they have to come to the table with fairer deals, it's as simple as that… It gives us more of a bargaining tool that we can ask for an MRO." – Pub tenant

While hopes for the impact of the Act and the Code were high, a key concern was around automatic lease renewal for MRO leases. Rolling leases, where the lease automatically rolls over if the tenant has been fully compliant, were seen as crucial in enabling tenants to invest with confidence. Tenants were keenly aware of the issues faced in England and Wales since the introduction of their Pubs Code, which they generally viewed as flawed. Whilst England has a Landlord and Tenant Act that mandates rolling leases, at least one tenant reported that in practice this was not always happening and that rent and lease negotiations could be protracted and crippling for tenants. They were anxious to avoid a similar situation in Scotland.

"The concern is that in England where they've taken the Landlord & Tenant Act out of the lease, there is no automatic lease renewal – you can invest lots of money in a 10-year lease then have no right to renew another 10 years, assuming you're compliant with the lease. So there's a risk that this could happen with MRO leases – you get punted out at the end of the lease." – Pub tenant

"It's not worked so well in England with rent disputes getting tied up for months and months in a legal process, whereas these are things that need to be sorted quickly. The legal process can destroy a business, many guys stuck in this process might end up out of business." – Pub tenant