Tied pubs - Scottish Pubs Code - part 2: consultation

Chapter 2: Proposals on the code

Policy approach

11. In terms of policy aims, the Scottish Government is intervening here to re-balance the relationship between landlords and tenants. The code should be fair for both parties and it should be straight-forward, unambiguous and easy to use/follow, without unnecessary process.

12. In drawing up policy proposals, the voluntary code of practice in Scotland, together with the England and Wales' Pubs Code have been considered. It should be noted that many of the proposals put forward here are already in the voluntary code, but putting them on a statutory footing will bring them within the remit of the Adjudicator, giving certain enforcement rights to tied-pub tenants.

13. We are proposing to keep the requirements for the Scottish Pubs Code focused, proportionate and high level, to concentrate on issues where legislation is necessary or can deliver real benefits. A proportionate approach seeks to reduce the impact on smaller pub-owning businesses, recognising that the Tied Pubs (Scotland) Act 2021 provides for the code to apply to all tied pub-owning businesses.

14. The draft parts of the Scottish Pubs Code on which we are consulting are at Annex A.

Information and advice to new and renewing tenants

15. There are points in the tenancy cycle where the code could provide further clarity about what is expected of pub-owning businesses and this would allow tenants to be able to make an assessment of returns, risks and rewards (the regulatory principles 2 and 3). The first point is when new tenants enter into a tied pub lease or existing tenants renew their lease (the draft regulations at Annex A use the term "prospective tenants" to refer to both new and renewing tenants).

16. To assist tenants in their assessment of the risks and rewards of tenancy, it is proposed that pub-owning businesses advise tenants to undertake pre-entry training as well as provide information about how they can undertake such training before they enter any lease. We have listened to industry representatives and propose an exemption for experienced tenants.

Question 1: Should pub-owning businesses be required to provide information about pre-entry training to tenants?

• Yes
• No
• Don't know

Please provide any comments

17. A business plan is another key way of assessing whether a pub operated under the lease being offered to the tenant will be a viable business that fairly shares the risks and rewards amongst the parties, fulfilling the third principle. We propose that pub-owning businesses should be required to advise prospective tenants to prepare a business plan based on independent advice, provide information on sources of independent advice, ask to see any business plan prepared by the tenant and take that business plan into account when negotiating a lease. Previous Scottish Government research on the pub sector in Scotland has indicated that tenants who took independent financial or legal advice before purchase found the information useful.

Question 2: To what extent do you agree or disagree that the code should require pub-owning businesses to do the following activities in relation to the tenant's business plan?

Activity

Advise tenants to seek appropriate advice to develop a suitable business plan

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Provide tenants with information on sources of independent advice

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Ask to see any business plan prepared by the tenant

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Take into account the tenant’s business plan when negotiating the lease

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Please provide any comments

18. Before a tenant enters into a new or renewed lease, or develops a business plan, the pub-owning business should make available certain information, to ensure fair and lawful dealing and also to enable tied pub tenants to make an assessment in relation to second and third regulatory principles (not worse off than if they weren't subject to a tie; and a fair share of risk and rewards between the parties).

19. We have prioritised the information that tenants should receive, recognising that new tenants can find the volume of information given to them at the outset a challenge. This does not prevent pub-owning businesses from routinely providing more information, if they wish to do so.

20. We are proposing that all new tenants and renewing tenants should be given the following information:

• A copy of the draft lease.
• A rent assessment statement.
• Information about:
  • The costs of running the pub, e.g. business rates, fees, service rates and other costs.
  • Any publicly available reports providing benchmarks or information on the cost of running tied pubs.
  • Any advice and support the pub-owning business can provide to tenants and prospective tenants.
  • Any arrangements proposed by the pub-owning business relating to gaming machines at the pub, including details of how income from the machines is to be distributed.
  • Sources of independent advice and support for tenants and prospective tenants.

21. If not already covered in the terms of the draft lease, new and renewing tenants should in addition be provided with information about:

• Processes for dealing with breaches of lease terms.
• Responsibilities and processes for dealing with repairs and dilapidations.
• Any investment proposals relating to the pub.
• Current price list of tied products of services, and any expected changes or discounts.
• Processes for dealing with complaints and disputes arising under the lease.

22. In addition, the following information should be provided to tenants who are new to the pub being leased:

• Description of the pub.
• Description of the pub's licences.
• Information about any enforcement action against the pub in the last two years, for example relating to health and safety, food hygiene, licensing or planning.
• The number of tenants that have taken on the pub over the past 10 years.

Question 3: Please suggest any information requirements which could be added or removed for new and renewing tenants

Please provide any explanation for suggesting the addition or removal of requirements

Rent assessment and rent reviews

23. Rent reviews and rent assessments form another key part of the tenancy cycle. As part of the rebalancing of the relationship between tenant and landlord, the code will exclude lease terms which allow only the pub-owning business to initiate a rent assessment.

24. The proposal is that the pub-owning business should be required to give the tenant a rent assessment statement as part of a rent review process, whether under a contractual rent review clause or under the statutory right to rent review. Rent assessments should be carried out in line with Royal Institution of Chartered Surveyors (RICS) guidance. The pub-owning business should also advise the tied pub tenant to obtain professional independent advice before rent is agreed, for example from an accountant or a solicitor. The pub-owning business should be able to point tenants to reputable independent organisations and professionals such as the Financial Services Register, Association of Chartered Certified Accountants or trade associations, which do not provide advice to the pub-owning business.

25. The rent assessment statement should contain at least the following information:

• Proposed rent.
• Methods, assumptions and disregards used to calculate the proposed rent.
• A profit and loss forecast for the next 12 months.
• Any other information, or sources of information relied upon to assess the proposed rent.

26. This information should enable tenants to make an assessment about whether there is a fair share of risk and reward.

Question 4: We are proposing that pub-owning businesses during the rent review process provide the following information as a minimum as part of the rent assessment statement: the new rent; methods, assumptions and disregards used to calculate the rent; a profit and loss forecast for the next 12 months; and any other information or sources used to assess the proposed rent. Should anything be added or removed from this list?

27. In the Pubs Code for England and Wales, rent assessments must be carried out in accordance with RICS guidance. We are proposing to take a similar approach here in order to ensure a professional and consistent quality of rent assessment is assured.

Question 5: When preparing a rent assessment statement, should pub-owning businesses, or someone acting on their behalf, be required to take into account guidance on rent assessment issued by the Royal Institute of Chartered Surveyors (RICS)?

• Yes
• No
• Don't know

Please explain your answer

28. It is proposed that the code explicitly enables tenants to ask for a rent review (and a rent assessment as part of that) if a rent review has not taken place in the past 5 years or where material circumstances affecting the pub change. The pub-owning business should not be required to undertake a rent review for short-term agreements (less than 12 months) or where Market Rent Only (MRO) negotiations are underway. This statutory right to rent review will sit alongside any existing contractual right to rent review in the tied-pub lease.

Question 6: To what extent do you agree or disagree that tenants should be able to request rent reviews in the following circumstances?

Circumstance

The rent has not been reviewed within the past 5 years

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

The lease is longer than 12 months

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Where there is a material change in circumstances affecting the pub

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

The tenant is not currently in MRO negotiations

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Please suggest other circumstances, if any, where tenants should be able request rent reviews.

Question 7: To what extent do you agree or disagree that tenants can request a rent review when the following material change in circumstances occur?

Circumstance

Change to local infrastructure

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Change to local employment

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Change to local environmental factors

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Long-term change to the local economic environment

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Please tell us what other circumstances, if any, should be taken into account ?

Question 8: What kind of leases should a tenant be able to request a rent review for? (select all that apply)

• New leases
• Existing leases
• Don't know

29. Some leases contain a contractual requirement to have a rent review, typically half-way through a term, with a 5 year lease term being common. The code makes certain terms in leases connected with rent reviews unenforceable e.g. a term which provides for rent assessment only to be initiated by the pub-owning business (see more on this below). We propose that under the code a rent review can be requested by the tenant where the contractual period of the lease is 12 months or more and where one hasn't taken place in the past 5 years, or where material circumstances affecting the pub change.

Question 9: To what extent do you agree or disagree that a legal right to request a rent review under the code is workable alongside existing contractual rent review rights?

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Strongly disagree
• Don’t know

Please explain the reasons for your answer

Question 10: What would be the likely impact of this approach to rent review on your business or on the tied pubs sector?

30. In order to provide certainty to both tenants and pub-owning businesses, it is proposed to set out timescales for rent reviews and rent assessments. We propose that the rent assessment process should be no longer than 4 weeks and the whole rent review process should be no longer than 12 weeks from the date of the tenant's request. This matches our approach to Market Rent Only leases, where we consulted on a 8 week time period for negotiation, and 4 weeks for an independent rent assessment to be carried out by a Royal Institution of Chartered Surveyors (RICS) member assessor.

Question 11: To what extent do you agree or disagree with the proposal that a rent assessment statement should be provided within 4 weeks of a request?

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Disagree
• Don't know

Please explain the reasons for your answer

Question 12: To what extent do you agree or disagree with the proposal that the statutory rent review process should take no longer than 12 weeks, beginning from the date of the tenant's request?

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Disagree
• Don't know

Please explain the reasons for your answer

31. Tied pub leases can include processes for how the tenant and the pub-owning business should resolve disputes. We are proposing that disputes about the provisions in the code on rent assessment and rent review can only be heard by the Adjudicator once those contractual dispute resolution processes have been exhausted. This will allow the tenant and pub-owning business to resolve their issues using mechanisms already agreed in the lease. Where it is not possible to resolve matters that way, the Adjudicator can provide arbitration for these issues.

Question 13: To what extent do you agree or disagree that disputes on rent review and rent assessment should be referred to the Adjudicator only after dispute resolution processes in the lease have been exhausted?

• Strongly agree
• Tend to agree
• Neither agree or disagree
• Tend to disagree
• Disagree
• Don't know

Please explain the reasons for your answer

Question 14: What else, if anything should the code cover on rent reviews and rent assessment?

Repairs and dilapidations

32. Repairs and dilapidations have been raised as possible areas which would benefit from inclusion in the code. We recognise that responsibilities between tenants and landlords vary depending on the type of tied pub lease/tenancy agreement. We have already proposed that information provided to new tenants and for new leases should include processes and responsibilities for dealing with repairs and dilapidations. We would encourage the tenant to deal with any issues relating to the cost or effectiveness of repairs as a result of dilapidations with their landlord in the first instance, and seek to resolve any disputes directly with the company.

33. We propose that the code will include a requirement that when enforcing repairs and dilapidations clauses in a tied-pub lease, pub-owning businesses must act fairly and reasonably. A failure to deal with repairs and dilapidations fairly and reasonably could be referred to the Adjudicator for arbitration, but only after any dispute resolution processes provided for in the lease have been exhausted.

Question 15: Do you have any comments on the proposals on repairs and dilapidations?

Flow monitoring devices

34. Flow monitoring devices measure the amount of beer sold by the tied pub tenant. This can show variances between the amount purchased from the pub-owning business and the amount sold and can indicate that the tied pub tenant is or is not buying beer from outside of tied arrangements. The voluntary code of practice requires that additional evidence must be secured, on top of readings from Flow Monitoring Devices, before the pub-owning business penalises their tied pub tenant for any breach of tie. We propose that the code will also make provision for this.

Question 16: Should additional evidence be required before a pub-owning business can take action as a result of a reading from a Flow Monitoring Device?

• Yes
• No
• Don't know

Question 17: Do you have any comments on the proposals on Flow Monitoring Devices?

Gaming machines

35. We propose that pub-owning businesses should not be able to make it a mandatory requirement of a tied-pub lease that a tenant has to lease gaming machines. This would not prevent a tied pub tenant from agreeing voluntarily to accept such terms in the lease or in a separate agreement with their pub-owning business or another supplier of gaming machines. This should increase tenant choice and increase access to a range of gaming machine suppliers, providing tenants with greater flexibility to adapt their pub to suit their local conditions. This policy will not apply to existing leases, only to new leases entered into after the code is put in place.

Question 18: Should gaming machines be covered by the code?

• Yes
• No
• Don't know

Question 19: Do you have any comments on the proposals on gaming machines?

Restriction on enforcing certain terms of agreement

36. The Scottish Pubs Code is required by the Tied Pubs (Scotland) Act 2021 to prohibit the pub-owning business from enforcing certain terms of agreement. These terms are:

• a term under which a tied-pub tenant is prevented from, or can be penalised for, taking action to enforce the code,
• a term which provides that a rent assessment in relation to the tied pub—
  (i)may be initiated only by the business,
  (ii)may only determine that the rent is to be increased,
  (iii)may not determine that the rent is to be reduced.

Question 20 – What other terms, if any, should the code prevent pub-owning businesses from enforcing?

Requirement to provide information to Adjudicator

37. We are proposing that pub-owning businesses should be required to notify the Adjudicator that they are captured by the definition of "pub-owning business" in the Act and the code, to keep the Adjudicator informed of any structural changes in the business such as mergers or acquisitions, and also inform the Adjudicator if they cease to be a pub-owning business. This will provide clarity about which businesses are covered by the legislation, in the absence of a readily available identifier for pub-owning businesses.

Requirement to comply with Adjudicator's directions

38. Under the Tied Pubs (Scotland) Act 2021, the Scottish Pubs Code is required to set out that a pub-owning business must comply with a direction issued by the Adjudicator. Such directions can be issued as a result of an investigation which has found that a pub-owning business has not complied with the code. A direction could, for example, direct the business to do, or stop doing something or to publish information relating to the investigation in a certain way by a specific date.

Terms of the code excluded from arbitration

39. The Tied Pubs (Scotland) Act 2021 allows for disputes about whether a pub-owning business has complied with a part of the code to be brought forward for arbitration. Arbitration can be carried out by the Adjudicator or by someone the Adjudicator appoints. The Tied Pubs (Scotland) Act 2021 allows parts of the code to be excluded from arbitration. It is proposed that only aspects of the code which might result in disputes between tenants and landlords are suitable for arbitration. The intention is to exclude the following terms of the code from arbitration because they concern the relationship between the pub-owning business and the Adjudicator and should not result in disputes between tenants and landlords:

• Requirement to comply with Adjudicator's directions following an investigation.
• Information to the Adjudicator by pub-owning businesses.

Question 21: What other parts of the code, if any, would not be appropriate for arbitration?

Other comments on the code

40. As mentioned before, we are seeking to keep the content of the Scottish Pubs Code focused, proportionate and high level. Further guidance could be produced by the Adjudicator at a later date.

41. The operation of the code will be subject to a review 2 years after it comes into effect.

Question 22: Is there anything else that should either be included or removed from the Scottish Pubs Code?