Tied pubs - Scottish Pubs Code - part 2: consultation

Chapter 3: Proposals on financial penalties and fees and expenses for arbitration

Financial penalties

42. The Act provides for the Adjudicator to take enforcement action when they are satisfied that a pub-owning business has failed to comply with the code. This will support the Adjudicator in enforcing the code. The enforcement action might include imposition of a financial penalty on the business. Scottish Ministers are required to define the permitted maximum for such a penalty by regulations and they can do this either by specifying the maximum by an amount or by setting out a methodology by which it is to be determined. Appeals can be made to the sheriff about the imposition and amount of the penalty.

43. Since the penalties will be imposed on pub-owning businesses of widely varying size and turnover, it does not seem fair to specify the permitted maximum as a set amount since that could have a disproportionate impact on smaller pub-owning businesses. Our intention therefore is to define the financial penalties by setting out a methodology for calculation of the penalty. To ensure that businesses are impacted equally, the proposal is for the permitted maximum to be set as a percentage of the pub-owning business's annual turnover. Where the business is part of a wider pub-owning group, then the percentage will apply to the annual turnover of the group.

44. Where the business has published accounts within the past 12 months, the annual turnover will be determined by reference to those accounts. Where no accounts have been published within the last 12 months, the annual turnover will be determined by reference to the business's monthly turnover during that period.

45. The turnover that will be taken into account for these purposes is income receivable (after deduction of trade discounts, VAT and other taxes) in respect of:

• provision of products and services as part of the business's ordinary activities in the UK
• gifts, grants, subsidies or membership fees receivable in the course the business's ordinary activities in the UK
• rent, or money in lieu of rent, payable for land in the UK.

46. We propose to set the maximum penalty as 1% of turnover. This allows for a significant penalty if required but the Adjudicator is able to impose a smaller penalty where they consider this appropriate.

Question 23: Do you think that the maximum penalty for a pub-owning business or group that has failed to comply with the code should be 1% of turnover?

• Yes
• No
• Don't know

Please explain your answer

Question 24: Do you have any comment on the proposed method for determining the turnover of the business?

Fees

47. Tied pub tenants who submit a dispute for arbitration under the code will need to pay a fee to the arbitrator (the Adjudicator or someone appointed by them). Pub-owning businesses will also be liable, in most situations, to pay for the arbitrator's reasonable fees and expenses. Under section 17(1) to (3) of the Act, Scottish Ministers must provide for a fee to be paid to the Adjudicator, or a person appointed by the Adjudicator, by a tied-pub tenant who submits a dispute for arbitration.

48. Requiring tenants to pay a fee for arbitration will support enforcement of the code and provide recognition that arbitration brings costs. We want fees to be fair and proportionate and set at a level that discourages vexatious or minor disputes being brought forward but does not prevent the submission of necessary requests for arbitration. We have considered relevant comparators. The equivalent fee for arbitration under the Pubs Code for England and Wales, which was set in 2016, is £200. Given inflationary pressures, we have concluded that the fee should be £250 and this should be payable at the time the dispute is submitted for arbitration.

Question 25: Do you think that the fee for a tenant to submit a dispute for arbitration should be set at £250?

• Yes
• No
• Don't know

Please explain your answer

Expenses

49. As mentioned earlier, pub-owning businesses will be liable, in most circumstances, to pay for the arbitrator's reasonable fees and expenses. However, the Adjudicator can, on request from the pub-owning company, relieve the pub-owning business of liability for reasonable fees and expenses and make the tenant liable instead. Section 16 of the Act deals with these matters.

50. Under section 17(4) to (6) of the Act, the Scottish Ministers may also specify, in legislation, circumstances when a tenant is required to make a payment to the Adjudicator in respect of the expenses of an arbitration. This is on top of any fee, which the tenant must pay. In doing so, the Scottish Ministers can set a limit on the amount the tenant would normally be required to pay and specify circumstances when that limit might be exceeded. The Adjudicator would still have discretion under section 16(3) of the Act, at the request of a pub-owning business, to relieve the business of liability for fees and expenses and make the tied-pub tenant liable for reasonable fees and expenses to the extent the Adjudicator considers appropriate.

51. If we were to use the powers in section 17(4) to (6) of the Act, we consider the appropriate approach to be as follows:

• Specify in regulations that the tenant is required to make a payment in respect of the expenses of an arbitration where the arbitration has resulted in an award in favour of the pub-owning business;
• Set a limit on the amount of expenses a tenant would ordinarily be required to pay. We would be interested to hear views on whether such a limit should be set and if so, at what level;
• Specify that the tenant is required to pay expenses in excess of that limit where an arbitrator has decided under section 16(2) of the Act that the pub-owning business has no liability for fees and expenses, on account of the dispute having been submitted to the arbitration by the tenant vexatiously.

Question 26: To what extent do you agree or disagree that a tenant should be required to pay towards the expenses of an arbitration where the arbitration has resulted in an award in favour of the pub-owning business?

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

Question 27: What limit might be set for the amount of expenses a tenant would ordinarily be required to pay? Please give reasons.

Question 28: To what extent do you agree or disagree that a tenant should be required to pay expenses in excess of any ordinary limit where an arbitrator has decided that the pub-owning business has no liability on account of the dispute having been submitted for arbitration by the tenants vexatiously?

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

Question 29: Do you have any other comments on the proposals around fees and expenses?

Question 30: Please let us know if you have any other comments in relation to either set of proposals (the Scottish Pubs Code or on financial penalties, fees and expenses)