Is the end in sight for unfair practices within the public house industry?

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Even prior to the 2007 recession the inclusion of supply ties in pub leases had been controversial, especially as a result of the growth of pub owning companies. Such worries have been combined with other concerns about the fairness of the relationships between pub owning companies and their tenants. Following an earlier report in 2004, the House of Commons Business and Enterprise Committee considered in 2009 that supply ties operated by pub companies may well be anti-competitive and may have a detrimental effect on the pub market. This led to a call for a market investigation. In 2009, the Office of Fair Trading (OFT) examined a complaint by consumer rights organisation CAMRA regarding the impact of the operation of beer supply ties within the pub industry. However, the OFT decided that no further action was required and an appeal against the decision was lodged. The OFT found that consumers benefit from competition and choice between pubs and that this competition prevented the beer tie from being used to inflate pub beer prices beyond competitive levels. The OFT also found that the beer tie had not prevented tied pubs from offering a wide choice of beers to consumers.

The OFT concluded that the pub sector in the UK was competitive overall and it did not find evidence of competition problems that were having a significant adverse impact on consumers. In November 2011, the Government announced that it had agreed a package of self-regulatory measures, including an Industry Framework Code, with the pub industry to address concerns about the relationship between pub companies and tenants. New Regulations In 2013 the Government concluded that because concerns persisted, the self regulatory approach was not sufficient. The Business Innovation and Skills Department (BIS) then launched a consultation on proposals to establish a statutory code and an independent adjudicator for the pub sector to govern the relationship between large pub companies and their tied tenants. The Government has confirmed its view that, while self-regulation has brought a number of improvements through the Industry Framework Code and dispute resolution services, these changes have not gone far enough. This is because a large number of pubs in the UK are leased or tenanted by either a brewing or a non-brewing pub-owning company.  The majority of these are subject to the imposition of a beer tie and other exclusive purchasing obligations. These ties require the tenant or lessee to purchase beer and other drinks solely through the landlord pub company.

On 3 June 2014, the Government announced that a statutory code of practice would be introduced to govern the relationship between pub owning companies and their tied tenants. Further, there will be an appointed independent adjudicator who will be responsible for monitoring compliance of the code and adjudicate disputes. The aim of the “Core Code” is to provide all tied tenants within England and Wales with greater transparency, fair treatment, and the right to request an open market rent review if they have not had one for five years. Any alleged breaches of the code will be able to be referred to the adjudicator for decision. There will also be an “Enhanced Code” which will require large pub companies (500 or more tied pubs in England and Wales) to offer parallel tied and free-of-tie rent assessments to potential or existing tenants if they request them. The adjudicator will be responsible for enforcing both Codes (Core and Enhanced). The adjudicator will have powers to arbitrate disputes, investigate systemic breaches and provide guidance on interpretation. It is also intended that the adjudicator will be given powers to impose financial sanctions upon those who breach the Codes.

On 19 November 2014, the Small Business, Enterprise and Employment Bill completed the House of Commons report stage and had its third reading. The Bill as amended in the House of Commons includes a provision requiring a large pub owning company to offer its tenants a “market rent only option” without a “beer tie”. The introduction by MPs of the new clause in the Bill is strongly opposed by pub companies with a large portfolio of tied tenants (such as Enterprise Inns and Punch Taverns), due to its impact on their business model.

Enterprise Inns have stated: “This amendment, which was not supported by the government, threatens to have serious unintended consequences for publicans and the industry at large.” Enterprise Inns referred to the Government’s own review and to independent economic research, commissioned by the Government, which “found that a ‘market rent only’ option would lead to widespread pub closures, significant job losses and reduced investment in the sector”.

Taking a similar view, Punch Taverns has stated: “… the amendment would lead to the creation of an unworkable two tier economic market and would be contrary to existing legal contracts and property rights. It also runs contrary to the OFT’s view when it considered a super-complaint from CAMRA in 2010 and concluded that tied tenants were able to compete effectively and that the commercial interests of pub companies and their tenants were aligned.”

However, the amendment to the Bill has been welcomed by tenant’s groups and by CAMRA, which have long campaigned for this. CAMRA stated in a press release: “Allowing over 13,000 pub tenants tied to the large pub companies the option of buying beer on the open market at competitive prices will help keep pubs open and ensure the cost of a pint to consumers remains affordable. The large pub companies will no longer be able to charge their tenants prices up to 60 pence a pint higher than open market prices.”

“This simple choice should spell the end of pub company licensees being forced out of business through high rents and tied product prices.”

It has been reported in the Financial Times that the government is unlikely to try to overturn the amendment. The Bill was introduced into the House of Lords on 19 November 2014 and has its second reading on 2 December 2014. The very latest from the UK Parliament website is that the Bill is now at Report stage in the House of Lords, and line by line examination of the Bill took place on 3 March 2015. Amendments have been discussed and a second day of report stage is scheduled for 9 March 2015.

Following this stage the Bill will then go for a Third Reading in the House of Lords. When a Bill has passed through its third reading in both Houses it is returned to the first House (where it started) for amendments to be considered. Both Houses must agree on the exact wording of the Bill. There is no set time period between the third reading of a Bill and consideration of any Commons or Lords amendments. If the Commons makes amendments to the Bill, the Lords must consider them and either agree the amendments or make alternative proposals. If the Lords disagrees with any Commons amendments, or makes alternative proposals, then the Bill is sent back to the Commons.

A Bill may go back and forth between each House until both Houses reach agreement. Once the Commons and Lords agree on the final version of the Bill, it can receive Royal Assent and become an Act of Parliament (the proposals of the Bill now become law). It is very likely that the Bill will become legislation within the first year of the new Government’s term. It is clear from the point of view of tied tenants that such provisions will benefit them, but it remains to be seen how extensive and effective the adjudicator’s role and the Codes of practice will be within the industry. Katy Kernahan, March 2015.

To discuss the issues raised in this article give Katy a call on 01272 372128