Grand Committee
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Small Business, Enterprise and Employment Bill
(9 years, 10 months ago)
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The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, I remind the Committee that, in the event of a Division in the Chamber, the Committee will adjourn for 10 minutes from the sound of the Division Bell.
Clause 40: The Adjudicator
Baroness Neville-Rolfe
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)
My Lords, we come today to Part 4 of the Bill and the much debated topic of the Pubs Code and the adjudicator. The problems we are trying to address in the pubs industry have a long history. The imbalance in bargaining power between tied tenants and their pub-owning companies, and the difficulties that arise from this imbalance, have been well documented by the BIS Select Committee in four reports over the course of 10 years.
Part 4 of the Bill introduces a statutory Pubs Code and an independent adjudicator to enforce it, to provide much needed protections for the 13,000 or so tenants who are tied to large pub-owning companies in England and Wales. Furthermore, the other place voted to add to the Bill a market rent only option for pub tenants, meaning that pub-owning companies will be required to offer their tenants the right to go free of tie in certain circumstances. The tenant would then pay a market rent for the pub but would be free to purchase beer and other products from any source.
As I set out at Second Reading, the Government have listened to the decision in the other place and accept that there should be a market rent only option. The amendments I am moving today seek to make the provision workable and mitigate the potential unintended consequences. The amendments, which are split into three separate clauses for clarity, set out a clear framework for the market rent only option, make provision for the procedures needed to deliver it, and provide for the adjudicator to resolve disputes. Our amendments will provide tied tenants with the right to a market rent only agreement at a number of trigger points, including at a rent review; at a lease renewal; when there is a significant and unexpected price increase; or if a local economic event occurs that is outside the tenant’s control. Although prospective tenants will not have the right to the market rent only option, our amendments provide that they will have the protection of the parallel rent assessment—PRA—which will show them how their tied deal compares with a free-of-tie deal.
Although I have not yet had the pleasure of meeting him, I pay tribute to my honourable friend Greg Mulholland for his tireless campaigning on behalf of pub tenants. I would also like to thank noble Lords from all sides of the House for the constructive discussions we have had in advance of today’s debate and the perceptive questions they have raised with me. I can assure the Committee that the Government are committed to making the market rent only provision workable and legally robust. That is why we have brought forward these amendments, which are needed to ensure that the benefit to pub tenants can be achieved.
For example, the market rent only clause introduced in the other place provided MRO to tenants on entering administration. Rather than provide protection for tenants, this could hasten the route to company liquidation, which would certainly not be in the tenant’s interests. The Government’s amendments attempt to address such unwelcome effects, which I will cover in more detail as the Committee progresses.
There may be some differences of opinion on the detail of the Government’s new clauses, which the House will rightly want to debate, but I encourage the Committee to accept these amendments today to ensure that a workable framework is in place as the basis for further discussion on Report. The Government’s new clauses set out in the Bill the key principles of the market rent only option, and I am sure that we will debate these during the course of today. Our new clauses provide for the details of the market rent only process and market rent only triggers to be set out in secondary legislation.
For example, this includes the point at which the market rent will begin to be paid. I know some would prefer this detail to be set out in primary legislation but this would not allow for the consultation that is essential to get this right. There has been very limited consultation because of the genesis of this clause. I believe that that is a risky way to legislate. A full public consultation will help to ensure that the process works as we all intend. The use of secondary legislation for this purpose also allows some flexibility if a review later demonstrates the need for a change of process.
I know that a number of my noble friends and other noble Lords have tabled amendments to the market rent only provisions. I think it would be right to let them speak before I try to respond to the amendments.
Lord Berkeley (Lab)
My Lords, I am grateful to the Minister for that introduction. I have two amendments in this group and I am certainly not happy that they are in a group of 66 amendments. This must be about a record for Committee stage. It is interesting that amendments in this group have been put down by a number of different noble Lords, but there are five separate groups further on for amendments tabled by the noble Lord, Lord Hodgson. I am sure that he deserves such special treatment but I wonder why. I do not know whether any other noble Lord was consulted about this grouping—I certainly was not. I give notice that I would like to debate Amendment 90A separately. I do not know whether any other noble Lords will have a similar view, but I hope that that is acceptable.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I also have a number of amendments in this group. I think the answer to the noble Lord’s question is that these amendments are all about Clause 42 and the subsequent groups are about subsequent clauses. What we are doing here is debating the whole of Clause 42, rightly or wrongly. It may be too big a group but that, I think, is the background. I think other amendments to subsequent clauses form other groups.
The Government have said that they will accept the spirit of the amendments passed in the other place, but I am afraid that despite the Minister’s assurance—
Lord Whitty (Lab)
My Lords, before the noble Lord, Lord Hodgson, proceeds, the point made by my noble friend Lord Berkeley indicates a more serious procedural problem. It is not that these amendments are not serious, but they are specific. I also have some amendments in this group, but if I degroup them, a decision would have been taken on the Minister’s amendments before we reached the appropriate point in the text of the Bill.
We have a very new clause, inserted at the final stage in the Commons. The Minister quite rightly said that there has been limited chance for consultation on that. We have a huge amendment from the Government deleting an entire clause and replacing it. The noble Lords, Lord Berkeley and Lord Hodgson, and I, all have amendments to the original amendments. My noble friends Lord Mendelsohn and Lord Stevenson have amendments to the Government’s amendments. So, there is not only a large number of amendments, but it is going to be a very confusing debate.
That is not to say that we should not have the debate today. However, the way that this has been dealt with, and the fact that consultation since the Commons decisions until now has not allowed consultation with the bodies that represent tied landlords, has not allowed for significant debate with those in the Commons who pushed this amendment. We have a few weeks between now and Report stage for proper consultation to take place. I am very happy to have the discussion today because that will inform the Government, but at the end of that discussion it will behove all of us to withdraw our amendments and move them for a proper discussion on Report, which could have been preceded by some effective consultation between the Government and the various parties involved, both politically and industrially.
Although we can degroup this group, there is a rather more profound problem here. If all noble Lords agree to withdraw their amendments at the end of the debate, there is no great problem and we can have a sensible discussion over the next three weeks. However, if we proceed, we proceed as per normal. It would be sensible, even from the Government’s point of view, if we allowed ourselves a bit of a breathing space to have those discussions.
Lord Berkeley
Is my noble friend suggesting that the Minister should withdraw her amendments as well?
Lord Snape (Lab)
Before the Minister replies, I endorse and agree with the remarks made by my noble friends. On Second Reading, I intervened on the Minister’s opening remarks. I said:
“I am sure that the House will recognise how far the Government have moved on this”—
that is, the principle of consultation—
“and will welcome that movement. However, can she assure us that any future discussions will involve representatives of the tenants and will not be dominated by the pubcos?”.
The Minister replied as follows:
“My Lords, I can assure the noble Lord that we are always discussing these issues”—
I emphasise the word “always”—
“and changes with tenants—that is extremely important when you are making changes of any kind—and, indeed, they have helped us to get to the position that we are now in”.—[Official Report, 2/12/14; col. 1243.]
That is not the view of the tenants who I have spoken to. Indeed, most of them take the view that the position we are now in is thanks to the noble Lord, Lord Hodgson, and some of the pubcos.
Although we are grateful to the Minister for the sympathetic way in which she pointed out that there was a difficulty with some of the amendments in the group, we should return to the question of consultation. I hope that she will spend some time explaining to us exactly what consultation has taken place and with whom. Is it true, for example, that, despite the Minister’s promise on Second Reading, the consultation with the representatives of tenants consisted of an hour or so in the department? What consultation has taken place with the pubcos in the department and elsewhere?
I have a feeling, looking around at the Room, that a considerable amount of entertaining—if I can put it that way—has gone on over lunch. Perhaps the views of the pubcos have played a major role not only in the grouping of the amendments—about which we rightly complain—but the sentiments that the Minister expressed and, I fear, will express, about the postponement of proper legislation that was voted on in the House of Commons but seems to us by the amendment and the grouping to be being flouted by the Government.
I hope that the Minister can reassure us at this early stage, because if she cannot, I can assure her of a fairly long and drawn out Committee sitting here today, and that a considerable number of amendments will be tabled at Report on behalf of those who feel that they have a raw deal under the existing arrangements and cannot see it getting any better under the Government’s proposals.
Lord Cope of Berkeley (Con)
My Lords, I think we are still intervening on the speech of my noble friend Lord Hodgson on these procedural matters. I urge my noble friend not to withdraw all her amendments for the simple reason that I find it very difficult to unravel, from all the amendments tabled by the Government and by others, exactly where we are supposed to be at the end of the process that the Government wish. It would be helpful to write the Government’s proposals in full into the legislation at this stage, so that we and everyone else who is to be consulted in a short while can see exactly what the Government are proposing properly set out. No doubt then, at Report, some noble Lords will move their amendments, whether they are identical to or different from those on the amendment paper.
Lord Snape
I find it difficult to imagine that someone with such a distinguished record as the Deputy Chief Whip in the other place can confess to any confusion about the layout of the Bill and the amendments. Regarding him seeking clarity, it was my experience in the Whips’ Office—although not personally with him—that clarity was sometimes the last thing that Deputy Chief Whips ever sought. Indeed, I find it surprising—as I suspect the Committee will—that the noble Lord should make such an admission at this early stage.
Lord Cope of Berkeley
That is as may be, but I hope, if the noble Lord thinks that I have diverted from my previous course of action, that that will strengthen the force of the remarks that I make.
Baroness Neville-Rolfe
My Lords, I do not know whether it is appropriate for me to stand up before noble Lords start to talk about the amendments, but I am essentially, as noble Lords know, a practical person, keen to try to progress the Bill and to do the right thing with today’s business on pubs. I will respond to the point that has just been made on consultation and reassure the noble Lord, Lord Snape, that Jo Swinson, my friend in the other place, held a round table with pub companies and another with tenants, both for the same amount of time. Officials have also had discussions with people on both sides of the debate throughout, while always trying to be balanced and objective. Ministers, advisers and officials have also had several meetings with Greg Mulholland since Report in the Commons, although it would be fair to say that he is keen to keep his clause exactly as it is. So far, that has made progress a little difficult.
Lord Snape
I thought I heard the Minister say that she has not met Greg Mulholland. It is surprising that a Minister in charge of a Bill in your Lordships’ House has not got round to meeting the person responsible for a major amendment to that Bill, although she rightly paid him a compliment for the work that he has done. Is there any reason why she did not meet him?
Baroness Neville-Rolfe
The noble Lord makes a good point. The Secretary of State and Jo Swinson have been intimately involved in all this. I have now taken over the yoke in this House. The next thing I was going to say is that I held an open-door session yesterday. Noble Lords were invited. I was surprised that more noble Lords were not able to come, but that might have been a timing issue. I am keen to get to know all the views of the Committee on this important issue. I joined the House of Lords because it is an important revising Chamber. We have to look at these things and get them right. Our door will be open between now and Report.
Clearly this group of amendments is very large, but I have already said that I would like to listen to what is being said by noble Lords on their amendments before I respond and comment on what we should do with our amendments. We are being very constructive; we are trying to seek a balance and to do the right thing. If we could get on and get into the detail we may find that we can narrow down some of our differences.
Lord Hodgson of Astley Abbotts
My Lords, when I was interrupted a minute or two ago I was explaining that I had some amendments here and that we had some doubts still, despite my noble friend’s assurances about the workability of what is now proposed. I should say to the noble Lord, Lord Whitty, who I think asked the question, that I do not propose to move my amendments today; I propose to have them discussed. I suspect that that is what he expected me to say, but then I suspect that he was not putting his question to me.
At this point I remind the Committee, as I did the House at Second Reading, that until a year ago I was a non-executive director of one of the six companies covered by the proposed code. The group of which I was a non-executive director had five breweries, two large ones and three small, stretching from Cumbria to Ringwood in the New Forest. It owns some 2,000 pubs, of which about 500 were managed, and the balance were tenanted in various forms.
This is a bit of housekeeping. The Captain of the Gentlemen-at-Arms has told me that it has been suggested that I did not declare this interest at Second Reading. For the record, I draw the attention of the Committee, and indeed the House, to col. 1289 of Hansard on 2 December, the date of the Second Reading of this Bill, in which I declared in terms the interest that I just declared. It was further suggested by someone that I did not declare my interest at the beginning of my speech. That is perfectly true; I did not. I think that the Companion does not require you to make your declaration at the beginning of the speech. The beginning of my speech was not about pubs; it was about pre-pack administrations and about the Government’s procurement policies as they affect small companies, in which I had no interest to declare. When we came to the pubs, I made the declaration that I have described, so I hope that we can draw a line under that question.
I thank my noble friend and her team of officials for the time they have given to discussing some of the operational problems that it is feared may occur. I thank the Government, having listened to some of the arguments that my noble friend has just briefly outlined for the Committee, which include a complete rewriting of Clause 42, which, as we realise, is the essential heart of the new regime. The amendments, as we have heard, were tabled last Thursday night, and it is fair to say that, given only three complete working days since, all parties are struggling to understand the full implications of what is now proposed. My noble friend Lord Cope of Berkeley had a sensible suggestion to achieve some permanence that we can then discuss and amend on Report if necessary. I do not suppose that CAMRA will agree with much of what I say but it may be persuaded by some of the arguments, and I suspect it would agree that we are struggling slightly with the flow of information that has come so late in the day.
I have tabled a number of amendments to Clause 42, which form part of a strategic whole. Before discussing the amendments in detail, I shall take a few minutes to discuss the shape of the pub industry and how those amendments would be to its long-term advantage. I begin by making three things clear. First, these amendments do not—I repeat, not—seek to overturn the House of Commons decision to introduce a market rent only option, the MRO. I think that that is probably a mistake; time will tell, but it may accelerate pub closures. However, the Government have decided to accept the decision, so I want to move on from that point.
Secondly, the amendments are designed to help to keep pubs open. The sector is under pressure from a wide range of adverse tides. There seems to be a view that somehow pubcos want pubs to close. A landlord needs a tenant as much as a tenant needs a landlord. That is particularly true of the company with which I was involved, which brewed its own beer in integrated premises, and it is through its own pub estate that a large proportion, 25% to 35%, of the product is sold. A closed pub is of no use in this regard, and closure even for a short period can be disastrous. If I may use the noble Lord, Lord Stevenson, as an example, if he is in the habit of having a pint on the way home from work and his normal hostelry is the Crown but it closes for refurbishment, he will not cease having his pint but will go to the King’s Head, elsewhere in the high street. It may be that as a result of the Crown having closed for a bit, his permanent patronage will be shifted to the King’s Head. In the company in which I was involved, when we undertook refurbishment we wanted it to be as quick and painless as possible to avoid upsetting our regular clientele.
Thirdly, these amendments are designed to iron out some of the idiosyncrasies and unevenness that, if not changed, will seriously affect future investment in the sector and its longer-term health. I am afraid that it is not realistic to believe that individual free house operators will have access to the sums of capital that large companies have at their disposal.
I turn to the industry. As I have said, the Bill affects only six companies, unless the Government accept Amendment 69A, tabled by the noble Lord, Lord Berkeley. It is not surprising that the issue of hybridity has raised its head and has had to be addressed in Clause 70(3). The six companies fall into two categories: two of them brew beer as well as owning pubs, which they sell in part through their own estate. They also sell in supermarkets, through independent pubs, free houses, off-licences and so on. I will refer to these as the integrated model. The other companies are pubcos. They do not brew beer; they very often buy their beer in from breweries operated by their rivals. They are clearly more focused on the rental levels available in their pubs.
As I explained at Second Reading, this rather counterintuitive structure of pure pubcos came about because of a parliamentary decision on the beer orders in the 1980s, which prevented breweries from owning more than 2,000 pubs. The disinvestment programmes forced on them resulted in what have become known as pubcos. They resulted from a parliamentary decision, which many argue had a completely unexpected and unintended consequence. We need to make sure that we do not set out today on a journey that has similar unintended consequences. By the way, some argue that the way in which this weakened the brewers weakened the whole of British beer on the pub market and led to the rise of foreign lagers, which are sold in every pub in the country. If your Lordships go into a pub you will be faced with Stella Artois, which is originally Belgian, Fosters and Castlemaine from Australia, Grolsch from Holland, Kronenbourg and, more recently, Peroni. Most, although not Peroni, are brewed here under licence but not owned in Britain at all.
Those two types of companies have differently aligned interests and objectives, but I would like the Committee to remember a further differentiation between managed and tied pubs. Managed pubs, as the title implies, are run by employees of the company who are paid a salary with a bonus and other fringe benefits. They are quite different from tied tenants, who are essentially self-employed small businessmen. All the issues about beer pricing and other conditions of the tie are of no interest to the manager, who is in effect running a branch office. I am very grateful to my noble friend for having made it clear in moving her amendment that managed houses have no place in the provisions of Part 4.
As I said at Second Reading, people feel strongly about pubs; even if they do not want to go to them, they like them to be there. Their disappearance is resented for removing an essential part of what people see as a community. Just how strongly people feel about pubs, though, even I underestimated. It is not often, working away as a humble Back-Bencher in the decent obscurity of your Lordships’ House, that a single sentence in a 13-minute speech can get one simultaneously on to the front pages of the Daily Mail and the Daily Telegraph and described as an Islamophobe to boot. For the record, let me set my sentence in context.
I said that the pub trade in all its forms—tied, untied and free—faces very adverse tides, which are resulting in pub closures. The adverse tides, in which I fear that the tie plays only a marginal part, include cheap alcohol in the supermarket, with an average price of £1.13 per pint compared to about £3 in the pub, so that people drink at home; the rise in the consumption of other beverages not normally associated with the pub, such as wine; the rise in regulation including drink-driving, the smoking ban and new licensing laws; rises in costs, including council tax; and deep-seated socioeconomic changes, including the deindustrialisation of parts of Britain—I used the example of the carpet trade in Kidderminster at Second Reading—and the arrival of people whose faith forbids the drinking of alcohol. That last point is not in any way and was never meant to be a criticism, as I am a great believer in religious tolerance in every direction. However, it means that such people are, quite understandably, unlikely to be persistent frequenters of premises which, under Clause 65(3), are defined as ones in which,
“one of the main activities carried on at the premises is the retail sale of alcohol to members of the public for consumption on the premises”.
As a result of these trends, in which sectors of the pub trade are closures now taking place? From the publicity being given, it would appear that the conclusion is that nearly all the closures are taking place in the tied sector. The truth, I am afraid, is rather different. Mr Doug Jack, an analyst at Numis, the City investment house, says in a paper that the closure rate in the free-of-tie sector is more than double the closure rate in the tied, tenanted, leased sector. There is a multitude of reasons for this, all connected to the fact that tied pubs also tie the pub company into the pub’s success or failure. As part of the rent is paid through the beer, the pub company is motivated to drive up beer volumes, which is why pub companies invest substantial amounts in capital expenditure, tenant support and rent concessions when good licensees are struggling.
Lord Snape
If, as the noble Lord implies, the tie is not the principal reason behind the unhappiness of many tenants, perhaps I could refer him to the CAMRA report into the tie. Can he explain to the Committee why more than 70% of tied tenants feel that the tie is, to say the least, unhelpful to their business?
Lord Hodgson of Astley Abbotts
I do not say that the tie is perfect. In fact, I was about to say that the tie has had its imperfections. But I do not think the statistics that are produced by some of the pubcos show that there is the level of dissatisfaction that the CAMRA figures indicate. We can argue about the polling; no doubt the way you ask the question and who asks the question can move the figures around a bit. But I think the other side—the pubcos—would argue that actually the level of dissatisfaction among tenants is not as great as the CAMRA figures suggest.
Lord Snape
Again, can the noble Lord give us some examples? If CAMRA has got it wrong and he has got it right, perhaps he can explain to the Committee how he has come to that conclusion.
Lord Hodgson of Astley Abbotts
The noble Lord is very kindly almost making my speech for me. I was about to say—
Lord Hodgson of Astley Abbotts
I was about to say that in the 25,000 or so examples of tied tenancies, I do not doubt that there are examples of egregious behaviour by pub owners. Those need to be addressed swiftly and promptly. But I do argue, and I will provide at least two specific examples when we come to Amendment 82 on significant investment—I remember the noble Lord, Lord Snape, chiding me at Second Reading and asking me to produce them—that the tie can work well for all parties and can provide a cheap and effective way of creating a satisfactory, profitable small business. I do not want to see the creation of a regulatory structure that strangles the possible advantages that the tie can offer.
To compete for people’s leisure time and their leisure pound, pubs have to offer an experience that is valued by the chosen target market. The target market may be younger males with sport, TV and pub games; younger females want more of a wine bar; families want play areas for children; and cheaper meals attract the retired. But noble Lords will quickly recognise that setting out first to choose a target market and then to develop it successfully takes experience and knowledge. That back-up and support is what in good circumstances a pubco can provide.
Whatever type of pub you are running, running a successful pub is very hard work: long, anti-social hours; periods of the year when external events such as the weather dramatically reduce your level of trade—this evening, if the weather continues as it is, pubs all over the country will be empty; and a readiness to deal with, humour and enjoy the company of the great British public in all their diversity. By no means do we all possess the multifaceted set of skills required to be a successful Mein Host.
Lord Berkeley
Looking at the list of groupings, it appears that the first amendment in the name of the noble Lord, Lord Hodgson, is Amendment 69, which seeks to leave out Clause 41(6), which says:
“The Pubs Code may require large pub-owning businesses to provide parallel rent assessments”.
Is that what he has been speaking to for the past few minutes?
Lord Hodgson of Astley Abbotts
I hope I made it clear to the Committee that I was trying to give a bit of a tour d’horizon of how these amendments fitted into the future. I was trying to explain that the adverse tides, which I have just been talking about, are not part of the tie but are part of other, bigger issues. In a couple of minutes I will come to each of the amendments, of which Amendment 69 is the first.
I explained that running a pub was exceptionally hard work and many people coming into it, often as a second career, find that it is not as easy as it looks. Like all of us, they are inclined not to blame themselves but to look for somebody else to blame. In such circumstances, the owner of the tied pub can be a first, and relatively easy, target. A complaint sells itself well in the community and the local MP’s surgery. This does not just apply to pubcos; I have had correspondence since Second Reading from people with free-of-tie pubs which have fallen on difficult times. When they tried to close them they were prevented from doing so by them being listed as assets of community value, so they were left with a bit of a pub they could not sell and a pub which they did not want to buy.
Finally on this opening section, I draw the Government’s attention to what I call the nuclear option. This is not available to the integrated companies because, as I explained, they need the pub estate to sell their beer, but it is available to pubcos. The pure pubcos could react to this parliamentary focus on rent only by becoming property companies. They could cut their overheads drastically by removing all the pub support, such as business development managers. This would boost their profitability in the short term; in the longer term, they would sell the better performing parts of the estate to other companies while closing and seeking alternative uses for the rest. This nuclear option—and I have no idea how likely it is—could dramatically increase the rate of pub closures. The amendments in my name—the focus of the intervention by the noble Lord, Lord Berkeley, a minute ago—are designed, as a whole, to avoid a dogma-driven solution and instead create, with the MRO option, a balanced and flexible structure which affords the best chance of keeping pubs open in as many places as possible.
After that very long introduction, I will whip through the amendments in my name. Amendment 69 seeks to delete Clause 41(6). As my noble friend said, this proposes a system of parallel rent assessments. These might have been of value before the House of Commons amendment introducing the MRO and associated provisions. Given that change, parallel rent assessments are essentially duplicates of what is proposed elsewhere. I am not sure whether they are needed anywhere, but they are certainly not needed in connection with the MRO option. I hope that my noble friend will explain why they are still there and how they are supposed to operate within the confines of the Government’s proposed new clause to replace Clause 42.
The remainder of the amendments in my name are all concerned with Clause 42—which, as my noble friend has explained, it is proposed to remove. The proposed new clause definitely answers some of them, definitely does not answer others, and the impact in the remaining cases is unclear. I would be grateful for my noble friend’s help in bringing clarity to these points. Amendments 70 and 71 are covered because they are about tied and managed pubs and my noble friend has made it clear that managed pubs form no part of the new regime. Amendments 72, 73 and 74 are important because they concern integrated businesses that brew beer and sell it through their own estate. It must be logical for the Pubs Code to permit such businesses to require their tenants to stock their own brands of beer and cider. If, under the code, a new MRO tenant could immediately turn round to the pub owner and say: “I am not going to stock your beer any more: I am going to stock the beer of your bitter rival”, this would have a disastrous effect on pub ownership.
Lord Snape
Has the noble Lord reflected on the wording of Amendments 73 and 74? Does he feel that, as presently drafted, they restrain the sale of products other than beer, even if they do not stop it? I agree with the principle, but is he happy with the drafting?
Lord Hodgson of Astley Abbotts
Well, the focus in these pubs is on the beer—and possibly cider—because that is what is really essential to the brewers. That is part of their output. If they cannot sell their beer through the tied pubs, that might be cutting off 30% of their market.
Lord Snape
No, the point that I am seeking to make is that if the amendment is accepted, it appears to stop the tenant selling anything other than beer.
Lord Hodgson of Astley Abbotts
My wording is focused on beer and cider and not on other products at all. I think the clause is clear. It has to be read in conjunction with the fact that the MRO tenant can be clear that he is free to purchase those beers or ciders wherever he wishes, not necessarily through the brewery, so there can be no question of unfairness of pricing.
Lord Snape
I am sorry to keep interrupting; I am asking him to define his own amendments here. Brewers do not only sell beers. They sell soft drinks as well, which are often part of the tie. His amendments appear to stop them from doing that. That is the only point I am putting to him. To be quite honest, I think his amendments are daft anyway, but they appear even sillier when one reads them.
Lord Hodgson of Astley Abbotts
There are two parts to this. The question is whether the tenant is being forced to take supplies at a price higher than he can buy elsewhere. The key part is to ensure that, if the tenant feels that he or she is not getting the fairest price from the brewery, he or she can buy elsewhere. They can go to a wholesaler or other sources. That is his or her protection. A protection for the brewery is that it can insist that its beer be sold. A protection for the tenant is that the brewery cannot insist that the beer be bought from that brewery. It can be bought wherever the tenant wishes. The brewery has to compete for it and make sure that they offer the keenest price to the tenant.
After that exchange, I hope that my noble friend will be able to clarify and reassure me that the Government intends to provide certainty of supply, and that this provision will form part of the Bill. This is a very important amendment for the future of the industry.
Moving to Amendments 75, 76, 83 and 86, these are essentially drafting points to clarify the timing on when an MRO offer has to be made. I think the new clause addresses them but I hope my noble friend can confirm this.
Amendment 88 amends Clause 42(9)(b), adding at the end,
“provided that the requirement to enter into a new tenancy or lease if such tenants choose the Market Rent Only option shall not be considered discrimination”.
The purpose of that amendment is as follows. It would surely be unfair for the tenant to use the MRO option as a means to evade his obligations under his existing lease. A tenant may choose the MRO option, but having made that choice, he must then sign up for it and it should not be discriminatory for the pub owner to require him so to do. Further, in taking the MRO option, the tenant is electing to agree to a normal commercial lease as defined by the British Property Federation. That is to say, an MRO lease does not contain any special underlying legal features unique to the sector. It would be most helpful if my noble friend would give some assurance on that point.
Amendments 79 and 89 are about “significant” and “unfair” and potentially have a greater impact. They concern the events that can trigger the requirement to make an MRO option available. Clause 42(6)(b) requires the offer of an MRO option,
“when the large pub-owning business gives notice of, or imposes, (whichever is the earlier) a significant increase in the price at which it supplies products, goods or services”.
This wording appears to be replicated in subsection (6) of the proposed new clause. Amendments 79 and 89 propose to replace “significant” with “unfair”.
The question is, what constitutes a “significant increase”? Is it the right word anyway? The reasons given for the introduction of the Pubs Code revolve around the inequality of arms between the pub owner and the tenant. The Pubs Code is intended to ensure fair dealing between the two parties and give the tenant redress when unfair practices have taken place. The word “significant” is a general term, not a particular one. The Oxford English Dictionary defines “significant” as important and notable. There might be many reasons for there to be a significant, important and notable increase in the price of what the Bill calls a “product, good or service” supplied to a tenant.
Lord Berkeley
Has the noble Lord thought about what the word “unfair” means? For the pubco, it is probably different to what it means for the tenant. It seems to me to be rather more wishy-washy than “significant”.
Lord Hodgson of Astley Abbotts
I am delighted that the noble Lord, Lord Berkeley, said that. I am about to come to the definition of “unfair” in about one second. I am talking about the importance of the definition of “significant” as important and notable. The price of beer might rise sharply because of: the cost of raw materials, such as hops; governmental action on alcohol taxation following medical advice; or increased delivery costs following price rises or road tax changes. It is surely not right to potentially penalise the pub owners alone as a result of such events, which have equal impact on all parties.
By contrast, coming to the point made by the noble Lord, Lord Berkeley, the Oxford English Dictionary definition of “unfair” is: not equitable; “unjust”; not according to the rules; partial. In my view, this precisely matches the concept behind the Pubs Code. It is intended to deal with situations that are inequitable—that is to say unfair—between the two parties: the pub owner and the tenant. I hope that the Government will think again about this wording before Report.
I turn to Amendment 80, which concerns the other events that could trigger the requirement to offer an MRO option. This formed part of my noble friend’s introductory remarks. Clause 42(6)(c) requires an MRO offer on the sale of a pub. This would be quite unfair to pub-owning companies. Pubs, whether singly or in blocks, can be sold for perfectly legitimate reasons. So long as the tenant’s position is protected, as it would be, the identity of the owner really makes no difference to the tenant. If this paragraph were to remain in the Bill it would freeze up the market for pubs and so discourage investment.
The amendment also seeks to remove another trigger point at Clause 42(6)(d): that, if a pubco goes into administration, an MRO offer must follow to the tenants. I think that my noble friend addressed this point in her opening remarks. The same objections apply to this: provided that the tenant’s position is protected, he has no interest in the affairs of the pub owner. If this paragraph were to remain, it would have serious consequences for the industry. First, pubcos would find it much harder to borrow. From a bank or lender’s point of view, the fact that, on administration, the relationship of the pub owner could change with every one of its tied pubs would make lending significantly more risky and, therefore, less attractive, thereby reducing the flow of investment to the sector. Secondly, if administration was to occur, the position of the creditors would be significantly worsened as value could be destroyed by the uncertainties that would result from an MRO option. I understand that the Government are proposing to withdraw those paragraphs. I would like my noble friend to give that commitment.
Amendment 81 is also concerned with a trigger point: Clause 42(6)(e), which appears to form part of the proposed new clause at subsection (6)(d) and subsection (9). This also covers the emergence of trigger events. In the proposed new clause, the definition of a trigger event is drafted very widely and is likely to lead to a good deal of uncertainty in its application and interpretation. That is surely not to the advantage of any party in these circumstances.
We have the well established procedure that has been used to determine appeals against rateable value; that is, whether there is deterioration in the circumstances of a property. Paragraph 2(7) of Schedule 6 to the Local Government Act 1988 lays out the matters to be taken into account. They include,
“matters affecting the physical state or physical enjoyment of the hereditament … the mode or category of occupation of the hereditament … matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there, and … the use or occupation of other premises situated in the locality”.
This definition sets out the criteria for when a change happens to a business and a rating reduction can be allowed. It is a well used and well understood definition that could, with advantage, be used to define when an MRO option could be triggered. I hope my noble friend will reflect further on this before Report.
I come now to Amendment 82 and the points made by the noble Lord, Lord Snape. This is an important amendment and I do not think it has been addressed in new Clause 42. The amendment inserts into the Pubs Code:
“The Pubs Code shall offer an exemption from the Market Rent Only Option for a mutually agreed period in return for a significant investment by a large pub-owning business in that tenant’s pub”.
This would mean that if a pub-owning business spends a significant sum improving a pub, the Pubs Code would permit an agreement with the tenant for a period during which there would be an exemption from the MRO option.
Those who successfully proposed the amendment to Part 4 of the Bill in the House of Commons see the tie as universally malign—the point that the noble Lord, Lord Snape, and I discussed a few minutes ago—an arrangement without merit and having no benefit. But this is not true. I was challenged by the noble Lord, Lord Snape, at Second Reading to produce evidence to support the continuation of the tie in any form, and this I will now do, with a couple of examples.
If I may, I will take the Committee to the Black Bull in Mansfield. I should make it clear that the tenant, Janice Shaw, has given permission for me to use it as an example. When Janice Shaw took the pub on, it was trading at about £7,000 a week as a result of a lack of catering facilities, which resulted in strict food service times and a rather poor food offering. The brewery invested £100,000 in the pub. It addressed kitchen standards and capacity, doubling the size of the kitchen by extending it into the car park. In addition, the pub was redecorated, with new signage and fixtures and fittings. The result is that the turnover is up to £10,000 a week—an increase of £3,000 a week or £150,000 a year. The brewery has increased the rent by £5,200, from £32,800 to £38,000, and is making, as it wished me to remind the Committee, £6,000 more from increased sales of beer. So from Janice Shaw’s point of view, she has £150,000 of extra revenue while the landlord has £11,200 of extra profit. It is doubtful whether a bank would have funded this. It is a messy lend, being part construction work, part purchase of fixtures and fittings, and part redecoration. Of course, a bank would not have had the same vision and confidence as to the likely success post-investment.
My second example is the Crown Hotel in Southwell, Nottinghamshire. Anna Guise is the current tenant. She took on the Crown in 2005. Although pretty well run, the site had become tired, resulting in the consumer often becoming confused; little food was being sold; the reliance on the town centre drinking circuit was evident; and there was a need to change to a more balanced offer in order to appeal to wider consumer groups. Anna Guise tried to invest in the site but could not afford the necessary capital and the pub remained in decline. To support the operation, the brewery reduced the rent and Anna’s father supported her with regular cash injections.
The brewery invested £84,000 in November 2013 without requesting any rental uplift. The cap ex addressed both internal and external standards, modernising throughout. It developed the back bar to include coffee, wine and a more rounded offer. A new menu was introduced and food was served all day. The evening drinking remained but the message to the consumer was that the feel of the building had been improved and fresh signage was introduced. Post investment, decline has been reversed and there is now 39% growth. That has enabled her to plan for a brighter future for her pub.
The basic point is that integrated pubcos that wish to sell will not invest £100,000, or even £84,000, if there is no guarantee that they will be able to sell their beer and if, after the money has been accepted and an investment has transformed the pub, the tenant will be able to say that they want to change the basis of the contract. The amendment would permit—not require—a situation in which if significant investment has taken place, of the sort that I have just described, the two sides could agree a period during which the MRO option would not be available. Without this, pubco investment will be significantly reduced, and I hope that my noble friend can give some reassurance on that point.
Amendments 84, 85 and 87 are drafting amendments to Clause 42(8). Subsection (8) is concerned with the 90-day assessment period during which an independent assessor reaches a judgment on the terms of the no-tie agreement. It is important to be clear what happens during that 90-day interregnum. It must be made clear that the tenant must comply with the existing contract until the new MRO contract comes into effect.
Finally—no doubt much to the relief of the Committee—Amendment 89 is paralleled in large measure by Amendment 83A in the name of my noble friend Lord Borwick, concerning the rather unattractively named SCORFA—special commercial or financial advantages. I will leave my noble friend to address that and how it will fit into the MRO world post the break of the tie.
I recognise that I have thrown a lot at my noble friend in the last few minutes, although I hope that her officials were already aware of my direction of travel. It is important that all parties to the debate get clarity on the Government’s position. I am talking not about clarity on the broad principle—we all understand the MRO option—but rather on the more granular aspects of how the policy is intended to operate and what the consequences are likely to be.
Lord Berkeley
In this grouping, my Amendment 69A is the next one that is not a government amendment, so if it is convenient for the Committee I will speak to that and try not to delay the Committee too long with comments on the amendments from the noble Lord, Lord Hodgson. If I then have comments after the Minister has spoken, I am sure she will be willing to accept them.
I want to put on record that it is great shame that the Government have somewhat changed what was agreed in the House of Commons. I see the government amendments, and those of the noble Lord, Lord Hodgson, as putting the whole issue into the long grass, which is very sad. Rather than having the MRO option in primary legislation, which I thought was excellent—although obviously there is detail that we need to talk about—we could be left for many years with people opposing any secondary legislation that comes in and then debating it at that stage. Who knows what will happen then?
Amendment 69A is a probing amendment about why the Government, or the House of Commons, chose a maximum of 100 pubs rather than 500 pubs. I have had some useful discussions with St Austell brewery in Cornwall, which comes somewhere in-between. I have also talked to many of its tenants and others, and many who I talked to would be pleased to be able to renegotiate under the MRO. The family brewers, including St Austell, believe that they provide a much better and friendlier quality of ownership than the very big ones. I suspect that they are right in that.
Lord Hodgson of Astley Abbotts
On Amendment 80, if it were a retail outlet such as a high street store, there would be no reason why a company should not sell its retail store to someone else. Why should a brewery be any different?
Lord Berkeley
It is a question of what would constitute selling and what would be transferring it to a company in which the brewery had 100% or 99% of the shares. It is a grey area. The noble Lord may be right but I do not see that as a reason for having his Amendment 80 or any of the others. We can go on debating this.
I still think that Amendment 82, in the name of the noble Lord, Lord Hodgson, is trying to say that once the tenant has started the negotiation he has to finish it. That is very unfair on the tenant because, while he may have said that he wanted to start it, if he is not happy with the outcome it is surely reasonable that he would not have to conclude an agreement. The short answer is that he will not stay there long and will suffer severe financial hardship.
I could go on for a long, long time, but I have one last comment on Amendments 73 and 74. I did not really understand the noble Lord’s explanation to my noble friend Lord Snape. If his amendment would enable the tenant to buy his beer and other drinks at whatever price he chose from whomever he chose, why are we going through all the rigmarole of all these different adjudications? Just let him do it now. I am sure that I have it wrong, but it would be nice if at some stage the noble Lord could explain the amendment in words of one syllable.
Baroness Wheatcroft (Con)
My Lords, I speak in favour of my noble friend Lord Hodgson of Astley Abbots. First, given the in-depth knowledge that he has shown on the subject, I hope that he is a member of our Catering Committee because he would be an asset there. I shall speak briefly because this is complicated and there is a lot more to go. We need to spell out that if a tenant opts for a market rent only deal, there should be a completely new agreement between the tenant and the landlord, and that should take in everything, from investment to the length of lease—it is a new lease, effectively. We should spell out that there is freedom to renegotiate there.
On Amendment 80, I completely concur that, for the ongoing good of the business, it is important that an MRO should not be triggered simply by a sale or an administration. The Minister indicated that she saw things the same way, and I hope that we will hear that confirmed.
Lord Snape
My Lords, to respond to some of the amendments of the noble Lord, Lord Hodgson, I say in passing that although, at my request, he came up with some examples of landlords being happy with the tie, they did not seem to me typical of what takes place in the industry. I do not want to repeat to the Committee anything that I said on Second Reading, when I detailed some of the problems that my daughter and son-in-law have had. Their treatment by Enterprise Inns is a lot different from the cases outlined by the noble Lord when he moved his amendment. Similarly, on Second Reading, with the permission of a couple called Dawn and Michael Shanahan from the Bulls Head in Old Whittington near Chesterfield, I read out a letter showing how they had been treated, which, I am sure that the noble Lord would agree, is a lot different from either of the examples that he gave to the Committee this afternoon.
The fact that more than 70% of pubco tenants have expressed their unhappiness to CAMRA indicates that far more of them have been and are being treated as in the two examples that I gave on Second Reading than in the two examples that the noble Lord has given to the Committee today.
I thought that the noble Lord was seeking to intervene; he looked a bit restive. I thought that he was going to come up with even more examples of happy tenants, but there are not that many of them around. He has probably exhausted the lot of them with those two.
Lord Hodgson of Astley Abbotts
The noble Lord has provoked me enough. I was sent a book this thick by some of the pubcos containing responses from tenants. Have I leafed through it? Do I want to bore the noble Lord and the Committee by producing it? Certainly not, but a large number of tenants drawn from all around the country were explaining how satisfied they were with the way that the tie operated. The ALMR has written to Members of the Committee to say that the tie works for its members and that it supports it.
Lord Snape
The first question about that association, whatever it was he said, is: who is funding them in the first place? Let us leave that aside. The noble Lord tells the Committee that he has a very thick book of completely satisfied tenants. Again, is there some reason why CAMRA did not consult them? The figures are there. I will send the document across to him. Oh, he does not want it—he indicated dissent. If there is such a crowd of happy tenants up and down the country, CAMRA would surely have spoken to them. I hope that I take both sides of the Committee with me when I say that CAMRA is a trusted and respected organisation on these matters. The fact that it records a dissatisfaction figure of more than 70% indicates that the bulky document referred to by the noble Lord, Lord Hodgson, may not be as laudatory about the pubcos as he indicated.
Let us look at some of the amendments in the noble Lord’s name. It is impossible to read, from the Minister’s expression, whether or not she favours them. Sometimes it can be an advantage sitting on this side, as Ministers are not always as inscrutable as the noble Baroness. Given some of the obvious failings in these amendments, I cannot believe that the Government are about to accept them. The noble Lord has not told us why in Amendment 69 he wants to take out the parallel rent assessment, but I presume he—or those who have briefed him—has a good reason to do so.
Amendments 70 and 71 are concerned with the definition of a large pub-owning business as one with 500 tied pubs. I do not know whether the Minister can understand what the noble Lord is getting at, but I am afraid I do not and I find those amendments pretty confusing. I ask for clarification from the noble Lord on Amendments 73 and 74 because they seem to refer specifically and solely to beer, whereas we know that the tie includes lots of other products, including soft drinks. They are excluded under the terms of the amendment, presumably, and it would have been useful if the noble Lord could have expanded on that point.
On Amendments 75 to 82, it is interesting that the former editor of the Sunday Telegraph is in favour of denying MRO to existing tenants. She did not particularly say why but the newspaper has, sadly, sunk in its popular appeal since she left the editorship. It would have been helpful if she had given some reason why she feels that existing tenants should be denied MRO. If one combines those amendments with Amendment 69ZB, there would be neither code nor MRO for existing tenants. I am not sure whether the noble Baroness is in favour of that too, because she did not tell us. I can understand that the noble Lord, Lord Hodgson, and—I put this as delicately as possible—those he associates with might be in favour of excluding existing tenants from both the code and the MRO, but I am at a loss to understand why the Committee at large would wish to do so.
Amendments 84 to 87 are also in the noble Lord’s name. In Amendment 85 there is no time laid down for the period of negotiation between the tenant and the pubco. If a tenant is in financial trouble and the pubco knows it—and, of course, it would—dragging on the negotiations would mean that the tenant went under anyway, regardless of the final outcome. I am sure that was not the intention behind the amendments. If I have provoked the noble Lord to his feet again, I would be delighted to give way.
Lord Hodgson of Astley Abbotts
I understand that the noble Lord wishes to find fault with my proposals. The amendment relates to Clause 42(8)(e), which refers to,
“at the time of the three month assessment”.
The question is, where in the three months? All my amendment does is change this to, “at the end of the three month assessment”. All I wanted to do was to get clarity so that the tenant—presumably an MRO tenant—or the pub owner knows when the events actually happen. It must be in everybody’s interests to have clarity about the sequence of events and how everything fits together, whatever one’s view may be about the legislation as a whole. That is my only point.
Lord Snape
I am sorry that the noble Lord feels that I am out to find fault with his amendments. He should not be unduly sensitive. I was under the misapprehension that that is what Parliament is about: maybe I have got it wrong. I find fault with his amendments first because they do not do what he thinks they will—or at least I hope that they do not—and secondly because they are unfair, particularly to existing tenants. That is one of the reasons why I have taken the view that I have. I would like to know the Minister’s view on the amendment, particularly the question of denying the MRO to existing tenants. As far as Amendments 88 and 89 are concerned, if the Minister accepts them, she would be discriminating against existing tenants and I hope that she will reject them.
There is a considerable debate to be had on new Clause 42. I am not proposing to start that now. I hope that the Minister will reply to these amendments and bear in mind that as far as the general point of new Clause 42 is concerned, we would seek to have a substantial debate on its content aside from the amendments that we are currently discussing.
Viscount Younger of Leckie (Con)
My Lords, I start by saying how pleased I am to hear from my noble friend the Minister that the spirit and intention behind today’s debate in Committee is to have a general debate and to cover the large range of amendments. I wish, however, to speak to Amendment 82, which I call the exception clause to the MRO—or the clause to permit an exception, I should say, according to my noble friend Lord Hodgson. I support the amendment, which is in the names of my noble friends Lord Hodgson and Lord Ridley and the noble Lord, Lord Howard of Rising.
I declare an interest—perhaps a rather tenuous interest—as the scion of a brewing family. We owned Younger’s of Alloa, based near Stirling in Scotland, and my father—the late George Younger, the fourth Viscount—was a seventh-generation brewer. He started work in the vats before entering Parliament in 1964, still at the tender age of 32. His father—my grandfather—sold the company in 1961 to Tennent Caledonian. He was one of the first brewers—if not the first—to produce cans of beer with pictures of ladies on the outside, presumably with the intention of increasing sales. The Falkland Islands was one of the export markets.
Down to business. I support, as far as it goes, the intention of the Government in accepting the will of the other place to give tied tenants of large pub-owning companies the right to go free in certain circumstances. The devil is in the detail of the definition of “certain circumstances”. This requires further debate, which we are having today. I know that noble Lords are keen to ensure that the law ends up being robust. I believe that there should be a balanced market, in which large pub-owning companies have all the necessary reassurances that their support of and investment in pubs are viable, and tied tenants have a fair deal, however that might be defined, where there is enough flexibility for them to run their businesses and not be too restricted on purchase of supplies or price, for example.
I note that the intention is that the statutory code and adjudicator will address the imbalance of power in relation to the 13,000 tied tenants of the six pub-owning companies with 500 or more tied pubs. There is good intention behind the further protections given by the Government in the amended MRO clauses by the adoption of certain trigger points, which have already been mentioned by my noble friend the Minister: first, at rent review or five years after the latest one, whichever date is sooner; and, secondly, when the tenant renews their lease.
The two further trigger points that have been mentioned are: first, when there is a significant or unexpected increase in the price of the tied products supplied to the tenant; and, secondly, when an economic event occurs that is beyond the tenant’s control and has a significant impact on the tenant’s ability to operate the pub. I am aware that there will be a consultation on those last two triggers, which I welcome. But I am concerned that the Government may not be going far enough to reassure the pub-owning companies, and I ask my noble friend the Minister to consider a permit to have an exception from the MRO for a particular period of time in the case that a pub-owning company makes a significant investment in that pub. This is for the following reasons.
Pub-owning companies have to be shown that their investment will be secure, viable and provide a satisfactory rate of return over a period of time. In the south-east, for example, there have been investments of as much as £300,000 to £400,000 in pubs where the rate of return is calculated over a period of time—often a long period of time, well beyond five years. A trigger point, however well intentioned, creates a chilling effect. It may, at worst, stop an investment and, at best, it will cause the pub-owning company to lower the investment and perceived risk if the rate of return it needs to secure is over a shorter period because there is a trigger date looming. This is a clear unintended consequence which I am sure the Minister will have considered.
Having alluded primarily in my remarks to funds for developing or renovating pubs, which my noble friend Lord Hodgson also referred to, let us also consider another very important point for pubs: cash flow. Tied tenants are unquestionably grateful for the important financial support during fallow periods of sales, which typically occur for on-trade beer sales from January to late February and October to November each year. Without an MRO, the tied tenant is paying less rent, thereby lowering his annual fixed costs as he will be buying less beer from the company. Such fallow periods include periods when roads may be unexpectedly closed by the council or a snowstorm prevents custom. A trigger point that disfavoured the pub company could mean that there was less room for manoeuvre in negotiations.
Pub companies invest £200 million across the sector each year. Banks are not yet stepping up to the plate to support pubs sufficiently. They still perceive the pub sector as a risky bet when it comes to lending. A director of a finance company was recently quoted as saying that a considerable number of loan applications from viable SMEs were being declined by the high street banks because the application “fails to meet the criteria” or is “outside the bank policy guidelines”. We have all heard this in other, unrelated debates.
Lord Snape
Can the noble Lord tell us of any pubcos which are financially successful under the present arrangement? At present, business is as bad for the pubcos as it is for the tenants. No one is making a great deal of money.
Viscount Younger of Leckie
I thank the noble Lord, Lord Snape, for his comment, but I would like to make the point. The gist of my argument is that at the end of the day, the pub company has a choice about where it invests its money. It needs to be sure in investing its money—which it would obviously want to do to support each and every pub—that it is tied down to an amount for a particular period. The pubcos have their shareholders and their employees to think about in terms of that investment.
Lord Snape
I apologise for interrupting again. My point was in response to the noble Lord’s comment about the banks being reluctant to lend to SMEs. I presume he puts pubcos into that category. Is that not because the model has proved to be unsuccessful and, from a financial point of view, would amount to a very bad risk for the bank?
Viscount Younger of Leckie
We perhaps need to talk about individual cases, but it is generally perceived that because of the crisis in 2008, banks have changed their lending criteria. Naturally enough, many pubs are small businesses and they are suffering in the same way as other non-pub small businesses. I am making a general point about the banks’ ability to lend.
Lord Snape
I am sorry to interrupt the noble Lord for the third time. To take two examples—Enterprise Inns and Punch Taverns—the big pubcos have declared appalling financial results. They are selling off the pubs because they are in such a financial mess. It is not surprising in those circumstances that they find it very difficult to borrow money.
Viscount Younger of Leckie
I note the noble Lord’s point. I would like to illustrate some of the amounts that these pub companies invest. I mentioned earlier that they invest £200 million across the sector each year. One of the larger pub companies has estimated that, had the MRO been in place without an effective opt-out, the £30 million of capital investment which has taken place in the last 18 months would not have happened.
To illustrate how this investment affects individual businesses, another pub company recently invested £245,000 in one of their pubs in Nantwich in Cheshire. This investment created 10 jobs and took the turnover from £145,000 per annum to £330,000. A similar sum was invested in a pub in Wigan, which again boosted turnover from £250,000 to £345,000 and doubled the number of jobs. These are just two examples to add to the ones given earlier by my noble friend Lord Hodgson, of how tied pub companies invest in their estates every year to the benefit of both parties through the tied contract.
I conclude by saying that I hope the Minister has listened carefully to what I have said about the investment angle for pub companies, while not forgetting that we are talking about the livelihoods of tied tenants as well. That is just as important in terms of being fair.
Lord Berkeley
The noble Viscount, Lord Younger, has given two more examples to add those of the noble Lord, Lord Hodgson, of the happy tenants who have lots of money. He cited one company as investing £30 million in pubs which would not have invested if the MRO had existed. What assumptions is he making about the fair rent that would result from an adjudication under those circumstances? Is he assuming that the rent would stay the same or that it would go up to compensate for the profit that the breweries would no longer be making when they sell beer or soft drinks? The figure of £30 million is pretty meaningless without knowing on what assumptions it is based.
Viscount Younger of Leckie
I take the noble Lord’s point, but I spoke in support of my noble friend Lord Hodgson’s amendments on the grounds that there would be an exemption from the MRO.
Lord Hodgson of Astley Abbotts
The issue is that every company has a target return on capital. If it is to make an investment, it wants to make a return on capital and the company will set a target. The problem is that if you are going to invest your £30 million, you want to know what your return on capital will be. One issue that relates to return on capital is what will be the contractual relationship. Therefore, before you make your investment, you want to know what the end play will be, because that means that you can be assured—if it all goes well; it does not always go well—that you will get that rate of return on capital. That is the background to the figure that my noble friend is giving. Companies want to be certain that they have targets for the return on capital which they need to meet.
Lord Berkeley
With respect, “They would say that, wouldn’t they?”. I am glad that the cavalry has been brought in to help the noble Viscount, Lord Younger. The noble Viscount says that that £30 million would not be invested. “They would say that, wouldn’t they?”. We could do with some figures.
Lord Hodgson of Astley Abbotts
The truth of the matter is that every time an argument is produced to point out how pubcos operate as commercial enterprises, the noble Lord says, “They would say that, wouldn’t they?”. Capital investment budgets are set to be achieved, with certain target rates of return required to justify them. Otherwise the value of the stock—or the value of the company, if it is a private company—falls. If you do not have a rate of return on your investment higher than the cost of capital, the value of your business is falling.
You need to know what you are getting into, what your contractual relationships are and how long they will last. You cannot be certain, because, with the best will in the world—taking the example of pubs—some pubs do not do as well as one hopes. It does not work because the location is not right, the tenant is not right or the arrangements are not right. The idea is to hit the target. With the greatest respect to the noble Lord, he must understand that unless your rate of return on capital is higher than your cost of capital, you are destroying the value of your business.
Lord Berkeley
I am sorry, my Lords, but I will try just one last time. The rate of return could just as easily be calculated on the basis of the rent that the tenant will be paying once he has been through the process, because that will be fixed and the company will know it. That is the rate of return, whether the company likes it or not.
Viscount Younger of Leckie
Having been listening to my debate, I should conclude. I should answer the question appropriately. The clause is intended to provide an exemption which would allow an unspecified time for agreement to be drawn up because of the perceived investment to be given by the pub company.
Lord Whitty
My Lords, I have a number of amendments in this huge group. I should point out that none of them applies to Clause 41, which, strictly speaking, is what the noble Baroness’s amendment relates to, but I have a number that apply to Clause 42: Amendments 69ZC, 71A, 72A, 74ZA, 74ZB, 87A to 87C and 89ZA. However, in view of the way this discussion is going, and my earlier points, I hope the Committee will forgive me for straying somewhat wider. For the avoidance of any doubt, I have no interests to declare, ancestral or otherwise, except as a consumer—and even then, not in January, which is probably why I am in such a bad mood.
The Committee probably should be grateful to the noble Lord, Lord Hodgson, for explaining the structure of the industry and how it works, and those situations where the tied arrangement has worked very well for both sides, but it was an explanation that was really from the point of view of the large pubcos. He also explained the context in which they work—the economic context, the social changes and so forth—and that the whole industry is under some significant pressure. But my concern in this area is for those small businesses—and they are small businesses—of the tenants who are in tied or partially tied accommodation. This Bill is called the Small Business, Enterprise and Employment Bill; it is not called the big brewers’ restrictive contracts and exploitation Bill. Were it so, it might have been closer to what some Members of the Committee appear to be wanting.
The Minister and the Government have to recognise that the Bill we are dealing with, and Clause 42 as brought over from the Commons, is a result of a quite unusual political event and a quite unusual level of lobbying, if you like, on behalf of those small businesses we are talking about. Actually, in substantive terms, it is the first major defeat that this Government have suffered as a coalition. I think, therefore, that we should take seriously what the Commons have sent to us rather than trying to redraft virtually the totality of it, even though the Government, as the Minister has made clear, accept that MRO should be in there. I would also point out to noble Lords that this is not saying that this is the end of tied tenancies; it is simply putting those tied tenancies on a fairer basis. I know that there are those—I suspect my noble friend Lord Snape is one of them—who wish to abolish tied tenancies in total. But this is in a sense much more of a compromise position.
Lord Snape
I would be grateful if my noble friend would not portray me as being a raving left-winger on these matters. I am not seeking to abolish the tie completely; like most people, I just want a fairer system than we have at present.
Lord Whitty
In that case, my noble friend and I are on exactly the same point in the ideological spectrum—as ever. We are discussing these as amendments to the pre-existing text that we received from the Commons. Government Amendment 89A effectively rewrites that proposition from the Commons.
At Second Reading the Minister said on behalf of the Government that there were things that needed to be done to ensure that the proposition was going to be workable and did not have unintended consequences. I understand that, and that means there are parts of the noble Baroness’s amendment that I would be in favour of. But under the amendment as we now have it—and we have not had it for very long; the fact that we are debating it today puts us in some difficulty given that the consultation hitherto, as I said earlier, has been somewhat attenuated—the Government’s changes in detail do a number of things. They delay the implementation because whereas the proposition adopted by the Commons set the situation on the MRO in primary legislation, therefore bringing it into effect at the earliest point when the Bill came into law, we are, instead, reliant on the drafting of the code and the bringing forward of secondary legislation.
The Government’s amendments also change a number of the trigger points, thereby diluting the effectiveness of the MRO proposition. Amendment 89A changes the threshold because it confuses the issue of tied pubs with all tenanted pubs. The Pubs Code ought to relate to all relationships between the pubcos and their tenants, whether they are tied or not. The MRO relates to the tied pubs but the threshold of defining who this applies to should be the size of the company as a whole, which includes all sorts of tenancies. Restricting it to tied tenancies lays open the possibility of them ending one or two ties to get below the 500 mark. I do not suppose I could prove it in a court of law, but there are indications that some of the pubcos are looking to split their company structure so they would not hit the 500 mark for tied tenancies. We ought not to lay that temptation before them. The Government’s proposition fails to recognise that there is a distinction between how a Pubs Code—which I think we are all in support of—operates and the MRO option, which relates only to tied tenants. I hope, therefore, that my propositions do a number of things. They separate out the issue of the code from that of the MRO. The code is set out clearly in Clause 41 and, at the beginning of Clause 42, the MRO coming into effect is not dependent on the code. The amendments in my name would also change the definition of the threshold, although most of that comes up in a later group, in relation to Clause 66.
I do not like the procedure on this Bill because the Government have misjudged the mood, not just in the Commons and among those tied tenancies and other organisations which have pressed for this. They have succumbed unnecessarily to pressure from the larger breweries. There is no need for some of the changes to the proposition that we have received. There is, therefore, a need to reinforce those rather than go in the opposite direction, which the Government’s amendments are doing. What came to us from the Commons was not perfect, but the Government are proposing to make it worse. For that reason, we all need to take a step back and look at what we agree on in the original proposition, the amendments we are discussing today and the Government’s proposed complete redraft. We need to see whether we could, in discussion with all sides of the industry, come up with something closer to an agreement in time for Report or, possibly, send it back to the Commons and let them sort it out.
We are in an unfortunate position today. This is a complex group of amendments and none of us understands all the issues. Whatever comes out of this is going to be pretty unsatisfactory and not a good basis on which to go to Report at this point in a parliamentary Session. This does need sorting: it needs to be workable and I agree with the noble Baroness that we do not want to see unintended consequences. However, we need to be clearer as to what the consequences are that have led to the propositions in the Government’s redraft.
I hope that the Government take a step back and talk to everyone concerned. The easiest way to do that would be to withdraw all the amendments today. If the Government will not do that, we are probably in for a fairly rocky time between now and Report. If we have not met at least the overwhelming spirit of what the Commons decided, the Bill will be back in the Commons and we are in for ping-pong on the Bill. I cannot believe that the Government’s business managers really want that. There is a way to deal with this quietly and consensually. It may not work, but it might, and it would get the Government out of an awful lot of trouble. As usual, I am trying to be helpful to the Government, and I hope that they heed my words and those of my noble friends.
Lord Borwick (Con)
My Lords, I want to speak to Amendments 82A and 83A and thereby take in my noble friend’s Amendment 88. Amendment 82A concerns the amount of time for the negotiation of the MRO. In the original Bill, it was stated to be 21 days, which I think is too short. The difficulty for identifying a time for any negotiation is that the time required at the beginning of the process, when it is new to both parties, will be different to the time to produce a market rent in a negotiation in, say, five years’ time, when everyone knows what the rules are. When the lawyers are helping both sides with their arguments, it could take substantially longer than 21 days.
My noble friend may say that that will come out in the detail of the Pubs Code and the statutory instrument, but how will that time be judged? Will it change from the beginning of the period and a few years’ time?
Amendment 83A concerns the problem that under the Bill and the government amendments, existing tenancy agreements would continue. So the lease would continue in all respects other than in the rental. That brings up the difficult subject of SCORFA—an acronym standing for “special commercial or financial advantages”, and is designed not to flummox the great people of Hansard but to refer to all the advantages given to the pub tenant, all the way down to providing glasses, ashtrays and beer mats.
If the lease is being changed to rent only, it is unreasonable to leave the landlord, the pub owner, in the position of providing those benefits when he is not providing the rent. My noble friend may say that all those points will be dealt with in the statutory instrument that forms the Pubs Code, but it will be subject to consultation. What if the result of that consultation is a mass of people saying that it should not be included? If so, will we have landowners subject to a lease that is not right, where one important clause has been removed?
Surely my noble friend will agree that a matter as reasonable and important as this should be in the Bill and bring forward government amendments to deal with the issue.
Lord Stoneham of Droxford (LD)
My Lords, I worked for most of my life in a sector where we were often referred to as being in the last-chance saloon—the newspaper industry. It is perhaps a more appropriate analogy to make to the pub sector and its owners. Many attempts have been made to grapple with this issue. My noble friend mentioned four Select Committees. There have been unintended consequences in profusion as we have tried to deal with the issues over the past 10 or so years. We have to get it right this time and anticipate, where we can, any actions that could try to get round the intentions set by Parliament.
We are talking about small businesses. At its heart, what we are trying to achieve is to be in favour of free and fair competition. This means that ties must not create unfair pressures on individual publicans or give too much power to large companies. That is what this is about. When Parliament started to look at the whole beer industry over the last 20 or 30 years, it never anticipated the existence of pubcos. We can concentrate on them, but pubcos are already property companies that have overleveraged themselves—as, indeed, have many regional newspaper owners, as I know from experience. They are finding it difficult to survive and to invest. I will come on to that in a moment, because it is at the root of a lot of problems.
With their amendment, the Commons agreed to enshrine in law the principle that the tied licensee should not be worse off than a free-of-tie licensee. That is what the Commons laid down. I accept the concerns mentioned by the noble Lord, Lord Whitty, that we do not want to go down a route where this is watered down and put into a consultation period of 12 months, and then find, as we emerge from the long grass, that it has been watered down even further. That is my concern. There are a number of weeks still to look at this. As we move to Report our task is not to water down what the Commons decided but to improve the workings of the code and the Commons’ intentions, to enable our pubs to be more sustainable, able to be improved and invested in, and to protect community institutions run by enterprising and hard-working publicans.
Over the last few weeks I have been pleased to visit a number of pubs owned by Punch and Enterprise. One visit was at the instigation of the management of Punch. I have to say that no lunches were involved, but they knew the way to my heart: they arranged for me to see the pub that is the principal pub of Portsmouth football supporters. I also visited some tenants on their own as part of my due diligence looking at aspects of the Bill.
I will deal with a number of particulars that are being raised in the amendments. First, let us look at the threshold. There is a change from the threshold being “all pubs” to 500 tied pubs. As the noble Lord, Lord Whitty, indicated, the concern there is that it creates a distinction that might encourage companies to move tied pubs out of their remit so that they can get below the 500 limit. The original definition was, I think, based on the size of the company and the power that they are likely to have in the marketplace. There was also a concern to protect the smaller, family-owned brewery companies and their tied pubs. We are concerned about this change because we fear that it will provide an incentive for companies to reduce their number of tied pubs.
We also recognise that, in the leasehold model, there is a lot of movement between tied and non-tied pubs, where exploitation of market power can emerge. That is why it was thought important, in the original Commons clause, to link the two, so that the 500 threshold was across the board and not just related to the tie. The other aspect—there is a division here that the Minister should confirm—is that we are assuming that the 500 limit will be confirmed and can be changed, if necessary by affirmative action, if the response is that it is used to contrive ways round the threshold. However, the actual figure will not be enshrined in the primary legislation. I would like confirmation on that.
There are further issues on definition. The proposal is fundamentally to protect tied pubs but once the market rent option is exercised the tenant effectively will not be able to access the protection offered by this pubco. Someone said earlier that the rights of tenants will be preserved, but if they move from a company that is covered by the 500 threshold to one where it is not, they will lose some of their rights. We need to ask the Minister what her current thinking is in ensuring that some ongoing protection continues if a tenant moves to the market rent option.
We are concerned about the removal of the sale and the administration trigger points, as these are precisely the avenues that anybody trying to get round the legislation will go down. I also understand the concerns, particularly with the complication on the administration side—we all know it is a complex process—but speed is of the essence. We need to look at what protection is available to the tenant in sale and administration. If a company decides to sell and move a tied pub into another company that is below the threshold they will lose the market rent option right. Tenants will lose a right by that move. Is there some mechanism that can continue that protection after the sale for those tenants in that situation?
Similarly, on administration, I understand the complications. I have worked in that area at times in my career when companies—not my companies—have been in administration. I know that speed is of the essence and the complication of the MRO is an issue. Again, if somebody is a tenant in a company that goes into administration and moves into a company that no longer has the protection of the threshold, will they lose their rights? I think they will at the moment, but if we are to change the triggers we must look at that when we consider the reformed clause.
Another area in which concerns have been raised is the parallel rents assessments. When a tenant has the opportunity to go down the market rent option, the whole point of the parallel rent assessment is that it improves the information for the tenant in terms of helping him to make a decision as to his direction. Doing away with that for existing tenants needs to be looked at.
I turn to the amendment tabled by the noble Lord, Lord Borwick. I understand that there are two stages. There is a 21-day period when someone is trying to get agreement on the market rent option. If he goes down that route he has 90 days for it to be set and organised. But if we turn the 21 days into 90 days there will be a six-month period of uncertainty, which clearly is not acceptable. In the initial negotiating period both parties might agree that they are making progress and are moving towards an agreement but they cannot meet the 21 days, so they could mutually agree to extend the period. That would be quite normal in a legal process in business. That is another area that should be looked at.
Something I noticed when I visited those pubco pubs was that some publicans had investment or were about to have investment. They are the tenants who are most likely to be pleased and probably in line with this, but not altogether. We need some protection for investment in the sector. As we go down the route of the market rent option it will have to reflect the investment that has been made in the pub.
I assume also that if the pub has had an investment, some agreement will have to be made on exactly how that would be funded. The tenant might well want less of an increase in rent and more on the wet rent because that is a marginal cost, as opposed to a fixed cost. These are quite complex issues but there is nothing stopping protection where the market rent option is a possibility; if there has been investment, it would normally be reflected in the market rent that is set.
With those comments, while I did not speak in our initial debate, I say that I am concerned. I had access to the order of the amendments only at about 12 o’clock today, so trying to prepare how the hell one was meant to reply to this debate was difficult when one did not know what the order was. A lot is required in working out what the final Clause 42 should have in it. I shall listen carefully to what the Minister says but, as I imagine we have four weeks or so before we come back to this on Report, we will have to have a consultation on the detail so that we get this right.
Lord Mendelsohn (Lab)
My Lords, I want to clarify one thing in response to the comments of the noble Lord, Lord Hodgson, about my dear and noble friend Lord Stevenson of Balmacara, who is not in his place. He does in fact drink at the Crown; the alternative option is the Red Lion. They both happen to be privately owned, so we will leave that one there.
I am grateful to my noble friend Lord Whitty for helping us to focus on the context of this debate. There is little doubt that a small business Bill is the perfect location for these provisions. During the discussions we have had on supporting small business, all sides of the Committee have raised issues to ensure that small businesses are given the support to allow them to operate efficiently and to have the right level of protections and opportunities for commercial activity, employment, growth and development. In the area that we are addressing today, we are looking at issues of asymmetric information, imbalances of bargaining power, behaviour and commercial restrictions—all issues that we have discussed in different ways on parts of the Bill.
We believe that the Bill should be a key part of the UK’s growth requirements, to be achieved by allowing commerce and markets to flourish and addressing impediments to functioning and competitive markets. This is why we are keen to support it. Commercial change, innovation, transformation and adaptability are crucial for the UK. With all the good that there is within the UK pub sector—although there has also been some bad, which many colleagues spoke to so eloquently at Second Reading—it is a market that should see itself as being enabled by the proposed legislation and the measures that we are debating today. We certainly see the market rent only option in this context. It is a firm pro-business and pro-market principle that we are pleased to see in the Bill.
Labour has long argued for a market rent only option as the only way of guaranteeing the principle that tied tenants are no worse off than their free-of-tie counterparts. We have brought the issue to a vote in the Commons four times. Under the original Bill, licensees would merely have had the right to ask their pub company to show them how much their rent would be under a free-of-tie scheme. This was problematic, as all the information would be held by the pubcos; all the calculations would be crunched by their accountants and all the final estimates made by them. Even if they then revealed that the landlord would be better off free of tie, they would have had no legal right to demand this option.
The Government’s own response to a consultation on a statutory code, printed in June, concluded that,
“a mandatory free-of-tie option … is popular with many tenant groups and might arguably offer the simplest way of ensuring a tied tenant is no worse off than a free-of-tie tenant”.
However, for reasons known only to them, it took a new clause and a massive Back-Bench rebellion for the Government to come to what in our view was the right conclusion. Now that they are there, we are very pleased that they are working hard on how we can make this work. The proposed new clause puts the right principles back into the Bill. It delivers a mandatory free-of-tie option that allows publicans to buy their beer on the open market. The Business, Innovation and Skills Select Committee concluded that this was the only way to ensure that landlords would be no worse off than if they were free of tie, as it would force pubcos to offer tied tenants the best deals.
We are in a somewhat complex position. We have had amendments tabled very late and I saw the impact assessment only on my way into the Committee today. It is not simple and straightforward, and the lack of time to adequately identify where we are on all these matters has generated a great deal of examination and commentary. Some aspects were expected, but there is a great deal of concern about the approach in detail. I look forward to listening to the comments and explanations that the Minister is going to give. I expect she will have quite a bit to do today. We should make it clear that although we are supportive of the Government’s approach—
Lord Hodgson of Astley Abbotts (Con)
The noble Lord makes a very important point about what will be in the legislation and what will be in the code. This point was made by the noble Lord, Lord Whitty, and we are all concerned about it. If there are two sides to the argument, both sides are suspicious that consultation will mean that they lose out one way or the other. Have the Opposition reached a view on how much can be in the code and how much in the Bill, or are we still working that out?
Lord Mendelsohn
As I am pressed, there are a number of details where that balance is the issue we have to address. Perhaps we need some more comments from the Government in explanation of the current provisions. We are also looking for the direction of travel to help give us a real sense of what should and should not be.
As I said, although we support the Government’s approach, we take the view that some of their drafting has lost the strength and essence of the Commons amendment. We are keen to ensure that what is passed is workable and sensible and we are happy to work together on this. However, to be fully satisfied, we need to see an evolution on Report, in a couple of important respects. We are keen for an indication that the Government would show some willingness to consider changes. There is a very important need to provide detail and direction. There are some issues which should be dealt with in the Bill but others whose place is in secondary legislation. We will be looking for a strong indication of the direction of travel to provide us with the right assurances that we will be looking at the right sort of areas and issues at the next stage. There is also a requirement for clarity in what we would describe as “dual-use clauses” where the drafting suggests that a measure could be used for two diametrically opposed purposes. In that regard, it would be useful if the Government would give an indication of how it is used for one and not the other.
We understand the concerns of the many different parts of the industry that variously have particular and shared issues with the Bill as it stands. We appreciate their need for greater clarity to ensure that they can make decisions and reasoned evaluations. We have a great industry in this country and we expect that the legislation will make it greater. We have met with a number of companies and I have been impressed with their management. There will be some costs and adjustments to make, and listed companies with short-term expectations—hyped by banks’ analysts—will be put under particular pressure. As my noble friends have said, a number of business models were dubious to begin with.
Many of the managements of the companies I have spoken to will fare very well indeed under the new provisions. They are a very capable group, readily able to innovate and develop new, efficient and sound commercial operations, relationships and models. They are, indeed, doing so in the face of a number of factors which have hugely affected the industry over the last decade, including the amount of beer that is bought in supermarkets, the change in consumer tastes, substitutional competition and other sorts of regulation. It is right that their concerns are properly addressed: we may not agree with some of them but we are certain they should be properly considered and clarity provided as far as possible. I would be grateful if the Minister would set out her thinking on the future of the industry.
We would appreciate a fuller understanding on the issue of investment. Pubcos have come to us to say that they will be discouraged from making investments in their estate. We have tried hard to get a full estimate of whether that investment is income-generating or is just for maintenance, because these alternatives offer different returns on capital. This addresses my noble friend’s point that the property element of this is very different to the other commercial aspects. We have not had sufficient clarity on that but we take the point that we need to address this question.
For example, if a pub company were to redecorate a pub and install new aspects at a cost of £50,000, it would be reasonable to expect a return on that investment over time. The company’s view would be that it would be unfair for the tenants to go to a market rent only provision six months later. They say that this would discourage them from making the investment. They suggest that the pubco should be able to make it a condition of their investment that a contract of around five years would come into force and supersede the old one, so the tenant could go MRO only where the code had otherwise been breached. They would like this assurance in the Bill. Can a pub company reach an agreement with a tenant to establish a new agreement in return for an investment and therefore postpone a rent review for five years? Is that one of the provisions of the Bill? Could we provide some certainty on whether they have the scope to do that? Perhaps the Minister could address this matter in detail.
It would also be helpful to have clarity on allowing breweries that qualify as large pub-owning companies to require tenants taking the MRO option to continue to stock certain of their products. Organisations such as CAMRA have said that they are comfortable with this provision as a means of ensuring that the brewing pub-owning companies can continue to distribute their brands. Companies, understandably, are wondering what parameters are available to them now, and what is likely to be in delegated legislation. It would be useful all round if the Minister gave us a better sense of the Government’s direction of travel. For example, have they considered giving brewer pub companies the right to require that a tenant does not sell direct competitive products? Can the Minister provide a broader understanding of the nature and level of legal advice that the Government have taken on this, and of their expertise in evaluating the European competition considerations?
Similarly, what certainty do the Government intend to provide for brewers in Amendment 91ZA? Is it to ensure that they will have the right to require that an MRO tenant must stock their required beer and cider products? What is their evaluation of the argument that the brewers need the certainty that they will be able to require and enforce a stocking requirement as an integral part of the MRO lease offer? What are the Government expecting a stocking requirement to cover? Is it to specify the individual products to be sold, whether draught or bottled; does it include minimum purchase obligations, if necessary, to ensure incentives are made to sell its products and not those of a direct competitor; and would they require a tenant to prove that the stocking obligation has been met, given that the tenant is not required to purchase the specified products direct from the brewer or approved wholesaler?
There are some other areas worthy of consideration. We would appreciate some detail on the code and the adjudicator. The industry is interested in whether the Government’s view of the role and function has evolved since it was first introduced when there was no MRO provision, and whether it is likely to widen in scope in secondary legislation. It would also be very helpful if the Minister were able to indicate what lessons the Government have learnt from the current operation of the Groceries Code Adjudicator—which is not without some criticism—for how they will establish the Pub Code Adjudicator and the drafting of the code.
We are delighted that the MRO is now in the Bill, but we are also very aware of a need to strike a balance in the final legislation. Using the primary legislation to try and close every feasibly conceivable loophole while protecting tenants could put a straitjacket around the industry. Our amendments are designed to ensure that the legislation delivers on the intentions that we support but is not so restrictive as to cause harm to an industry we all want to see thrive. Some of our amendments are probing in nature to make sure that we have a clear sense about some of the detail. In this House we need to answer two questions—what should be in the code, and who it should cover—before sending the Bill back to the Commons. That is what these amendments intend to clarify.
Amendment 89AA is a probing amendment. This clause examines the provision that tied tenants can trigger an MRO only when changes specifically impact on their business as opposed to pubs in general, including managed houses, hotels and free houses. As it is currently written, if there was suddenly a global increase in, say, the price of barley, which was passed on to all licensed traders, the tied tenant could use this unforeseeable event as a trigger to go MRO if the price increase was passed to them. Is it the Bill’s intention that an MRO option could be triggered in such circumstances? What is the Government’s view of how “unforeseen events” would operate? Would this include actions by the Chancellor of the Exchequer? Does it mean unforeseen at the time of contract, or does “unforeseen” apply to things that would ordinarily be put in a risk register to establish potential risks that could happen to a business? Do “unforeseen” and a risk register become mutually exclusive? Does an unforeseen event have to have a particular impact and effect on all kinds of alcohol sales? Is this drafted so that if, for any reason, those in tied pubs were to be charged excessively more than free-of-tie and other tenants, tied tenants should be allowed to react against this specific treatment? We would be grateful for any indications on this.
We believe that Amendments 89AB and 89AC will remove ambiguity from the Bill and ensure that the trigger points can be activated only when all these specific criteria are in place. We are looking for an explanation of how the Government arrived at the current drafting.
On Amendment 89AD, we feel that there is a problem with the Government’s use of “level of trade” as a trigger point, which merely refers to how many pints a pub is selling and not to the deeper situation. For example, if a pubco increased its supply prices and the tenant felt that they could increase the price at which they sell a drink to the public because of local competition, their level of trade would remain static. However, their overall profitability could be fatally undermined. The amendment would ensure that the overall level of profit would be the key factor.
On Amendment 89AE, the idea that a transfer of title should be used as a trigger point was originally placed in the Bill for very good reasons—for example, in the case of a tenant who agreed to a tied contract for five years with a large pub company, but who found after two years that they were now the tenant of a smaller pub company that was not covered by the code if their pub was sold. However, if this power is given carte blanche it could stifle the pub sales market, which would not be sensible for the overall health of the sector, particularly where smaller companies could revive pubs in their local area.
Likewise, it would not be right for publicans to be stuck in a tie when their circumstances have significantly changed and they no longer have any of the protections of the code. This amendment would make it clear that transfer of title alone is not enough, but if such a transfer detrimentally affected a pub, the landlord should be able to assert his or her rights. We would be grateful for some understanding of how the Government arrived at the current drafting.
Amendment 89AF is in response to concerns raised with us by publicans and those in the industry. There is a feeling that there are ways that companies that we would all accept should be covered by the code could get around it as it is currently written. One such way is that a business owning 2,000 pubs could split itself into five smaller concerns, each of which would own fewer than 500 pubs, but to all intents and purposes the same ownership structure would exist. There may be myriad ways that lawyers—some clever, some just expensive—could exempt their clients from the code. However, as noted, we do not want the code to be so long and onerous as to paralyse the industry. We therefore believe that it would be right to create this power, which we hope will never need to be used, to act as a powerful deterrent against such egregious behaviour and ensure that the spirit of the code is always fulfilled.
In general, we are concerned that some of the drafting could create a situation where there may be ways to avoid the Bill’s intentions. We take these concerns very seriously. We do not feel in a position to prepare any amendments that would not be without flaws at this stage, but we would be very keen to work with the Government to ensure that any potential risks are addressed. We are keen to hear some assurances from the Government that they will look very carefully at these matters and their general approach to avoidance, and how they think those assurances could be met in the operation of the legislation, the code and the adjudicator. In particular, we are concerned about how the triggers will work and whether they will provide sufficient protection to small businesses. We want to be assured that the protections are there to stop triggers being used to game the legislation.
We also make a general point to urge that the new code is swiftly implemented via secondary legislation within 12 months of the enactment of the Bill. In short, we need to ensure, as the Bill progresses, that it secures the best of the existing model, reforms what is needed and eliminates bad practice. We understand that that is where the Government are on this. Some reassurances would be very helpful.
I hope that the Minister will forgive me for being so forward and will find the following suggestion useful. We think that the right way forward is to let the Government have their amendments today and return, after discussions with all parties, with amendments to those amendments to strengthen them in the light of these discussions. We hope that we can get a clear assurance on that and a strong commitment that that is what we will see in the Bill on Report. That would be useful reassurance at this stage.
Baroness Neville-Rolfe
My Lords, I thank all noble Lords who have spoken in a helpful discussion. When we saw the grouping we knew that it would be a marathon. I hope that noble Lords will forgive me if I make a lengthy 10,000 metre reply, so that the various questions that have been raised are answered.
I shall respond first to the noble Lord, Lord Berkeley, on timing, and secondly, to the noble Lord, Lord Mendelsohn, on his suggestion. I want to reassure the noble Lord that Clause 41 places a clear duty on the Secretary of State to introduce the Pubs Code within 12 months of Royal Assent. As government Amendment 89A sets out, this must include the MRO provision. The Government are completely committed to getting on with things and to swift implementation. I am also completely committed to open discussion in this House between now and Report. I will try to answer the points in this debate, but if I fail I would urge noble Lords to talk to me before Report, and I am sure that there will be further collective discussions.
I enjoyed the intervention of the noble Lord, Lord Mendelsohn, because he put today’s discussion into the context of small business policy where there is much consensus. I sense that he is trying to make progress. I agree that we should try to get the framework right today, if noble Lords agree, once they have listened to me, by agreeing the government amendments. Then we should discuss the issues and possible changes ahead of Report, including whether we have the right balance between the core Bill and the subordinate legislation, as he mentioned. We have thought about that quite a lot. I do not want to lose this important Bill, which would be a very serious unintended consequence, and timing is tight.
Before turning to the individual amendments, I thank my noble friend Lord Hodgson, who took the Floor for a long time, for bringing his knowledge of the industry to this important debate. He spoke of the impact of social change on pubs, which is an opportunity and a concern, and described a nuclear option, which is exactly what we want to avoid.
I now turn to Amendments 69ZC, 74ZB, 87A, 87B, 87C, 89ZA and 102B. I start by thanking the noble Lord, Lord Whitty, for his comments. We have certainly tried to listen to the other place and come up with provisions that achieve the objectives agreed, and to ensure that there is no avoidance in the system of the kind he described. These amendments set out the detailed definition of the market rent only option in the Bill. One effect is that the MRO will come into force on Royal Assent, before the Pubs Code Adjudicator existed. Market rent only and the protections it brings can work properly only if it is introduced with the code and with the adjudicator.
Clause 42, introduced in the other place, says:
“The Pubs Code shall include a Market Rent Only Option”,
so it would still require secondary legislation. The code must be introduced within a year, and under our Amendment 89A it must include MRO.
Secondly, and importantly, the amendment would not allow us to consult on the MRO process. As I have already said, given that it was introduced into the Bill only at a relatively late stage, it is incomplete in its design and it is important that we have some public consultation to ensure that the process works as intended. Following consultation, we will introduce the code by secondary legislation through the affirmative procedure.
Much of the detail of the triggers for MRO is more appropriate for secondary legislation. Clause 42 as drafted provides no detail on the terms of the new commercial tenancy and what an MRO-compliant tenancy would be. We wish to consult to get a stronger sense of what this constitutes and, similarly, what constitutes a “significant” increase in price and,
“an event outside of the tenant’s control … that impacts significantly on the tenant’s ability to trade”.
Companies and tenants affected by market rent only need the opportunity to comment on the process, not just the authors of Clause 42. The Government are committed to ensuring that MRO is robust and workable.
Turning to Amendments 75 to 78, 82A and 83 to 88, I am not convinced that these amendments are necessary. To respond first to the point made by the noble Lord, Lord Borwick, the market rent only clause introduced into the Bill in the other place outlines some of the process involved in obtaining a market rent only assessment and taking up the offer, but it does not set out a complete process of the kind he is seeking. The Government will consult on the detail of the process and set this out in secondary legislation. I have explained that there is a drop-dead date for the whole process.
Our intention is to follow the outline process in the Mulholland clause. So after the tenant requests a market rent only option, the first step will be for the pub-owning company to offer a market rent, which the tenant will accept or which will provide the basis for negotiation between the two sides. If the tenant and pub-owning company cannot agree a market rent only agreement within a certain period of time, the tenant and pub-owning company will jointly appoint and jointly pay for an independent assessor to determine the market rent for the pub.
Our amendments allow the code to stipulate that the existing agreement between the pub-owning company and tenant will prevail until the market rent only procedure concludes. To answer my noble friend Lord Hodgson, there is a power in government Amendment 89B to set out in the code that existing contractual arrangements remain in force until such time as the procedure comes to an end and the new market rent only contract starts.
If in the end the tenant opts for a market rent only agreement, this will constitute a new agreement between the tenant and pub-owning company. The terms of the agreement will need to be clear to the tenant before he accepts the offer. To be clear, at this point the pub-owning company can remove from the MRO agreement any special commercial or financial advantages—SCORFA—that the tenant was entitled to under the tied agreement. As I said earlier, we intend to consult publicly to ensure that the process works as intended.
On my noble friend Lord Hodgson’s Amendment 88 in particular, the only requirements for a lease to be MRO-compliant are set out in Clause 43(4). Other than this, it is up to the pub company to decide what the MRO lease or licence looks like. The pub company will be free to offer a new lease or tenancy without it being considered to be discriminatory.
Turning to Amendments 79, 81 and 89, in addition to consulting on the detailed process for MRO, we will consult on the detailed definitions of the trigger points for an MRO assessment. These will be set out in the statutory code, which is subject to affirmative resolution. Under our amendments the tenant would be entitled to the MRO option: at rent review; if the tenant renews their lease; when there is a significant price increase for tied products which was not reasonably foreseeable; and if an event occurs that is beyond the tenant’s control and meets the descriptors set out in the Pubs Code. The headlines would rightly be in the Bill but we need to set out the details in secondary legislation.
I confirm that the MRO trigger at the point of renewal applies to tenancy agreements that are protected by the Landlord and Tenant Act or which have a specific right of renewal clause in their tenancy agreement. Those tenants who are contracted out of the Landlord and Tenant Act will have the protection of the parallel rent assessment in any negotiations on a new lease at their existing pub. The trigger if there is a significant price increase which was not reasonably foreseeable at the beginning of the tenancy or at the point of a rent assessment would not include circumstances when a pre-agreed discount period ends.
By contrast, Amendments 79 and 89, tabled by my noble friend Lord Hodgson—
Lord Hodgson of Astley Abbotts
Can we therefore take it that the trigger points will not include the sale of a pub, provided the tenant’s position is protected, or a pubco going into administration?
Baroness Neville-Rolfe
My Lords, that is the proposal set out in the Government’s amendments.
Lord Stoneham of Droxford
Will the Minister confirm whether she is looking at any protection for people who, when a company is sold or goes into administration, move from a company that is covered by the threshold to one that is not?
Baroness Neville-Rolfe
My Lords, I hope I will cover that to the noble Lord’s satisfaction in a minute. I return to Amendments 79 and 89, which propose that only an unfair price increase would trigger the market rent only option. Our view is that this sets the bar unrealistically high. The purpose of this trigger point is to afford the tenant some protection if the pub-owning company increases the prices of its tied products significantly and unexpectedly, as this may have a large impact on the balance of risk and reward between the two parties. Similarly, the trigger of events occurring outside the tenant’s control is intended to protect tenants when the assumptions underlying their projected income and turnover change dramatically. We envisage that these events would include situations in which local economic factors impact on trade, such as the sad closure of a local factory. However, that would not include macroeconomic events such as a recession, or a change in the tenant’s personal circumstances.
Amendment 81 seeks to define events outside the tenant’s control by reference to the Local Government Finance Act 1988. However, that definition would not account for cases such as a change in local competition, which could have a significant impact on turnover. Public consultation on the specific phrasing of these triggers will help the Government to ensure that the trigger points are appropriately defined. In response to the noble Lord, Lord Hodgson, we expect to refer to the definition in the 1988 Act, but may need to expand on it. I have set out our thinking so far on the detail of the triggers and will come on to talk about administration and insolvency. We will consult on these but I am also happy to discuss further the ideas offered by the noble Lord, Lord Mendelsohn, before Report, if that would be helpful.
My noble friends Lord Hodgson of Astley Abbotts and Lord Howard of Rising have tabled Amendments 69A, 70 and 71 to set the threshold for the market rent only option at 500 tied pubs. I agree with them, and Amendment 91ZB would deal with this very point. As I think the Committee understands, this is intended to bring the threshold for MRO into line with the rest of Part 4 of the Bill. The Government do not have sufficient evidence of a problem in the free-of-tie pub sector to justify intervention there. Regulation of this market would result in pub tenants with commercial leases being treated differently from, and receiving additional protection to, other tenants with commercial leases. This difference is not justifiable on the evidence.
Conversely, Amendment 69A, tabled by the noble Lord, Lord Berkeley, seeks to amend the threshold to 100 or more tied pubs. Noble Lords will be aware that, after considerable debate in Committee, the other place voted to remove companies with fewer than 500 tied pubs from the scope of the Pubs Code and adjudicator. Those other companies expressed significant concerns about the requirements that complying with a statutory code would have placed on them. The Government listened carefully to the points raised and have decided to accept the will of the other place in terms of the cut-off.
I can reassure the noble Lord, Lord Berkeley, that the representative body for companies with fewer than 500 tied pubs, the Independent Family Brewers of Britain, has committed to continue funding the current industry dispute resolution services and to keep the industry framework code up to date. This will provide important protections for the tied tenants of family brewers, and seems a better approach than extending regulation to smaller operators such as St Austell Brewery in Cornwall—which he mentioned—or J W Lees in Manchester.
I also reassure the noble Lord that the Government have provided protection against avoidance of the code through changes in group structure. Clause 69(2) provides that any part of a group undertaking will contribute to the calculation of tied pubs for the purposes of the threshold. That means that the Pubs Code will apply to all parts of the group undertaking.
Lord Hodgson of Astley Abbotts
Again, I apologise for interrupting my noble friend, and I am grateful for the detailed response that she is giving. The example that she is giving about investment does not deal with the fact that beer is being sold. The beer companies want to sell their beer—25% to 30% of their beer is sold through their tied houses, their estate. If the legislation does not allow that, it knocks away a reason for investing. It is not sufficient to get a return on the capital—that is, the rent—it is also selling a product that they produce elsewhere in the group. That is, provided—to meet the point of the noble Lord, Lord Snape—that the tenant is free to buy it anywhere if he can buy it cheaper.
Baroness Neville-Rolfe
I thank the noble Lord for raising that point. There is a link to the stocking requirement, which I shall come on to talk about, as he suggests. I am not suggesting that investment is the easiest thing to deal with, because we all want investment in this important industry.
Perhaps I can mention a couple of final points before I move on from investment. One is my noble friend Lord Younger’s point about cash flow, which is a good point. If a tied tenant expresses an interest in choosing MRO, the pub company can make the argument about the benefits of the tie—for example, in managing tenant cash flow. That freedom will still exist. At that point, the tenant can choose to remain in a tied agreement. I am grateful to the noble Lord, Lord Mendelsohn, for entering the fray on this issue and suggesting a way forward on the question of securing pub company investment in pubs. I am happy to look at that further.
Further, enabling tenants to forgo the MRO in exchange for a promise of investment may risk intimidation of a pub in difficulty. That will probably not occur often, but it was a concern that we considered in trying to balance these things.
I turn to Amendment 89AA. I believe that it is designed to help to define a significant price increase in relation to a price increase that would trigger an MRO. It is important to get that definition right. It needs to be fair to pub companies and tenants alike. That is why the Government propose to consult on the definition and set the detail out in secondary legislation. I confirm that reference to wholesale price lists will be used in our consultation proposals for that definition.
Amendments 89AB and 89AC amend the MRO trigger for circumstances outside the tenant’s control that affect trade. The noble Lords opposite wish to confirm that all four of the conditions set out in subsection (9) of the proposed new clause in government Amendment 89A must be met for this trigger to be engaged. I can confirm that the current drafting of the clause delivers this effect.
Amendment 89AD relates to the same change of circumstances trigger and proposes to replace,
“an impact on the level of trade”,
with,
“an impact on the level of profitability”,
as the measure for that trigger. We consider that a focus on the tenant’s ability to trade addresses the key issues that affect the fair balance of risk and reward between pub company and tenant. The government amendments ensure that where changes in local economic circumstances affect tenant income, the protection of the MRO trigger will apply. To focus instead on profit would bring in issues such as rates, energy prices, wages and salaries. These issues could further impact on the income of the tenant but there is likely to be minimal impact. The amendments also introduce more complexity in terms of definition and measurement of a significant impact.
I believe that through Amendment 89AE, the noble Lords opposite are seeking to confirm that on the sale of a pub the other triggers for MRO would still apply. Where the new owner of the pub is covered by the code, then this is the case. Where the pub company purchasing the pub is below the threshold, the tenant will not have the MRO option but will have the protection of the voluntary industry code. This is consistent with the Government’s acceptance of the will of the other place to remove family brewers from the scope of our measures.
Amendment 89AF would introduce a power for the Secretary of State to provide an MRO trigger on transfer of title or administration in two specific circumstances. The first is if avoidance of MRO was the “sole or significant” reason for transfer of title or administration. The second is where,
“fewer than 500 pubs … are part of a group or have similar ownership to other companies”,
which own more than 500. I will deal later with the detail of the Government’s reasons for removing the transfer of title and administration trigger, but first I will focus on the specifics of the Opposition’s amendment.
We think it is extremely unlikely that the serious step of administration would be used to avoid MRO. No company considers insolvency lightly. Where a company is in financial difficulty, it will seek professional advice from an insolvency practitioner. It may be advised to restructure the business, which could involve selling off some parts of it. However, entering administration to avoid MRO would not achieve the objectives of administration, which is to rescue the business. For this reason, an insolvency practitioner would not recommend administration. It is also hard to imagine that pub companies would sell off high numbers of pubs purely to take themselves outside the scope of MRO and the code. Most of the pub companies in scope have over 1,000 pubs, so that would be a drastic step. I reassure noble Lords that where a tied pub is sold to another company covered by the code, MRO protections would continue to apply.
The amendment tabled would also provide a power to bring companies with fewer than 500 pubs into the scope of the code where they were part of a group or had similar ownership to other companies that cumulatively own more than 500 pubs. We share the noble Lords’ concern about the potential for gaming—for example, through the break-up of a pub company to avoid the threshold—but I confirm again that the Government have provided this protection in Clause 69(2). I am afraid that we are not clear whether there are companies with fewer than 500 pubs that have similar ownership to companies with more than 500. Nor, if there were, is there evidence that they should be brought into scope with reference to a concept of similar ownership.
Amendment 80, tabled by my noble friend Lord Hodgson, seeks to remove two of the trigger points in the MRO clause so that tenants will not have the right to MRO if their pub is sold or the pub-owning company goes into administration. The Government’s amendments should address my noble friend’s concern. In the case of the transfer of title trigger, the Government consider that other, more proportionate protections exist for tenants when their pub is sold to another owner, as any new owner would be bound by the tenant’s existing contractual rights. If the sale makes little difference to the pub, there is no problem. If it makes a significant difference to the trading position, another MRO trigger is already available—the trigger for circumstances outside the tenant’s control. The inclusion of the transfer of title trigger would have the unintended consequence of making the sale of pubs as going concerns less appealing to potential buyers, leading to fewer pubs and fewer pub tenancies. For these reasons, the Government wish to remove this trigger from the Bill.
The Government’s amended clauses also remove the trigger when a pub-owning company goes into administration. During administration, the company in administration may continue to operate. Tenants will continue to have their existing obligations towards the company in administration, and the company will continue to have its existing obligations to the tenants, acting through the administrator. If any of the other triggers for MRO are met during this period, such as if the company brings in a significant price increase, the tenant will still have the right to MRO. The primary aim of administration is to rescue the company, and this preserves jobs as well as value. Giving all the pub-owning company’s tenants the right to MRO at this critical point would be likely to reduce the value of the pub company’s estate. Pub-owning companies below the threshold are unlikely to buy the company’s pubs if the tenant could opt for the MRO option during the course of the sale. This would reduce the chances of rescuing the pub-owning company and could ultimately push the company into liquidation. Clearly, this would not be in the interests of the tied tenants, employees and suppliers of the former business and the creditors.
I want to clear up something which was raised by the noble Lord, Lord Snape. He expressed concern that the Government are trying to deny existing tenants the right to MRO. This is not the case. We have merely sought to remove two of the triggers to avoid unintended consequences that are detrimental to tenants. I should be happy to discuss this further with the noble Lord, as we are in the same place on objectives.
Lord Snape
I thought that it was the wicked noble Lord, Lord Hodgson, who was seeking to deny tenants this particular protection, not the Government.
Baroness Neville-Rolfe
Perhaps I can move on to further amendments.
The market rent only amendment introduced in the other place made provision to allow brewers who own tied pubs to require any tied tenants of theirs who elect to exercise MRO to continue to sell the brewery’s products, so long as the tenant may buy them from any source. Amendment 91ZA, which I am bringing forward today, provides in Clause 65 that stocking requirements, which satisfy the conditions in that clause, do not constitute a tie, so they can be included in an MRO offer. Under such a stocking requirement brewers can require their pub tenants to sell their products, limited to beer and cider. This focuses the measures on what pub-owning companies tell us are the products that concern them. Under Amendment 91ZA, the tenant must be able to buy this beer or cider from any source and be able to sell beer and cider produced by other companies.
I thank my noble friend Lord Hodgson for Amendment 69. I agree that the MRO provisions largely remove the need for the parallel rent assessment. However, the MRO option is available only to tenants with an existing tied agreement with their pub-owning company. As prospective tied tenants do not have the right to an MRO offer, we intend to retain the protection of the parallel rent assessment for them. This means that prospective tenants may request a parallel rent assessment, following rent negotiations with their pub company, upon paying a fee of £200. Together with the transparency provisions of the Pubs Code, this will ensure that prospective tenants can make an informed decision on whether a particular tied deal is fair and right for them. We also intend that those tenants who have contracted out of the Landlord and Tenant Act will have the protection of the parallel rent assessment in any negotiations on a new lease at their existing pub. This is because those tenants do not have a right to renew their lease and so will not have the right to the MRO option when they negotiate a further deal. I agree that the parallel rent provisions are no longer required for existing tied tenants who now have the MRO option, and Amendments 69ZA and 69ZB, which I have tabled, would deliver this.
I apologise for the marathon, but when I said that the Government were committed to MRO I really meant it. The government amendments before us are designed to make it workable. Unless we amend the clause, we risk ending up with an Act that is so anomalous and open to legal challenge that no Government, whatever their make-up, would be able to implement it effectively. Surely this is not the outcome that noble Lords are seeking. I urge the Committee to accept these amendments so that we have a legally robust foundation on which to build the continuing discussions ahead of Report. In the spirit of the discussion, I ask the noble Lord, Lord Whitty, who has the first amendment, whether he is now content for us to move the government amendments.
Lord Berkeley
Before we get to that, could the Minister please clarify what she said, quite a long time ago in a very interesting speech, about the timing of the introduction of the MRO? That has been changed in her amendments; the Bill says a maximum of one year. What is the actual timing? That is one of our big worries—that this could get kicked into the long grass.
Baroness Neville-Rolfe
I thank the noble Lord for raising that point. The confusion may arise because it is within 12 months of Royal Assent.
Lord Berkeley
If it will help the Minister to deal with this, I could speak for a little longer. I thank her for her comments generally in her necessarily long speech. She gave me a lot of comfort that what the Government are trying to do is the right thing. She prayed in aid the will of the Commons a number of times, and that is right. Of course, timing is one of those issues. I will be very pleased to hear what she has to say.
Baroness Neville-Rolfe
Before the noble Lord sits down and the noble Lord, Lord Whitty, takes the Floor, the answer is 12 months—but that is 12 months after the Bill comes into force. Apparently it will take two months for the Bill to go through to Royal Assent, so the maximum is 14 months. However, the message that I was trying to impart to the Committee is that we are determined to get on with this, push ahead and find workable solutions in that time.
Lord Whitty
My Lords, I am not sure that the Minister is procedurally correct to say that I have the first amendment. She has the first amendment in this group, which she can move at this point. Although mine is the first amendment on Clause 42, it is not the first one in this group. If she is asking whether she has said enough for me to roll over in relation to her own amendments, the answer is probably, “Almost, but with great regret”.
She has said that she is prepared to talk to all the parts of the industry involved, and she has done that in a very generous way. However, when she went through this clause by clause, there seemed to be fairly clear opposition to all the areas of concern that had been expressed by me, the noble Lord, Lord Stoneham, and my noble friends Lord Berkeley and Lord Snape. If she is prepared to say that all these things are open for discussion before we get to Report, I suppose that the sensible thing for me to do would be to say that I did not object to her clause. While I was clear on the conciliatory tone at the beginning, when it came to any individual item it seemed to be the firm position of the department to oppose it. However, it is not really my position to object at this point.
Baroness Neville-Rolfe
Okay. I welcome the lecture on procedure and apologise for not getting it right. As a new Minister, I am learning. The answer is yes, we are very open to discussion. What I was trying to do, I thought, was to be helpful in going through our thinking about why the various provisions were set out in the way that they were. I have already indicated that there are one or two places where I can see that the points made today would lead to further discussion. The answer is that we are open-minded and are keen to find a workable way forward, and are happy to do that in discussion in this House. I beg to move.
Baroness Neville-Rolfe
(a) ”
“(b) ”
Lord Berkeley
“( ) require pub-owning businesses to publish wholesale prices charged to their tied pub tenants.”
Lord Berkeley
I hope we can deal with this group of amendments a bit more quickly than the previous group because there are only two of them: Amendments 68T and 68U. I think they are quite important.
Amendment 68T comes from the Federation of Small Businesses research which found that 27% of licensees believed when they signed their agreement that the price they would be paying for beer and probably other drinks was going to be lower than the price they would have to pay in the open market. They claim that they were not given adequate pricing information as prospective tenants. CAMRA analysed the prices that licensees paid in 2013 and found that pub companies’ prices were 50% to 70% higher than wholesale prices. That is pretty incredible, and certainly reflects some of the comments I have heard from tenants—that they are lucky if they can cover their costs on beer, and they have to work 24 hours a day to make any return on food.
CAMRA hosted a round-table session for pubcos and licensees and I have a couple of quotes here. The first is from the tenant of a pubco-tied pub in Burnham—I do not know which Burnham; it does not say—who says:
“Price wise the difference is absolutely crazy. John Smiths is £133, but you can get it for £82 wholesale. Kronenbourg is £170, you can get it for £100. It’s not little amounts—it’s lots”.
The licensee of a pubco-tied pub in Berkshire said:
“If they’d said to me, ‘You do realise that you can drive to Rebellion brewery and buy your beer at £70 for 72 pints but we’re going to charge you £150’, then how many people would say, ‘Hang on a minute, that’s not right, is it?’”.
Those are two unhappy tenants. We have heard about a lot of happy tenants today from the noble Lord, Lord Hodgson, and a few other people. I think it would be a very useful thing if the pubcos were required to publish the prices that they charge tenants. That is Amendment 68T.
Amendment 68U is about guest beers. I agree with CAMRA that it would be very useful to see all tied pubs of any description have the right to have a guest beer. It should be defined as a beer that is either cask-conditioned or bottle-conditioned in order to ensure access to the smaller companies, and improve consumer choice. It would allow the tied tenants to stock a single cask from anywhere in the world at a freely negotiated price.
There has been a growth in small brewers in pubs. They obviously make enough money, otherwise they would not be doing it. I think that it would be a really good idea to have the ability to have one guest beer in every pub. If the tenants were allowed to buy that beer from whomever they wanted and at whatever price, it might also demonstrate to the pubcos that charging 70% extra for their beer was not the way to make friends either with their tenants or their customers. I beg to move.
Lord Hodgson of Astley Abbotts
In the situation envisaged under Amendment 68U, could the guest beer be provided by the brewery that owns the pub?
Lord Hodgson of Astley Abbotts
Under Amendment 68U, can the guest beer be provided by the brewery that owns the pub?
Lord Berkeley
Of course it could, but to some extent that defeats the object, because if it is a tied pub, the brewery is already supplying the beer. It would be for the tenant to decide; that is the point. If the tenant decided to do that and to have a monopoly with one brewery, that would be fine.
Lord Snape
I do not object, and I do not think my noble friend does either, to pubcos insisting that their tenants sell their own beer. His amendment states that they can buy that beer from any source, rather than from the pubco through the tie. I think I am correct. I do not know whether the examples he gave of the excessive price difference that tenants have to pay—the 50% to 70% that CAMRA revealed—are common, but I do not think even the noble Lord, Lord Hodgson, could defend that sort of gap. Could the noble Lord emphasise that this is not about preventing pubcos from insisting that the tenants sell their beer but about the source of that beer and the price that the tenants pay?
Lord Berkeley
My noble friend raises an interesting issue. It is quite reasonable that a pubco that has a tied pub with tenants requires the tenants to buy the beer from them. That is the reason we are going through this—so that tenants can get out of it if they do not like it. While they are in it, the fact that they are buying beer at a certain premium—50% to 70%—provides part of the profit to the pubco, along with the rent. We can debate which. It has always been my understanding that if the tenants choose to go down the route of getting away from being tied, then presumably the calculation of the rent—we talked about this earlier—will in part take into account the loss of profit to the pubco in no longer being able to sell the beer at this inflated price to the pub.
There is a balance to be struck here. The amendment would allow the tenant to buy another beer from somebody else at whatever price and it would not necessarily affect the relationship with the pubco. It could do, but that is for negotiation. I hope I have clarified that.
Lord Mendelsohn
I thank my noble friend Lord Berkeley for some excellent amendments. It is important to understand this in the context of the Bill. Amendment 68T addresses one of the big issues we have with information in commercial sectors, which works terribly to the disadvantage of small businesses. We think that very serious consideration should be given to this. Amendment 68U considers the opportunities to create market access for small businesses. That would be very useful and have many beneficial by-products, and would certainly trigger a great deal of capacity for small businesses to thrive in a sector with dominant market features.
I encourage the Government to look very sympathetically towards these amendments. There are issues with Amendment 68U. I did a quick calculation of what it might cost the industry; I do not think it is that much but I would be very interested if the Government came forward with whether or not they think there are any difficult parameters to it. I am not convinced that there are. It would be useful if the Government were to come forward very positively on this.
My noble friend Lord Whitty made a very important point in the previous group of amendments: it is nice to hear that matters will be taken seriously, but there was a great deal of anxiety on this side as we went through that group. As we get to other groups of amendments, such as the one beginning with Amendment 96ZB, we will look for greater assurances that these matters will be taken seriously. However, on small businesses, this is a very neat and useful group of amendments.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lord, Lord Berkeley, for these amendments. In the spirit of collaboration, perhaps I can explain why we see them as problematic and see whether he agrees.
Amendment 68T would require pub-owning companies to publish wholesale prices. Even if that requirement was limited to alcoholic drinks, it would make public the details of a commercial financial arrangement between two parties to the world at large—including the pub owner’s customers, if I have understood the amendment correctly. It is important to stress that in this Part of the Bill we are regulating the relationship between tied tenants and their pub companies. At no point in our consultations has the need to publish wholesale prices emerged as a requirement to address unfairness. To do so would be an additional piece of regulation for the sector on top of the regulation we are introducing. In a few cases, pub-owning companies that we expect to be covered by the code already publish their wholesale drink prices online. Others publish those prices on a site with access restricted to their own tenants. Others do not publish them at all. On beer prices, tied tenants will tend to pay higher prices for their beer than from an outside wholesaler. That is integral to the tied deal. We recognise that transparency is important, and the Pubs Code already provides that transparency where it is needed—in the relationship between the tenant and the pub-owning company. As I said, the Pubs Code will require the wholesale prices to be provided to the tenant, as well as the current and relevant price lists.
Turning to Amendment 68U on guest beer, when the Government consulted on the issues and evidence that preceded the drafting of these clauses, we included questions about guest beer. The reasons for rejecting that option were clearly set out in our response to the consultation. Some will remember that I come from an all-male family of very keen beer drinkers, so I sympathise with the point, but while there was considerable support for the right to stock a guest beer, there were concerns about the potential for this to undermine the tied model by reducing the alignment of interests between the tenant and the pub company. This was because many tenants would select a draught lager as guest beer, which would typically be the biggest-selling beer. The proposal in the noble Lord’s amendment seeks to address this concern by stipulating that the guest beer should be limited to a brand of cask-conditioned or bottle-conditioned beer. I understand that. Unfortunately, this raises potential competition law issues. We are advised that restricting the guest beer to a particular type is likely to be contrary to EU competition law.
I hope that that background shows that the Government have considered the noble Lord’s proposition seriously and that, in the circumstances, he will agree to withdraw the amendment.
Lord Berkeley
I am grateful to the Minister and to my noble friends for their responses. On Amendment 68T, I think that putting the price of beer charged to a tenant in the public domain may be going a little bit over the top, but if it is published on a website and available to the tenant that is fair enough. However, this comes to the imbalance between a small business—and tenants are, after all, very small businesses—and the pubco. The fact that these people did not understand that the price of beer may not have been what they thought shows something about the unbalanced and bad relationships that some of these pubcos clearly have with some of their tenants. I am not blaming anybody but they are small businesses. Maybe we could have a think about that and have a meeting to discuss it before Report.
Amendment 68U deals with guest beer. I spent the morning at DG Comp in Brussels today. I cannot say I was talking about beer but I know the people there well and I can always check on that. There are important issues here but perhaps we could have a discussion about this too. I would like to see guest beers in some of the tied pubs and I think many others would too. What beers they are would depend on what kind of beer you like drinking. That is enough of that, at this time of the night. I am grateful for the Minister’s response and look forward to further discussions. I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
Lord Whitty
Lord Whitty
My Lords, this amendment is the first in my name relating to Clause 42. Clearly, I cannot press it today if the Government do not agree with it but I hope they understand that, in the discussions that the Minister has promised us, we will wish to return to all the issues that relate to the distinction between the Pubs Code provisions and those of the MRO. Subject to that, I will not press the amendment.
Baroness Neville-Rolfe
“Pubs Code: market rent option
(1) The Pubs Code must require pub-owning businesses to offer their tied pub tenants falling within section 67(1)(a) a market rent option in specified circumstances.
(2) A “market rent option” means the option for the tied pub tenant—
(a) to occupy the tied pub under a tenancy or licence which is MRO-compliant, and(b) to pay the market rent in respect of that occupation.(3) The Pubs Code may specify—
(a) circumstances in which a market rent option must or may be an option to occupy under a tenancy; (b) circumstances in which a market rent option must or may be an option to occupy under a licence.(4) A tenancy or licence is MRO-compliant if—
(a) taken together with any other contractual agreement entered into by the tied pub tenant with the pub-owning business in connection with the tenancy or licence it—(i) contains such terms and conditions as may be required by virtue of subsection (5)(a),(ii) does not contain any product or service tie other than one in respect of insurance in connection with the tied pub, and(iii) does not contain any unreasonable terms or conditions, and(b) it is not a tenancy at will.(5) The Pubs Code may specify descriptions of terms and conditions—
(a) which are required to be contained in a tenancy or licence for it to be MRO-compliant;(b) which are to be regarded as reasonable or unreasonable for the purposes of subsection (4).(6) Provision made under subsection (1) may, in particular, require a pub-owning business to offer a tied pub tenant a market rent option—
(a) in connection with the renewal of any of the pub arrangements; (b) in connection with a rent assessment or assessment of money payable by the tenant in lieu of rent;(c) in connection with a significant increase in the price at which any product or service which is subject to a product or service tie is supplied to the tied pub tenant where the increase was not reasonably foreseeable—(i) when the tenancy or licence was granted, or(ii) if there has been an assessment of a kind mentioned in paragraph (b), when the last assessment was concluded;(d) after a trigger event has occurred.(7) The Pubs Code may specify what “renewal” means in relation to a tenancy or a licence for the purposes of subsection (6).
(8) In subsection (6) “pub arrangements”, in relation to a tied pub, means—
(a) the tenancy or licence under which the tied pub is occupied, and(b) any other contractual agreement which contains an obligation by virtue of which condition D in section 65 is met in relation to the premises.(9) In this Part a “trigger event”, in relation to a tied pub tenant, means an event which—
(a) is beyond the control of the tied pub tenant,(b) was not reasonably foreseeable as mentioned in subsection (6)(c),(c) has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub, and(d) is of a description specified in the Pubs Code.(10) In this Part “market rent”, in relation to particular premises at any time, means the rent which the premises might reasonably be expected to fetch at that time in the open market, on the assumption that condition B in section 65 continues to be met.”
Lord Snape
I will be extremely brief, as the Minister has dealt with most of the points that arose from the amendments. There is a nagging feeling that what we are going to approve now is not what the House of Commons actually wanted. The fact is that—surprisingly, at this stage of a Parliament—the Commons defeated the Government on a fairly basic principle with regard to this Bill.
At Second Reading, the Minister accepted on the part of the Government the will of the Commons and said, basically, that the Government would adopt the principles that the Commons had advocated with regard to pub codes and publicans. With respect, that is not what we are getting today; what we thought was there in the Bill has now become a consultative period and what will amount to secondary legislation. I put it to the Minister, and to the Committee at large, that at this stage of this Parliament what we are doing is not what the Commons wanted us to. I can see that questions will be asked at that end of the building about our procedures here.
We have only a short time before the general election on 7 May, after which there will be a new Government, of whatever political hue or hues. That will mean there is a considerable amount of time before consideration takes place and the Minister’s undertakings to the Committee today are brought into force. I put it to the Minister that before Report we should look again at the two Clause 42s, the old one and the new, and see if there are parts of the old one that really ought to be incorporated into the new one, if only to ease the feeling outside this place that whatever happens over the next year or 14 months will water down the agreements that we thought had been reached as a result of the Commons decision. It is unusual, to say the least, that a Government should be defeated on something like this.
I address my closing remarks to the noble Lord, Lord Hodgson, in particular: he should not think that the decision was arrived at because of pressure from CAMRA or any other body. I think that many Conservative Members of the other place looked at what was happening to their own local in their own town or village and decided that that was why they felt Greg Mulholland’s amendment ought to be accepted. I hope I can get some assurances from the Minister that there will be some discussions with other people before Report so that we can see some of the watering down that we perceive in the difference between the two Clause 42s being rectified.
Lord Hodgson of Astley Abbotts
Once again, the trade is under pressure and the noble Lord assumes that it is all due to the tie. I wish it were that simple. The fact is that there are real difficulties for our pubs, for the reasons that I have explained. Trying to put more pressure on one particular part of the industry will not help it, I fear.
Lord Snape
Again, I accept that, but the noble Lord must accept that when Back-Benchers rebel in the way that Back-Benchers rebelled in the other place on a piece of legislation such as this, those rebels share a great many concerns. I put it no higher than that. I asked the Minister for an undertaking that she will look again at the differences between the two clauses and see whether we can toughen up new Clause 42 in the way that I believe the House of Commons intended in the first place.
Baroness Neville-Rolfe
I am grateful to the noble Lord, Lord Snape, for raising that point. First, I emphasise that we have accepted MRO; I do not renege on anything that I said at Second Reading. The detail of legislation has to be right. Let us by all means meet; let us meet soon; let us look at new Clause 42 alongside the old Clause 42 and engage on the differences and why we have done things, in good faith, in the way that we have. I would be very happy to agree to that process and I am grateful for the discussion that has taken place today. We are trying to do the right thing here.
Lord Snape
I thank the Minister for that undertaking, and for the way that she has conducted the Committee so far. I did not even object to the noble Lord, Lord Hodgson, being present in the same room; we might teach him something about the pub trade that he does not know, although that is difficult to imagine.
Baroness Neville-Rolfe
“Market rent option: procedure
(1) The Pubs Code may—
(a) make provision about the procedure to be followed in connection with an offer of a market rent option (referred to in this Part as “the market rent option procedure”);(b) confer functions on the Adjudicator in connection with that procedure.(2) Provision made under subsection (1) may, in particular—
(a) make provision for the tied pub tenant to give notice to the pub-owning business that the tenant—(i) considers that circumstances are such that the pub-owning business is required to offer the tenant a market rent option, and(ii) wishes to receive such an offer;(b) require the appointment of a person (referred to in this Part as an “independent assessor”) to determine the market rent of the premises concerned in a case where the pub-owning business and the tied pub tenant cannot agree on that market rent;(c) require that appointment to be made by the pub-owning business and the tied pub tenant acting jointly or (where they cannot agree on a person to appoint) by the Adjudicator;(d) require the Adjudicator to set criteria which a person must satisfy in order to be appointed as an independent assessor;(e) specify that the determination of the market rent by the independent assessor must be conducted in accordance with provisions of documents specified in the Pubs Code;(f) where any document is specified for the purposes of paragraph (e), refer to the provisions of the document as amended from time to time.(3) The Pubs Code may make provision for—
(a) the tenancy or licence under which the tied pub is occupied, and(b) any other contractual agreement entered into by the tied pub tenant with the pub-owning business in connection with the tenancy or licence,as they are in force when a notice is given by virtue of subsection (2)(a), to continue to have effect until such time as the market rent option procedure has come to an end (regardless of whether any of the agreements would or could otherwise cease to have effect before that time).(4) The Pubs Code may, for the purposes of subsection (3), specify the circumstances in which the market rent option procedure is to be treated as having come to an end.”
“Market rent option: disputes
(1) The Secretary of State may by regulations confer functions on the Adjudicator in connection with the resolution of disputes relating to the offer of a market rent option.
(2) The regulations may, in particular, make provision concerning the resolution of disputes about whether—
(a) circumstances are such that a pub-owning business is required to offer a tied pub tenant a market rent option;(b) a proposed tenancy or licence is MRO-compliant;(c) a determination of the market rent of a tenancy or licence made by an independent assessor has been made in accordance with the Pubs Code;(d) any other requirement of the market rent option procedure has been complied with.(3) The regulations may, in particular, confer on the Adjudicator the function of determining the market rent of a tenancy or licence in such circumstances as may be specified in the regulations.
(4) Nothing in sections 45 to 49 applies in relation to provision made by virtue of section (Pubs Code: market rent option) or (Market rent option: procedure) but the regulations may include provision which is similar to that contained in or made under those sections.”
“( ) Any proposed changes to the Pubs Code must be subject to full parliamentary scrutiny and consultation.”
Lord Hodgson of Astley Abbotts
My Lords, after three and a quarter hours on the first set of amendments, I shall be exceptionally brief. I propose Amendment 90 and will speak to Amendments 92 and 96A. They are all concerned with the process by which any future changes to the Pubs Code will be brought about. At this stage they are probing amendments.
As we have found in our discussion over the past few hours, the operation of the Pubs Code is not without its controversial aspects, and this is a chance for the Minister to explain to the Committee how she sees those changes being reported on. Amendment 90 is concerned with the operation of Clause 43, concerning any review of the Pubs Code. It would insert the words:
“Any proposed changes to the Pubs Code must be subject to full parliamentary scrutiny and consultation”.
It is a pretty declaratory amendment, and I should be grateful to hear from the Minister a bit more about the detail of how she thinks that it will operate.
Amendment 92 concerns Clause 66, which defines a pub-owning business as being a landlord of 500 or more tied pubs. Can that figure be changed? When we get to Amendment 91D, I think that my noble friend Lord Howard of Rising will have something more trenchant to say on the subject than I have, but I think that it is important to learn how the Minister thinks that that figure could be changed, if it was to be.
Finally, Amendment 96A substitutes an affirmative order for a negative resolution procedure for the permission for the abolition of the Pubs Code under Clause 63(1)(c). As I said, at this stage, they are all probing amendments, but it would be helpful to the Committee if my noble friend could explain how she thinks that the changes to the code and ancillary aspects might take place in future. I beg to move.
Baroness Neville-Rolfe
My Lords, I hope that I can reassure my noble friend that the Pubs Code will be the subject of further formal consultation following Royal Assent. Furthermore, it will be a statutory instrument made under the affirmative procedure, and any future changes to the code will also be subject to that procedure. On Amendment 92, I reassure my noble friend that any change to the threshold for pub companies to be covered by the code must also be made by affirmative resolution, and must follow a review and full consultation.
On Amendment 96A, Clause 63 provides that the adjudicator can be abolished if, following a review, the Secretary of State is satisfied that the role of the adjudicator is no longer deemed necessary. It is only in the event of the Pubs Code having already been revoked and not replaced by the affirmative resolution procedure, as I have said, that the adjudicator would be abolished by the negative procedure. In those circumstances, the removal of the adjudicator is of course consequential on the abolition of the code, which would have been debated in both Houses. The adjudicator’s role is to enforce the Pubs Code; if Parliament has debated and agreed the decision to revoke the code, it seems entirely reasonable to abolish the adjudicator by negative procedure. I hope that this reassures my noble friend that he can withdraw his amendment.
Lord Hodgson of Astley Abbotts
I thank the Minister. I accept her explanation of all three amendments, and I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
Lord Berkeley
“Definition of market rent
The market rent shall be determined on the basis of the likely turnover and profit of the business of the pub, and shall not take into account any value to the pub owner of a change of use of the pub.”
Lord Berkeley
My Lords, this amendment concerns how the adjudicator takes into account the various financial factors relating to a pub when considering what its market rent should be. We have a lot of pubs where I live in Cornwall, some of them very lovely ones on the waterfront. I do not know how much money they make but there is a feeling that if they were sold for desirable waterside residences, of which there are already an enormous number, they could probably fetch a much larger amount of money than they earn for the owners at the moment as pubs.
That may or may not matter, but there is an issue here of what the role of the pub is in a small community. It acts as a kind of community centre. It may be where people congregate at different times of the day. It keeps village life going. It would be a great shame if the value of a pub on the open market, for retail or as a house, made it in the interests of the landlords to sell it and try to change its use.
There was another example in the Guardian last Saturday, in a nice article on pubs generally, given by someone who works for a company called Paramount Investments:
“In north London if I am selling a pub as a development opportunity I might be able to ask £700,000-£1m for something that as a pub I would only be able to get £350,000-£450,000 for”.
It gives other examples in Marylebone and other places where property values are very high, as they are in London. The problem is wider than London and Cornwall; it could be in many places where the property value is high. In this amendment, which obviously is a probing amendment so the wording might not be quite right, I am trying to propose that in assessing the rent no allowance should be made for a change in value due to a change of use that could be achieved if the pub were no longer a pub. I beg to move.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lord for his amendment and I am looking forward to visiting some of his local pubs in Cornwall before long. To be brief, subsection (10) of the proposed new clause in government Amendment 89A makes it clear that a market rent is,
“the rent which the premises might reasonably be expected to fetch at that time in the open market”,
on the assumption that the sale of alcohol for consumption on the premises remains the main activity or one of the main activities of the premises. It is clear that the market rent is for the premises as a pub. I hope this reassures the noble Lord.
Lord Berkeley
I am very grateful to the Minister. The amendment came through after I went through all this. I am very grateful for her explanation and beg leave to withdraw the amendment.
Baroness Neville-Rolfe
“( ) regulations under section (Market rent option: disputes),”
Baroness Neville-Rolfe
Lord Hodgson of Astley Abbotts
My Lords, I will speak also to Amendment 90C. We come to Clause 60 about levy funding. This brings us to the age-old question of who is going to pay for the regulatory structure now being set up.
Clause 60(1) says:
“The Adjudicator may require pub-owning businesses to pay in each financial year a levy towards the Adjudicator’s expenses”.
Pub-owning businesses are, of course, defined elsewhere in the Bill as having 500 or more tied pubs. I think the word “may” is a euphemism. “Will” require is undoubtedly the right way to put it—who else is going to pay?
I recognise that any pubco with fewer than 500 tenants falls outside the code, although I share the questions of the noble Lord, Lord Berkeley, over the logic of why a tenant of a pubco owning 500 tied pubs should be treated any differently from a tenant of a pubco owning 450 tied pubs. The noble Lord, Lord Berkeley, made a very fair point as far as that was concerned. But I can reassure him because the answer is that in quite a short period of time it will not be outside the code. It is inevitable that the MRO option and the Pubs Code generally will roll out over the whole pub sector. It may be unofficial but no small pubco or brewery will be able to resist the demands of one of its tenants who thinks that his rival on the high street who is owned by a large pubco has gained some competitive advantage. The small pubco or small brewer may resist for a bit, but in fairly short order they will have to concede or risk having some seriously disaffected tied tenants, on the basis that the tenants will say that if the brewer has nothing to hide, they have nothing to fear.
The code will become the standard for the industry, not just in the way the MRO option has to be offered but in a range of other factors that make up the tied relationship under the code. My argument is that those who use the code and are able to take advantage of it ought to pay for the system it establishes. So Amendment 90B leaves out “may require” and inserts the words “must require every”, and Amendment 90C changes the definition of those required to pay the levy to include all companies or breweries that operate tied pubs.
The levy, which will presumably be levied on a per-pub basis, would not cost the smaller companies much. The bulk of the costs of the new regulatory regime will be borne, quite rightly, by the larger tied estates. However, there is an important point of principle that those who benefit from a regulatory regime should contribute, however modestly, to its cost. I beg to move.
Lord Newby (LD)
My Lords, these amendments relate to Clause 60, which will enable the adjudicator to levy funds on pub-owning businesses to contribute to the adjudicator’s expenses, with the Secretary of State’s consent. Amendment 90B would change “may” to “must”, making the power a duty. We have had many similar debates on a number of subjects during my time in your Lordships’ House. I remember with affection the noble Lord, Lord Barnett, trying to get us to put “must” into various banking Bills, with no success. As I said then, and as I am sure the noble Lord, Lord Hodgson, realises, “may” in reality often means “must”. I assure him that in this case the amendment is not necessary.
The amendments would together require the adjudicator to impose a levy not only on the pub-owning companies in scope of the code but on any pub-owning company with tied pubs. I hear what the noble Lord says about the code becoming the industry standard for everybody, but that is by no means clear at this point. It is certainly not a requirement of the Bill. To the extent that pubcos not covered by the Bill did not use the code, this amendment would go against the “polluter pays” principle. The Government are clear that funding the adjudicator through a levy on pub-owning businesses covered by the Pubs Code is the right approach. The conduct of the large pub-owning businesses has led to the need for the adjudicator, so it is appropriate that they should cover the costs. This approach is in keeping with the funding of the Groceries Code Adjudicator by the large retailers in scope of the Groceries Code.
It would be unfair for companies such as the family brewers, whose tied tenants would not have the protections of the Pubs Code—at least initially—nor the ability to refer disputes to the adjudicator, to contribute to the levy. The representative body for some of these smaller companies, the Independent Family Brewers of Britain, has committed to continuing the current voluntary arrangements. This includes funding industry dispute resolution services to continue to provide protections for their tied tenants, so the amendment would require them to pay twice. The Government intend to fund the set-up costs of the adjudicator—but, once it has been established, it is only right that the expenses are met by that part of the industry whose conduct has led to the need for the adjudicator. The existing drafting of Clause 60 provides for this.
The amendments would also require the adjudicator to impose a levy every financial year. This would be the case even if, however unlikely, the money was not required that year—a situation which could arise if there was sufficient money left unspent from the previous year. It is therefore right to allow this flexibility for such circumstances. I hope that I have been able to persuade my noble friend that he should not press his amendment.
Lord Hodgson of Astley Abbotts
My Lords, my noble friend has brought us back to the extraordinary aspect of the parliamentary draftsmen, where “may” equals “must”. Who else in this country would believe that “may” equals “must”? He is quite right to remind us that this is one of the quirks of parliamentary draftsmanship. If, as he points out, the polluter should pay—and if the code becomes widely used by smaller companies below the 500 limit—all I would like to know is whether there is a possibility that, at that stage, the cost of the code could be extended to cover the people using the code, because that is the “polluter pays” principle that he referred to. I hope that the Government will think about that, but, in the mean time, and particularly given the hour, I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
“(5A) But condition D is not met if the contractual obligation is a stocking requirement.
(5B) The contractual obligation is a stocking requirement if—
(a) it relates only to beer or cider (or both) produced by the landlord or by a person who is a group undertaking in relation to the landlord, (b) it does not require the tied pub tenant to procure the beer or cider from any particular supplier, and(c) it does not prevent the tied pub tenant from selling at the premises beer or cider produced by a person not mentioned in paragraph (a).(5C) In subsection (5B), “beer” and “cider” have the same meanings as in the Alcoholic Liquor Duties Act 1979 (see section 1 of that Act).”
Baroness Neville-Rolfe
“(1) A person is a “pub-owning business” for the purposes of this Part—
(a) in the period beginning with the day on which the Pubs Code comes into force and ending with the following 31 March, if immediately before the Pubs Code comes into force the person was the landlord of 500 or more tied pubs;(b) in any subsequent financial year, if for a period of at least 6 months in the previous financial year the person was the landlord of 500 or more tied pubs.(1A) For the purposes of calculating the number of tied pubs of which a person (“L”) is the landlord, any tied pub the landlord of which is a person who is a group undertaking in relation to L is treated as a tied pub of which L is the landlord.”
Baroness Neville-Rolfe
My Lords, the tied model has long been part of our history. As my noble friend Lord Hodgson said, properly operated it can be beneficial to both pub company and tied tenant. However, as the Government made clear in their consultation response, the evidence has accumulated of problems of abuses of the tied relationship. In an online survey carried out in parallel with the Government’s consultation, 91% of more than 700 tenants identified the beer tie as the biggest challenge that they face. In the government amendments that I am moving we are focusing the market rent only option on the tied model, consistent with rest of this part of the Bill. All of this part will then apply to pub-owning companies which own 500 or more tied pubs.
In contrast, the MRO option inserted into the Bill in the other place would apply to companies with 500 pubs of any kind and one tenanted or leased pub. This would include free-of-tie pubs. As I have already said, the Government do not agree with that approach. There is some evidence of problems in the free-of-tie sector. Some free-of-tie tenants, for example, feel that their property insurance is too high. That is a common issue with commercial leases right across sectors. In the pub sector, by contrast, we have a large body of evidence of problems with tied pub agreements. The Government therefore wish to focus regulation where there is evidence of significant problems, not on the free-of-tie sector. I hope that the Committee will be content to support these amendments. I propose again to listen to noble Lords before responding to the other amendments in this group.
The Deputy Chairman of Committees (Baroness Stedman-Scott) (Con)
My Lords, I advise the Committee that if this amendment is agreed to it pre-empts Amendments 91A and 91AZA.
Lord Howard of Rising (Con)
My Lords, I wish to speak to Amendment 91D in this group. Its purpose is to remove uncertainty and so give smaller breweries a stable background in which to run their businesses. Helping small business is after all the purpose of the Bill. For these smaller breweries—indeed, for any pub company—to be successful in a declining market, it is essential that they make significant investment in their pubs. This necessary investment is not practical if they do not know under what rules they are operating. My noble friend mentioned changing the figure of 500 by affirmative resolution, but while change by regulation or order goes some way towards parliamentary examination it is, for practical purposes, a rubber stamp. Between 1950 and 2014, only 11 resolutions were rejected in the other place and only five in your Lordships’ House.
For that reason, if the Secretary of State can change the 500-pub definition to a different number by regulation, that will create uncertainty and severely restrict, if not halt, the investment necessary for the survival of the smaller breweries—which, by the way, generally speaking, have been increasers rather than closers of pubs. If noble Lords think that it is overpessimistic to say that investment will dry up, I remind them that under the last change in the rules governing the ownership of pubs many famous names, as my noble friend Lord Hodgson alluded to earlier, such as Whitbread, Bass, Scottish & Newcastle, Courage and Watneys have been absorbed by multinationals. It would be against the spirit of what we are trying to achieve today if a consequence was to contribute to the demise of small breweries.
Any change to the number of 500 should be subject to primary legislation. I urge the Minister to consider the amendment seriously so that those smaller breweries can continue to invest and create the prosperity necessary to maintain that part of the pub sector and help stem the decline of pubs.
Lord Whitty
My Lords, I have three amendments in this group which go in exactly the opposite direction of the noble Baroness’s amendments.
We could keep the question of definition to talks between now and Report. I do not want to go over the arguments that we had earlier, but to define the owners, the pubcos, to which this applies in reference solely to tied pubs runs the danger of those pubcos altering their tenancy arrangements so that they fall below the threshold. I assure the noble Lord, Lord Howard, that this provision is not intended to hit the family and small regional brewers. We know that the large companies have a range of arrangements with their tenancies and are defined by the totality of their portfolio. It is relatively easy, given the turnover of tenants, for the companies to switch from one form of tenancy to another. They would have a motivation to do so, in order to fall below a tenancy threshold related to tied accommodation alone.
This is one of the issues on which we should have further talks. It is possible that we would have a different tied-specific definition, but that would require other obligations being put on the pubcos so that they would not change the designation of their portfolio to get around this threshold. I suppose that it would be difficult to draft such clauses, but there is a real danger of them gaming this situation. We know that some companies are already contemplating breaking their structure up.
We need more talk about what the definition covers. In a sense, this is the wrong way to go about it, but I would hope that the noble Baroness would not press the amendment and would rather make it subject to the talks to which she has committed for the coming period.
Lord Hodgson of Astley Abbotts
The noble Lord, Lord Whitty, and I have taken common cause on various things but he will not be surprised to know that I cannot take common cause with him on this tonight. A managed pub, as I explained at some length in my opening remarks, has an employee. It is a totally different relationship. To say that pubcos could switch their estate from being tied to being managed would mean changing the whole basis of the employment. The fact is that they are employees with salaries and bonuses and fringe benefits. It is not possible to undertake the sort of gaming that the noble Lord is describing—in terms of switching from managed to tied—which is why managed pubs can safely be left out. The question of what the tie means is something which we have been discussing tonight, but managed pubs form no part of this because they have employees with all the applicable rights and responsibilities.
Lord Stoneham of Droxford
My Lords, the noble Lord, Lord Hodgson, indicates why this needs more discussion. He is right on managed pubs—I absolutely agree—but leased pubs do switch between leased and tied. That is why I was raising my point. The Bill looks very much at the tied part of the sector, but there is movement here which needs to be looked at. To say that any change in the number—once we have decided what that number is—should require further primary legislation and be subject to affirmative resolution is wrong because, as we have seen over the last couple of decades in this sector, people adjust to new legislation and they also sometimes try to avoid its objectives. The Minister, with suitable consultation through the affirmative procedure, needs to be able to make changes as necessary. The number could well be up or down, but it needs to be made appropriately. The prime issue is leased and tied pubs, not managed ones.
Lord Berkeley
My Lords, in this group is my motion that Clause 68 stand part of the Bill. This is an interesting clause, because it is called “Power to grant exemptions from Pubs Code”. If this is read one way, one could assume that every pubco will seek exemption by being specified. This is the usual business of what “specified” means. The word is mentioned eight or nine times in this short clause and then, at the end, it says:
“In this section ‘specified’ means specified in regulations”.
We have not seen the regulations, which is, I am afraid, quite normal in this House and has been for many years. What does “specified” mean? There are various exemptions, such as,
“the dealings of a specified pub-owning business …with their tied pub tenants… of a specified description”.
Does it mean that if they sell fish and chips rather than food they are going to be exempt? Does it mean that if they invite too many Members of your Lordships’ House out to lunch they are going to be exempt? Henry VIII would be proud of this clause and I am sure the Minister is equally proud of it. However, before we get much further we ought to have some explanation of what it means. Who would be exempt and under what circumstances? Why should there be any exemptions? I am sure the Minister will be able to give me some good explanations about why it is very important to have this clause in the Bill.
Lord Mendelsohn
My Lords, I have only a few points to make on these matters as the issues have already been covered quite well. However, I want to stress that these are highly important to our consideration of the Bill and we will look closely at the evolution of the Government’s thinking on them. We stand ready to work with the Government on these amendments and are content to move forward with them in the Bill, on the basis of there being discussion at a later time. However, we would be very concerned if there were no further changes.
We are concerned with how the thresholds are framed. We accept that the Government are focused on the pub-owning companies and we are highly supportive of that. We do not like the formulation that uses the phrase “tied pubs”. We believe there is an overwhelming case to use the terms we proposed—“tenanted” and “leased”—and we would like to see these in the Bill. We have some sympathy with the Government’s predicament on getting these definitions right, but we hope they are willing to show some flexibility on it. There is considerable concern that the situation can be gamed and that the provision of a power to the Secretary of State to vary the number of 500, and to grant exclusions, could be a serious and significant weakening of the Bill or a measure to ensure that anti-avoidance measures can be made more effective.
It is very important that there is a much clearer statement about what the dual-purpose clauses are and that what we put in the Bill is consistent with the work of the other place. It would be very useful if the Minister could give us much greater reassurance on that.
Baroness Neville-Rolfe
My Lords, I am grateful to my noble friends and to noble Lords for their amendments. We are, of course, happy to meet with noble Lords to discuss how these amendments work, the needs of small business and anti-avoidance. We agree with the noble Lord, Lord Mendelsohn, that reform should be about the tie. There is a difference in Committee this evening but a number of concerns have been expressed. These include the lack of draft regulations which, I am afraid, reflects the fact that MRO was a late amendment to this important Bill.
Having said that, perhaps I could talk a bit about the powers and then quickly address the amendments so that the Committee can understand where we are coming from, ahead of any discussions. First, any use of the power would need to be on the basis of strong evidence to justify the exclusion of a type of agreement or type of company. Without this evidence, it would be open to challenge. For example, if it were used to exclude one or two pub companies, it could be seen as a discriminatory use of the power and would lead to a high risk of successful legal challenge. Any attempt to undermine the principle of the legislation—that is, by exempting all pubs—would be an improper use of the power, as it would be subverting the will of Parliament.
Amendments 91AZA, 91BA and 91CA would include the free-of-tie market in the scope of our provisions. As I set out in my opening remarks, the evidence of the past 10 years, from the BIS Select Committee and the government consultation onwards, shows that the problems in the pub industry relate to abuses of the tied relationship. We do not have evidence of a problem in the free-of-tie or managed market.
Amendments 91A, 91B and 91C in the name of the noble Lord, Lord Berkeley, seek to lower the threshold to capture pub companies with 100 or more tied pubs. I have probably covered this ground adequately in our earlier discussions, and in the interest of time, if the noble Lord is happy, I will not repeat the points.
I should probably talk about the need for Clause 68; that might be helpful. It is an important clause, as it is the means by which we can ensure that the definition of a “tied pub” does not inadvertently capture a restaurant or hotel premises. We are already aware of a fish and chip restaurant chain that may meet the definition as set out in Clause 65, and it is possible that there could be other such cases. We would be happy to talk through that concern. We all think that we know a pub when we see one and we think we know the difference between a pub and a fish and chip shop, but increasing food consumption in pub, gastropubs and so on has made separation by legal definition more complex. Clause 68 provides a power for the Secretary of State to exempt a particular type of tenant or premises from the Pubs Code by secondary legislation so that only pub premises are in scope.
The noble Lords, Lord Stoneham and Lord Whitty, were concerned about pubcos turning tied pubs into free-of-tie pubs by coming under the threshold. The evidence that we have of abuse is in the tied market. As I said earlier, if pub companies turned pubs into free-of-tie pubs, their ability to exploit their tenants through the tie would be gone.
Lastly—and I am sorry because he spoke first—my noble friend Lord Howard championed small operators, which I was glad to hear, and queried the power of the Secretary of State to amend the threshold by way of secondary legislation. The Government are clear that the threshold we have proposed of 500 or more tied pubs is the right one, because it is designed to ensure that the Pubs Code and the market rent only option are targeted at the part of the market where we have a problem. However, legislation needs to be capable of responding to changes in the market that may come about in the longer term—for example, if new pub ownership models were to emerge that merited exclusion from all or part of the code.
I hope that we can agree the government amendments so that we have a base for further discussion ahead of, and on, Report. In view of the explanations I have given, I hope that noble Lords will not move their amendments.
The Deputy Chairman of Committees
My Lords, I must advise that if Amendment 91AD is agreed then Amendments 91B to 91CA will be pre-empted.
Amendments 91AA to 91AD
Baroness Neville-Rolfe
Baroness Neville-Rolfe
“(b) who is party to negotiations which have reached the stage of a provisional trading agreement for the prospective tenancy of a premises which are, or expected to be, a tied pub ahead of any final terms of the agreement being agreed.”
Lord Hodgson of Astley Abbotts
My Lords, Amendment 93 could be called, in shorthand terms, the “shopping around clause”. My noble friend the Minister may have spoken to this earlier; I hope that she will be able to reassure me in fairly short order that my amendment is no longer needed with the new provisions.
Clause 67, to which this amendment refers, defines inter alia the term “tied pub tenant”. It does so in respect of prospective tenants at subsection(1)(b), which says,
“who is a party to negotiations relating to the prospective tenancy of or licence to occupy premises which are, or on completion of the negotiations are expected to be, a tied pub”.
That is a very loose definition. An individual might make a casual inquiry—even by telephone—about taking on a tied tenancy but may be without any serious intent, at least initially, of eventually signing up. However, the pubco does not know that when the telephone call is received. As such, under this wide definition in the new regime, it will have to go through considerable administrative procedures at some cost at this early stage.
My Amendment 93 would narrow the definition to people who are getting close to signing up and making an arrangement by inserting the words,
“who is party to negotiations which have reached the stage of a provisional trading agreement for the prospective tenancy of a premises which are, or expected to be, a tied pub ahead of any final terms of the agreement being agreed”.
This has the effect of requiring serious administrative effort to be made only once the tenant has shown himself to be of serious intent. It in no way weakens his position; it merely ensures that he is likely finally to take on a tenancy before he qualifies as a tied pub tenant, with all that that implies under the code. I beg to move.
Lord Newby
My Lords, I hope that I can reassure my noble friend Lord Hodgson on this point. Evidence from the Government’s consultation in 2013 and correspondence we have received from tenants shows that many such prospective tenants appear to have been given insufficient information, or have even been misinformed, by large pub-owning companies about the pub that they are negotiating to take on. The Pubs Code will ensure that prospective tenants receive the information they need to make a considered decision on whether the deal they are being offered is fair and right for them.
I completely understand the concerns that my noble friend raised. As he said, we clearly need to avoid the situation where any casual enquirer is entitled to all the code’s protections. That would be unnecessary and onerous for the pub companies. At the same time, we need to ensure that prospective tenants receive the information promised by the code early enough in their negotiations with the pub company to influence their decision. That is why we have carefully phrased Clause 67(1)(b) to restrict these rights to those who are,
“a party to negotiations relating to the prospective tenancy”.
If there have been no negotiations, there would be no right to the details. The pub-owning company would not be in breach of the Pubs Code for failing to supply them. We will consult on the code before it is finalised, which will allow us to ensure that we will draw the line in the right place, in a way that takes account of the procedures that different pub companies use to recruit and take on new tied tenants. I hope that that gives my noble friend the reassurance that he seeks.
Lord Hodgson of Astley Abbotts
I am grateful to my noble friend. His remarks make clear that the Government have hoisted on board the danger of considerable administrative cost and effort for casual inquiries, which is the thrust behind my amendment. I should just like to get reassurance from outside that the “party to negotiations” carries the weight that he implied in his remark. If it does, I am more than content and, for the purposes of this evening, I am happy to withdraw the amendment.
Lord Hodgson of Astley Abbotts
Amendments 94 and 95 once again concern Clause 67, the definition clause—in particular, the definition of a tenancy in Clause 67(2). Amendment 94 would remove line 43, the words,
“includes a tenancy at will”,
from the provisions of the code. A tenancy at will is essentially a short-term informal agreement which imposes no timescale on either side. It would therefore seem illogical to impose the relatively heavy-duty encompassing arrangements of the code in such circumstances, which either side can abrogate at any time. For the same reason, Amendment 95 would exclude from the code short-term temporary agreements by the wording:
“The definition of tenancy … excludes temporary agreement where the tenant has occupied the same pub premises for less than twelve months”.
There are many reasons why individuals take on a pub under temporary agreements. For example, earlier I referred to the hard work and long hours required to run a successful pub. Some people find the experience not entirely to their liking and give up. Others, perhaps more wisely, decide to give the experience a try for a few months to see how it fits with their lifestyle and whether they really enjoy it. They do so under a temporary agreement. It surely cannot be logical to apply the administrative burden of the new regulatory regime in such circumstances.
There are those who argue that that will provide a loophole to evade the new regime—the noble Lord, Lord Snape, will no doubt be on his feet in a second. I accept the existence of that suspicion. The answer must be to draft the code or the primary legislation so that temporary agreements cannot last more than 12 months and that one temporary agreement with the same premises and tenant cannot follow another. That will give people the opportunity to dip their toe into the water and see how they like it, without having to go through a lot of administrative hassle. That is a simpler, better and less costly way to encourage tenants to come forward and see whether they like it without having to take on all the administrative requirements of the code. In that spirit, I beg to move.
Lord Snape
My Lords, I enter the debate with some trepidation after the way that it was introduced. I, too, will be very brief. I am grateful to the noble Lord, Lord Hodgson, for making my speech for me. He underlined the dangers of the amendment. Tenancies at will are where part of the problem lies. I go back to my daughter and son-in-law’s experience. They think that it must be wonderful to have a tenancy on a country pub with ivy round the door, great customers and all the rest of it. Of course, they will be treated very well by the pubcos. They will be looked after; their delivery will come on the proper day; lots of things will be done on their behalf. After a year, once they sign up, they will find out the reality of the situation. It is at that stage that many problems arise, despite the blandishments of the noble Lord, Lord Hodgson, so I hope that despite his honeyed words, the Minister will resist the temptation. I say to him: nice try but it will not wash, I am afraid.
Baroness Neville-Rolfe
My Lords, I thank my noble friend Lord Hodgson for his amendment on tenancies at will. I was very glad also to hear from the noble Lord, Lord Snape, given his great experience in the industry.
I agree with my noble friend that tenancy at will agreements are important in enabling pub companies to cover short-term gaps, to keep pubs trading in between tenants. They also allow the company time to complete due diligence on a new longer-term tenant. Temporary agreements can be useful to a prospective tenant as a trial run, prior to committing to a longer-term agreement. I have known ex-senior civil servants who have taken on pubs and found them quite a challenge.
In the other place, my honourable friend Jo Swinson committed to consider calls to exempt genuinely short-term agreements from the Pubs Code. These calls came from pub companies and some tenant groups. I can announce today that the Government will use the power in Clause 68 to exclude from the code tenancies at will and temporary agreements that do not extend beyond a certain limited period. This is to ensure that agreements that are meant to be temporary do not run on for long periods of time as a way of avoiding the code. This does not require an amendment to the Bill but, as part of the consultation on secondary legislation, we will consult on the length of agreements that should be exempted.
We have heard different views from stakeholders as to the length—including 12 months, as proposed by my noble friend—but we have also heard calls for six and nine months. Therefore, we will consult more widely on the length of any exemption period before bringing forward regulations. I hope my noble friend will feel able to withdraw his amendment.
Lord Hodgson of Astley Abbotts
I am very grateful to my noble friend for that commitment. I am not stuck on 12 months. All I think we should be trying to provide is a means for people to test out the possibility of becoming a tenant and, therefore, a reasonable period of time. It could be six or nine months; I am quite content about that. The important thing is we should have a regulatory-light opportunity for people to try it out and then if they decide that they want to make it their career, they get the full protections anticipated under the code. In those circumstances, I am happy to withdraw the amendment.
“( ) The definition of “tenancy” in subsection (2) excludes franchise agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products.”
Lord Hodgson of Astley Abbotts
My Lords, this amendment is concerned with the franchise of pub operations. I have remarked repeatedly during the past few hours that the point of weakness of the tie is where the interests of the two parties—the pub owner and the tenant—diverge.
That tension occurs in two places in particular. The first is the rent being charged for the tied premises. The belief or allegation is that landlords are insufficiently deterred from increasing the rent charged. I would emphasise that pubcos have an interest in avoiding pubs closing, particularly those that have an integrated model because they need the outlet for their beer, but undoubtedly the tension exists and, as I said, I do not doubt that some bad cases have occurred. The second point of tension is in the pricing of the goods that the tied tenant is obliged to sell. Again, the allegation is that the pub owner will push the sale price as high as possible. Again, there are arguments why this is not in the pub owner’s interests. Again, let me recognise that the conflict of interest exists.
Some pubcos, particularly integrated pubcos, have sought to address these twin challenges. They have done so by creating a business model based on revenue-sharing. Under such a model, both parties have an interest in maximising turnover. This business model is exactly like a franchise for McDonald’s, Pizza Express or Costa Coffee. Indeed, the agreements have been accredited by the British Franchise Association.
How does it work? The franchisee receives the property, fixtures and fittings, capital investment, and repair and replacement of the fixtures and fittings of the building. All his bills are paid, including rates and utilities. The only bills not paid are council tax and staff wages. He also has services such as training, marketing and business support—the SCORFA arrangement we talked about earlier—and he has products to sell. For this, the franchisee—the operator of the pub—takes a share of the income at the cost of a business fee of about £5,000, compared to the £250,000 that you have to pay for a McDonald’s franchise, for example.
The cost of the products to the franchisee is irrelevant because they are paid a percentage of the revenue of the pub. The goods are delivered to the site and the franchisee holds them on behalf of the franchisor—the brewer. The products are held on the sale-or-return basis. At no time does any cash change hands in respect of payment for the products. The franchisee and franchisor take an agreed share of the total income. The franchisee has the ability to set the retail sales price for the beer in the pub being operated. The pubco effectively supplies everything, with the franchisee then dictating the price to sell it at. The pubco shares the income and, on top of this, the franchisee also receives a profit share. Under the agreement, the percentages and shares of the profit are set out in the contract and cannot be altered.
It appears that this revenue-sharing franchise-type arrangement will still fall within the provisions of the proposed code, so Amendment 96 seeks to insert a new subsection into Clause 67, which is concerned with the definition of tenancy. It proposes that:
“The definition of ‘tenancy’ in subsection (2) excludes franchise agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products”.
This approach in the wording ensures a community of interest between the franchisor and the pubco. If the Government do not accept this amendment, or one like it, they will be singling out the pub trade for very discriminatory treatment. If the argument is that the franchisee has to sell a certain type of product, that is true—but if you hold a McDonald’s franchise, you have to stock Pepsi and are forbidden to sell Coke. Members of the Committee might liken it to walking into a Costa Coffee and asking, “Please can I have a Starbucks?”.
This revenue-sharing arrangement ends the possibility of divergence of interest between pub owner and tenant. It provides a useful model for future pub developments and I trust that the Government will either be able to reassure me tonight that it is not intended to include these or make the necessary changes on Report. I beg to move.
Lord Berkeley
I really cannot imagine how anyone would want to take a franchise like this. It is a variation on the old zero-hours contract, which we talk about. It could be a franchise with zero income and the hours being 24/7. Why should anybody want this contract? I will be interested to hear what the Minister says, but the pubcos must love it.
Baroness Neville-Rolfe
My Lords, I thank my noble friend Lord Hodgson for this amendment on franchises and the noble Lord, Lord Berkeley, for his intervention. Pub franchises are of course covered by these measures because they fall within the definition of a tied pub in Clause 65. I understand my noble friend’s argument that a pub franchise agreement based on a share of turnover, rather than a tied rent, can lead to a better alignment of interests between a pub company and a tenant.
However, there are other aspects of the pub company and tenant relationship that can lead to unfairness, in the same way as for more traditional tied pubs. The Pubs Code includes transparency protections for tied tenants to ensure that they are clear as to what they are signing up to. We believe that these protections and others in the code should be available for all tied pub tenants, including those with a pub franchise agreement. I can, however, provide some reassurance to my noble friend. If, as he says, price increases make no impact on the tenant in a franchise agreement, the MRO-only trigger for pricing will never apply to a franchise agreement. Should a franchisee exercise the MRO option the pub company will still be able to benefit from the stocking requirement, so the tenant could still be required to stock its beer and/or its cider. The pubs company’s obligation to provide services as part of the franchise agreement would of course fall away.
I am, however, afraid that we believe that to exempt franchises would leave a loophole in the legislation. Tied pubs could be converted to franchise pubs to gain exemption from the code. If pub franchise agreements seek to reduce some of the risks of the tied model for tenants by revenue-sharing, as my noble friend Lord Hodgson explained, we would welcome that. One would expect such agreements to be less likely to fall foul of the Pubs Code. In turn, one would expect those tenants to be more satisfied and less likely to request the MRO option. This is not a reason, however, for removing franchise agreements from the scope of the legislation where we remain uneasy about opening up a loophole. I appreciate my noble friend’s amendment but I hope that he will feel able to withdraw it.
Lord Hodgson of Astley Abbotts
My Lords, on a rather sour note, I am afraid that that was a very disappointing response. To say that it is a loophole, this arrangement with revenue sharing does not come within the tied tenancy arrangements, as envisaged. The tension in the tie is the rent you pay and the price you pay for the prize.
Lord Snape
I have never heard of one but I am sure the noble Lord can tell us.
Lord Hodgson of Astley Abbotts
There are probably 400 or 500. The idea is that it is a very easy way for a tenant to start in the pub trade and he shares the risk as he has a revenue-sharing arrangement. Unless the Government say that they will require McDonald’s and others to offer other people’s products, there is no argument for discriminating against pubs that are franchises as long as they have franchises that match what happens in McDonald’s, pizza franchise companies and the coffee companies.
It is just a way of driving the pubs into a corner and finding ways that they cannot live with. The arrangements are used frequently by many other industries, and if pubcos are to prosper they must be able to use similar new developments and not be trapped in what is essentially a framework that has existed for hundreds of years. It was an innovative idea by pubcos to get away from the problems that have bedevilled us all this afternoon. I shall come back on this strongly as it has been too quickly and too easily brushed aside. But, for tonight, I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
Baroness Neville-Rolfe
““independent assessor” has the meaning given by section (Market rent option: procedure);
“market rent” and “market rent option” have the meanings given by section (Pubs Code: market rent option);
“market rent option procedure” has the meaning given by section (Market rent option: procedure);
“MRO-compliant”, in relation to a tenancy or licence, has the meaning given by section (Pubs Code: market rent option);”
““product or service tie” means a product tie or a service tie;”
“service tie” means any contractual obligation of a tied pub tenant to receive a service supplied by—
(a) the landlord of the tied pub or a person who is a group undertaking in relation to the landlord, or(b) a person nominated by the landlord or by a person who is a group undertaking in relation to the landlord;“stocking requirement” has the meaning given by section 65.”
“( ) In this Part, references to “rent”, in relation to a licence to occupy, are to be read as references to the fee payable in respect of the licence.”
Baroness Neville-Rolfe
Baroness Neville-Rolfe
“Fines on summary conviction in England and Wales: transitory provision
(1) Subsection (2) applies to any provision of this Act that provides that a person guilty of an offence triable either way is liable on summary conviction in England and Wales to a fine.
(2) In relation to an offence committed before section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force, the reference to a fine is to be read as a reference to a fine not exceeding the statutory maximum.
(3) After section 1131 of the Companies Act 2006 insert—
“1131A Fines on summary conviction in England and Wales: transitory provision
(1) In relation to an offence committed before section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force, in the provisions mentioned in subsection (2), “a fine” is to be read as “a fine not exceeding level 5 on the standard scale”.
(2) The provisions are—
(a) section 156A(7)(a);(b) section 167D(5)(a);(c) section 279D(5)(a);(d) section 853L(2)(a).(3) In relation to an offence committed before section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force, in the provisions mentioned in subsection (4), “a fine” is to be read as “a fine not exceeding the statutory maximum”.
(4) The provisions are—
(a) section 790F(2)(b)(i);(b) section 790R(3)(b)(i);(c) section 1028A(11)(b)(i);(d) section 1032A(12)(b)(i);(e) paragraphs 7(1)(b)(i), 13(4)(b)(i) and 14(3)(b)(i) of Schedule 1B.””
Baroness Neville-Rolfe
Baroness Neville-Rolfe
Baroness Neville-Rolfe
Lord Mendelsohn
“( ) The Scottish Government may lay before Parliament legislation to extend provisions under Part 4 to Scotland.”
Lord Mendelsohn
My Lords, I guess that the least welcome comment would be, “It may be a one line clause but I have seven reasons for it”.
This is a very simple provision. Many Scottish Members of the other House, including members of the nationalist parties, voted to pass the code on the basis that the Scottish Parliament would have an off-the-shelf code to implement in their own jurisdiction should they so wish. This amendment ensures that this option stays open.
It is right that it should be for Holyrood to decide. It is a devolved matter for which they have responsibility. While it does not form part of the legislative consent memorandums under consideration by the Scottish Parliament on the measures in the Bill that the Scottish Government may be looking at, it was felt worthwhile to make this provision possible so that it would be plausible for them to do so in the circumstances that they so wished. There are many in Scotland who have reported that there may be some interest in this, and, again, that is not a matter for us. I am very pleased to see the noble Earl, Lord Lindsay, in his place. He and many others have been attuned to what is discussed there. If we amend this sensibly and well, we will be in a position to have something which, in the circumstances that the Scottish Parliament would think this is the right thing, they would be able to use. I beg to move.
The Earl of Lindsay
I am very much hoping that my noble friend will be able to reassure us that there are and have been instructive discussions with the Scottish Government on this point and that the dialogue with the Scottish Government has not come too late in the day for a co-ordinated cross-border approach, either via a Sewel Motion in this Bill or via parallel legislation introduced in Holyrood. Reassurance on these points is important in the context of this Bill, but it also has a wider importance.
Just last week, the Government published the document, Scotland in the United Kingdom: An enduring settlement, in which they stressed that it was essential that there was effective intergovernmental working and close collaboration between the United Kingdom and Scottish Governments. That statement restated an important recommendation from the Smith commission report, published in November 2014. That, in turn, restated a central recommendation of the Calman commission in 2009, on which I sat. This is the reason for my interest in my noble friend being able to reassure us that there has been timely, constructive dialogue between London and Edinburgh on this Bill and on this particular point.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord for his amendment and for giving me the opportunity to say something about the application of these measures in Scotland. I am delighted to hear from my noble friend Lord Lindsay. I have discussed this matter with him and the noble Lord, Lord Reid, outside the Committee. The measures in Part 4 of the Bill apply to England and Wales only, of course. This is because regulation of tied pubs is a devolved matter in Scotland and it is for the Scottish Government to make their own legislation. Should they decide to legislate, they would not need any additional powers to be conferred by the UK Government.
My honourable friend Jo Swinson has recently written to the Scottish Minister for Business, Energy and Tourism encouraging the Scottish Government to consider bringing forward their own legislation in this area. My officials stand ready to assist as necessary. We understand that the Scottish Government have been engaging stakeholders from all sides of the debate and are considering whether there is evidence for a similar intervention in Scotland. I hope that the noble Lord will, therefore, accept that his amendment is not required.
Before I sit down, as this is the final day of the Committee, I should like to take a brief moment to put on record my thanks at the end of what—for some of us—has been a dry January, which has rightly ended with us talking about beer. First, I would like to thank all the patient Chairs of our Committee and those behind the scenes: Hansard, the clerks and the doorkeepers who have helped ensure our debates run smoothly and finish on time. I am also very grateful to my noble friends Lord Popat, Lord Newby and Lord Nash, on this side of the House, for their support in steering this Bill through Committee, and to my noble friend Lord Stoneham for being so loyal an attendee.
Furthermore, I would like to thank officials from the nine government departments who have been here to support the Government: BIS, the Treasury, HMRC, the Department for Education, UK Export Finance, DCLG, the Cabinet Office, the Ministry of Justice and DWP. We even talked about Gibraltar on the day that the noble Lord, Lord Mendelsohn, went missing and I would like to congratulate him on the refreshing new perspective he has brought to our work. I would also like to say how glad I was to see the noble Lord, Lord Stevenson, back today. I know he has been ill and we have had great collaboration with him and his colleagues.
Most importantly, I thank the noble Lords opposite, and all noble Lords who have been involved in the Committee, for their contributions to our debates. We have scrutinised the Bill in full, with some good and thorough debate. I have welcomed the spirit of co-operation that has been apparent even today. This is a vital Bill because small businesses are the engine of Britain. This Bill will help them innovate, grow and compete in many ways—from prompt payment to access to Government contracts. I look forward to noble Lords’ support for the Bill in its remaining stages to ensure that it reaches the statute book this spring.
Lord Mendelsohn
My Lords, I thank the Minister for her reply. On our amendment, all I would say is that between now and Report we will have some indication of where the Scottish Government are going, and we may well return to it in due course. At this stage, we would be very interested to hear her response.
I say from this side a strong thank you to the Chairmen, doorkeepers, officials, Hansard, and everyone else who has helped with these proceedings, and to colleagues for being such an interesting group in getting to grips with the Bill.
This is done in a spirit of co-operation. There are many occasions in politics where we are at daggers drawn, and many on which we find common cause. Sometimes we are in the middle. This is one where we are rather more towards one pole than the other. Our biggest criticism of the Bill is that it does not go far enough, but it would be churlish to say that that is a reason why we should not give it a great deal of co-operation. In that regard, I thank the noble Lord, Lord Popat, and the Minister, the noble Baroness, Lady Neville-Rolfe, for their contributions to the debate. I hope that in the weeks we have, on some of the more interesting issues, we can continue that spirit of co-operation. I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
Baroness Neville-Rolfe
“( ) Section 13 (electronic paying in of cheques etc) comes into force—
(a) on the day this Act is passsed, for the purpose of enabling the making of regulations under section 89D of the Bills of Exchange Act 1882 (as inserted by section 13); (b) on 31 July 2016, for all other purposes.”