Enterprise Bill [HL]
Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn
Lord Hodgson of Astley Abbotts
I am afraid that I have to disagree with the noble Lord. I am explaining why the background to these amendments is the rate of pub closures. That is what we are seeking to consider. That is the whole background to the amendments. I am sorry if the noble Lord feels that I am making a Second Reading speech but I am just trying to set out the status of the pub sector at present. In about a minute and a half, I will come to the treatment of the three amendments that the noble Lord, Lord Whitty, has tabled, and I shall certainly tackle them straight on. However, I need to do that against the background of the reasons for the problems in the sector. Those are not merely to do with the operation of the Mulholland amendments but are part of a bigger societal change.
Going back to CAMRA for a moment, I think that this is misplaced optimism. There is not the demand for a wide range of specialist beers changing week by week—Old Boot Polish one week and Sheep Dip the next. Some pubs will be interested in selling those but, for the most part, demand is for the well-known lagers such as Stella Artois, Peroni and so on. That will be the profitable and sensible way for landlords to trade.
I would not want the Committee to think that I was arguing that everything in the sector was rosy. In a sector with 20,000-plus tenants, there are bound to be pubcos—and, dare I say, tenants—who do not behave quite as well as they might. I freely admit that in the tied sector that conflict of interest is most acute.
Lord Mendelsohn
Given this rather large view of returns on the market, I have a quick question. If there were not the unsustainable leverage and the change in the business models of the companies concerned, would the noble Lord be making the same speech?
Lord Hodgson of Astley Abbotts
Before the noble Lord concludes, can he explain why we are going back over the managed pub issue? We have covered that already. We agreed that there was an issue with tied pubs, but Amendment 53ZD takes us back to stuff that we cleared away before. I accept the arguments and discussions about the parallel rent assessment, but it was perfectly clear that we were not going to include managed pubs, because they do not operate in the same way as tied pubs. Nor indeed did we talk about further reports on people wishing to sell tied pubs. People are free to sell tied pubs. Why should that be something that applies particularly to the adjudicator?
Lord Mendelsohn
I thank the noble Lord, Lord Hodgson, for that intervention. I shall make it very clear. We introduced these as probing amendments to test a variety of things. The context is that that was prior to the publication of the consultation, and the debate that we have had is very different from the one that we would have had. I and, I suspect, some others in this Room would have tickled the noble Lord, Lord Hodgson, on some of those issues in other circumstances, but these are the circumstances that we are presented with: we are focusing on the consequences of the consultation.
It will come as no surprise to anyone to hear that I was always sceptical of the legal advice—we are going back to the constants of “may” and “must”—but I also presented in meetings counsel’s views, which have turned out to be rather prescient. I would be very grateful if the noble Baroness, who will always resist publishing the advice, would at least give us a much greater recitation of what legal advice has been given and whether the Government have taken effective external advice, as well as advice on whether the consultation was consistent with the Act. Will the Minister give a timetable for the Government to come forward with a proper impact assessment of the consultation proposals, as opposed to the proposals that we all agree to? We would also be grateful if she would set out whether existing legislation will allow the Pubs Code Adjudicator to deal with the pubcos gaming the system. If this measure goes through in the form it is in now, it will mean that the pubcos can game it to their hearts’ delight.
We would also be grateful if the Minister could give us an indication as to whether the Minister in the department directly responsible for signing off this consultation gave direction to the officials to draft the consultation on the basis of the proposals not contained in the Act and whether there has effectively been a change of policy to ignore the Act and introduce a different form. This more consistently follows what was proposed previously as opposed to the Act, and we would be very grateful for some assurance that such directions were not given by the Minister responsible.
Enterprise Bill [HL]
Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn
Lord Mendelsohn
My Lords, in moving Amendment 20, I will speak to Amendments 21 and 22 and address some of the issues relating to Amendments 23 and 31, in the name of the ever-present and astute noble Lord, Lord Stoneham. This cuts to the very heart of what we are trying to get the commissioner to do: how the commissioner can operate most effectively and what some of the powers are that make the whole system work. This is very important to consider in the light of the narrow focus of the objectives in the short term and the hope that the office will establish objectives that will make a big difference to small business over time.
Amendment 20 would provide greater power for the commissioner to investigate and call for information. Amendment 21 would reinforce this by specifying the breadth of areas where they can call information from: government departments, local authorities, public sector bodies and companies. This is largely because there are very few powers available in the Bill, and the ability for another organisation to frustrate the commissioner is clear. So in our view, Amendment 22 is extremely important because it provides what is in a sense a lever which encourages people to go through a process of mediation.
The objective of the office of small business commissioner—in a sense, the classic design—is to enhance competition and a fair operating environment for small businesses. The investigation of small business complaints, business behaviour and facilitating the resolution of disputes form the core, whether or not that involves greater accessing of information and education, influencing government and their agencies to be much more focused on small business, or even acting as an advocate for government. But at its very core, the function of helping disputes gain some traction and thus resolve matters for small businesses is extremely important. These underpinning powers give it the force to make sure it can get to the heart of any matter, and that it has sufficient leverage to encourage some form of mediation. The Small Business Commissioner needs a power to encourage as well as to discourage.
The cost of a dispute for a small business is not just the financial costs but lost business and the cost of pursuing any resolution, such as legal costs. There is also a considerable opportunity cost, and a great deal of stress. The opportunity costs include what would otherwise have been achieved for the business in terms of time and effort. So, if a small business which is resolving a dispute takes someone out of the business, added to those costs is the disruption caused for the operators themselves.
Small business disputes face a particular difficulty, which is that they do not generally arise in the ordinary course of operating such businesses. They are periodic and emerge in unusual circumstances, and accordingly small business operators may not identify an emerging dispute until quite late on in the process, and might not have developed the skills to resolve the dispute. Through the early identification of emerging disputes, financial costs can be dealt with easily, incurring much less of a burden for both parties; and it also means that relationships that are critical to running small businesses can be maintained.
As we have seen with previous legislation, a small business commissioner and effective alternative dispute resolution operate speedily and at low cost. We would hope that the Government would consider mediation to be an additional tool that could be used over time. It is an informal and collaborative process and is generally of far greater benefit to small businesses, principally because it facilitates parties continuing their commercial relationships. Also, the potential costs of legal proceedings outweigh what small businesses would gain from the dispute. Long, drawn-out legal proceedings with the possibility of appeal may also hinder the parties so that they do not deal with each other commercially while the action proceeds, and the breaking of the business relationship is likely to persist. Accordingly, in alternative dispute resolution a strong emphasis is put on things which can be signposted by the Small Business Commissioner, such as those which they can supervise or take some sort of role in. This encourages the parties to be commercially realistic rather than intransigent, and to seek an outcome that is not 100% in favour of one side.
In order to create such a role, it is clear that some kind of lever is required. Amendment 22—my particular favourite—states that if one party is uncooperative or is unwilling to go through sensible mediation, the Small Business Commissioner can provide a commentary that will be taken into consideration when the question of costs is considered if that matter goes to litigation. Australia is a good and successful example of the use of this power, which helps to ensure that the parties come to a resolution. A small business can rack up massive costs when the Small Business Commissioner has reached a firm conclusion, and we have seen how resolutions can be reached over time much more collaboratively, in keeping with the intention of maintaining good business relations. That is not axiomatic; there are of course provisions for the court to take different views and provide protections, so that people do not game the system. But the notion that a small business commissioner, using their discretion, can ensure that someone comes to the table in a co-operative and collaborative spirit, and that all parties take a sensible view, underpinned by the idea that someone else will be accountable for costs, is a considerable and beneficial power.
All in all, we are hoping to the narrow focus of the Small Business Commissioner. The Bill already narrows who it covers, who it deals with and what it can do in general. The Small Business Commissioner, by the very definition of a small business—by the exclusion of large entities being able to contact it; by its roles and functions, its capacities and flexibilities; in providing no scope to deal with local authorities; by its staffing, its capabilities and the unusual power that the Secretary of State has to abolish it; and by its levers for enforcement and information—relates only to a small proportion of the type of disputes that can be dealt with. On late payments, it is already narrowed by the legal definition of the contract terms it can cover. It deals only with disputes with large businesses, even if large businesses are a consequent part of the step. It excludes the public sector and most contract term variations, along with anything that can go through an alternative complaint procedure.
As we near the end of these clauses, I am hoping that, while we have not been able to address such issues, the Minister might be sympathetic to giving the provision greater teeth and flexibility, so that progress can be made. I beg to move.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I have some sympathy with this amendment. It offers the possibility of speeding up the process of resolving complaints. For the respondent—that is, the person about whom the complaint has been made—time is his friend. He has the money so the longer that he can spin it out, delay and obfuscate, the better. The complainant may lose heart and give up, but in any case in the mean time he hangs on for money. There may be occasions when the Small Business Commissioner says, “Actually, if we could get that particular piece of information, we could resolve this. We could cut to the chase and reach a resolution”. Up to that point, the respondent could have been trying to flatter to deceive, appearing quite helpful and giving lots of answers, but not actually giving the answers to the questions that were relevant to the point at issue.
I think that the noble Lord, Lord Mendelsohn, has made a good point. I would like to see us find ways in the Bill to facilitate the speeding up of this process by the Small Business Commissioner being able to cut through the Gordian knot—if he believes that such a situation exists—by requiring that information which has not been offered voluntarily can be compelled to be disclosed with a view to making his job and the whole process work more efficiently.
Lord Mendelsohn
My Lords, I add our support for the first of the measures. I thank the noble Lord, Lord Stoneham, for introducing it into our discussions and the noble Lord, Lord O’Neill, for his excellent comments.
Amendment 30, in my name and that of my noble friend Lord Stevenson, would give the Small Business Commissioner a role in commenting on access to finance and to make a simple and straightforward case. A number of measures try to increase access to finance, whether they be the provision of overdrafts for very small businesses, forms of growth capital, older forms of asset finance, newer forms of peer-to-peer lending or other forms of finance. Many people look at these schemes and programmes; indeed, committees in this House, the Government and other bodies have looked at the performance of a number of the initiatives that are available and whether they give the right benefits and whether too much is taken out of them.
The purpose of the Small Business Commissioner is to take the perspective of a small business to try to find ways in which such schemes work to best effect on behalf of small business. In many ways, this is our thinly veiled attempt to enable the Small Business Commissioner to be the advocate of small businesses and to take a particular perspective that encourages the voice of those who require access to finance to come to the fore. Where the Small Business Commissioner is able to draw on the lessons learnt from resolving disputes—where there are broader lessons, challenges and problems—those comments can be made. Invariably, the problem is not just about cash flow. If you have a problem with cash flow, access to finance will be the crucial test of whether you are able to survive.
Lord Hodgson of Astley Abbotts
My Lords, I just want to say a word about Amendment 30, to which the noble Lord, Lord Mendelsohn, has just spoken. On Monday, at our first meeting in Committee, I said that I thought that the SBC role had been drawn in a way that is a bit too focused, but I say to the noble Lord that Amendment 30 would take that role well beyond the bounds of what the Small Business Commissioner should be doing. The comments that I made on Monday about payday loans apply equally here. This is not part of his competence. Hundreds of bodies and people make recommendations about how to improve finances for small and medium-sized companies. That is a serious issue, but it is not part of what he should be doing. He is focused on a different part of the field. I am sure that my noble friend will not accept the amendment, as plenty of bodies are looking into the provision of finance to small business and this would be a distraction from the commissioner’s central task, albeit that I still think that the central task is a little too narrowly drawn.
Lord Mendelsohn
My Lords, I should declare at the start of these amendments that I am regulated by the FCA, so this is actually terribly in my interest. This relates to being able to give small business some guidance. Very briefly, money-lending regulations apply to a whole range of small practices ranging from financial and credit services, accountants, lawyers, estate agents and a number of others.
As ever, the regulations are quite complex within this context; there are duties to assess the risk of the business, your own business activity being used by criminals, who you are conducting business with, checking the identity of beneficial owners, monitoring their business actions and reporting on management control systems, or keeping documents and making sure that you are training your employees. I am bound to say that as ever, these obligations on companies that try to comply are very hard on them indeed; small businesses in particular find that very tough. For those who have no intention of bothering to comply with them it is exceptionally easy; I cannot say this comprehensively, but in cases that I checked the fines are significantly smaller than the costs of having to comply by having a compliance adviser or other sorts of people.
We therefore hope that the Small Business Commissioner will be able to play a role here to help define what is good activity rather than the constant uncertainties that happen, especially over something such as this. Is it sensible for a small business with two or three people in one of these areas to have to phone up the company secretary at a FTSE 100 company to say, “Can I have the passports and identity checks of your company directors?” and to have to carry on referring them in those sorts of circumstances? Perhaps this may not be a formal role, but this now famous annual report may well have some provisions which will be helpful to at least simplify this for small businesses.
Secondly, on awareness of share sale fraud—I apologise that we may not have drafted this to the most exacting standards that we would otherwise have liked to have done—I will try to give noble Lords the thrust of the measure. Again, small businesses are particularly vulnerable to a number of frauds that take place where people try to sell bogus financial services and products and other sorts of things. This affects areas where online fraud is established or verified through the use of things such as addresses or other sorts of things as well as when online and offline meet. We are trying to give the regulators some ability, obligation or duty to communicate; hopefully the back end of how that might work best for government would be between the enforcement agencies and the regulators. I will give a great example, which was, of course, when City of London Trading Standards sought a conviction against Regus Management, which housed just the address of a particularly fraudulent scheme. When contacted by—on this occasion—consumers, the company said that its offices were based there, when, of course, it was just a postal address. Just by saying that it was based there gave it a credibility which led to a couple of people being defrauded.
It is also very useful to know that the police are now enforcing a crackdown on boiler room fraudsters in the City of London and Canary Wharf. This is good practice; we would like to encourage regulators to get the message out so that there is reasonable coverage across the rest of the country. This is just about trying to place a duty on them to try to make sure that something can be done to help support small businesses across the country. I beg to move.
Lord Hodgson of Astley Abbotts
I cannot resist, although I know that the Committee is like a horse heading for the stable, therefore I shall be very brief indeed. On the comments made by the noble Lord, Lord Mendelsohn, on money laundering, this area has a life of its own, and the impact on smaller businesses is stupendous and without any real evidence of any efficacy whatever. This area is still growing, and the tentacles of bureaucracy are widening all the time, therefore the burden will be greater. I therefore very much support the idea that we take any steps to make sure that it is effective—not that we should not do it, but that it is effective. That is the thrust of the noble Lord’s Amendment 49B and trying to make sure that we try to prevent the further spread of this. I have today received a request about money laundering from my clearing bank. When I left university in 1964 I went to work in America. The bank has written to me saying, “We see you worked in America in the 1960s; tell us what you were paid as part of our money laundering investigation”. What that can possibly add to its knowledge of me 50 years ago I cannot possibly imagine. If you use the term “money laundering” everyone says it must be a good idea. It will require a big effort to make sure that we are effective. The question is: are we stopping people doing these terrible things, not just spraying information around and ticking boxes? Therefore, all power to the Minister.
Enterprise Bill [HL]
Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn
Lord Hodgson of Astley Abbotts
Before the noble Lord, Lord Stoneham, finally withdraws this amendment, I hope that, if he is to persist in this at a later stage of the Bill, he will reflect on how one distinguishes payment from monitoring and contract. If you accept a payment-by-results contract, you are committed to it long before you get to the payment stage. If you change the monitoring methods in the middle of the contract, the payment flows from that because it is then paid a different way. The yardsticks, the key performance indicators, will be different. While it is very neat for the Government to say this is about payment, it washes back up the chain to what was done before. I understand what my noble friend Lord Cope and the Minister said, but these are not discrete silos. They are all interlinked.
Lord Mendelsohn
I have one final question. The Minister said that this of course addresses the issue about the imbalances of power. What is the size of a particular business and the circumstance of a transfer of goods which defines whether that imbalance of power exists? Is that defined by size, turnover or number of staff? What is the definition of power that allows this to take place?
Lord Hodgson of Astley Abbotts
My Lords, as the noble Lord, Lord Mitchell, sat down, I realised that I have some EIS investments. Since I spoke in that group, although not on the EIS, I probably ought to declare that for the record before we go any further.
Amendment 10 is concerned with the law. Here I am trying to steer between Scylla and Charybdis. Scylla, as evidenced by the Minister, is about advice to be given on supplier relationships, and Charybdis is the statement in paragraph 6 of the Explanatory Notes that:
“The Small Business Commissioner will not provide advice on legal issues relating to a specific case”.
Obviously, I understand the challenge surrounding the use of the word “specific” but there is an issue here about the way large businesses can use legal means to delay payment. I am aware that Amendment 39 in the name of the noble Lord, Lord Aberdare, focuses on the construction industry. I do not wish to run before his horse to block it. Therefore, I do not want to get involved in that industry.
My focus is on two areas. The first is the practice of finding a minor fault, or perhaps claiming a minor fault, in some goods supplied and withholding a disproportionately large proportion of the sum owed—and, when challenged, the purchaser inviting the supplier to use the law in the certain knowledge that the legal wheels can be made to grind slowly, which is one way that this can happen. The second is the use of a similar approach in matters involving intellectual property—an area where small businesses give a huge degree of help to our economy because small businesses worry away at the coalface, finding new and better ways of doing things—where a small business has made a breakthrough and developed a new product, patented it and then is sat on by a large company.
What do I mean by “sat on”? The example I have in mind is a company I knew of which developed a new freezer cabinet for supermarkets. It had various devices that made it particularly efficient and operationally effective. A large supermarket chain bought six of these—to the delight, obviously, of the small business, which thought that this was a breakthrough—only to find that the supermarket had reverse-engineered the freezer chests and was now manufacturing them itself. The small company claimed infringement of a patent—the intellectual property. The supermarket denied it and invited the small company, if it believed that it had a case at law, to take it to court. The sting in the tail in the meeting was when the person from the supermarket said, “By the way, just before you make up your mind, our lawyers say that we can prevent this from coming to court for two or three years”. The small company had no way to sustain the cash flow and the capacity to maintain the costs of a legal action for two or three years.
There will always be a degree of inequality of arms between large and small companies in legal matters, but there is a chance here, where we have supplier relationships being abused in this way, for the Small Business Commissioner to be of real help to small businesses and help redress that balance. That would be of advantage to our country and of particular advantage to the small business community. It is not about specificity or about getting involved in individual cases but, rather, about making sure that where these sorts of cases happen they are published and efforts are made to make sure that their use and abuse is minimised. I beg to move.
Lord Mendelsohn
Briefly, I support this amendment, which dovetails quite nicely with an issue that we will raise later on the powers of the Small Business Commissioner. There are many difficult cases, on which many people receive letters, where the ability to use legal processes works massively to the detriment of small businesses, and it is exceptionally difficult to be able to extend those procedures. I think that the noble Lord, Lord Hodgson, made the point that it is not about getting involved in the legal case in and of itself but about using the convening power and sense of the Small Business Commissioner to help to get these processes streamlined to make sure that small businesses are not affected by that asymmetry. This is a very sensible and proportionate amendment and we support it.
Baroness Neville-Rolfe
I thank my noble friend Lord Hodgson for his amendment and for his examples, including the IP examples—an area that he knows is close to my heart. I like the Scylla and Charybdis parallel, which one could use more broadly in public policy. I did Latin A-level, being in an era when they did not teach women science.
Clause 3 provides for publication of general advice and information relevant to small businesses and their supply relations, and to resolving disputes. Under existing drafting, obviously this could include information about the timings of and risks of delays within legal proceedings. However, I think that the intention of my noble friend is much broader than the provision of advice and information to small business. As I see it, he intends that the commissioner should shine a light on where delays in legal processes and litigation tactics are used in a manner that is detrimental to small business as they frustrate efforts to resolve a dispute, as he said in examples that he raised.
Clause 9 requires the commissioner to publish an annual report on its activities. This must include a summary of the matters raised with the commissioner by small businesses that the commissioner considers are the most significant. It can of course include any recommendations that the commissioner may have in relation to such matters. Therefore, if issues related to delays in legal processes are brought to the commissioner’s attention and she or he considers them significant, he or she may include them in the annual report.
It is difficult to develop this further without impeding the right of business to have access to the courts. However, obviously, as the noble Lord, Lord Mendelsohn, says, the commissioner has a certain convening power. I do not think that my noble friend Lord Hodgson was trying to get him involved in individual cases, and that convening power will be able to be used to survey what is happening in these areas—as I said, to shine a light on them. I therefore agree with the spirit of the amendment, which is to shine a light on delays, on aspects of the courts system or on the exchange of legal letters that are preventing or deterring small businesses from resolving disputes. However, the Small Business Commissioner has sufficient powers in this respect and I am not persuaded that we should go any further in this area.
Small Business, Enterprise and Employment Bill
Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn
Lord Mendelsohn
My Lords, Amendment 33M makes provision that the Secretary of State may, through secondary legislation, create an opt-out for an MRO in return for a sum of investment. The amendment tries to outline important provisions and considerations and to ask the Government to be clear on what that means. It also asks that they implement safeguards to ensure that the MRO is not watered down. Our belief is that if the investment offer is fair, reasonable and attractive to a tenant, there will be little or no risk of the tenant taking up the MRO at that time. The MRO trigger would be there to ensure that pub companies made reasonable investment offers and were not just bullying or cajoling tenants into signing away rights cheaply.
My reasons for tabling the amendment are twofold. First, we do not fully accept the Government’s argument concerning Clauses 42 and 43 on the Pubs Code. We think that the legislation is insufficient and would be very interested to hear the Minister’s view on this. Secondly, this measure has the capacity to undermine the Commons amendment. We do not feel that it is appropriate to accept the measure without a detailed indication of what it entails and without some markers on the face of the Bill.
There are many horror stories in relation to this, as in relation to the operation of how pub companies deal with the provision of a sale. Indeed, I heard this morning from a tenant about how all their rights were bullied out of them and how they were moved dramatically from a position of reasonable success and security, with the pub company using the provision in a dispute over a sale. Many Members of this House will have heard stories from a variety of sources about issues concerning investment. We are concerned to make sure that these are dealt with adequately, and that the problems that led to this part of the Bill and to the issues that arose in the other place are dealt with properly.
We are also very keen to make sure that the industry, in and of itself, has the capacity to continue to develop and invest, finding a way to work with its tenants productively, sensibly and creatively so as to grow, commercialising the sector to full effect. Therefore, we are looking to the Government to provide a clear view on how they will deal with this. We accept that much of this will be dealt with in secondary legislation, as with other things, but because of the nature of some of these provisions, and the speed at which they have been made, we will be very keen to have some idea of what the Government see the regulations and guidance as including and how they will be framed.
We would be very grateful for some clarification on the following: the definition and amount of investment; what the Government consider to be the maximum deferral period of MRO in return for investment, and their view on whether it should be capped at five years; the stage at which the deferral for an MRO will begin— that is, will it be after the sums are agreed or when they are all fully expended?—the buyout of agreement provisions, whereby a tenant can opt for MRO; the tenant’s option to allow for alternative and blended finance to maintain MRO and how this will operate with investment agreements; and the ability for an investment agreement to trigger the parallel rent assessment. We would also like to have a strong reassurance about how the investment agreement will be a trigger event for the MRO. We would like clarification that an agreement of investment will mean that there is no opt-out of the Landlord and Tenant Act 1954, and an assurance that the investment agreement will recognise the different nature and size of pubs and relevant investment requirements. There is a considerable difference between a large pub in, say, the centre of London and one in a remote village, and it needs to be recognised that a one-size-fits-all model does not work.
There are other considerations, such as who commissions the work, to what standard, who signs it off and is responsible for overruns, the examination of the current condition of properties and other matters. These are not the only relevant factors. We have also received correspondence on problems between pub companies and tenants, and on how these mechanisms have specifically been used. We believe that it is in everyone’s interests to have a working mechanism that allows for investment and makes that investment work. We feel that more clarity now will ensure that problems can be avoided in the future.
I hope that the Minister will be happy to consider these matters in full. Given their sensitive nature, we will be happy to return to them at Third Reading following this debate on the substantive points. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, I have Amendment 33W in this group. The noble Lord, Lord Mendelsohn, has done us all a favour by tabling Amendment 33M, which has the great virtue of ensuring a reference in the Bill to the importance of investment in the sector. There are aspects of his amendment which would be operationally and definitionally problematic, which I will come to in a minute or two, but there is a germ of a good idea and I hope that we may be able to persevere with this over the next few days. By contrast, I find the Government’s position less satisfactory, in that, as I understand it, there is to be no reference to the importance of investment in the sector anywhere in the Bill. It will all be left to the consultation process, with all the attendant uncertainties which all sides of the House have referred to during the debates this afternoon.
The Government have made a practical argument that the pubcos could achieve certainty by offering tenants a new agreement at the same time as the offer of investment. In the explanatory note that the Government circulated last week, there is a suggestion that the Bill does not prevent pub companies from issuing a tenant with a new lease alongside the offer of investment. Sadly, most tenants will not be attracted by this because of the problems of stamp duty. A lessee on a 15-year lease with a rent, say, of £50,000 will pay stamp duty of around £5,000 at the outset. If they are in year two or year three of the lease, and the pub company has to grant them a new agreement in order to make an investment with a five-year payback, they will have to write off the £5,000 they have already paid, pay another £5,000 in stamp duty for the new lease and then pay all the legal costs associated with it, which are estimated at around £1,500. Not surprisingly, this is not a particularly attractive option for the lessee. In essence, the Government’s position now is to force small businesses who want to take advantage of pub company investment to pay additional tax to do so. That is surely contrary to the aim of the Bill, which is to increase access to finance for small companies.
I think all noble Lords agree that investment in pubs is urgently needed if the trade is to prosper, because pubs are having to reinvent themselves to meet new competitive conditions, with a greater emphasis on food, facilities for families and so on. These investments are what bankers called “messy lends”, because they tend to be a mixture of: land works, for example extending the car park; construction—increasing the footprint of the pub; internal fittings, such as enlarged kitchen facilities; and general work such as new signage, new fixtures and fittings, and general decoration. A banker will have some doubt as to the ultimate value of that investment if it is unsuccessful. They are not always therefore very attractive to third-party lenders, but they are attractive to integrated pubcos, because their own estate is an important route to market for their own beer, often accounting for up to 25% or 30% of their production. It needs to be made clear that there is no requirement for a tenant to accept the pub owner’s money. If he or she can find funds elsewhere, on better terms, so be it, although the fact is that an integrated brewer usually is able to offer the best terms.
I referred to the need for pubs to reinvent themselves as a result of changes in society. That brings me to the downside of the amendment of the noble Lord, Lord Mendelsohn, as currently drafted. He referred to the vast range and diversity of investment needs, but I fear that parts of his amendment represent a straitjacket. What is a “rent assessment” in relation to MRO in the introductory section of his amendment? Reinventing yourself as a gastropub in a prosperous London suburb is a vastly different proposition from reinventing yourselves as a value-conscious family-friendly pub in Middlesbrough, but both are important if we are to maintain the pub trade in all its glory and all its diversity.
I argue that the maximum deferral period of five years, as proposed in subsection (2)(b) of Amendment 33M in the name of the noble Lord, Lord Mendelsohn, is not appropriate to appear in the Bill. Secondly, the proposed buyout provisions under subsection (2)(d) are likely to act as a disincentive to investment. Thirdly, for reasons that were clear from my previous amendment, I am anxious to pull MRO and PRA together, whereas the noble Lord has separated them under paragraphs (f) and (g) of his amendment.
My Amendment 33W does not suggest a new clause— as the amendment in the name of the noble Lord, Lord Mendelsohn, would do—but the insertion of two paragraphs in Clause 43, “Pubs Code: market rent option”. My amendment envisages a situation where the Pubs Code would clearly set out what can and cannot be included in such a deferral agreement. Tenants would continue to enjoy all the protections of the Pubs Code and the Pubs Code Adjudicator. No tenant could enter into a deferral agreement without having first taken appropriate professional advice to ensure that he or she is aware of the terms of the agreement and has taken advice on its suitability for their business. The tenant must choose to opt into the deferral agreement; that is, he or she has the right to refuse to enter into any such agreement. The adjudicator should oversee the deferral system to allay concerns from tenants around the process of entering a deferral. A deferral would apply only to significant investments to be defined in the Pubs Code and would not therefore be available for incidental investments for maintenance or repairs which are the responsibility of the owning pub company. The deferral agreement could last for a mutually agreed period of time.
The Pubs Code could set a maximum period of time for a deferral agreement if appropriate. Some flexibility may benefit both tenants and pub companies depending on the scale of the investment, as the noble Lord, Lord Mendelsohn, pointed out, and the length and nature of existing lease arrangements. For the avoidance of doubt, during the deferral agreement the tenant will maintain their right to exercise all other MRO triggers, including significant price increases and material change in circumstances as defined in the Pubs Code.
Whatever approach is followed, it is critical that there is some reference to the importance of investment in the sector in the Bill. Without that certainty, the flow of investment, most of which will inevitably come from the big pubcos and are the subject of the restrictions in this Bill, will reduce. Having heard the remarks of the noble Lord, Lord Mendelsohn, as well as my own, I hope very much that my noble friend will be able to accept the spirit of what is intended and agree to table a suitable amendment to address this issue at Third Reading.
Small Business, Enterprise and Employment Bill
Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn(9 years, 9 months ago)
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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.