Lord Snape
Main Page: Lord Snape (Labour - Life peer)Small Business, Enterprise and Employment Bill
Lord Snape Excerpts
Viscount Ridley (Con)
My Lords, I declare an interest in that I own two properties that are operated as pubs but they are not beer-tied pubs. I congratulate my noble friend on guiding us through the complexities of these amendments. I have to say, I found the topic of mitochondrial heteroplasmy two weeks ago much easier to understand.
On the whole, I subscribe to the revolutionary idea that people should be free to come up with any commercial arrangements between consenting adults that they wish to, but I certainly recognise that there is a clear wish in this House and the other place for some version of a pub code and a market rent only option. I welcome the Government’s sensible and measured approach to bringing all sides together in this but, as my noble friend Lord Hodgson said, the key question is whether this will keep pubs open.
The industry is clearly warning us that the Bill, unamended, could cost a lot of money—maybe £20 million a year—and could result in the closure of hundreds of pubs. This is confirmed by an independent study by London Economics. It may be wrong and it may be crying wolf, but if it is not, the Bill will have done precisely the opposite of what we all want: it will have closed pubs and thereby damaged communities. It behoves us to tread carefully.
The Government have listened carefully to all sides of this debate and made, as the Minister said, a proportionate and targeted response. They have made important changes to the MRO which will make it more workable, less open to legal challenge and fairer to all stakeholders, while maintaining its spirit. Without the government amendments, there is a risk that we would see less investment. It is a simple fact that many beer-tied pubs have received significant investments. Without the safeguards, the MRO would create uncertainty that deterred investment. We would thereby also lose a low-cost entry into the sector: tenants without the capital to invest in a free-of-tie pub would not necessarily come forward at the same rate—we have heard something on that already. It is crucial that if tenants want to go to an MRO and find investment outside they can do so, but if they want to defer MRO to the next rent review in exchange for investment they should be able to do that, too.
The one law that we keep passing in this House is the law of unintended consequences. Can my noble friend give the House some reassurance that these complicated amendments will minimise the risk of widespread pub closures?
Lord Snape (Lab)
My Lords, I join noble Lords on both sides in welcoming the government amendments and particularly the amendment proposed by my noble friend Lord Whitty—I cannot say the same about the amendment proposed by the noble Lord, Lord Hodgson, but that will not surprise him given our discussions during the passage of the Bill.
As I understand my noble friend’s amendment, he seeks to ensure that if a pub is to be sold, a tied tenant can take action to ensure that the tie terms are not used by a future owner to restrict choice of products or unreasonably increase tied product prices. I think that that would be the effect of the Government not accepting the amendment. I would be grateful for the Minister’s comments.
I have some concern about the emasculation of the adjudicator as far as any code protection is concerned and the events which I have just outlined taking place. I wonder why the Government have decided in the way that they have as far as the adjudicator’s powers and duties are concerned.
The noble Lord, Lord Hodgson, as ever, warned us all of the consequences of what we are doing, as did the noble Viscount. I appreciate the view expressed on the law of unintended consequences—it has happened on lots of other occasions, particularly in the pub business. Nowhere did it operate in greater detail than in the case of the Conservative Government’s beer orders back in the 1990s. I thought that they were a good idea at the time, but the law of unintended consequences meant that, instead of brewers owning pubs, pubcos owned them. If we could turn the clock back, I think that we would prefer to rely on the charity of the brewers, although that might in itself be a fairly inexact term, rather than rely on the pubcos.
The noble Lord, Lord Hodgson, told us again that the pubcos would look elsewhere for investment if some of the provisions of the Bill were to go forward. I have to say that the pubcos have been looking for alternative investment for very many years. If one looks at the investment that they have made in their pubs compared to the money that they have taken out from the sale of their properties—I could give the House the figures—one sees that far more has been taken out in the form of sale of buildings by pubcos than has ever been invested. Indeed, I could give the noble Lord a list of deeply unhappy tenants who have been promised and have expected investment in their property from the pubcos which has either turned out to be pretty shoddy or has never materialised. If the noble Lord is going to try to frighten us all during the remaining stages of this Bill, he will have to do a bit better than he has done so far.
I would be interested to hear the Minister’s view about the noble Lord’s Amendment 33L. I hope that she will reject it as the ploy that it is it on behalf of the pubcos to, if not maintain the status quo, undermine the decisions taken by the other place, which, by and large, have been welcomed by both sides of your Lordships’ House.
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.
Lord Snape
My Lords, following what the noble Lord, Lord Hodgson, has said, I hope that the Minister will do no such thing as regards his amendment. Amendment 33W seeks to legitimise a loophole in the legislation. The pub-owning businesses are seeking to introduce a provision in the Bill permitting them to defer market rent only option in exchange for significant investment. The fact is that there is nothing now and, as I understand it, nothing proposed in the Bill to restrain pub-owning businesses from undertaking such an exercise. A pubco could simply offer an investment in conjunction with the surrender of the existing lease in exchange for a new lease and a deferred period until the next rent review. I hope that the noble Lord, Lord Hodgson, who has tabled this amendment, agrees with that. I do not believe, and I think that most pub tenants do not believe, that there is any necessity to have this opt-out in the Bill.
As ever, the noble Lord talks about investment being urgently needed in some of these buildings. The reality is that this investment is not taking place. There is a queue of licensees and tenants who are anxious to tell noble Lords on both sides that this investment is not taking place. It would not take place if the Minister were to be unwise enough to accept this amendment, no matter how ably spoken to by the noble Lord, Lord Hodgson. As licensees see it at present, only pubs which accept an increase in rent to cover any investment by the pubco receive any investment. Much of the investment, such as it is, that takes place in pubs takes place in closed pubs in order to tart them up to sell them on the market. I am afraid that pubcos have a pretty bad reputation in these matters.
Baroness Wheatcroft (Con)
My Lords, it is clear that pub companies need to be encouraged to invest in their estate: it is an obvious thing to do. The pubcos claim that they invested £200 million in their properties over the past two years and so, although there are complaints from tenants, there must be some happy ones out there.
Lord Snape
I apologise for interrupting the noble Baroness so soon in her speech. If there are some happy ones out there, could she list them for the benefit of the House?
Baroness Wheatcroft
I am afraid that I do not have the details of the happy ones because they are obviously getting on with running their businesses rather than contacting me, and I hope that they are doing very well.
Lord Snape (Lab)
My Lords, I fear that I am going to miss the dulcet tones of the noble Lord, Lord Hodgson, on the rest of the Bill. I have sat through this paean of praise for the pubcos at Second Reading, in Committee and so far during the proceedings in your Lordships’ House today. I have some sympathy with the noble Lord’s view about the events of the late 1980s; it is a pity that he was not around in the other place when a Conservative Government were insisting that the power of the brewers at that time should be curbed. He obviously feels that the outcomes of that legislation, such as the beer orders that followed, have led to the situation in which we find ourselves now. Yet the contradiction appears to be that, while it is fair to say that he deplored the effects of the beer orders and what took place—the sell-off of the pubs and the relinquishing of the tie between the brewers and pubs has led to the pubcos that we have today—he has spent every stage of this Bill defending those same pubcos. He cannot really have it both ways; if the beer orders and their aftermath were so bad in the 1980s in creating these organisations, I wonder why he has spent so much time defending them during the passage of this legislation.
Lord Hodgson of Astley Abbotts
My Lords, I know that this is Report, not Committee, but if I may say so to the noble Lord, I have made it perfectly clear that there are between 20,000 and 25,000 tied agreements between pubcos and tenants, and not every one of them behaves like a saint; clearly, mistakes are made. I have explained, if he was not listening to my remarks earlier, that the problem with the tie is that built into it are two inherent conflicts of interest.
Lord Snape
I am grateful for that clarification; perhaps if the noble Lord had made it at Second Reading we might have spent less time bickering. The noble Lord’s Amendment 33Y seeks to put into the Bill some exemption for franchise agreements. The Minister will correct me if I have got this wrong but I think the Government have taken care of those franchise agreements and arrangements within the Bill itself. If they have not, they left themselves enough time, with the consultative procedures that the Minister has so ably outlined, to look at them again over the next few months, when these consultative arrangements are actually taking place.
The problem with accepting the amendment, of course, is that in effect it would pre-empt that consultation and we would be likely to see the pubcos working their way around the legislation in the way about which the noble Lord, Lord Hodgson, warned us. So although I found him as lucid as ever, I think that he convinced one or two of us on this side of the House that his amendment not only was not necessary but, were it to be accepted by the Minister, would lead to an even worse situation than we are in. Surely the noble Lord can see that making exemptions in the Bill, denying the adjudicator and the Pubs Code the opportunity to consider what agreements should be exempt, and to reverse that exemption if it transpires that the exemption is being gamed at a later date to circumvent the legislation, is the proper way forward. I hope that the way in which the Minister indicates the Government’s attitude to this amendment will indicate the way in which they will take this matter forward.
Like the noble Lord, Lord Hodgson, I am coming to the conclusion of my own remarks on the Bill. I would like again to say a few words about investment. It has been a consistent theme of the noble Lord that the Bill and the failure to accept his amendment would have a serious negative effect on investment that the pubcos make in licensed premises generally; I think that that is a fair summing up of his position. However, when one looks at what I repeat is the myth of investment by the pubcos, a different situation is immediately apparent. In 2014, for example, Punch invested £43 million in its core estate but sold pubs to the value of £111 million. It has already announced that it hopes to make £307 million from selling over 1,000 of its non-core estate. Enterprise Inns invested £66 million in pubs that year, then disposed of £73 million-worth of them. This does not sound to me like either a prosperous industry or an industry controlled by those who seek a sensible and profitable way forward for it, regardless of the legislation before your Lordships today.
Lord Berkeley
Could my noble friend clarify whether those investment figures are those quoted by the companies concerned, or are they the figures that they told the landlords they were investing but in fact did not, so the landlord had to do it and then got charged extra for the investment that did not happen?
Lord Snape
My Lords, the figures that I gave were the ones that the pubcos themselves published, but I certainly agree with my noble friend. Again, without detaining your Lordships too long, I could produce in the course of the debate on this amendment 14 or 15 independent licensees who told me—along, I am sure, with other noble Lords on both sides of the Chamber—about the broken promises made by the main pubcos about investment.
I admire the oratory and indeed the optimism of the noble Lord, Lord Hodgson, who not only told us that these institutions—the pubcos, whose creation he inadvertently deplored as a result of the legislation passed by a Conservative Government back in the 1980s —were really decent chaps who are anxious to invest in their property, but forecast the result of the election as a Conservative majority. However, my reaction is: has he put his money where his mouth is? Even better, perhaps he could put the pubcos’ money in that direction because, like me, he does not know the outcome. None of us does. Not even those well known pundits, the pollsters, can tell us the result of the next election. I admire his optimism, if not his sentiments, as far as the pub industry is concerned. I hope that the Minister will do as she has done with the two previous attempts made by the noble Lord, Lord Hodgson, at amending this legalisation and will smother him with honeyed words but kick his wishes into touch.
Lord Mendelsohn
My Lords, I shall speak to Amendment 33AZ. I support the Government’s position on this. Before I explain why we support their position, I say to the noble Lord, Lord Hodgson, that we are very keen for the sector to prosper and develop and that initiatives by the pub companies and individual tenants will create a vibrant environment. I do not recognise the “sky is falling in” scenario that he presents, and I do not believe that the fact that some companies are looking at the potential of REITs is a big indication of things that have happened in relation to this Bill. I was approached to invest in a pubco REIT well before this Bill was even announced by the Government, and the reasons why it did not take off were leverage and risks associated with our operating model. The same issues will exist today when it happens. Ironically, I think we have more certainty now with the provisions of the Bill, but I do not think that this is a brand new scenario where the risks are so huge.
I shall speak to Amendment 33AZ because we are happy to accept Clause 71, which provides the Secretary of State with the power to make regulations enabling exemptions from the Pubs Code and that the specified descriptions of those exempted will be determined by secondary legislation. Our amendment seeks to apply the affirmative procedure to this to ensure that we can debate these matters properly and sensibly and allow the sort of discussion that we have had today.
We were concerned that the Government had described the notion of a genuine franchise as something they would be willing to consider within that context. The discussions have gone by. Our concern is not that there should not be such consideration, but we are not clear that there is a real definition which applies to that and we are yet to be convinced that there is a case for any particular exemption.
Generally, franchises are long-established arrangements. Many erudite books have been written on this subject, some of which bear my surname, but I have absolutely none of the credit for having written any part of them. These are arrangements where one party, the franchiser, grants another party, the franchisee, the right to use its trade mark, trade name or certain business systems or processes to produce or market goods or services according to certain specifications. Franchisees usually pay a one-time franchise fee plus a percentage of sales revenue as a royalty and gain name recognition, tried and-tested products, standard building design and décor, detailed techniques in running and promoting the business, training of employees and ongoing help—a range of things that will help the franchiser to gain the rapid expansion of the business and earnings at minimal capital outlay, and where the franchisee is able to develop businesses that they are comfortable about being able to establish.
Essentially, once you have an integrated business where there is a property element owned by someone else, we are yet to be persuaded that any of the mechanisms is anything other than rent by another name. There are ways in which the contracting arrangements can be very different, but in effect it comes down to the same essential relationship, despite the method of payment, be it royalties, profit share, cost deductions, rent plus or minimum guarantees. We are yet to be convinced that there is an operable definition that can work. I look forward to hearing the Minister’s comments. We are very keen to support the Government’s position that there should not be such an exclusion. We are very happy to return to this if the Government wish, but we support their position as it stands.