Small Business, Enterprise and Employment Act 2015 and Pubs Code etc. (Amendment) Regulations 2021

Baroness Bloomfield of Hinton Waldrist Excerpts

Wednesday 9th March 2022 Grand Committee

Moved by

[Baroness Bloomfield of Hinton Waldrist]

That the Grand Committee do consider the Small Business, Enterprise and Employment Act 2015 and Pubs Code etc. (Amendment) Regulations 2021.

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, I beg to move that the Small Business, Enterprise and Employment Act 2015 and Pubs Code etc. (Amendment) Regulations, which were laid before the House on 30 November 2021, be approved.

The Pubs Code was introduced in 2016 to ensure the fair and lawful treatment of tied pub tenants of large pub-owning businesses. These regulations would improve its practical operation. A tied pub tenancy is where the tenant has agreed to purchase beer and other stock from their pub-owning landlord in return for a lower rent and other benefits. That agreement means that the tied pub tenant is unable to negotiate deals in the open market for beer and other products, but also means that their landlord has a shared interest in the success of the pub and works in partnership with the tied tenant. This has not worked well in all cases, and evidence from tenants to several Select Committees identified failures in the tied pubs sector and led the Government to introduce the Pubs Code to regulate this relationship. The Pubs Code creates certain rights and protections for tied tenants, including better information prior to signing a contract; no upward-rent-only reviews; no tied gaming machines; a right, at certain points, to break their tied arrangement and opt for a free-of-tie tenancy, by way of the market-rent-only process; and a system of redress through the Pubs Code Adjudicator.

The tied model is not inherently bad. In many cases, if not most, tenants are positive about their tied arrangements and welcome the partnership with the pub-owning business. It is therefore crucial that the Pubs Code strikes the right balance between creating rights and protections for the tied tenant, the property rights of pub-owning businesses and their ability to realise the value of their investments. To ensure the Pubs Code continues to operate as intended, a statutory review must be conducted every three years. The first such review concluded with the publication of the Government’s report in November 2020. This found that although there had been improvements, there were some aspects of the code’s practical operation that could be improved. Following a public consultation, the Government committed to make several changes to the Pubs Code.

The most significant changes in these amendments are the improvements to how the process for the market-rent-only option works in practice. The MRO process enables the tied tenant to request a proposal from their pub-owning business that sets out the terms for a free-of-tie tenancy where the tenant would pay a market rent. That rent will likely be higher with the removal of the contractual agreement to purchase tied products from the landlord and is a matter for the parties to negotiate.

The SI will improve the MRO process, first by requiring the initial MRO proposal from the pub-owning business to include a rent proposal, so that parties can negotiate both terms and rent at the same time. Secondly, it will create a single resolution period of up to three months. Unlike the current process, where the tenant has 14 days to decide whether to refer an MRO proposal to the PCA, the parties will have time to negotiate the proposed free-of-tie terms and rent. This change has been welcomed by most stakeholders, including the PCA. Only the tenant can end this period early, at any time after 21 days, enabling them to refer the proposed terms to the PCA, or the proposed rent to an independent assessor.

Finally, the SI makes other changes, adjustments and clarifications to the MRO process, reflecting the introduction of the resolution period. For instance, where there is a procedural defect in the MRO proposal, such as the omission of the rent offer, the tenant has 14 days to refer this to the PCA to resolve such technicalities more quickly. It also provides expressly for rereferral to the PCA where the tenant considers that the pub-owning business’s revised response is still not MRO-compliant.

Schedule 1 to the statutory instrument uses powers in the Small Business, Enterprise and Employment Act 2015 to amend the qualification period for a business owning tied pubs to come into or out of scope of the Pubs Code. This amends the requirement from having owned 500 or more tied pubs for six months in the previous financial year to three months. No new pub-owning business has met this threshold since 2016, but noble Lords will be aware of the merger and acquisition activity that is a feature of the pub sector.

Currently, tied tenants could wait for nearly 18 months after their landlord reaches the 500 tied-pub threshold before acquiring the rights and protections of the code. For example, under the legislation as it stands, a pub company meeting this 500 tied-pub threshold through tied pub acquisitions in October 2022 would not come under the code until April 2024. Under the amendment, the maximum period is reduced to 15 months, so a pub company meeting that 500-pub threshold in October 2022 would come under the code in April 2023. Similarly, a pub-owning business reducing its number of tied pubs to below 500 would remain regulated for a longer period, but this also means that the minimum period of full protection for the remaining tied tenants increases from six to nine months and would help to manage such changes, which are beyond the tenant’s control.

In Schedule 2, the comparison period, used to determine whether a significant price increase for a tied product or tied service has occurred, is amended from 56 weeks to 52 weeks. This is one of the events allowing a tied tenant to request an MRO proposal, and therefore serves to disincentivise significant price increases for tied beer, et cetera, under the tie.

The Government are cautious about changing this arrangement, but there is a case for amending how the comparison period is calculated. A 56-week comparison period could capture two annual price increases, raising complications for the more traditional 12-month business planning cycle. The proposed change amends the comparison period to 52 weeks but continues to disincentivise price increases, thereby protecting tied tenants.

Lastly, I move to notification of the PCA regarding extended protection, which applies where a tied pub is transferred to a landlord not regulated under the code. Tenants with extended protection continue to benefit from many of the code’s provisions for a limited time, including access to the PCA. Currently, the PCA will have no direct knowledge of such transfers. This amendment will require a regulated pub-owning business, before the transfer, to inform the PCA when it is transferring a tied pub where the tenant will enjoy extended protection. This enables the PCA to contact new owners, raising awareness of their tied tenants’ rights and protections.

In conclusion, this SI makes important changes to improve the practical operation of the Pubs Code, most notably in creating a longer period to enable the tied tenant to negotiate a free-of-tie tenancy or, indeed, a better tied deal. I commend these regulations to the Committee.

[Lord Kennedy of Southwark (Lab Co-op)]

My Lords, I should make it clear at the start how much I like a pub. I have spent my adult life visiting pubs all over the country and am a big supporter of them. I see them as the heart of the community and as a very British thing. We are very well served. Having said that, we all know about how many pubs are struggling and are closing. During the pandemic, I think that 40 pubs a week were going bust. That is something that we should all regret. Even outside the pandemic, I think that we have all known for years that many pubs have struggled. Publicans, those who are tied to a company and those who are not, have to work very hard to have an offering that actually serves their community. We will all know of very different pubs that know their customers well. Good pubs know what their customers want and serve them well.

The code itself is a good thing, but in practice it has not always worked to the benefit of the tied tenant. It is a bit like a David and Goliath battle, in that even when individual tied tenants seem to get changes, they are still tied into the agreement they have. I think sometimes it is very difficult for them. Yes, the tie means that they get a cheaper rent, but they are then tied into buying the beer and other things to sell often at a slightly higher price. If they want to change to a market rent, getting out of that can take a long time. There is not really speed here. Yes, the changes make some progress, but I think that, generally speaking, the adjudicator and the process have not particularly served the landlords of tenanted pubs particularly well. I still think that, even with these changes, tied tenants are getting a bit of a raw deal in some respects. We need to do much more, otherwise it will always be the tenant who has to wait to make the change and to pay. All those things go further to ensure that we lose more and more pubs.

What I would like to hear from the Minister when she responds is what further is going to be done. If anything I am saying today has any resonance with her, what are we going to do then to ensure that we will not be sitting here in years to come with more and more pubs lost, or saying that we are going to make further changes to the code? As it is now, it is not going to be good enough and we are going to see more pubs lost.

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I will leave it there. I look forward to the noble Baroness’s response.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I thank the noble Lord, Lord Kennedy, for those perceptive comments. I too am a big fan of pubs. We have a free house in the next village that gets a lot of our custom.

The points the noble Lord raised demonstrate the importance of the Pubs Code itself and the broad support to improve its practical operation. As I said in my opening speech, a number of tied tenants are very happy with the arrangements with the larger brewers, but I reiterate that the clear and narrow purpose of the Pubs Code is to regulate the relationship between large pub-owning businesses that own at least 500 tied pubs and their tenants to ensure that there is fair and lawful treatment.

The Government will commence the second statutory review this year. Ministers are considering how they wish to approach the review, but stakeholders will again be invited to share their views about how well they think the code is operating. The second review will cover the three years to the end of March this year. Stakeholders’ responses and publicly available evidence will be considered to assess the practical operation of the code to inform the Government’s conclusions. The first review did not find that the tied pub arrangement had been a significant driver of pub closures, although a number of responses to the review gave examples where they believed that the tie had contributed to the failure of a tenant’s business.

We acknowledge that these are exceptional times for the hospitality sector, including the wider pub sector. It will take time to assess the longer-term impact of Covid on the pub sector. Prior to the Covid pandemic, however, the main causes of pub closures, as identified by the Office for National Statistics, were changes in demand because of short-term economic factors and longer-term changes in consumer habits. I acknowledge that there was a worry that pub-owning businesses might have used Covid as an opportunity to punish former tied tenants for exercising their right to a market rent only free-of-tie tenancy under the code by not giving them the same support, but that is one of the reasons why the Government have introduced these streamlined arrangements to allow tenants to use the market rent only process, and why we have tweaked the Pubs Code Adjudicator to help resolve these dispute under the code.

The Pubs Code was drafted to balance those important rights and protections for tied tenants against the property rights of pub-owning businesses to operate their tied pub estate and to secure a return on their investments. We believe these amendments are proportionate in improving the practical operation of the Pubs Code and achieving real improvements for tenants without placing undue constraints on pub-owning businesses, particularly at a time that remains difficult for the tied pub sector. As I said, the next consultation is already well under way. It will be interesting to see what lessons can be drawn out of that. For the moment, I commend this instrument to the Committee.

Motion agreed.