Pubs Code and the Adjudicator

Debate between Greg Mulholland and Lord Jackson of Peterborough

Thursday 14th April 2016 Westminster Hall

[Greg Mulholland]

The hon. Gentleman expresses the views of his tenant constituents. Tenants’ organisations and tenants throughout the country have expressed that same view. I will come on clearly to lay out why the appointment of the pubs adjudicator is simply untenable.

[Mr Stewart Jackson (Peterborough) (Con)]

The hon. Gentleman is right to pay tribute to the cross-party nature of the campaign. I am someone who voted with him in 2014 and am very much on his side, but, in fairness, to balance things out, does he concede that our coalition Government between 2010 and 2015 realised the necessity of a new code and regulatory framework to address the issues that he has raised over many years?

[Greg Mulholland]

The hon. Gentleman is absolutely right. I want to thank him personally because he has been a real champion for pubs in Peterborough and his support of the Save the Pub group and the Fair Deal for Your Local campaign has been warmly welcomed. Today is precisely about trying to finish a job that dates back to Select Committee inquiries, the first of which was in 2004—that is how long the issue has been on the political agenda. We are finally getting to the stage of a statutory code of practice, but that, still, is flawed and contains loopholes.

In the spirit of the hon. Gentleman’s intervention, that is an issue about which tenants have asked: is this conspiracy or cock-up? I am clear that what has happened is a cock-up. There was an excellent leading article in the Publican’s Morning Advertiser on 7 April in which Mike Berry, who is a neutral person on such issues, said:

“The Government has not covered itself in glory throughout this entire process. From accusation by campaigners of acting in bad faith by removing or amending parts of the legislation, to U-turns over the original omission of parallel rent assessments, the latter part of this saga has been particularly fraught. And that’s before we even consider the furore from some over the appointment of Paul Newby as the pubs code adjudicator”.

I say to the Minister that this is not personal, but the change of civil servants at the Department for Business, Innovation and Skills after the election has clearly led to mistakes being made and a lack of understanding of some of the complexities and technicalities of this legislation, to the extent that in a meeting with a group of tenants, one of the people who has been involved in drafting the pubs code and was on the panel that interviewed the adjudicator said, “I don’t really know much about this.” That being the case, how can tenants possibly have confidence in the Department? I have also been informed that one of the civil servants who had previously worked on the code and who did have experience and the confidence of tenants was brought back in to work on it.

Mistakes have been made, and those mistakes must now be rectified—that is all that we are asking for today —so that, when the pubs code comes in on 26 May and the Pubs Code Adjudicator starts work at the beginning of June, people will have confidence that that has been done properly and that the will of both Houses has been abided by. The legislation was subject to votes in both Houses, and Ministers in both the last Government and this Government, including the Minister here today, made clear promises to abide by those votes and introduce the pubs code and the market rent-only option.

I will address the concerns about the pubs code, the first draft of which was published on 29 October 2015. I declare an interest as chair of the British Pub Confederation, which represents 13 organisations, 11 of which are licensee organisations. The confederation and the Fair Deal for Your Local campaign, which many hon. Members supported, were appalled at the first draft, which included the outrageous clause 8.12. I have given credit to the Minister and her team, and to the Secretary of State, for being prepared to listen and to drop that provision, and we ask them to do so again to address the issues highlighted by an amendment that I tabled to the Enterprise Bill and by one tabled in the name of the shadow Minister, the hon. Member for Sefton Central (Bill Esterson). Unfortunately, we did not get the chance to discuss or vote on either of those amendments, so we urge the Minister to make those changes herself.

The first loophole in the draft code is that, as it is currently written, any tenant seeking to take the all-important market rent-only option that we voted through the House on 18 November 2014 will be forced to give up their lease for a shorter, five-year one. That is simply not acceptable. Clearly, all that the market rent-only option means and ever has meant is that tenants have the simple right to seek an independent assessment of their commercial rent on a free-of-tie basis and then pay that sum—and only that sum—to the pub-owning company for the entire remainder of their lease or tenancy. That loophole is simply not acceptable and must be removed if BIS is to stick to its commitment to introduce the market rent-only option that was voted for. As the person who tabled that clause, I can say that the code simply does not do that as long as that loophole is there.

The second loophole is an extraordinary one that allows a waiver in exchange for investment for people who have not even taken on a tenancy or lease. There has been much discussion about investment, but I think many hon. Members fail to understand the reality of pubco investment. A Federation of Small Businesses survey of its licensee members found that 68% had not had any investment from their pub companies in the past 12 months. Indeed, the costs of investment presented by pubcos are often inflated. Many tenants report that they have had cheaper quotes from other suppliers but are forced to use the contractors that the pub company insists on. There is a problem with allowing a waiver for people who have not yet taken on a pub. We accept that there will be a waiver to allow for investment—it must be limited, substantial and genuine investment—but we strongly say that it should not come in until someone has been in a lease or tenancy for two years.

The reality is that when pubs are vacant, frequently because of a failure of a previous tenant due to the tied pubco model, there is a need for repairs and basic investment simply to make the pub fit to let to someone else. If someone is forced or encouraged to sign a waiver before they have even taken on that pub, there is a real danger that that will be used and abused, with people able to say, “We have invested in this pub that you are about to take, and therefore you have to give up your right to an independent rent assessment for another five years.” That would be the case, and they would therefore not get that assessment for 10 years. There is also a great danger of encouraging pub companies to seek to force out sitting tenants who have the right to a market rent-only option, in favour of someone new who will sign away their right to it.

[Mr Jackson]

The hon. Gentleman is making a strong, detailed and comprehensive argument. He will know that paragraph 127 of the impact assessment produced by the Department specifically references a non-gaming caveat. Rather than waste valuable time and energy and the efforts of civil servants and others, including hon. Members, down the track in producing secondary legislation to amend the code, is it not better that we identify the gaming loopholes now before the code comes in on 1 June?

--- Later in debate ---

[Greg Mulholland]

What a quite extraordinary comment, in the mother of all Parliaments, that somehow we are not allowed to challenge a Minister to condemn bad behaviour—what an extraordinary comment, even from the right hon. Lady. Quite remarkable.

The next thing that the Minister and her team must do is on the Pubs Code Adjudicator. Representatives from all sides of the pub sector noted as long ago as 2013 that to ensure impartiality, it would be sensible for the post to be taken up from outside the pub sector, if the role were to gain industry-wide confidence, credibility and acceptance. That is clearly the basic, essential nature of this role, yet BIS has clearly and demonstrably failed to ensure that.

Let me lay before the House the very serious issues as to the clear flaws and untenability of this appointment. The appointee, Mr Paul Newby, is a chartered surveyor and a director and shareholder of Fleurets. He clearly has a conflict of interest, and it is clearly a disqualifying conflict of interest. Fleurets is the largest surveying practice operating in the very sector that the pubs code is being introduced to regulate. Of course, the reason for that is to protect tenants from abuse by their pubco freeholders.

Mr Newby’s CV, which is publicly available—although, interestingly, it has been taken off the Pubs Independent Rent Review Scheme website—openly advertises for whom he acts. Let me list the six companies that Mr Newby is required to regulate: Enterprise Inns, Punch Taverns, Marston’s, Greene King, Heineken—which is Star Pubs & Bars—and Admiral Taverns. Who do he and his firm currently, and boastfully, say they act for? Enterprise Inns, Punch Taverns, Marston’s, Greene King, Heineken and Admiral Taverns. He clearly is conflicted and biased. Of course the Minister will say, “But he has also operated and acted for tenants,” but actually, given the nature of this appointment, that equally would mean that he is conflicted.

[Mr Jackson]

Mr Newby may be an exceptionally gifted and talented man to have appointed, but does the hon. Gentleman agree that just the appearance of a conflict of interest is difficult? In this respect, it would circumscribe due process on those occasions when he was required to act in his official capacity. In that sense, it is not fair on him or the taxpayer, or on all the other stakeholders in this situation.

[Greg Mulholland]

The hon. Gentleman is absolutely right. I actually believe that Mr Newby has been let down in this process, because clearly his application was never tenable and should never have been proceeded with.

The Minister will say, “Oh yes, Mr Newby has represented tenants,” but does she realise that some tenants are actually pub companies themselves? It says that in Mr Newby’s own CV. I was in such a pub last night—the excellent, award-winning Eagle Ale House in Battersea. The award-winning licensees there lease it from Enterprise Inns, but Enterprise Inns are themselves tenants of a property company, so some of the “tenants” that Mr Newby has represented may well be pub companies.

Let me deliver this message as clearly as I can. Let me tell the House about the Fleurets website, and I would urge hon. Members to look at it. Fleurets widely advertises, including on its website and in trade publications, that it acts for all six of the large pubcos to be regulated, and that these are all clients that Fleurets and Mr Newby, as a director and shareholder, derive a substantial part of their income from.

The British Pub Confederation asked in a letter to the Secretary of State what proportion of the number of cases that Mr Newby has acted in have been on behalf of pubcos, and what proportion have been for tied licensees. The Government refused to answer that question in the letter of response, so I ask it again, and we must have a reply. And what is the proportion of income that Fleurets and Mr Newby make from pub companies and from tenants? We know the answer. Companies House records show that Mr Newby has been a director of Fleurets Ltd since 1995 and of Fleurets Holdings since 2009. He owns 100 ordinary A shares in Fleurets Holdings, amounting to 11.79% of the ordinary share capital in the company. Fleurets Holdings Ltd wholly owns Fleurets Ltd.

The Fleurets website makes it plain that the thrust of the company is to market its services to corporate entities, not to individual tenants. The logos of Fleurets’ corporate clients appear on various pages of the site but there is no mention of tenant clients. There are quotes from satisfied clients. The only ones from the tied pub sector are from Star Pubs & Bars—owned by Heineken—Fuller Smith & Turner, Marston’s, J.W. Lees and Daniel Thwaites. None of the CVs of the nine directors on the website shows any specialisation in acting for individual tied tenants or mentions doing so. Mr Newby’s own CV does not mention his acting for any individual tenants. His CV that was on the PIRRS website—strangely, now taken down, as I said—confirmed that for the last five years, he has worked most closely with Enterprise Inns, Marston’s and Punch Taverns. In 2008, when Martin Willis, the current chairman of Fleurets, was questioned by the Business and Enterprise Committee over a conflict of interest, he said:

“I think we represent just about every pubco”.

That is clearly very true today.

Interestingly, I noticed that among the logos of companies that Fleurets has represented was that of Criterion Asset Management, the director of which is Theo Osborne, brother of the Chancellor of the Exchequer. Did the Minister and her team know that? Mr Newby’s company website provides an interesting indication of the preferences of Mr Newby’s firm in relation to the pros and cons of the tied model, which he is now expected to regulate. In 26 pages of news and information articles on the Fleurets website, as of yesterday, there was no criticism at all of the tied model. In contrast, the website is effusive in its promotion of that very business model, the one practised by so many of Mr Newby’s clients—the very companies that he is supposed to regulate.

Let me read some of the headlines. Under “Leasehold pubs are an Attractive Option”, the article states:

“There are some excellent businesses on offer from most Pub Companies”.

Under “The Leasehold Pub—The route to success”, the article states:

“With very little capital needed, tied and free of tie leasehold pubs offer the opportunity for passionate people to build spectacular businesses”.

Under “How Do I Go About Getting Into The Pub Trade?” the article states:

“Whilst getting into the licensed trade can seem quite daunting it must be remembered that breweries and pub companies are continually on the look-out for enthusiastic new partners to run their pubs...For the first time operator this route can often be the best as it comes with various support and training packages and it is invariably the lowest cost of entry”—

that is something that many tenants who have struggled with the tied pubco model would strongly dispute.

Another interesting article, and something that has been missed entirely by BIS in this process, is headlined, “Pubs sold for alternative uses in 2014 by Fleurets”. The truth is that Fleurets is not only a surveyor, but the estate agent of choice in the big pubco sell-off. The indebted companies, who got themselves into billions of pounds of debt through their own recklessness and their acquisition spree, are now asset-stripping their estates, often selling for non-pub use, sometimes against the wishes of licensees and often against the wishes of local communities. Fleurets is doing that for them and profiteering from it—and so, currently, is Mr Newby. Did BIS realise that? It does not appear so, because there has been no mention whatsoever of Fleurets’—or Mr Newby’s—role and financial links in that respect.

I will give a powerful example of why tenants cannot and will not accept Mr Newby as the adjudicator. This morning I had an email from a former director of the British Institute of Innkeeping—an organisation that the Minister was keen to quote from, citing it as a licensee organisation. I need to correct the record because it is not; it is a charity rather than a representative licensee body. I think she was indicating somehow that it supports this appointment. Well, that former director is now an adviser to publicans and other small businesses, but during his years with the BII he worked closely with larger surveyors, specifically naming Fleurets. He has described the relationship between these chartered surveyors’ firms—again, specifically naming Fleurets—and their pub company customers. He says—I quote from that email—that it is “a gravy train”. He explains that there are chartered surveyors in the sector who use valuation methods that advantage their pub company customers, and explains how surveyors and pub companies work together, using what he says are—I quote again—“questionable” practices, to ensure the best outcome for the pub company and not for the pub tenant, because of course most of the surveying work and most of the income comes from pub companies, not tenants—which is inevitable when tied tenants are running a pub and can barely break even.

We need to put to bed the idea that somehow this situation is acceptable because Mr Newby has represented a few tied tenants in his time and has potentially even won some cases for them. Very interestingly, there was an admission at a roadshow by Fleurets that it delegates tenant cases to less experienced and less expensive surveyors—something that Mr Newby very clearly is not.

When we were going through the process, we were told that the Pubs Code Adjudicator would be like the Groceries Code Adjudicator and that the Department for Business, Innovation and Skills would follow similar principles. It has clearly and demonstrably failed to do so. Paragraph 1 of the Groceries Code Adjudicator’s conflicts of interest policy and register of interests refers to ensuring

“that no conflict arises, or could reasonably be perceived to arise, between the official position of the Adjudicator and private interests, financial or otherwise”.

The hon. Member for Peterborough (Mr Jackson) has said clearly that that is not the case with the appointment of Mr Newby, who has a prejudicial financial interest. Paragraph 6 states:

“A conflict may arise whenever an outside interest might influence, or be perceived to be capable of influencing, a person’s judgment.”

The extraordinary thing is that the reply to the British Pub Confederation’s letter states simply, “We don’t think there is a conflict of interest.” When asked whether Mr Newby declared his clear conflicts of interest, the reply was: “We asked him about his conflicts of interests at the interview and were told that there weren’t any and we accepted that.” That is extraordinary and should never have happened.

Let me share with the Chamber paragraph 18 of the Groceries Code Adjudicator’s policy and register of interests:

“Financial interests will generally arise from the ownership of assets (or other investments or sources of income) such as shares (whether bearing a right to vote or not)”.

Just yesterday, the British Pub Confederation’s secretary, Simon Clarke, received a letter from the Secretary of State saying:

“I understand that Mr Newby will continue to hold a number of non-voting shares in Fleurets, as security whilst monies owed to him are repaid”.

The situation is serious. Someone will be allowed to continue to have shares in a company that profits from the work of the very companies that he will be regulating. You could scarcely make it up.

This week, the Prime Minister has been keen to tell us that he divested himself of all shares before becoming Prime Minister, but that has not got him out of the hole he has found himself in during the last few weeks. Yet we are seriously discussing a statutory adjudicator with a quasi-judicial role and the Department seems to think it is fine for him to hold shares in such a company. That is quite extraordinary.

Just this week, the Premier League, which has much higher standards than the Department for Business, Innovation and Skills, removed Kevin Friend as a referee for Tottenham Hotspur’s game against Stoke on Monday because he lives near Leicester and supports Leicester. That was a good decision by the Premier League to avoid any feeling of bias. Yet the clear perception of bias in Mr Newby’s appointment is being ignored. With respect, simply to say, “We don’t think tenants are concerned,” when tenants’ associations have written to make clear their concern, is extraordinary.

Fiona Woolf was unable to preside over the child abuse inquiry simply because she had had dinner with someone who at that stage might have been of interest to the inquiry. Yet in Mr Newby’s case, the Department for Business, Innovation and Skills has simply brushed under the carpet and dismissed his clear professional and financial links to the very companies he is supposed to regulate. How can the Minister possibly say that tenants can and will have confidence in Mr Newby, given that he will continue to receive share dividends from a company that has pubcos as its majority customer base?

Part of what the Minister will say today and part of what she has already said relates to her former career and profession of barrister, a profession I strongly admire. My sister and brother-in-law are barristers and I have huge respect for the work that barristers do. The Minister therefore knows that barristers are obliged to operate under the cab rank rule and to represent a client who comes to them with a legal problem in their area of expertise. As advisers, they are expected and mandated forcefully to advocate their client’s position. The role of adjudicators and judges is different.

The Minister has stated that a surveyor is like a barrister—another form of professional—and simply takes cases. That completely misses the point. Surveyors do not operate under the cab rank rule. Mr Newby and his company, Fleurets, actively market themselves to pubcos, including two of those he is supposed to regulate in a matter of weeks, boasting on his company’s website of his expertise in representing them. If the Minister is under any impression that there is some equivalence between the way barristers operate under the cab rank rule and how a director and shareholder of a commercially active chartered surveying company would act, she is missing the reality of surveying, particularly in the pub sector.

The point is that Mr Newby will not be like a barrister. He will be like a judge. He will no longer advocate for his clients, but will adjudicate like an ombudsman or a judge, in this case like a jury and executioner. Why are the standards of public confidence that our excellent judiciary regard as essential to their legitimacy not applicable to Mr Newby in his new rule as statutory adjudicator, which is a quasi-judicial role? He will be judging contentious legal issues that would otherwise see the parties concerned in front of the judiciary.

At the heart of the problem—the British Pub Confederation has taken legal advice on this—is that there is a lack of protection in contract law for tenant publicans who may enter into tied lease arrangements naively or when the realities of their new circumstances have been misrepresented by pubco representatives. That is precisely why we are legislating. It is impossible for Mr Newby with his current position and links to be able to fulfil that quasi-judicial role.

I have mentioned the 11 licensee groups that form part of the British Pub Confederation. They all oppose this appointment. The Minister has suggested that some licensee organisations support the appointment, but I am not aware of any and certainly the British Institute of Innkeeping, a trade charity, does not. The Campaign for Real Ale, which she mentioned, has not welcomed the appointment and has said it will scrutinise Mr Newby’s activity. It is a consumer group and does not, as she wrongly said in the main Chamber, represent licensees. It is a consumer, campaigning group.

The Association of Licensed Multiple Retailers—which could be an organisation the Minister is talking about—represents multiple tenants, some of whom are individuals and some of which are companies, including Greene King, one of the companies the adjudicator will regulate. The Association of Licensed Victuallers Associations is run by a former Enterprise Inns employee and its 2015 dinner and AGM was sponsored by Enterprise Inns. I am afraid the Minister is kidding herself in saying that tenants’ groups and tenants may support the appointment.

Let me say clearly that British Pub Confederation licensee groups and their licensee members have made it clear that they will not accept Mr Newby adjudicating on their cases. They have a clear right to do that, which means he will be unable to act in a large proportion of cases, which will need to be dealt with by someone else, presumably a deputy adjudicator. What a farce. What a mess.

I am not the only one saying that. According to the guidance on conflicts of interest and the arbitrator’s code of conduct of the Royal Institution of Chartered Surveyors, in the majority of cases brought before Mr Newby, either party will be able to stall the process by citing his conflict of interest as a reason not to accept him as adjudicator. The adjudicator cannot be a surveyor, particularly not one from the pub sector.

On that, I can do no more than read to the House what the Royal Institution of Chartered Surveyors told the Government in its response to the 2013 consultation on the adjudicator:

“Whether or not the Adjudicator is a chartered surveyor, he/she will require assistance from other specialist Chartered Surveyors…It is likely that many will have a conflict of interest having advised one of the parties on a range of matters”.

Was the Minister aware of that advice from 2013? Also, a pub sector surveyor might well wish, intend or need to return to their career surveying and acting for the pub companies and selling off pubs for them after their term as adjudicator, so there would always be the suspicion that they were worried about annoying the people from whom they would then seek to again be taking the majority of their income.

BIS was warned in 2013 by tenants groups. Simon Clarke of the Fair Pint Campaign and the secretary of the Independent Pub Confederation wrote:

“It would be catastrophic if the Adjudicator were a Chartered Surveyor”

because

“specialist Chartered Surveyors active in the market may have conflicts of interest and should not be put in positions where perception of independence or impartiality is a requirement of the parties”.

Mr Clarke is himself a chartered surveyor, a RICS member, so he knows what he is talking about. He knows that he could not be the adjudicator—the pubcos would certainly be screaming had he been appointed—but Mr Newby cannot either.

I hope that, having heard what I have shared with the House today, the Minister will reflect and realise that this appointment is untenable. However, let me make it clear: if Mr Newby is not removed from post, an initial early legal opinion taken by the British Pub Confederation is that there are indeed strong grounds for the decision—one that the Department has clearly made on a flawed basis, not taking into account the reality of the situation—to be judicially reviewed. I hope that the Minister will listen and accept that this was a mistake. We do not believe it was anything more than a mistake, but a mistake it certainly was—one that did not follow the previous knowledge that the very same Department had.

To conclude, I urge the Minister to listen at this late stage to people who have been involved in this issue for five, 10, 15 or 20 years—to experts in the sector. The pubs adjudicator cannot be someone from the sector, for the very reasons that I have laid out. It has to be someone who is impartial and has the confidence of all sides, or it simply will not work. The pubs code must be changed. The two loopholes must be removed. I urge the Minister not to make the mistakes that the Conservative Government made with the 1989 beer orders. That was very courageous and correct legislation to give consumers better choice in pubs, but there was lobbying by the large companies, which saw the opportunity to sell off pubs to their friends, giving golden handshakes and setting up the very pubcos that we are now talking about. We must not make the same mistake again. We must close the loopholes and we must see a proper adjudicator, so that we can finally have confidence that this long-running saga will come to an end and so that tenants can have confidence in both the code and the adjudicator.