Small Business, Enterprise and Employment Bill

Lord Berkeley Excerpts

Wednesday 28th January 2015 Grand Committee

[Lord Berkeley (Lab)]

My Lords, I am grateful to the Minister for that introduction. I have two amendments in this group and I am certainly not happy that they are in a group of 66 amendments. This must be about a record for Committee stage. It is interesting that amendments in this group have been put down by a number of different noble Lords, but there are five separate groups further on for amendments tabled by the noble Lord, Lord Hodgson. I am sure that he deserves such special treatment but I wonder why. I do not know whether any other noble Lord was consulted about this grouping—I certainly was not. I give notice that I would like to debate Amendment 90A separately. I do not know whether any other noble Lords will have a similar view, but I hope that that is acceptable.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I also have a number of amendments in this group. I think the answer to the noble Lord’s question is that these amendments are all about Clause 42 and the subsequent groups are about subsequent clauses. What we are doing here is debating the whole of Clause 42, rightly or wrongly. It may be too big a group but that, I think, is the background. I think other amendments to subsequent clauses form other groups.

The Government have said that they will accept the spirit of the amendments passed in the other place, but I am afraid that despite the Minister’s assurance—

[Lord Whitty (Lab)]

My Lords, before the noble Lord, Lord Hodgson, proceeds, the point made by my noble friend Lord Berkeley indicates a more serious procedural problem. It is not that these amendments are not serious, but they are specific. I also have some amendments in this group, but if I degroup them, a decision would have been taken on the Minister’s amendments before we reached the appropriate point in the text of the Bill.

We have a very new clause, inserted at the final stage in the Commons. The Minister quite rightly said that there has been limited chance for consultation on that. We have a huge amendment from the Government deleting an entire clause and replacing it. The noble Lords, Lord Berkeley and Lord Hodgson, and I, all have amendments to the original amendments. My noble friends Lord Mendelsohn and Lord Stevenson have amendments to the Government’s amendments. So, there is not only a large number of amendments, but it is going to be a very confusing debate.

That is not to say that we should not have the debate today. However, the way that this has been dealt with, and the fact that consultation since the Commons decisions until now has not allowed consultation with the bodies that represent tied landlords, has not allowed for significant debate with those in the Commons who pushed this amendment. We have a few weeks between now and Report stage for proper consultation to take place. I am very happy to have the discussion today because that will inform the Government, but at the end of that discussion it will behove all of us to withdraw our amendments and move them for a proper discussion on Report, which could have been preceded by some effective consultation between the Government and the various parties involved, both politically and industrially.

Although we can degroup this group, there is a rather more profound problem here. If all noble Lords agree to withdraw their amendments at the end of the debate, there is no great problem and we can have a sensible discussion over the next three weeks. However, if we proceed, we proceed as per normal. It would be sensible, even from the Government’s point of view, if we allowed ourselves a bit of a breathing space to have those discussions.

[Lord Berkeley]

Is my noble friend suggesting that the Minister should withdraw her amendments as well?

[Lord Whitty]

Yes, my Lords.

[Lord Berkeley]

Good.

[Lord Snape (Lab)]

Before the Minister replies, I endorse and agree with the remarks made by my noble friends. On Second Reading, I intervened on the Minister’s opening remarks. I said:

“I am sure that the House will recognise how far the Government have moved on this”—

that is, the principle of consultation—

“and will welcome that movement. However, can she assure us that any future discussions will involve representatives of the tenants and will not be dominated by the pubcos?”.

The Minister replied as follows:

“My Lords, I can assure the noble Lord that we are always discussing these issues”—

I emphasise the word “always”—

“and changes with tenants—that is extremely important when you are making changes of any kind—and, indeed, they have helped us to get to the position that we are now in”.—[Official Report, 2/12/14; col. 1243.]

That is not the view of the tenants who I have spoken to. Indeed, most of them take the view that the position we are now in is thanks to the noble Lord, Lord Hodgson, and some of the pubcos.

Although we are grateful to the Minister for the sympathetic way in which she pointed out that there was a difficulty with some of the amendments in the group, we should return to the question of consultation. I hope that she will spend some time explaining to us exactly what consultation has taken place and with whom. Is it true, for example, that, despite the Minister’s promise on Second Reading, the consultation with the representatives of tenants consisted of an hour or so in the department? What consultation has taken place with the pubcos in the department and elsewhere?

I have a feeling, looking around at the Room, that a considerable amount of entertaining—if I can put it that way—has gone on over lunch. Perhaps the views of the pubcos have played a major role not only in the grouping of the amendments—about which we rightly complain—but the sentiments that the Minister expressed and, I fear, will express, about the postponement of proper legislation that was voted on in the House of Commons but seems to us by the amendment and the grouping to be being flouted by the Government.

I hope that the Minister can reassure us at this early stage, because if she cannot, I can assure her of a fairly long and drawn out Committee sitting here today, and that a considerable number of amendments will be tabled at Report on behalf of those who feel that they have a raw deal under the existing arrangements and cannot see it getting any better under the Government’s proposals.

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[Lord Hodgson of Astley Abbotts]

I was about to say that in the 25,000 or so examples of tied tenancies, I do not doubt that there are examples of egregious behaviour by pub owners. Those need to be addressed swiftly and promptly. But I do argue, and I will provide at least two specific examples when we come to Amendment 82 on significant investment—I remember the noble Lord, Lord Snape, chiding me at Second Reading and asking me to produce them—that the tie can work well for all parties and can provide a cheap and effective way of creating a satisfactory, profitable small business. I do not want to see the creation of a regulatory structure that strangles the possible advantages that the tie can offer.

To compete for people’s leisure time and their leisure pound, pubs have to offer an experience that is valued by the chosen target market. The target market may be younger males with sport, TV and pub games; younger females want more of a wine bar; families want play areas for children; and cheaper meals attract the retired. But noble Lords will quickly recognise that setting out first to choose a target market and then to develop it successfully takes experience and knowledge. That back-up and support is what in good circumstances a pubco can provide.

Whatever type of pub you are running, running a successful pub is very hard work: long, anti-social hours; periods of the year when external events such as the weather dramatically reduce your level of trade—this evening, if the weather continues as it is, pubs all over the country will be empty; and a readiness to deal with, humour and enjoy the company of the great British public in all their diversity. By no means do we all possess the multifaceted set of skills required to be a successful Mein Host.

[Lord Berkeley]

Looking at the list of groupings, it appears that the first amendment in the name of the noble Lord, Lord Hodgson, is Amendment 69, which seeks to leave out Clause 41(6), which says:

“The Pubs Code may require large pub-owning businesses to provide parallel rent assessments”.

Is that what he has been speaking to for the past few minutes?

[Lord Hodgson of Astley Abbotts]

I hope I made it clear to the Committee that I was trying to give a bit of a tour d’horizon of how these amendments fitted into the future. I was trying to explain that the adverse tides, which I have just been talking about, are not part of the tie but are part of other, bigger issues. In a couple of minutes I will come to each of the amendments, of which Amendment 69 is the first.

I explained that running a pub was exceptionally hard work and many people coming into it, often as a second career, find that it is not as easy as it looks. Like all of us, they are inclined not to blame themselves but to look for somebody else to blame. In such circumstances, the owner of the tied pub can be a first, and relatively easy, target. A complaint sells itself well in the community and the local MP’s surgery. This does not just apply to pubcos; I have had correspondence since Second Reading from people with free-of-tie pubs which have fallen on difficult times. When they tried to close them they were prevented from doing so by them being listed as assets of community value, so they were left with a bit of a pub they could not sell and a pub which they did not want to buy.

Finally on this opening section, I draw the Government’s attention to what I call the nuclear option. This is not available to the integrated companies because, as I explained, they need the pub estate to sell their beer, but it is available to pubcos. The pure pubcos could react to this parliamentary focus on rent only by becoming property companies. They could cut their overheads drastically by removing all the pub support, such as business development managers. This would boost their profitability in the short term; in the longer term, they would sell the better performing parts of the estate to other companies while closing and seeking alternative uses for the rest. This nuclear option—and I have no idea how likely it is—could dramatically increase the rate of pub closures. The amendments in my name—the focus of the intervention by the noble Lord, Lord Berkeley, a minute ago—are designed, as a whole, to avoid a dogma-driven solution and instead create, with the MRO option, a balanced and flexible structure which affords the best chance of keeping pubs open in as many places as possible.

After that very long introduction, I will whip through the amendments in my name. Amendment 69 seeks to delete Clause 41(6). As my noble friend said, this proposes a system of parallel rent assessments. These might have been of value before the House of Commons amendment introducing the MRO and associated provisions. Given that change, parallel rent assessments are essentially duplicates of what is proposed elsewhere. I am not sure whether they are needed anywhere, but they are certainly not needed in connection with the MRO option. I hope that my noble friend will explain why they are still there and how they are supposed to operate within the confines of the Government’s proposed new clause to replace Clause 42.

The remainder of the amendments in my name are all concerned with Clause 42—which, as my noble friend has explained, it is proposed to remove. The proposed new clause definitely answers some of them, definitely does not answer others, and the impact in the remaining cases is unclear. I would be grateful for my noble friend’s help in bringing clarity to these points. Amendments 70 and 71 are covered because they are about tied and managed pubs and my noble friend has made it clear that managed pubs form no part of the new regime. Amendments 72, 73 and 74 are important because they concern integrated businesses that brew beer and sell it through their own estate. It must be logical for the Pubs Code to permit such businesses to require their tenants to stock their own brands of beer and cider. If, under the code, a new MRO tenant could immediately turn round to the pub owner and say: “I am not going to stock your beer any more: I am going to stock the beer of your bitter rival”, this would have a disastrous effect on pub ownership.

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[Lord Berkeley]

Has the noble Lord thought about what the word “unfair” means? For the pubco, it is probably different to what it means for the tenant. It seems to me to be rather more wishy-washy than “significant”.

[Lord Hodgson of Astley Abbotts]

I am delighted that the noble Lord, Lord Berkeley, said that. I am about to come to the definition of “unfair” in about one second. I am talking about the importance of the definition of “significant” as important and notable. The price of beer might rise sharply because of: the cost of raw materials, such as hops; governmental action on alcohol taxation following medical advice; or increased delivery costs following price rises or road tax changes. It is surely not right to potentially penalise the pub owners alone as a result of such events, which have equal impact on all parties.

By contrast, coming to the point made by the noble Lord, Lord Berkeley, the Oxford English Dictionary definition of “unfair” is: not equitable; “unjust”; not according to the rules; partial. In my view, this precisely matches the concept behind the Pubs Code. It is intended to deal with situations that are inequitable—that is to say unfair—between the two parties: the pub owner and the tenant. I hope that the Government will think again about this wording before Report.

I turn to Amendment 80, which concerns the other events that could trigger the requirement to offer an MRO option. This formed part of my noble friend’s introductory remarks. Clause 42(6)(c) requires an MRO offer on the sale of a pub. This would be quite unfair to pub-owning companies. Pubs, whether singly or in blocks, can be sold for perfectly legitimate reasons. So long as the tenant’s position is protected, as it would be, the identity of the owner really makes no difference to the tenant. If this paragraph were to remain in the Bill it would freeze up the market for pubs and so discourage investment.

The amendment also seeks to remove another trigger point at Clause 42(6)(d): that, if a pubco goes into administration, an MRO offer must follow to the tenants. I think that my noble friend addressed this point in her opening remarks. The same objections apply to this: provided that the tenant’s position is protected, he has no interest in the affairs of the pub owner. If this paragraph were to remain, it would have serious consequences for the industry. First, pubcos would find it much harder to borrow. From a bank or lender’s point of view, the fact that, on administration, the relationship of the pub owner could change with every one of its tied pubs would make lending significantly more risky and, therefore, less attractive, thereby reducing the flow of investment to the sector. Secondly, if administration was to occur, the position of the creditors would be significantly worsened as value could be destroyed by the uncertainties that would result from an MRO option. I understand that the Government are proposing to withdraw those paragraphs. I would like my noble friend to give that commitment.

Amendment 81 is also concerned with a trigger point: Clause 42(6)(e), which appears to form part of the proposed new clause at subsection (6)(d) and subsection (9). This also covers the emergence of trigger events. In the proposed new clause, the definition of a trigger event is drafted very widely and is likely to lead to a good deal of uncertainty in its application and interpretation. That is surely not to the advantage of any party in these circumstances.

We have the well established procedure that has been used to determine appeals against rateable value; that is, whether there is deterioration in the circumstances of a property. Paragraph 2(7) of Schedule 6 to the Local Government Act 1988 lays out the matters to be taken into account. They include,

“matters affecting the physical state or physical enjoyment of the hereditament … the mode or category of occupation of the hereditament … matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there, and … the use or occupation of other premises situated in the locality”.

This definition sets out the criteria for when a change happens to a business and a rating reduction can be allowed. It is a well used and well understood definition that could, with advantage, be used to define when an MRO option could be triggered. I hope my noble friend will reflect further on this before Report.

I come now to Amendment 82 and the points made by the noble Lord, Lord Snape. This is an important amendment and I do not think it has been addressed in new Clause 42. The amendment inserts into the Pubs Code:

“The Pubs Code shall offer an exemption from the Market Rent Only Option for a mutually agreed period in return for a significant investment by a large pub-owning business in that tenant’s pub”.

This would mean that if a pub-owning business spends a significant sum improving a pub, the Pubs Code would permit an agreement with the tenant for a period during which there would be an exemption from the MRO option.

Those who successfully proposed the amendment to Part 4 of the Bill in the House of Commons see the tie as universally malign—the point that the noble Lord, Lord Snape, and I discussed a few minutes ago—an arrangement without merit and having no benefit. But this is not true. I was challenged by the noble Lord, Lord Snape, at Second Reading to produce evidence to support the continuation of the tie in any form, and this I will now do, with a couple of examples.

If I may, I will take the Committee to the Black Bull in Mansfield. I should make it clear that the tenant, Janice Shaw, has given permission for me to use it as an example. When Janice Shaw took the pub on, it was trading at about £7,000 a week as a result of a lack of catering facilities, which resulted in strict food service times and a rather poor food offering. The brewery invested £100,000 in the pub. It addressed kitchen standards and capacity, doubling the size of the kitchen by extending it into the car park. In addition, the pub was redecorated, with new signage and fixtures and fittings. The result is that the turnover is up to £10,000 a week—an increase of £3,000 a week or £150,000 a year. The brewery has increased the rent by £5,200, from £32,800 to £38,000, and is making, as it wished me to remind the Committee, £6,000 more from increased sales of beer. So from Janice Shaw’s point of view, she has £150,000 of extra revenue while the landlord has £11,200 of extra profit. It is doubtful whether a bank would have funded this. It is a messy lend, being part construction work, part purchase of fixtures and fittings, and part redecoration. Of course, a bank would not have had the same vision and confidence as to the likely success post-investment.

My second example is the Crown Hotel in Southwell, Nottinghamshire. Anna Guise is the current tenant. She took on the Crown in 2005. Although pretty well run, the site had become tired, resulting in the consumer often becoming confused; little food was being sold; the reliance on the town centre drinking circuit was evident; and there was a need to change to a more balanced offer in order to appeal to wider consumer groups. Anna Guise tried to invest in the site but could not afford the necessary capital and the pub remained in decline. To support the operation, the brewery reduced the rent and Anna’s father supported her with regular cash injections.

The brewery invested £84,000 in November 2013 without requesting any rental uplift. The cap ex addressed both internal and external standards, modernising throughout. It developed the back bar to include coffee, wine and a more rounded offer. A new menu was introduced and food was served all day. The evening drinking remained but the message to the consumer was that the feel of the building had been improved and fresh signage was introduced. Post investment, decline has been reversed and there is now 39% growth. That has enabled her to plan for a brighter future for her pub.

The basic point is that integrated pubcos that wish to sell will not invest £100,000, or even £84,000, if there is no guarantee that they will be able to sell their beer and if, after the money has been accepted and an investment has transformed the pub, the tenant will be able to say that they want to change the basis of the contract. The amendment would permit—not require—a situation in which if significant investment has taken place, of the sort that I have just described, the two sides could agree a period during which the MRO option would not be available. Without this, pubco investment will be significantly reduced, and I hope that my noble friend can give some reassurance on that point.

Amendments 84, 85 and 87 are drafting amendments to Clause 42(8). Subsection (8) is concerned with the 90-day assessment period during which an independent assessor reaches a judgment on the terms of the no-tie agreement. It is important to be clear what happens during that 90-day interregnum. It must be made clear that the tenant must comply with the existing contract until the new MRO contract comes into effect.

Finally—no doubt much to the relief of the Committee—Amendment 89 is paralleled in large measure by Amendment 83A in the name of my noble friend Lord Borwick, concerning the rather unattractively named SCORFA—special commercial or financial advantages. I will leave my noble friend to address that and how it will fit into the MRO world post the break of the tie.

I recognise that I have thrown a lot at my noble friend in the last few minutes, although I hope that her officials were already aware of my direction of travel. It is important that all parties to the debate get clarity on the Government’s position. I am talking not about clarity on the broad principle—we all understand the MRO option—but rather on the more granular aspects of how the policy is intended to operate and what the consequences are likely to be.

[Lord Berkeley]

In this grouping, my Amendment 69A is the next one that is not a government amendment, so if it is convenient for the Committee I will speak to that and try not to delay the Committee too long with comments on the amendments from the noble Lord, Lord Hodgson. If I then have comments after the Minister has spoken, I am sure she will be willing to accept them.

I want to put on record that it is great shame that the Government have somewhat changed what was agreed in the House of Commons. I see the government amendments, and those of the noble Lord, Lord Hodgson, as putting the whole issue into the long grass, which is very sad. Rather than having the MRO option in primary legislation, which I thought was excellent—although obviously there is detail that we need to talk about—we could be left for many years with people opposing any secondary legislation that comes in and then debating it at that stage. Who knows what will happen then?

Amendment 69A is a probing amendment about why the Government, or the House of Commons, chose a maximum of 100 pubs rather than 500 pubs. I have had some useful discussions with St Austell brewery in Cornwall, which comes somewhere in-between. I have also talked to many of its tenants and others, and many who I talked to would be pleased to be able to renegotiate under the MRO. The family brewers, including St Austell, believe that they provide a much better and friendlier quality of ownership than the very big ones. I suspect that they are right in that.

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[Lord Hodgson of Astley Abbotts]

On Amendment 80, if it were a retail outlet such as a high street store, there would be no reason why a company should not sell its retail store to someone else. Why should a brewery be any different?

[Lord Berkeley]

It is a question of what would constitute selling and what would be transferring it to a company in which the brewery had 100% or 99% of the shares. It is a grey area. The noble Lord may be right but I do not see that as a reason for having his Amendment 80 or any of the others. We can go on debating this.

I still think that Amendment 82, in the name of the noble Lord, Lord Hodgson, is trying to say that once the tenant has started the negotiation he has to finish it. That is very unfair on the tenant because, while he may have said that he wanted to start it, if he is not happy with the outcome it is surely reasonable that he would not have to conclude an agreement. The short answer is that he will not stay there long and will suffer severe financial hardship.

I could go on for a long, long time, but I have one last comment on Amendments 73 and 74. I did not really understand the noble Lord’s explanation to my noble friend Lord Snape. If his amendment would enable the tenant to buy his beer and other drinks at whatever price he chose from whomever he chose, why are we going through all the rigmarole of all these different adjudications? Just let him do it now. I am sure that I have it wrong, but it would be nice if at some stage the noble Lord could explain the amendment in words of one syllable.

[Baroness Wheatcroft (Con)]

My Lords, I speak in favour of my noble friend Lord Hodgson of Astley Abbots. First, given the in-depth knowledge that he has shown on the subject, I hope that he is a member of our Catering Committee because he would be an asset there. I shall speak briefly because this is complicated and there is a lot more to go. We need to spell out that if a tenant opts for a market rent only deal, there should be a completely new agreement between the tenant and the landlord, and that should take in everything, from investment to the length of lease—it is a new lease, effectively. We should spell out that there is freedom to renegotiate there.

On Amendment 80, I completely concur that, for the ongoing good of the business, it is important that an MRO should not be triggered simply by a sale or an administration. The Minister indicated that she saw things the same way, and I hope that we will hear that confirmed.

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[Viscount Younger of Leckie]

I note the noble Lord’s point. I would like to illustrate some of the amounts that these pub companies invest. I mentioned earlier that they invest £200 million across the sector each year. One of the larger pub companies has estimated that, had the MRO been in place without an effective opt-out, the £30 million of capital investment which has taken place in the last 18 months would not have happened.

To illustrate how this investment affects individual businesses, another pub company recently invested £245,000 in one of their pubs in Nantwich in Cheshire. This investment created 10 jobs and took the turnover from £145,000 per annum to £330,000. A similar sum was invested in a pub in Wigan, which again boosted turnover from £250,000 to £345,000 and doubled the number of jobs. These are just two examples to add to the ones given earlier by my noble friend Lord Hodgson, of how tied pub companies invest in their estates every year to the benefit of both parties through the tied contract.

I conclude by saying that I hope the Minister has listened carefully to what I have said about the investment angle for pub companies, while not forgetting that we are talking about the livelihoods of tied tenants as well. That is just as important in terms of being fair.

[Lord Berkeley]

The noble Viscount, Lord Younger, has given two more examples to add those of the noble Lord, Lord Hodgson, of the happy tenants who have lots of money. He cited one company as investing £30 million in pubs which would not have invested if the MRO had existed. What assumptions is he making about the fair rent that would result from an adjudication under those circumstances? Is he assuming that the rent would stay the same or that it would go up to compensate for the profit that the breweries would no longer be making when they sell beer or soft drinks? The figure of £30 million is pretty meaningless without knowing on what assumptions it is based.

[Viscount Younger of Leckie]

I take the noble Lord’s point, but I spoke in support of my noble friend Lord Hodgson’s amendments on the grounds that there would be an exemption from the MRO.

[Lord Hodgson of Astley Abbotts]

The issue is that every company has a target return on capital. If it is to make an investment, it wants to make a return on capital and the company will set a target. The problem is that if you are going to invest your £30 million, you want to know what your return on capital will be. One issue that relates to return on capital is what will be the contractual relationship. Therefore, before you make your investment, you want to know what the end play will be, because that means that you can be assured—if it all goes well; it does not always go well—that you will get that rate of return on capital. That is the background to the figure that my noble friend is giving. Companies want to be certain that they have targets for the return on capital which they need to meet.

[Lord Berkeley]

With respect, “They would say that, wouldn’t they?”. I am glad that the cavalry has been brought in to help the noble Viscount, Lord Younger. The noble Viscount says that that £30 million would not be invested. “They would say that, wouldn’t they?”. We could do with some figures.

[Lord Hodgson of Astley Abbotts]

The truth of the matter is that every time an argument is produced to point out how pubcos operate as commercial enterprises, the noble Lord says, “They would say that, wouldn’t they?”. Capital investment budgets are set to be achieved, with certain target rates of return required to justify them. Otherwise the value of the stock—or the value of the company, if it is a private company—falls. If you do not have a rate of return on your investment higher than the cost of capital, the value of your business is falling.

You need to know what you are getting into, what your contractual relationships are and how long they will last. You cannot be certain, because, with the best will in the world—taking the example of pubs—some pubs do not do as well as one hopes. It does not work because the location is not right, the tenant is not right or the arrangements are not right. The idea is to hit the target. With the greatest respect to the noble Lord, he must understand that unless your rate of return on capital is higher than your cost of capital, you are destroying the value of your business.

[Lord Berkeley]

I am sorry, my Lords, but I will try just one last time. The rate of return could just as easily be calculated on the basis of the rent that the tenant will be paying once he has been through the process, because that will be fixed and the company will know it. That is the rate of return, whether the company likes it or not.

[Viscount Younger of Leckie]

Having been listening to my debate, I should conclude. I should answer the question appropriately. The clause is intended to provide an exemption which would allow an unspecified time for agreement to be drawn up because of the perceived investment to be given by the pub company.

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[Lord Berkeley]

Before we get to that, could the Minister please clarify what she said, quite a long time ago in a very interesting speech, about the timing of the introduction of the MRO? That has been changed in her amendments; the Bill says a maximum of one year. What is the actual timing? That is one of our big worries—that this could get kicked into the long grass.

[Baroness Neville-Rolfe]

I thank the noble Lord for raising that point. The confusion may arise because it is within 12 months of Royal Assent.

[Lord Berkeley]

If it will help the Minister to deal with this, I could speak for a little longer. I thank her for her comments generally in her necessarily long speech. She gave me a lot of comfort that what the Government are trying to do is the right thing. She prayed in aid the will of the Commons a number of times, and that is right. Of course, timing is one of those issues. I will be very pleased to hear what she has to say.

[Baroness Neville-Rolfe]

Before the noble Lord sits down and the noble Lord, Lord Whitty, takes the Floor, the answer is 12 months—but that is 12 months after the Bill comes into force. Apparently it will take two months for the Bill to go through to Royal Assent, so the maximum is 14 months. However, the message that I was trying to impart to the Committee is that we are determined to get on with this, push ahead and find workable solutions in that time.

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Moved by

[Lord Berkeley]

68T: Clause 41, page 38, line 19, at end insert—
“( ) require pub-owning businesses to publish wholesale prices charged to their tied pub tenants.”

[Lord Berkeley]

I hope we can deal with this group of amendments a bit more quickly than the previous group because there are only two of them: Amendments 68T and 68U. I think they are quite important.

Amendment 68T comes from the Federation of Small Businesses research which found that 27% of licensees believed when they signed their agreement that the price they would be paying for beer and probably other drinks was going to be lower than the price they would have to pay in the open market. They claim that they were not given adequate pricing information as prospective tenants. CAMRA analysed the prices that licensees paid in 2013 and found that pub companies’ prices were 50% to 70% higher than wholesale prices. That is pretty incredible, and certainly reflects some of the comments I have heard from tenants—that they are lucky if they can cover their costs on beer, and they have to work 24 hours a day to make any return on food.

CAMRA hosted a round-table session for pubcos and licensees and I have a couple of quotes here. The first is from the tenant of a pubco-tied pub in Burnham—I do not know which Burnham; it does not say—who says:

“Price wise the difference is absolutely crazy. John Smiths is £133, but you can get it for £82 wholesale. Kronenbourg is £170, you can get it for £100. It’s not little amounts—it’s lots”.

The licensee of a pubco-tied pub in Berkshire said:

“If they’d said to me, ‘You do realise that you can drive to Rebellion brewery and buy your beer at £70 for 72 pints but we’re going to charge you £150’, then how many people would say, ‘Hang on a minute, that’s not right, is it?’”.

Those are two unhappy tenants. We have heard about a lot of happy tenants today from the noble Lord, Lord Hodgson, and a few other people. I think it would be a very useful thing if the pubcos were required to publish the prices that they charge tenants. That is Amendment 68T.

Amendment 68U is about guest beers. I agree with CAMRA that it would be very useful to see all tied pubs of any description have the right to have a guest beer. It should be defined as a beer that is either cask-conditioned or bottle-conditioned in order to ensure access to the smaller companies, and improve consumer choice. It would allow the tied tenants to stock a single cask from anywhere in the world at a freely negotiated price.

There has been a growth in small brewers in pubs. They obviously make enough money, otherwise they would not be doing it. I think that it would be a really good idea to have the ability to have one guest beer in every pub. If the tenants were allowed to buy that beer from whomever they wanted and at whatever price, it might also demonstrate to the pubcos that charging 70% extra for their beer was not the way to make friends either with their tenants or their customers. I beg to move.

[Lord Hodgson of Astley Abbotts]

In the situation envisaged under Amendment 68U, could the guest beer be provided by the brewery that owns the pub?

[Lord Berkeley]

I am sorry, I did not quite hear.

[Lord Hodgson of Astley Abbotts]

Under Amendment 68U, can the guest beer be provided by the brewery that owns the pub?

[Lord Berkeley]

Of course it could, but to some extent that defeats the object, because if it is a tied pub, the brewery is already supplying the beer. It would be for the tenant to decide; that is the point. If the tenant decided to do that and to have a monopoly with one brewery, that would be fine.

[Lord Snape]

I do not object, and I do not think my noble friend does either, to pubcos insisting that their tenants sell their own beer. His amendment states that they can buy that beer from any source, rather than from the pubco through the tie. I think I am correct. I do not know whether the examples he gave of the excessive price difference that tenants have to pay—the 50% to 70% that CAMRA revealed—are common, but I do not think even the noble Lord, Lord Hodgson, could defend that sort of gap. Could the noble Lord emphasise that this is not about preventing pubcos from insisting that the tenants sell their beer but about the source of that beer and the price that the tenants pay?

[Lord Berkeley]

My noble friend raises an interesting issue. It is quite reasonable that a pubco that has a tied pub with tenants requires the tenants to buy the beer from them. That is the reason we are going through this—so that tenants can get out of it if they do not like it. While they are in it, the fact that they are buying beer at a certain premium—50% to 70%—provides part of the profit to the pubco, along with the rent. We can debate which. It has always been my understanding that if the tenants choose to go down the route of getting away from being tied, then presumably the calculation of the rent—we talked about this earlier—will in part take into account the loss of profit to the pubco in no longer being able to sell the beer at this inflated price to the pub.

There is a balance to be struck here. The amendment would allow the tenant to buy another beer from somebody else at whatever price and it would not necessarily affect the relationship with the pubco. It could do, but that is for negotiation. I hope I have clarified that.

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[Baroness Neville-Rolfe]

My Lords, I am grateful to the noble Lord, Lord Berkeley, for these amendments. In the spirit of collaboration, perhaps I can explain why we see them as problematic and see whether he agrees.

Amendment 68T would require pub-owning companies to publish wholesale prices. Even if that requirement was limited to alcoholic drinks, it would make public the details of a commercial financial arrangement between two parties to the world at large—including the pub owner’s customers, if I have understood the amendment correctly. It is important to stress that in this Part of the Bill we are regulating the relationship between tied tenants and their pub companies. At no point in our consultations has the need to publish wholesale prices emerged as a requirement to address unfairness. To do so would be an additional piece of regulation for the sector on top of the regulation we are introducing. In a few cases, pub-owning companies that we expect to be covered by the code already publish their wholesale drink prices online. Others publish those prices on a site with access restricted to their own tenants. Others do not publish them at all. On beer prices, tied tenants will tend to pay higher prices for their beer than from an outside wholesaler. That is integral to the tied deal. We recognise that transparency is important, and the Pubs Code already provides that transparency where it is needed—in the relationship between the tenant and the pub-owning company. As I said, the Pubs Code will require the wholesale prices to be provided to the tenant, as well as the current and relevant price lists.

Turning to Amendment 68U on guest beer, when the Government consulted on the issues and evidence that preceded the drafting of these clauses, we included questions about guest beer. The reasons for rejecting that option were clearly set out in our response to the consultation. Some will remember that I come from an all-male family of very keen beer drinkers, so I sympathise with the point, but while there was considerable support for the right to stock a guest beer, there were concerns about the potential for this to undermine the tied model by reducing the alignment of interests between the tenant and the pub company. This was because many tenants would select a draught lager as guest beer, which would typically be the biggest-selling beer. The proposal in the noble Lord’s amendment seeks to address this concern by stipulating that the guest beer should be limited to a brand of cask-conditioned or bottle-conditioned beer. I understand that. Unfortunately, this raises potential competition law issues. We are advised that restricting the guest beer to a particular type is likely to be contrary to EU competition law.

I hope that that background shows that the Government have considered the noble Lord’s proposition seriously and that, in the circumstances, he will agree to withdraw the amendment.

[Lord Berkeley]

I am grateful to the Minister and to my noble friends for their responses. On Amendment 68T, I think that putting the price of beer charged to a tenant in the public domain may be going a little bit over the top, but if it is published on a website and available to the tenant that is fair enough. However, this comes to the imbalance between a small business—and tenants are, after all, very small businesses—and the pubco. The fact that these people did not understand that the price of beer may not have been what they thought shows something about the unbalanced and bad relationships that some of these pubcos clearly have with some of their tenants. I am not blaming anybody but they are small businesses. Maybe we could have a think about that and have a meeting to discuss it before Report.

Amendment 68U deals with guest beer. I spent the morning at DG Comp in Brussels today. I cannot say I was talking about beer but I know the people there well and I can always check on that. There are important issues here but perhaps we could have a discussion about this too. I would like to see guest beers in some of the tied pubs and I think many others would too. What beers they are would depend on what kind of beer you like drinking. That is enough of that, at this time of the night. I am grateful for the Minister’s response and look forward to further discussions. I beg leave to withdraw the amendment.

Amendment 68T withdrawn.

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Moved by

[Lord Berkeley]

90A: After Clause 43, insert the following new Clause—
“Definition of market rent
The market rent shall be determined on the basis of the likely turnover and profit of the business of the pub, and shall not take into account any value to the pub owner of a change of use of the pub.”

[Lord Berkeley]

My Lords, this amendment concerns how the adjudicator takes into account the various financial factors relating to a pub when considering what its market rent should be. We have a lot of pubs where I live in Cornwall, some of them very lovely ones on the waterfront. I do not know how much money they make but there is a feeling that if they were sold for desirable waterside residences, of which there are already an enormous number, they could probably fetch a much larger amount of money than they earn for the owners at the moment as pubs.

That may or may not matter, but there is an issue here of what the role of the pub is in a small community. It acts as a kind of community centre. It may be where people congregate at different times of the day. It keeps village life going. It would be a great shame if the value of a pub on the open market, for retail or as a house, made it in the interests of the landlords to sell it and try to change its use.

There was another example in the Guardian last Saturday, in a nice article on pubs generally, given by someone who works for a company called Paramount Investments:

“In north London if I am selling a pub as a development opportunity I might be able to ask £700,000-£1m for something that as a pub I would only be able to get £350,000-£450,000 for”.

It gives other examples in Marylebone and other places where property values are very high, as they are in London. The problem is wider than London and Cornwall; it could be in many places where the property value is high. In this amendment, which obviously is a probing amendment so the wording might not be quite right, I am trying to propose that in assessing the rent no allowance should be made for a change in value due to a change of use that could be achieved if the pub were no longer a pub. I beg to move.

[Baroness Neville-Rolfe]

My Lords, I am grateful to the noble Lord for his amendment and I am looking forward to visiting some of his local pubs in Cornwall before long. To be brief, subsection (10) of the proposed new clause in government Amendment 89A makes it clear that a market rent is,

“the rent which the premises might reasonably be expected to fetch at that time in the open market”,

on the assumption that the sale of alcohol for consumption on the premises remains the main activity or one of the main activities of the premises. It is clear that the market rent is for the premises as a pub. I hope this reassures the noble Lord.

[Lord Berkeley]

I am very grateful to the Minister. The amendment came through after I went through all this. I am very grateful for her explanation and beg leave to withdraw the amendment.

Amendment 90A withdrawn.

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[Lord Berkeley]

My Lords, in this group is my motion that Clause 68 stand part of the Bill. This is an interesting clause, because it is called “Power to grant exemptions from Pubs Code”. If this is read one way, one could assume that every pubco will seek exemption by being specified. This is the usual business of what “specified” means. The word is mentioned eight or nine times in this short clause and then, at the end, it says:

“In this section ‘specified’ means specified in regulations”.

We have not seen the regulations, which is, I am afraid, quite normal in this House and has been for many years. What does “specified” mean? There are various exemptions, such as,

“the dealings of a specified pub-owning business …with their tied pub tenants… of a specified description”.

Does it mean that if they sell fish and chips rather than food they are going to be exempt? Does it mean that if they invite too many Members of your Lordships’ House out to lunch they are going to be exempt? Henry VIII would be proud of this clause and I am sure the Minister is equally proud of it. However, before we get much further we ought to have some explanation of what it means. Who would be exempt and under what circumstances? Why should there be any exemptions? I am sure the Minister will be able to give me some good explanations about why it is very important to have this clause in the Bill.

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[Lord Hodgson of Astley Abbotts]

My Lords, this amendment is concerned with the franchise of pub operations. I have remarked repeatedly during the past few hours that the point of weakness of the tie is where the interests of the two parties—the pub owner and the tenant—diverge.

That tension occurs in two places in particular. The first is the rent being charged for the tied premises. The belief or allegation is that landlords are insufficiently deterred from increasing the rent charged. I would emphasise that pubcos have an interest in avoiding pubs closing, particularly those that have an integrated model because they need the outlet for their beer, but undoubtedly the tension exists and, as I said, I do not doubt that some bad cases have occurred. The second point of tension is in the pricing of the goods that the tied tenant is obliged to sell. Again, the allegation is that the pub owner will push the sale price as high as possible. Again, there are arguments why this is not in the pub owner’s interests. Again, let me recognise that the conflict of interest exists.

Some pubcos, particularly integrated pubcos, have sought to address these twin challenges. They have done so by creating a business model based on revenue-sharing. Under such a model, both parties have an interest in maximising turnover. This business model is exactly like a franchise for McDonald’s, Pizza Express or Costa Coffee. Indeed, the agreements have been accredited by the British Franchise Association.

How does it work? The franchisee receives the property, fixtures and fittings, capital investment, and repair and replacement of the fixtures and fittings of the building. All his bills are paid, including rates and utilities. The only bills not paid are council tax and staff wages. He also has services such as training, marketing and business support—the SCORFA arrangement we talked about earlier—and he has products to sell. For this, the franchisee—the operator of the pub—takes a share of the income at the cost of a business fee of about £5,000, compared to the £250,000 that you have to pay for a McDonald’s franchise, for example.

The cost of the products to the franchisee is irrelevant because they are paid a percentage of the revenue of the pub. The goods are delivered to the site and the franchisee holds them on behalf of the franchisor—the brewer. The products are held on the sale-or-return basis. At no time does any cash change hands in respect of payment for the products. The franchisee and franchisor take an agreed share of the total income. The franchisee has the ability to set the retail sales price for the beer in the pub being operated. The pubco effectively supplies everything, with the franchisee then dictating the price to sell it at. The pubco shares the income and, on top of this, the franchisee also receives a profit share. Under the agreement, the percentages and shares of the profit are set out in the contract and cannot be altered.

It appears that this revenue-sharing franchise-type arrangement will still fall within the provisions of the proposed code, so Amendment 96 seeks to insert a new subsection into Clause 67, which is concerned with the definition of tenancy. It proposes that:

“The definition of ‘tenancy’ in subsection (2) excludes franchise agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products”.

This approach in the wording ensures a community of interest between the franchisor and the pubco. If the Government do not accept this amendment, or one like it, they will be singling out the pub trade for very discriminatory treatment. If the argument is that the franchisee has to sell a certain type of product, that is true—but if you hold a McDonald’s franchise, you have to stock Pepsi and are forbidden to sell Coke. Members of the Committee might liken it to walking into a Costa Coffee and asking, “Please can I have a Starbucks?”.

This revenue-sharing arrangement ends the possibility of divergence of interest between pub owner and tenant. It provides a useful model for future pub developments and I trust that the Government will either be able to reassure me tonight that it is not intended to include these or make the necessary changes on Report. I beg to move.

[Lord Berkeley]

I really cannot imagine how anyone would want to take a franchise like this. It is a variation on the old zero-hours contract, which we talk about. It could be a franchise with zero income and the hours being 24/7. Why should anybody want this contract? I will be interested to hear what the Minister says, but the pubcos must love it.

[Baroness Neville-Rolfe]

My Lords, I thank my noble friend Lord Hodgson for this amendment on franchises and the noble Lord, Lord Berkeley, for his intervention. Pub franchises are of course covered by these measures because they fall within the definition of a tied pub in Clause 65. I understand my noble friend’s argument that a pub franchise agreement based on a share of turnover, rather than a tied rent, can lead to a better alignment of interests between a pub company and a tenant.

However, there are other aspects of the pub company and tenant relationship that can lead to unfairness, in the same way as for more traditional tied pubs. The Pubs Code includes transparency protections for tied tenants to ensure that they are clear as to what they are signing up to. We believe that these protections and others in the code should be available for all tied pub tenants, including those with a pub franchise agreement. I can, however, provide some reassurance to my noble friend. If, as he says, price increases make no impact on the tenant in a franchise agreement, the MRO-only trigger for pricing will never apply to a franchise agreement. Should a franchisee exercise the MRO option the pub company will still be able to benefit from the stocking requirement, so the tenant could still be required to stock its beer and/or its cider. The pubs company’s obligation to provide services as part of the franchise agreement would of course fall away.

I am, however, afraid that we believe that to exempt franchises would leave a loophole in the legislation. Tied pubs could be converted to franchise pubs to gain exemption from the code. If pub franchise agreements seek to reduce some of the risks of the tied model for tenants by revenue-sharing, as my noble friend Lord Hodgson explained, we would welcome that. One would expect such agreements to be less likely to fall foul of the Pubs Code. In turn, one would expect those tenants to be more satisfied and less likely to request the MRO option. This is not a reason, however, for removing franchise agreements from the scope of the legislation where we remain uneasy about opening up a loophole. I appreciate my noble friend’s amendment but I hope that he will feel able to withdraw it.