Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn

Monday 9th March 2015 Lords Chamber

[Lord Mendelsohn]

My Lords, Amendment 33M makes provision that the Secretary of State may, through secondary legislation, create an opt-out for an MRO in return for a sum of investment. The amendment tries to outline important provisions and considerations and to ask the Government to be clear on what that means. It also asks that they implement safeguards to ensure that the MRO is not watered down. Our belief is that if the investment offer is fair, reasonable and attractive to a tenant, there will be little or no risk of the tenant taking up the MRO at that time. The MRO trigger would be there to ensure that pub companies made reasonable investment offers and were not just bullying or cajoling tenants into signing away rights cheaply.

My reasons for tabling the amendment are twofold. First, we do not fully accept the Government’s argument concerning Clauses 42 and 43 on the Pubs Code. We think that the legislation is insufficient and would be very interested to hear the Minister’s view on this. Secondly, this measure has the capacity to undermine the Commons amendment. We do not feel that it is appropriate to accept the measure without a detailed indication of what it entails and without some markers on the face of the Bill.

There are many horror stories in relation to this, as in relation to the operation of how pub companies deal with the provision of a sale. Indeed, I heard this morning from a tenant about how all their rights were bullied out of them and how they were moved dramatically from a position of reasonable success and security, with the pub company using the provision in a dispute over a sale. Many Members of this House will have heard stories from a variety of sources about issues concerning investment. We are concerned to make sure that these are dealt with adequately, and that the problems that led to this part of the Bill and to the issues that arose in the other place are dealt with properly.

We are also very keen to make sure that the industry, in and of itself, has the capacity to continue to develop and invest, finding a way to work with its tenants productively, sensibly and creatively so as to grow, commercialising the sector to full effect. Therefore, we are looking to the Government to provide a clear view on how they will deal with this. We accept that much of this will be dealt with in secondary legislation, as with other things, but because of the nature of some of these provisions, and the speed at which they have been made, we will be very keen to have some idea of what the Government see the regulations and guidance as including and how they will be framed.

We would be very grateful for some clarification on the following: the definition and amount of investment; what the Government consider to be the maximum deferral period of MRO in return for investment, and their view on whether it should be capped at five years; the stage at which the deferral for an MRO will begin— that is, will it be after the sums are agreed or when they are all fully expended?—the buyout of agreement provisions, whereby a tenant can opt for MRO; the tenant’s option to allow for alternative and blended finance to maintain MRO and how this will operate with investment agreements; and the ability for an investment agreement to trigger the parallel rent assessment. We would also like to have a strong reassurance about how the investment agreement will be a trigger event for the MRO. We would like clarification that an agreement of investment will mean that there is no opt-out of the Landlord and Tenant Act 1954, and an assurance that the investment agreement will recognise the different nature and size of pubs and relevant investment requirements. There is a considerable difference between a large pub in, say, the centre of London and one in a remote village, and it needs to be recognised that a one-size-fits-all model does not work.

There are other considerations, such as who commissions the work, to what standard, who signs it off and is responsible for overruns, the examination of the current condition of properties and other matters. These are not the only relevant factors. We have also received correspondence on problems between pub companies and tenants, and on how these mechanisms have specifically been used. We believe that it is in everyone’s interests to have a working mechanism that allows for investment and makes that investment work. We feel that more clarity now will ensure that problems can be avoided in the future.

I hope that the Minister will be happy to consider these matters in full. Given their sensitive nature, we will be happy to return to them at Third Reading following this debate on the substantive points. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, I have Amendment 33W in this group. The noble Lord, Lord Mendelsohn, has done us all a favour by tabling Amendment 33M, which has the great virtue of ensuring a reference in the Bill to the importance of investment in the sector. There are aspects of his amendment which would be operationally and definitionally problematic, which I will come to in a minute or two, but there is a germ of a good idea and I hope that we may be able to persevere with this over the next few days. By contrast, I find the Government’s position less satisfactory, in that, as I understand it, there is to be no reference to the importance of investment in the sector anywhere in the Bill. It will all be left to the consultation process, with all the attendant uncertainties which all sides of the House have referred to during the debates this afternoon.

The Government have made a practical argument that the pubcos could achieve certainty by offering tenants a new agreement at the same time as the offer of investment. In the explanatory note that the Government circulated last week, there is a suggestion that the Bill does not prevent pub companies from issuing a tenant with a new lease alongside the offer of investment. Sadly, most tenants will not be attracted by this because of the problems of stamp duty. A lessee on a 15-year lease with a rent, say, of £50,000 will pay stamp duty of around £5,000 at the outset. If they are in year two or year three of the lease, and the pub company has to grant them a new agreement in order to make an investment with a five-year payback, they will have to write off the £5,000 they have already paid, pay another £5,000 in stamp duty for the new lease and then pay all the legal costs associated with it, which are estimated at around £1,500. Not surprisingly, this is not a particularly attractive option for the lessee. In essence, the Government’s position now is to force small businesses who want to take advantage of pub company investment to pay additional tax to do so. That is surely contrary to the aim of the Bill, which is to increase access to finance for small companies.

I think all noble Lords agree that investment in pubs is urgently needed if the trade is to prosper, because pubs are having to reinvent themselves to meet new competitive conditions, with a greater emphasis on food, facilities for families and so on. These investments are what bankers called “messy lends”, because they tend to be a mixture of: land works, for example extending the car park; construction—increasing the footprint of the pub; internal fittings, such as enlarged kitchen facilities; and general work such as new signage, new fixtures and fittings, and general decoration. A banker will have some doubt as to the ultimate value of that investment if it is unsuccessful. They are not always therefore very attractive to third-party lenders, but they are attractive to integrated pubcos, because their own estate is an important route to market for their own beer, often accounting for up to 25% or 30% of their production. It needs to be made clear that there is no requirement for a tenant to accept the pub owner’s money. If he or she can find funds elsewhere, on better terms, so be it, although the fact is that an integrated brewer usually is able to offer the best terms.

I referred to the need for pubs to reinvent themselves as a result of changes in society. That brings me to the downside of the amendment of the noble Lord, Lord Mendelsohn, as currently drafted. He referred to the vast range and diversity of investment needs, but I fear that parts of his amendment represent a straitjacket. What is a “rent assessment” in relation to MRO in the introductory section of his amendment? Reinventing yourself as a gastropub in a prosperous London suburb is a vastly different proposition from reinventing yourselves as a value-conscious family-friendly pub in Middlesbrough, but both are important if we are to maintain the pub trade in all its glory and all its diversity.

I argue that the maximum deferral period of five years, as proposed in subsection (2)(b) of Amendment 33M in the name of the noble Lord, Lord Mendelsohn, is not appropriate to appear in the Bill. Secondly, the proposed buyout provisions under subsection (2)(d) are likely to act as a disincentive to investment. Thirdly, for reasons that were clear from my previous amendment, I am anxious to pull MRO and PRA together, whereas the noble Lord has separated them under paragraphs (f) and (g) of his amendment.

My Amendment 33W does not suggest a new clause— as the amendment in the name of the noble Lord, Lord Mendelsohn, would do—but the insertion of two paragraphs in Clause 43, “Pubs Code: market rent option”. My amendment envisages a situation where the Pubs Code would clearly set out what can and cannot be included in such a deferral agreement. Tenants would continue to enjoy all the protections of the Pubs Code and the Pubs Code Adjudicator. No tenant could enter into a deferral agreement without having first taken appropriate professional advice to ensure that he or she is aware of the terms of the agreement and has taken advice on its suitability for their business. The tenant must choose to opt into the deferral agreement; that is, he or she has the right to refuse to enter into any such agreement. The adjudicator should oversee the deferral system to allay concerns from tenants around the process of entering a deferral. A deferral would apply only to significant investments to be defined in the Pubs Code and would not therefore be available for incidental investments for maintenance or repairs which are the responsibility of the owning pub company. The deferral agreement could last for a mutually agreed period of time.

The Pubs Code could set a maximum period of time for a deferral agreement if appropriate. Some flexibility may benefit both tenants and pub companies depending on the scale of the investment, as the noble Lord, Lord Mendelsohn, pointed out, and the length and nature of existing lease arrangements. For the avoidance of doubt, during the deferral agreement the tenant will maintain their right to exercise all other MRO triggers, including significant price increases and material change in circumstances as defined in the Pubs Code.

Whatever approach is followed, it is critical that there is some reference to the importance of investment in the sector in the Bill. Without that certainty, the flow of investment, most of which will inevitably come from the big pubcos and are the subject of the restrictions in this Bill, will reduce. Having heard the remarks of the noble Lord, Lord Mendelsohn, as well as my own, I hope very much that my noble friend will be able to accept the spirit of what is intended and agree to table a suitable amendment to address this issue at Third Reading.

Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Mendelsohn

Wednesday 28th January 2015 Grand Committee

[Lord Hodgson of Astley Abbotts (Con)]

The noble Lord makes a very important point about what will be in the legislation and what will be in the code. This point was made by the noble Lord, Lord Whitty, and we are all concerned about it. If there are two sides to the argument, both sides are suspicious that consultation will mean that they lose out one way or the other. Have the Opposition reached a view on how much can be in the code and how much in the Bill, or are we still working that out?

[Lord Mendelsohn]

As I am pressed, there are a number of details where that balance is the issue we have to address. Perhaps we need some more comments from the Government in explanation of the current provisions. We are also looking for the direction of travel to help give us a real sense of what should and should not be.

As I said, although we support the Government’s approach, we take the view that some of their drafting has lost the strength and essence of the Commons amendment. We are keen to ensure that what is passed is workable and sensible and we are happy to work together on this. However, to be fully satisfied, we need to see an evolution on Report, in a couple of important respects. We are keen for an indication that the Government would show some willingness to consider changes. There is a very important need to provide detail and direction. There are some issues which should be dealt with in the Bill but others whose place is in secondary legislation. We will be looking for a strong indication of the direction of travel to provide us with the right assurances that we will be looking at the right sort of areas and issues at the next stage. There is also a requirement for clarity in what we would describe as “dual-use clauses” where the drafting suggests that a measure could be used for two diametrically opposed purposes. In that regard, it would be useful if the Government would give an indication of how it is used for one and not the other.

We understand the concerns of the many different parts of the industry that variously have particular and shared issues with the Bill as it stands. We appreciate their need for greater clarity to ensure that they can make decisions and reasoned evaluations. We have a great industry in this country and we expect that the legislation will make it greater. We have met with a number of companies and I have been impressed with their management. There will be some costs and adjustments to make, and listed companies with short-term expectations—hyped by banks’ analysts—will be put under particular pressure. As my noble friends have said, a number of business models were dubious to begin with.

Many of the managements of the companies I have spoken to will fare very well indeed under the new provisions. They are a very capable group, readily able to innovate and develop new, efficient and sound commercial operations, relationships and models. They are, indeed, doing so in the face of a number of factors which have hugely affected the industry over the last decade, including the amount of beer that is bought in supermarkets, the change in consumer tastes, substitutional competition and other sorts of regulation. It is right that their concerns are properly addressed: we may not agree with some of them but we are certain they should be properly considered and clarity provided as far as possible. I would be grateful if the Minister would set out her thinking on the future of the industry.

We would appreciate a fuller understanding on the issue of investment. Pubcos have come to us to say that they will be discouraged from making investments in their estate. We have tried hard to get a full estimate of whether that investment is income-generating or is just for maintenance, because these alternatives offer different returns on capital. This addresses my noble friend’s point that the property element of this is very different to the other commercial aspects. We have not had sufficient clarity on that but we take the point that we need to address this question.

For example, if a pub company were to redecorate a pub and install new aspects at a cost of £50,000, it would be reasonable to expect a return on that investment over time. The company’s view would be that it would be unfair for the tenants to go to a market rent only provision six months later. They say that this would discourage them from making the investment. They suggest that the pubco should be able to make it a condition of their investment that a contract of around five years would come into force and supersede the old one, so the tenant could go MRO only where the code had otherwise been breached. They would like this assurance in the Bill. Can a pub company reach an agreement with a tenant to establish a new agreement in return for an investment and therefore postpone a rent review for five years? Is that one of the provisions of the Bill? Could we provide some certainty on whether they have the scope to do that? Perhaps the Minister could address this matter in detail.

It would also be helpful to have clarity on allowing breweries that qualify as large pub-owning companies to require tenants taking the MRO option to continue to stock certain of their products. Organisations such as CAMRA have said that they are comfortable with this provision as a means of ensuring that the brewing pub-owning companies can continue to distribute their brands. Companies, understandably, are wondering what parameters are available to them now, and what is likely to be in delegated legislation. It would be useful all round if the Minister gave us a better sense of the Government’s direction of travel. For example, have they considered giving brewer pub companies the right to require that a tenant does not sell direct competitive products? Can the Minister provide a broader understanding of the nature and level of legal advice that the Government have taken on this, and of their expertise in evaluating the European competition considerations?

Similarly, what certainty do the Government intend to provide for brewers in Amendment 91ZA? Is it to ensure that they will have the right to require that an MRO tenant must stock their required beer and cider products? What is their evaluation of the argument that the brewers need the certainty that they will be able to require and enforce a stocking requirement as an integral part of the MRO lease offer? What are the Government expecting a stocking requirement to cover? Is it to specify the individual products to be sold, whether draught or bottled; does it include minimum purchase obligations, if necessary, to ensure incentives are made to sell its products and not those of a direct competitor; and would they require a tenant to prove that the stocking obligation has been met, given that the tenant is not required to purchase the specified products direct from the brewer or approved wholesaler?

There are some other areas worthy of consideration. We would appreciate some detail on the code and the adjudicator. The industry is interested in whether the Government’s view of the role and function has evolved since it was first introduced when there was no MRO provision, and whether it is likely to widen in scope in secondary legislation. It would also be very helpful if the Minister were able to indicate what lessons the Government have learnt from the current operation of the Groceries Code Adjudicator—which is not without some criticism—for how they will establish the Pub Code Adjudicator and the drafting of the code.

We are delighted that the MRO is now in the Bill, but we are also very aware of a need to strike a balance in the final legislation. Using the primary legislation to try and close every feasibly conceivable loophole while protecting tenants could put a straitjacket around the industry. Our amendments are designed to ensure that the legislation delivers on the intentions that we support but is not so restrictive as to cause harm to an industry we all want to see thrive. Some of our amendments are probing in nature to make sure that we have a clear sense about some of the detail. In this House we need to answer two questions—what should be in the code, and who it should cover—before sending the Bill back to the Commons. That is what these amendments intend to clarify.

Amendment 89AA is a probing amendment. This clause examines the provision that tied tenants can trigger an MRO only when changes specifically impact on their business as opposed to pubs in general, including managed houses, hotels and free houses. As it is currently written, if there was suddenly a global increase in, say, the price of barley, which was passed on to all licensed traders, the tied tenant could use this unforeseeable event as a trigger to go MRO if the price increase was passed to them. Is it the Bill’s intention that an MRO option could be triggered in such circumstances? What is the Government’s view of how “unforeseen events” would operate? Would this include actions by the Chancellor of the Exchequer? Does it mean unforeseen at the time of contract, or does “unforeseen” apply to things that would ordinarily be put in a risk register to establish potential risks that could happen to a business? Do “unforeseen” and a risk register become mutually exclusive? Does an unforeseen event have to have a particular impact and effect on all kinds of alcohol sales? Is this drafted so that if, for any reason, those in tied pubs were to be charged excessively more than free-of-tie and other tenants, tied tenants should be allowed to react against this specific treatment? We would be grateful for any indications on this.

We believe that Amendments 89AB and 89AC will remove ambiguity from the Bill and ensure that the trigger points can be activated only when all these specific criteria are in place. We are looking for an explanation of how the Government arrived at the current drafting.

On Amendment 89AD, we feel that there is a problem with the Government’s use of “level of trade” as a trigger point, which merely refers to how many pints a pub is selling and not to the deeper situation. For example, if a pubco increased its supply prices and the tenant felt that they could increase the price at which they sell a drink to the public because of local competition, their level of trade would remain static. However, their overall profitability could be fatally undermined. The amendment would ensure that the overall level of profit would be the key factor.

On Amendment 89AE, the idea that a transfer of title should be used as a trigger point was originally placed in the Bill for very good reasons—for example, in the case of a tenant who agreed to a tied contract for five years with a large pub company, but who found after two years that they were now the tenant of a smaller pub company that was not covered by the code if their pub was sold. However, if this power is given carte blanche it could stifle the pub sales market, which would not be sensible for the overall health of the sector, particularly where smaller companies could revive pubs in their local area.

Likewise, it would not be right for publicans to be stuck in a tie when their circumstances have significantly changed and they no longer have any of the protections of the code. This amendment would make it clear that transfer of title alone is not enough, but if such a transfer detrimentally affected a pub, the landlord should be able to assert his or her rights. We would be grateful for some understanding of how the Government arrived at the current drafting.

Amendment 89AF is in response to concerns raised with us by publicans and those in the industry. There is a feeling that there are ways that companies that we would all accept should be covered by the code could get around it as it is currently written. One such way is that a business owning 2,000 pubs could split itself into five smaller concerns, each of which would own fewer than 500 pubs, but to all intents and purposes the same ownership structure would exist. There may be myriad ways that lawyers—some clever, some just expensive—could exempt their clients from the code. However, as noted, we do not want the code to be so long and onerous as to paralyse the industry. We therefore believe that it would be right to create this power, which we hope will never need to be used, to act as a powerful deterrent against such egregious behaviour and ensure that the spirit of the code is always fulfilled.

In general, we are concerned that some of the drafting could create a situation where there may be ways to avoid the Bill’s intentions. We take these concerns very seriously. We do not feel in a position to prepare any amendments that would not be without flaws at this stage, but we would be very keen to work with the Government to ensure that any potential risks are addressed. We are keen to hear some assurances from the Government that they will look very carefully at these matters and their general approach to avoidance, and how they think those assurances could be met in the operation of the legislation, the code and the adjudicator. In particular, we are concerned about how the triggers will work and whether they will provide sufficient protection to small businesses. We want to be assured that the protections are there to stop triggers being used to game the legislation.

We also make a general point to urge that the new code is swiftly implemented via secondary legislation within 12 months of the enactment of the Bill. In short, we need to ensure, as the Bill progresses, that it secures the best of the existing model, reforms what is needed and eliminates bad practice. We understand that that is where the Government are on this. Some reassurances would be very helpful.

I hope that the Minister will forgive me for being so forward and will find the following suggestion useful. We think that the right way forward is to let the Government have their amendments today and return, after discussions with all parties, with amendments to those amendments to strengthen them in the light of these discussions. We hope that we can get a clear assurance on that and a strong commitment that that is what we will see in the Bill on Report. That would be useful reassurance at this stage.