Lord Mendelsohn
Main Page: Lord Mendelsohn (Labour - Life peer)Small Business, Enterprise and Employment Bill
Lord Mendelsohn Excerpts
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)
My Lords, we come to several sets of amendments on pubs, a subject that has been much debated in this House and in the other place. We need to set the scene for today’s debate, which I think falls more naturally under the heading of the next grouping of amendments on market rent only. I suggest we proceed on that basis if noble Lords are content and treat this group of government amendments as the relatively technical group that it is.
For the first time, tied tenants will have a statutory code they can rely on, with an independent adjudicator to enforce it, with real sanctions at its disposal. There seems to be agreement in both Houses that a statutory Pubs Code and an adjudicator should be established. In setting up the Pubs Code Adjudicator, we have generally followed the Groceries Code Adjudicator model. This included specifying in this Bill:
“The Adjudicator may make arrangements with the Secretary of State or any other public authority for staff to be seconded to the Adjudicator”.
However, the GCA has experienced significant difficulties in securing staff on secondment from within the public sector. There is no single reason for this, but both the niche nature of the GCA and the ongoing pressures on departmental staffing levels are factors. We are keen to avoid the Pubs Code Adjudicator encountering similar problems. Amendments 33A and 33B to Schedule 1 therefore enable the adjudicator also to take secondees from the private sector. This will provide much needed flexibility for the adjudicator to find suitable staff from a wider pool—for example RICS-qualified surveyors to advise on rent assessments. We considered whether the adjudicator should have the ability to employ staff directly. However, we concluded that allowing secondments from the private sector would provide the flexibility needed without imposing employer responsibilities on the adjudicator.
Amendment 33C ensures that the adjudicator’s secondment policies are approved by the Secretary of State. This will enable the Secretary of State to specify that remuneration and the terms and conditions of persons on secondment to the adjudicator are in line with the department’s secondments policy. The amendment also provides that a person seconded to the adjudicator remains an employee of the employer he or she was seconded from.
Finally, Amendments 33E and 33F ensure that the staff of the adjudicator are subject to the House of Commons Disqualification Act 1975, in common with staff of government departments. I beg to move.
Lord Mendelsohn (Lab)
My Lords, we are happy to support these government amendments and are grateful to the Minister for the way in which she has dealt with this matter. We believe that our debate on the more substantive issues in the next group of amendments will cut to the heart of many of the important issues.
We support these technical amendments and are encouraged that the Government have learnt lessons from the introduction of the Groceries Code Adjudicator, which will be applied to ensure that the Pubs Code Adjudicator works effectively from the beginning. The only point we would make is that secondees should be drawn not just from the private sector but from a range of different areas so that they will provide the necessary experience to make the adjudicator’s work as effective as possible. Indeed, even within the context of the private sector they should be drawn from a range of disciplines. Apart from that point, on which we would be grateful for clarification from the Minister, we are happy to support these amendments.
Baroness Neville-Rolfe
My Lords, I am happy to clarify that we will take secondees from the best place possible, which could include—the noble Lord is probably referring to this—another Government, a non-profit organisation or some other source. This is to give us the flexibility to find the right people.
Lord Mendelsohn
My Lords, I shall speak to Amendment 33Y and cover some other issues. I congratulate the noble Baroness on her helpful approach to this. A great deal of work has been conducted and the Government are to be congratulated on the spirit in which they have worked to try, consistent with their word, to replicate the amendment passed in the Commons. They have done some very good work. The officials, of whom I have seen rather more than I expected, have worked diligently to do that, and I am encouraged and pleased to be able to say that we have made a great deal of progress. I think that the amendment meets the objectives of the Commons, which is to support all participants in the industry while recognising that we have challenges in the history of relations between the pubcos and the tenants which also need to be addressed.
I am not a pessimist regarding the concerns of some noble Lords about the commercial interests that will be affected by this. I have read the London Economics report—I was not convinced by it, but I have read it. I think that the impact of supermarket prices, for example, has been far more significant than other factors, so we have to put this into context. Our opportunity through the amendments and the Bill is not just to make those changes but to create a framework that will work for the industry and the development of the sector. That is an important objective for us to keep in mind.
This large series of amendments covers a lot of ground and a number of issues which lie at the heart of what was agreed in the other place on the issue of the market rent only option. As I said, the noble Baroness and her team have worked diligently in the face of time and other constraints to deal with them. In the particular circumstances of this part of the Bill, it is inevitable that our debate today has been rather more like Committee than Report, and it may be helpful to the Government if I explain that I think that the right thing to happen now is for a very limited range of issues to be given further consideration—a process in which we are happy to participate—and brought back for final decision at Third Reading. The noble Baroness stated in her introduction that she was happy to say that there is a great deal of support for some of the government amendments from CAMRA, Fair Pint, and others. In their briefings, they expressed their support for the amendments tabled by the noble Lord, Lord Stoneham, and my noble friend Lord Whitty and others standing in our names. There is a great deal of support for the amendments, which need to come together in some fashion to provide a coherent Bill.
We believe that the Government have made excellent progress on some matters, which we are pleased to support. I will outline those shortly. However, we still have profound reservations and are strongly opposed to some of the amendments before your Lordships’ House today. We are keen to ensure that they are dealt with through further discussion at this stage, and strongly recommend that they be finalised in time for Third Reading—and certainly before they go back to the other House. As I said, we are keen to work constructively with the Government, as we have done to date.
In that context, I particularly support the point made by the noble Lord, Lord Stoneham, that much of what we are now considering will be in secondary legislation. At this stage and at this time, as we move towards Third Reading, we need a lot more clarity on some things to know what is meant by the amendments, because that is where the direction of secondary legislation will go. It is worth being as expansive as we can in those circumstances.
We are happy to support a number of the government amendments: for example, making the minor but vital drafting changes to “market rent only option” and the “no worse off” principle, although I should be grateful if the Minister can confirm, as a tidying-up exercise, that if the Government have missed a change, they will bring it forward at Third Reading. We are happy to support the reinstatement of the parallel rent assessment for existing tenants—which means by implication that we are resolutely opposed to Amendment 33L.
We are very pleased to see one particular drafting change. I note that despite being told constantly of the legal impossibility of changing a “may” to a “must” in discussion on the Bill, we have one in government Amendment 33U. I had previously said that I might not mention that but I cannot resist. We understand that this drafting change is also there to express properly the Government’s commitment to this, which is very welcome.
We are also pleased to support the definition of market rent being brought in line with the guidance by the Royal Institution of Chartered Surveyors, and are content with the changes to the market rent only option procedure. We also hope keenly that the Minister will make a few comments on timings.
We have some questions in relation to the protections of the brewers’ routes to market. In general, we are happy to ensure that there are some protections. Our Amendment 33AR seeks clarification in the Bill that this route to market will allow some restrictions on the sales of competitors’ products, although not a complete ban. As now, brewing companies will have to look at their individual circumstances and ensure that they comply with all aspects of competition law. We will probe this to see what “some restrictions” means and are keen to seek some assurances on a number of points. Will the Government confirm that their provisions mean that tenants can be sure that they are no worse off than a free-of-tie tenant, because they will have access to free-of-tie pricing for all the alcohol that they sell? Will the Government assure the House that the stocking restrictions mean that brewers could require that their beer or cider is sold in their pubs, but not that products made by other specific brewers are purchased? We would also be grateful if the Government can confirm that tenants could purchase the required products from any supplier, and therefore access free-of-tie prices.
We are also keen to have the Government’s clarification as to how this will work. Tenants are not prevented from selling beer and cider from other brewers. The stocking requirement can restrict these sales but cannot provide exclusivity for the brewer. It would be interesting to understand how this will work. Any restrictions could be tested by the adjudicator as being reasonable or unreasonable but it would be very useful to get some better understanding of how the Government see this operating, since it covers placement, category, offers and marketing. If the stocking requirement was drawn too tightly, it could be deemed to be a tie in and of itself. We hope that the Government will acknowledge this possibility and confirm that it must comply with competition law.
As an example of what has been considered reasonable or unreasonable in the eyes of industry, and what it considers that it might look like, it has been suggested to us that the starting point would be what products are sold in the pub prior to a market rent only option. A stocking requirement which restricted the choice significantly post MRO would likely be unreasonable. We would like to have the Government’s observations on this point.
We accept that there has to be a balance and agree with the aim of the amendment: to ensure that the stocking requirement is meaningful. However, we also believe that there should be protections to ensure flexibility for the licensee to be able to vary their businesses to deal with the varied, and usually local, factors that they may need to address to ensure that theirs is a viable business—albeit those may be national trends about prices in supermarkets, other leisure facilities and substitutional activities. We believe that this leaves a lot of flexibility for the adjudicator and while we accept that the amendment allows for tenants to choose which wine, spirits, soft drinks, food and other services can be provided for all aspects of their pub, and who the providers can be, we are keen to ensure that nothing in the Bill allows for the asymmetries of power and information to be enshrined in legislation which in and of itself is designed to support small businesses and deal with those asymmetries. Together with the pub companies and tenants, we are keen to make sure that the balance of judgments is reasonable.
I look forward to the Minister’s reply and hope that she can address the issues in detail. We are of course happy to have further discussions on this between now and Third Reading. In the circumstances that she is unable to provide sufficient clarity of the tramlines on which this should operate, I am happy to address it again at Third Reading.
However, we are strongly opposed to the Government’s decision to weaken and water down the amendment from the Commons by eliminating the market rent only option on the sale of title or in administration. We are grateful to the Government for their discussions on this but are yet to be satisfied that there is any substance to the arguments that they presented to us. I am sure that threats of being taken to the European Court of Human Rights by the pub companies have exercised the Government, who have sensibly sought legal advice, but we strongly believe that either or both the legal advice and the client’s examination of that advice are wrong or flawed.
We have sought to deal with this question before coming to the Floor of the House; indeed, we asked for the advice that the Government had sought from counsel, which is experienced in competition, European and public law, to be published so that this could be dealt with. Our consultations with learned counsel and experts in these areas, and indeed in property law litigation including the European dimension, led us to vastly different conclusions. I know that the Minister has had a very distinguished career in business, and there is a crucial element when taking the advice of lawyers: beyond briefing them—indeed, in some cases I have heard of occasions when you can tell them what you want to hear—there is also a role for a client to examine the advice that is given and to challenge it. It is of course a choice for Ministers to decide what level of risk there is, but in this case Ministers seem to have chosen a threshold so low that we cannot fathom why, in our view, they have been as timid as they have.
The Government have said to us that they are restricted in publishing the legal advice that they received because it is privileged. The claim to privilege is quite odd, as all legal privilege can be waived. What are they worried about in relation to any such waiver? Not the advice falling into the public domain and hence fortifying any challenge, as it is already equally in the public domain that they believe there would be a basis for any such challenge. It is our view that this matter can be resolved in discussion, not on the Floor of any Chamber, if they would allow a full and open legal debate.
I hope that noble Lords will forgive me if I quickly outline why we do not accept the Government’s legal arguments on these provisions—if they were retained—fettering rights, causing improper pre-emptions, being challenged on the grounds of affecting value or, in the Government’s view, being uniquely placed for certain destruction under the weight of the ECHR. First, let us not forget that the MRO option is at market rent—by definition—so Clause 43(10) imposes on the parties only a method of determining rent that affects supply and demand for those premises. Infringements of property rights occur when you depart from the free workings of supply and demand, not when you insist on them. Therefore, the more numerous the points at which this can be insisted upon—point of sale rather than just point of entry—the better.
Secondly, without a sale triggering the MRO option, the option could be gamed as there is no benefit during the currency of the existing lease term, and this could become an avoidance tactic to ensure that delays in some cases could lead to tenants being the subject of improper pressures.
Thirdly, the point of sale of the reversion—the landlord’s interest—is a natural point to introduce MRO because the purchaser of the reversion, the new landlord, will be deemed to know the new law and hence that its purchase triggers the MRO option. The new landlord will know the effect of their purchase and be under no illusions as to where they stand.
Fourthly, there are many statutes that infringe property rights, some of them doing much more than simply adjusting the terms of the lease, as this proposes. Some actually confiscate property rights, such as the Leasehold Reform Act 1967, which gives tenants of houses the right to “enfranchise”—that is, buy the freehold off the owner against their will—and the Landlord and Tenant Act 1987, which gives owners of flats a right of first refusal to buy the freehold on any sale by the freehold owner. If this proposal raises human rights or other fundamental issues, so would most of the lease-related legislation on the statute book already.
Fifthly, there is enormous scope for safeguards, flexibility and evolution by the MRO option being overseen by the provisions of the Pubs Code, as reviewed every couple of years, and with the adjudicator’s retained rights to resolve disputes about MRO. This machinery has the ability to limit unfairness to landlords in individual cases because of the swifter introduction of the MRO option.
Sixthly, recent legislation has shown the need for, and has included, wider, more catch-all anti-avoidance provisions. The most effective is in the Landlord and Tenant (Covenants) Act 1995, enforcing the release of original tenant liability on assignment of the leasehold term, which, in Section 24, prohibits anything that seeks to avoid or frustrate the Act. The experience is that the wider the anti-avoidance net, the more it will catch. Making MRO triggered by sale strikes down in one go attempts by landlords to sell to get below the threshold applying to large pubcos.
We have been presented with other partial legal arguments, which I think are useful to set out our understanding and complete rebuttal. There is an argument that the pub company is not free to dispose of its property as the MRO trigger binds the new owner. There is no real limitation—it can still sell or choose not to. It is no different from restrictions on the freedom to dispose of freeholds of blocks of flats under the Landlord and Tenant Act 1987 and other such measures. There is also a variety of other restrictions placed by means of legislation in other areas that have a similar effect and have not been struck down or even significantly challenged.
Additionally, there is an argument that the MRO trigger results in preferential treatment for this class of commercial tenant. It does not give preferential treatment; it simply removes discriminatory, anti-competitive treatment. All these clauses and, indeed, much of this Bill are about this. I am rather pleased that this counsel has not pronounced on most of the rest of the Bill, because obviously that would undermine other provisions.
Lord Mendelsohn
Will the Minister confirm that we may return to matters contained in Amendments 33AS, 33AW, 33AX and 33AY at Third Reading?
Baroness Neville-Rolfe
My Lords, I was about to make the point that there are concerns on both sides. If the noble Lord wishes to press these amendments, we should test the opinion of the House.
Lord Stoneham of Droxford
My Lords, I do not want to detain the House too long on these amendments and have a long argument on the respective merits of “may” and “must”, as I understand there are certain legislative interpretations of that. However, as I said earlier, we are concerned that a lot remains to be decided in the secondary legislation. Therefore, we want to be as firm as we can about what the primary legislation lays down. If the Minister can confirm that “may” means “must”, I understand that there will be no problem. All I seek is clarity and to leave the draftsmen to draft what is appropriate in the circumstances in legislative speak, hoping that “may” equals “must” in a layman’s understanding.
However, Amendment 33AR is a more substantial and significant amendment as it seeks to align and clarify the definition of “tie”. Clause 68(5) defines “tie”, saying:
“Condition D … is subject to a contractual obligation that some or all of the alcohol to be sold at the premises”,
et cetera. Amendment 33AR seeks to widen that by inserting,
“product or service tie supplied or provided by”,
as other ties exist in pubs. We want to align this definition with the definition in Clause 43(4)(a)(ii), which states,
“does not contain any product or service tie other than one in respect of insurance in connection with the tied pub”.
We are seeking to clarify the definition of a tied pub. I beg to move.
Lord Mendelsohn
My Lords, I rise briefly in support of the amendments tabled by the noble Lord, Lord Stoneham, who has been an assiduous follower of the Bill. These are important tidying-up amendments that help correct and clarify some key measures in the Bill. In particular, Amendment 33AR is an essential requirement to make sure that there is consistency in the Bill. I hope that either the amendment will be accepted or the Government will agree to bring it back at Third Reading.
Baroness Neville-Rolfe
My Lords, I am afraid that I cannot agree to this amendment. I explained why we could agree to “must” elsewhere in the Bill but we are unable to agree to this amendment for reasons that I have also explained.
Lord Mendelsohn
“Investment agreements
(1) The Secretary of State shall establish regulations and guidance for cases where the extension of the rent assessment for pub tenants beyond usual terms is granted in return for a sum of investment from the pub company.
(2) These regulations and guidance shall include, but are not limited to, the following—
(a) the definition and amount of investment;(b) the maximum deferral period of MRO in return for investment to be five years;(c) the deferral period for MRO to begin after investment sums are fully expended;(d) the buyout of agreement provisions whereby a tenant can opt for MRO;(e) the tenant’s option to allow for alternative and blended finance to maintain MRO;(f) an investment agreement will be a trigger event for MRO;(g) an investment agreement will trigger the Parallel Rent Assessment; and (h) clarification that an agreement of investment means no opt out of the Landlord and Tenants Act 1954.(3) Any investment agreement must recognise the different nature and size of pubs and relevant investment requirements.”
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.
Lord Mendelsohn
I thank the Minister for that reply. It is worth making a few brief points, the first being on the genesis of the amendment. Since our discussions in Committee, we have all been looking for ways in which we can still support the industry and the sector. We have been kicking around the draft of a partnership investment agreement between the pub companies and the tenants to find a framework that will work. What is important about the investment agreement arrangements is that the discussion has been about a partnership. It has become clear throughout the process that there is great difficulty and, in some cases, there will be a large variety of problems which prevent the sector moving forward in the sense of partnership. The amendment is intended to address that and to ensure a reasonable balance of options. Where there is investment, we want to ensure that there are no circumstances where it could be argued that a tenant did something which they did not mean or that they could be fooled, and that they enter into nothing without full appreciation of the situation. We also want to bring out the best in the pub companies as they seek to work with their tenants towards achieving a better outcome.
It would be nice if the £200 million of investment that we have heard about had actually gone into developing estates. We have tried to address this over a long period; we have even been through the annual reports and other things. Most of that investment is for things that go wrong or the general upkeep of buildings. Development of the commercial future of the estate represents a very small proportion of that. It is important that investment is considered on the basis of what it achieves for the ongoing development of the businesses and the sector. In trying to put something in the Bill, we wanted to set some tramlines. Unless there is a clear sense in the Bill—in that regard, I am grateful for some of the Minister’s comments on the tenant Act—our fear is that arguments over secondary legislation will be less helpful, will have the problem of unintended consequences and will poison discussion between the parties. In this debate, we have seen how that affects things. We feel that it would be sensible to consider such a provision. We would be grateful if the Government could consider the matter again and come back at Third Reading with something which gives us a better indication of how the framework of secondary legislation can be put together or at least some of the tramlines. I beg leave to withdraw the amendment.
Lord Snape
My Lords, the figures that I gave were the ones that the pubcos themselves published, but I certainly agree with my noble friend. Again, without detaining your Lordships too long, I could produce in the course of the debate on this amendment 14 or 15 independent licensees who told me—along, I am sure, with other noble Lords on both sides of the Chamber—about the broken promises made by the main pubcos about investment.
I admire the oratory and indeed the optimism of the noble Lord, Lord Hodgson, who not only told us that these institutions—the pubcos, whose creation he inadvertently deplored as a result of the legislation passed by a Conservative Government back in the 1980s —were really decent chaps who are anxious to invest in their property, but forecast the result of the election as a Conservative majority. However, my reaction is: has he put his money where his mouth is? Even better, perhaps he could put the pubcos’ money in that direction because, like me, he does not know the outcome. None of us does. Not even those well known pundits, the pollsters, can tell us the result of the next election. I admire his optimism, if not his sentiments, as far as the pub industry is concerned. I hope that the Minister will do as she has done with the two previous attempts made by the noble Lord, Lord Hodgson, at amending this legalisation and will smother him with honeyed words but kick his wishes into touch.
Lord Mendelsohn
My Lords, I shall speak to Amendment 33AZ. I support the Government’s position on this. Before I explain why we support their position, I say to the noble Lord, Lord Hodgson, that we are very keen for the sector to prosper and develop and that initiatives by the pub companies and individual tenants will create a vibrant environment. I do not recognise the “sky is falling in” scenario that he presents, and I do not believe that the fact that some companies are looking at the potential of REITs is a big indication of things that have happened in relation to this Bill. I was approached to invest in a pubco REIT well before this Bill was even announced by the Government, and the reasons why it did not take off were leverage and risks associated with our operating model. The same issues will exist today when it happens. Ironically, I think we have more certainty now with the provisions of the Bill, but I do not think that this is a brand new scenario where the risks are so huge.
I shall speak to Amendment 33AZ because we are happy to accept Clause 71, which provides the Secretary of State with the power to make regulations enabling exemptions from the Pubs Code and that the specified descriptions of those exempted will be determined by secondary legislation. Our amendment seeks to apply the affirmative procedure to this to ensure that we can debate these matters properly and sensibly and allow the sort of discussion that we have had today.
We were concerned that the Government had described the notion of a genuine franchise as something they would be willing to consider within that context. The discussions have gone by. Our concern is not that there should not be such consideration, but we are not clear that there is a real definition which applies to that and we are yet to be convinced that there is a case for any particular exemption.
Generally, franchises are long-established arrangements. Many erudite books have been written on this subject, some of which bear my surname, but I have absolutely none of the credit for having written any part of them. These are arrangements where one party, the franchiser, grants another party, the franchisee, the right to use its trade mark, trade name or certain business systems or processes to produce or market goods or services according to certain specifications. Franchisees usually pay a one-time franchise fee plus a percentage of sales revenue as a royalty and gain name recognition, tried and-tested products, standard building design and décor, detailed techniques in running and promoting the business, training of employees and ongoing help—a range of things that will help the franchiser to gain the rapid expansion of the business and earnings at minimal capital outlay, and where the franchisee is able to develop businesses that they are comfortable about being able to establish.
Essentially, once you have an integrated business where there is a property element owned by someone else, we are yet to be persuaded that any of the mechanisms is anything other than rent by another name. There are ways in which the contracting arrangements can be very different, but in effect it comes down to the same essential relationship, despite the method of payment, be it royalties, profit share, cost deductions, rent plus or minimum guarantees. We are yet to be convinced that there is an operable definition that can work. I look forward to hearing the Minister’s comments. We are very keen to support the Government’s position that there should not be such an exclusion. We are very happy to return to this if the Government wish, but we support their position as it stands.
Lord Mendelsohn
“Register of people with significant control for property
(1) The Secretary of State shall by regulations made by statutory instrument establish a register of freehold estates and leases owned by or granted to people of significant control as outlined in Schedule 3.
(2) A statutory instrument containing regulations under subsection (1) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
Lord Mendelsohn
My Lords, we have tabled this amendment to add another property dimension to the register of persons with significant control. There are a variety of considerations as to the way we do that, consistent with the notions of transparency we are trying to bring in. We were minded to table the amendment to probe the Government on this issue largely as a result of Transparency International’s very interesting report on properties in London being bought through offshore corporate secrecy. We have tabled this amendment to try to deal with this issue in the context of the persons with significant control register, where they use a holding company to acquire these properties. The amendment would establish a register of persons with significant control for property.
Research that analysed data from the Land Registry and the Metropolitan Police Proceeds of Corruption Unit found that 75% of properties whose owners were under investigation for corruption made use of offshore corporate secrecy to hide their identities. Since 2004, more than £180 million-worth of property in the UK has been brought under criminal investigation as the suspected proceeds of corruption. However, this is believed to be only the tip of the iceberg as the scale of proceeds of corruption invested in UK property is understood to be considerably higher. Indeed, more than 75% of the properties under criminal investigation use offshore corporate secrecy. Some 36,342 London properties, totalling 2.25 square miles, are held by offshore haven companies, invariably through UK corporate entities. Of these, 38% are in the British Virgin Islands, 16% in Jersey, 9.5% in the Isle of Man and 9% in Guernsey. Almost one in 10 properties in the City of Westminster, 7.3% of properties in Kensington and Chelsea and almost 5% in the City of London are owned by companies registered in an offshore secrecy jurisdiction.
According to the latest figures, which cover October 2013 to September 2014, estate agents contributed to only 0.05% of all suspicious activity reports submitted. This figure does not match the risks posed by money launderers to the UK property market, the distortions created or the problems associated with the amount of money involved. It is important to understand that the overall value of these transactions in the report alone, which is only part of what can be easily identified, is, on rough calculations, between £100 billion and £250 billion.
Naturally, this amendment is insufficient by itself to tackle the problem and will not deal entirely with these sorts of issues and the distortions to the market that the corrupt money brings. A debate about how transparency should be established over who owns the companies that own so much property in the UK through making such transparency a Land Registry requirement is for another Bill at another time. However, this provision is useful as a result of the frequent structures that are developed to hide ownership, largely by establishing UK holding entities. This Bill provides an opportune moment to take our first step in addressing this. It will not address the problem but it is a step in the right direction. I beg to move.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord for tabling the amendment and am grateful to him for providing the background to it. I think he suggested that it was a probing amendment but it may be helpful if I explain some of the concerns it may raise in its current form. We must also consider the potential costs and wider implications of such a measure and the actions that we are already taking in this space, so I will endeavour to do that.
If we attempted to register the beneficial owners of all properties, that would impact on the 24 million titles on the Land Register. I am glad that this amendment would add the Land Registry to the long list of government departments involved in helping with this Bill. Last year, the Land Registry processed more than 32 million applications, which underpinned property sales worth hundreds of billions of pounds. Depending on how it is defined, a register of this kind could impact on millions of home owners, the vast majority of whom will be entirely law-abiding, as I sure the noble Lord agrees. It could also potentially deter perfectly lawful inward investment in all our major towns and cities.
If we consider the problem of companies—particularly overseas companies—being used to obscure the identity of the true owners of high-value properties, the scale of the problem is comparatively small. Approximately 0.4% of all titles in England and Wales are registered to overseas companies. Implementing the proposed reform would require us either to create a brand new register or substantially to alter either the existing Land Register, the company register or both. We need to consider carefully the links and interactions between these registers. We would also need to consider new mechanisms for requiring individuals to provide beneficial ownership information in relation to property.
In short, the cost and wider implications of such a measure would be huge for both government and property owners. This seems perverse in a Bill that is designed to help small business. Furthermore, a property register is not required by any international standards or EU directive. It is not a commitment the UK or our G7 or G20 partners have made. On that basis, I urge noble Lords to consider this problem in the context of the regimes we already have in place and the reforms we are committed to make in this important Bill. For example, the Land Registry already records the legal owner of a property, both residential and commercial, whether that is an individual or a company, and regardless of whether that company has been registered in the UK. Where the registered owner is a company, the Land Registry will also record the Companies House registration number for UK companies, or the territory of incorporation for overseas companies. This is information that can be accessed by the public. Where allegations of corruption or fraud are raised, the Land Registry works across a variety of government agencies to assist their investigations.
Let me be clear: the UK does not turn a blind eye to corruption and money laundering. Noble Lords will no doubt be familiar with the case of James Ibori, a former Nigerian politician who is reported to have owned a number of UK properties. In 2012, he was sentenced by a UK court to 13 years’ imprisonment for money laundering.
In this Bill we are taking forward world-leading reforms to ensure transparency of UK company ownership and control. We will talk about the register of people with significant control in more detail shortly. However, that reform means that, subject to the will of Parliament, from 2016 all UK companies will have to register their beneficial owners at Companies House. So where a property is owned by a UK company, information on that company’s beneficial ownership will be immediately accessible, online and for free once submitted. However, the misuse of companies is a global problem, and we need a global solution. That is why the UK is working hard to encourage other jurisdictions to take equally ambitious steps. We are seeing progress. G7 and G20 countries have made firm commitments on company beneficial ownership. EU member states will be required to implement central registers accessible to those with a “legitimate interest” when the fourth money laundering directive is adopted shortly.
These commitments will all help ensure that UK authorities can quickly and easily access beneficial ownership information on non-UK companies. These reforms to company transparency form part of our commitment to protecting the integrity of our financial system and ensuring that the UK maintains a strong reputation as a clean and safe place to invest, and a hostile environment for corrupt funds.
We will of course continue to look at what more can be done to tackle company misuse and illicit financial flows. However, that action must be proportionate and targeted. For all the reasons that I have set out, I do not believe that a register of property beneficial ownership represents a sensible or proportionate step. I hope noble Lords have been reassured by my explanation and some of the information that I have given, and that the amendment will be withdrawn.
Lord Mendelsohn
My Lords, there is certain irony in a Government who used the company wrapper on the purchase of property as a means of enhancing taxation perhaps not having been alive to the considerable opportunities that the amendment may present in the long run to deal with a variety of other things.
Aside from that, I thank the Minister for her reply. Uppermost in our considerations, in this and other amendments that we will come to, is ensuring there is the right level of transparency to ensure the integrity of how this country’s financial system operates. That is a goal we share. Both parties feel that, over time, they have dealt with the issue, only to find that problems come up again. It will constantly be work in progress and there is no step that one can take that will be sufficient to give everyone confidence that these matters will be dealt with. It would be useful for the Government to examine this area further. It is not a question of size or numbers. The reason that this problem is manageable is that a smaller number is involved, as opposed to the large mass of homes, and there will be little impact on the larger, law-abiding mass of people.
I am encouraged by what the noble Baroness has said. It is encouraging that we are looking to amendments that produce further enhancements to make sure that the ambitions that she has set out are fulfilled. I hope that she is sympathetic to them. I beg leave to withdraw the amendment.
Lord Mendelsohn
“Director’s duties: takeovers and mergers
(1) This section applies to directors of companies involved in any or all of the following—
(a) takeover bids;(b) merger transactions; and(c) transactions (not falling within paragraph (a) or (b) that have or may have, directly or indirectly, an effect on the ownership or control of companies of which they are a director.(2) Directors of companies affected by transactions outlined in subsection (1) must set out clearly in a public statement when making recommendations to shareholders how they have discharged their duties as directors, as outlined in section 172 of the Companies Act 2006 (duty to promote the success of the company).”
Lord Mendelsohn
My Lords, I draw attention to my entry in the register of interests, which shows that I have a professional capacity in the corporate finance sector. Amendment 56A concerns directors’ duties in mergers and takeovers. It is a modest measure, and I shall speak to it briefly and swiftly.
On Second Reading in the other place, the Secretary of State raised concerns about whether in mergers and takeovers there are the correct provisions in the code under which companies act. Indeed, public concern about the takeover of Cadburys by Kraft and the AstraZeneca/Pfizer situation led the Secretary of State at that time to say that the Bill would address those matters.
We have an excellent Takeover Panel, which is to be complimented. Since then, the panel has been hard at work introducing measures relating to matters that arose in Kraft/Cadbury, which have led to: a reduction in the time to make offers; long-term considerations to be given greater attention and the determining decision to be made not just on price; greater disclosure of bidders’ plans, fees and the financing of such offers; and the recognition of employees’ interests in takeovers. More recently, AstraZeneca/Pfizer raised other concerns about whether companies can really be trusted to honour the commitments that they made during a takeover bid. The Takeover Panel amended the code to allow companies voluntarily to make a new form of commitment, with a post-offer undertaking with which they would be required to comply, subject to expressly stated qualifications or conditions, which will strengthen the panel’s ability to monitor compliance with such undertakings by enabling the appointment of an independent supervisor, requiring written reports and suchlike.
However, all those issues centre on takeovers and do not deal with mergers, or even non-listed company mergers. Our amendment would enshrine the obligation for the directors of the company affected by all transactions to set out in a public statement when making recommendations how they have discharged their duties as shareholders. All those duties are laid out in the Companies Acts, and we want through the amendment to bring them to the forefront of directors’ thinking.
We are encouraged that after consultation during Committee, many in business and the City see that as a useful complement to the current work, role and position of the Takeover Panel. We are sure that that would fulfil the Secretary of State’s commitment during Second Reading and would also deliver for many practitioners a more dynamic and modern framework and approach. On a number of occasions, there have been transactions where a fulsome explanation was provided for the offeree directors’ recommendation where wider issues and considerations were fully taken into account.
I urge the Government to examine the letters issued by the chairman of Manchester United in May 2005, of Beale plc in January 2015, of Dixons Retail in June 2014 and the offer rejection letter of the AstraZeneca board in May 2014. Our amendment would make that practice, which is fully consistent with the Takeover Panel’s approach, mandatory. I beg to move.
Lord Mendelsohn
I thank the Minister for that reply. I was busily writing notes and wondering how I might be able to salvage a position, while feeling that today we have not really made as much progress as we would have liked. However, I must say that on this amendment I am exceedingly grateful for what she has said. We will take those assurances and look forward to hearing the progress with the letters. With many thanks, I beg leave to withdraw the amendment.