Small Business, Enterprise and Employment Bill

Lord Snape Excerpts

Wednesday 28th January 2015 Grand Committee

[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.

[Lord Cope of Berkeley (Con)]

My Lords, I think we are still intervening on the speech of my noble friend Lord Hodgson on these procedural matters. I urge my noble friend not to withdraw all her amendments for the simple reason that I find it very difficult to unravel, from all the amendments tabled by the Government and by others, exactly where we are supposed to be at the end of the process that the Government wish. It would be helpful to write the Government’s proposals in full into the legislation at this stage, so that we and everyone else who is to be consulted in a short while can see exactly what the Government are proposing properly set out. No doubt then, at Report, some noble Lords will move their amendments, whether they are identical to or different from those on the amendment paper.

[Lord Snape]

I find it difficult to imagine that someone with such a distinguished record as the Deputy Chief Whip in the other place can confess to any confusion about the layout of the Bill and the amendments. Regarding him seeking clarity, it was my experience in the Whips’ Office—although not personally with him—that clarity was sometimes the last thing that Deputy Chief Whips ever sought. Indeed, I find it surprising—as I suspect the Committee will—that the noble Lord should make such an admission at this early stage.

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[Baroness Neville-Rolfe]

My Lords, I do not know whether it is appropriate for me to stand up before noble Lords start to talk about the amendments, but I am essentially, as noble Lords know, a practical person, keen to try to progress the Bill and to do the right thing with today’s business on pubs. I will respond to the point that has just been made on consultation and reassure the noble Lord, Lord Snape, that Jo Swinson, my friend in the other place, held a round table with pub companies and another with tenants, both for the same amount of time. Officials have also had discussions with people on both sides of the debate throughout, while always trying to be balanced and objective. Ministers, advisers and officials have also had several meetings with Greg Mulholland since Report in the Commons, although it would be fair to say that he is keen to keep his clause exactly as it is. So far, that has made progress a little difficult.

[Lord Snape]

I thought I heard the Minister say that she has not met Greg Mulholland. It is surprising that a Minister in charge of a Bill in your Lordships’ House has not got round to meeting the person responsible for a major amendment to that Bill, although she rightly paid him a compliment for the work that he has done. Is there any reason why she did not meet him?

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[Lord Snape]

If, as the noble Lord implies, the tie is not the principal reason behind the unhappiness of many tenants, perhaps I could refer him to the CAMRA report into the tie. Can he explain to the Committee why more than 70% of tied tenants feel that the tie is, to say the least, unhelpful to their business?

[Lord Hodgson of Astley Abbotts]

I do not say that the tie is perfect. In fact, I was about to say that the tie has had its imperfections. But I do not think the statistics that are produced by some of the pubcos show that there is the level of dissatisfaction that the CAMRA figures indicate. We can argue about the polling; no doubt the way you ask the question and who asks the question can move the figures around a bit. But I think the other side—the pubcos—would argue that actually the level of dissatisfaction among tenants is not as great as the CAMRA figures suggest.

[Lord Snape]

Again, can the noble Lord give us some examples? If CAMRA has got it wrong and he has got it right, perhaps he can explain to the Committee how he has come to that conclusion.

[Lord Hodgson of Astley Abbotts]

The noble Lord is very kindly almost making my speech for me. I was about to say—

[Lord Snape]

Doing a better job, I hope.

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[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.

[Lord Snape]

Has the noble Lord reflected on the wording of Amendments 73 and 74? Does he feel that, as presently drafted, they restrain the sale of products other than beer, even if they do not stop it? I agree with the principle, but is he happy with the drafting?

[Lord Hodgson of Astley Abbotts]

Well, the focus in these pubs is on the beer—and possibly cider—because that is what is really essential to the brewers. That is part of their output. If they cannot sell their beer through the tied pubs, that might be cutting off 30% of their market.

[Lord Snape]

No, the point that I am seeking to make is that if the amendment is accepted, it appears to stop the tenant selling anything other than beer.

[Lord Hodgson of Astley Abbotts]

My wording is focused on beer and cider and not on other products at all. I think the clause is clear. It has to be read in conjunction with the fact that the MRO tenant can be clear that he is free to purchase those beers or ciders wherever he wishes, not necessarily through the brewery, so there can be no question of unfairness of pricing.

[Lord Snape]

I am sorry to keep interrupting; I am asking him to define his own amendments here. Brewers do not only sell beers. They sell soft drinks as well, which are often part of the tie. His amendments appear to stop them from doing that. That is the only point I am putting to him. To be quite honest, I think his amendments are daft anyway, but they appear even sillier when one reads them.

[Lord Hodgson of Astley Abbotts]

There are two parts to this. The question is whether the tenant is being forced to take supplies at a price higher than he can buy elsewhere. The key part is to ensure that, if the tenant feels that he or she is not getting the fairest price from the brewery, he or she can buy elsewhere. They can go to a wholesaler or other sources. That is his or her protection. A protection for the brewery is that it can insist that its beer be sold. A protection for the tenant is that the brewery cannot insist that the beer be bought from that brewery. It can be bought wherever the tenant wishes. The brewery has to compete for it and make sure that they offer the keenest price to the tenant.

After that exchange, I hope that my noble friend will be able to clarify and reassure me that the Government intends to provide certainty of supply, and that this provision will form part of the Bill. This is a very important amendment for the future of the industry.

Moving to Amendments 75, 76, 83 and 86, these are essentially drafting points to clarify the timing on when an MRO offer has to be made. I think the new clause addresses them but I hope my noble friend can confirm this.

Amendment 88 amends Clause 42(9)(b), adding at the end,

“provided that the requirement to enter into a new tenancy or lease if such tenants choose the Market Rent Only option shall not be considered discrimination”.

The purpose of that amendment is as follows. It would surely be unfair for the tenant to use the MRO option as a means to evade his obligations under his existing lease. A tenant may choose the MRO option, but having made that choice, he must then sign up for it and it should not be discriminatory for the pub owner to require him so to do. Further, in taking the MRO option, the tenant is electing to agree to a normal commercial lease as defined by the British Property Federation. That is to say, an MRO lease does not contain any special underlying legal features unique to the sector. It would be most helpful if my noble friend would give some assurance on that point.

Amendments 79 and 89 are about “significant” and “unfair” and potentially have a greater impact. They concern the events that can trigger the requirement to make an MRO option available. Clause 42(6)(b) requires the offer of an MRO option,

“when the large pub-owning business gives notice of, or imposes, (whichever is the earlier) a significant increase in the price at which it supplies products, goods or services”.

This wording appears to be replicated in subsection (6) of the proposed new clause. Amendments 79 and 89 propose to replace “significant” with “unfair”.

The question is, what constitutes a “significant increase”? Is it the right word anyway? The reasons given for the introduction of the Pubs Code revolve around the inequality of arms between the pub owner and the tenant. The Pubs Code is intended to ensure fair dealing between the two parties and give the tenant redress when unfair practices have taken place. The word “significant” is a general term, not a particular one. The Oxford English Dictionary defines “significant” as important and notable. There might be many reasons for there to be a significant, important and notable increase in the price of what the Bill calls a “product, good or service” supplied to a tenant.

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[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.

[Lord Snape]

My Lords, to respond to some of the amendments of the noble Lord, Lord Hodgson, I say in passing that although, at my request, he came up with some examples of landlords being happy with the tie, they did not seem to me typical of what takes place in the industry. I do not want to repeat to the Committee anything that I said on Second Reading, when I detailed some of the problems that my daughter and son-in-law have had. Their treatment by Enterprise Inns is a lot different from the cases outlined by the noble Lord when he moved his amendment. Similarly, on Second Reading, with the permission of a couple called Dawn and Michael Shanahan from the Bulls Head in Old Whittington near Chesterfield, I read out a letter showing how they had been treated, which, I am sure that the noble Lord would agree, is a lot different from either of the examples that he gave to the Committee this afternoon.

The fact that more than 70% of pubco tenants have expressed their unhappiness to CAMRA indicates that far more of them have been and are being treated as in the two examples that I gave on Second Reading than in the two examples that the noble Lord has given to the Committee today.

I thought that the noble Lord was seeking to intervene; he looked a bit restive. I thought that he was going to come up with even more examples of happy tenants, but there are not that many of them around. He has probably exhausted the lot of them with those two.

[Lord Hodgson of Astley Abbotts]

The noble Lord has provoked me enough. I was sent a book this thick by some of the pubcos containing responses from tenants. Have I leafed through it? Do I want to bore the noble Lord and the Committee by producing it? Certainly not, but a large number of tenants drawn from all around the country were explaining how satisfied they were with the way that the tie operated. The ALMR has written to Members of the Committee to say that the tie works for its members and that it supports it.

[Lord Snape]

The first question about that association, whatever it was he said, is: who is funding them in the first place? Let us leave that aside. The noble Lord tells the Committee that he has a very thick book of completely satisfied tenants. Again, is there some reason why CAMRA did not consult them? The figures are there. I will send the document across to him. Oh, he does not want it—he indicated dissent. If there is such a crowd of happy tenants up and down the country, CAMRA would surely have spoken to them. I hope that I take both sides of the Committee with me when I say that CAMRA is a trusted and respected organisation on these matters. The fact that it records a dissatisfaction figure of more than 70% indicates that the bulky document referred to by the noble Lord, Lord Hodgson, may not be as laudatory about the pubcos as he indicated.

Let us look at some of the amendments in the noble Lord’s name. It is impossible to read, from the Minister’s expression, whether or not she favours them. Sometimes it can be an advantage sitting on this side, as Ministers are not always as inscrutable as the noble Baroness. Given some of the obvious failings in these amendments, I cannot believe that the Government are about to accept them. The noble Lord has not told us why in Amendment 69 he wants to take out the parallel rent assessment, but I presume he—or those who have briefed him—has a good reason to do so.

Amendments 70 and 71 are concerned with the definition of a large pub-owning business as one with 500 tied pubs. I do not know whether the Minister can understand what the noble Lord is getting at, but I am afraid I do not and I find those amendments pretty confusing. I ask for clarification from the noble Lord on Amendments 73 and 74 because they seem to refer specifically and solely to beer, whereas we know that the tie includes lots of other products, including soft drinks. They are excluded under the terms of the amendment, presumably, and it would have been useful if the noble Lord could have expanded on that point.

On Amendments 75 to 82, it is interesting that the former editor of the Sunday Telegraph is in favour of denying MRO to existing tenants. She did not particularly say why but the newspaper has, sadly, sunk in its popular appeal since she left the editorship. It would have been helpful if she had given some reason why she feels that existing tenants should be denied MRO. If one combines those amendments with Amendment 69ZB, there would be neither code nor MRO for existing tenants. I am not sure whether the noble Baroness is in favour of that too, because she did not tell us. I can understand that the noble Lord, Lord Hodgson, and—I put this as delicately as possible—those he associates with might be in favour of excluding existing tenants from both the code and the MRO, but I am at a loss to understand why the Committee at large would wish to do so.

Amendments 84 to 87 are also in the noble Lord’s name. In Amendment 85 there is no time laid down for the period of negotiation between the tenant and the pubco. If a tenant is in financial trouble and the pubco knows it—and, of course, it would—dragging on the negotiations would mean that the tenant went under anyway, regardless of the final outcome. I am sure that was not the intention behind the amendments. If I have provoked the noble Lord to his feet again, I would be delighted to give way.

[Lord Hodgson of Astley Abbotts]

I understand that the noble Lord wishes to find fault with my proposals. The amendment relates to Clause 42(8)(e), which refers to,

“at the time of the three month assessment”.

The question is, where in the three months? All my amendment does is change this to, “at the end of the three month assessment”. All I wanted to do was to get clarity so that the tenant—presumably an MRO tenant—or the pub owner knows when the events actually happen. It must be in everybody’s interests to have clarity about the sequence of events and how everything fits together, whatever one’s view may be about the legislation as a whole. That is my only point.

[Lord Snape]

I am sorry that the noble Lord feels that I am out to find fault with his amendments. He should not be unduly sensitive. I was under the misapprehension that that is what Parliament is about: maybe I have got it wrong. I find fault with his amendments first because they do not do what he thinks they will—or at least I hope that they do not—and secondly because they are unfair, particularly to existing tenants. That is one of the reasons why I have taken the view that I have. I would like to know the Minister’s view on the amendment, particularly the question of denying the MRO to existing tenants. As far as Amendments 88 and 89 are concerned, if the Minister accepts them, she would be discriminating against existing tenants and I hope that she will reject them.

There is a considerable debate to be had on new Clause 42. I am not proposing to start that now. I hope that the Minister will reply to these amendments and bear in mind that as far as the general point of new Clause 42 is concerned, we would seek to have a substantial debate on its content aside from the amendments that we are currently discussing.

[Viscount Younger of Leckie (Con)]

My Lords, I start by saying how pleased I am to hear from my noble friend the Minister that the spirit and intention behind today’s debate in Committee is to have a general debate and to cover the large range of amendments. I wish, however, to speak to Amendment 82, which I call the exception clause to the MRO—or the clause to permit an exception, I should say, according to my noble friend Lord Hodgson. I support the amendment, which is in the names of my noble friends Lord Hodgson and Lord Ridley and the noble Lord, Lord Howard of Rising.

I declare an interest—perhaps a rather tenuous interest—as the scion of a brewing family. We owned Younger’s of Alloa, based near Stirling in Scotland, and my father—the late George Younger, the fourth Viscount—was a seventh-generation brewer. He started work in the vats before entering Parliament in 1964, still at the tender age of 32. His father—my grandfather—sold the company in 1961 to Tennent Caledonian. He was one of the first brewers—if not the first—to produce cans of beer with pictures of ladies on the outside, presumably with the intention of increasing sales. The Falkland Islands was one of the export markets.

Down to business. I support, as far as it goes, the intention of the Government in accepting the will of the other place to give tied tenants of large pub-owning companies the right to go free in certain circumstances. The devil is in the detail of the definition of “certain circumstances”. This requires further debate, which we are having today. I know that noble Lords are keen to ensure that the law ends up being robust. I believe that there should be a balanced market, in which large pub-owning companies have all the necessary reassurances that their support of and investment in pubs are viable, and tied tenants have a fair deal, however that might be defined, where there is enough flexibility for them to run their businesses and not be too restricted on purchase of supplies or price, for example.

I note that the intention is that the statutory code and adjudicator will address the imbalance of power in relation to the 13,000 tied tenants of the six pub-owning companies with 500 or more tied pubs. There is good intention behind the further protections given by the Government in the amended MRO clauses by the adoption of certain trigger points, which have already been mentioned by my noble friend the Minister: first, at rent review or five years after the latest one, whichever date is sooner; and, secondly, when the tenant renews their lease.

The two further trigger points that have been mentioned are: first, when there is a significant or unexpected increase in the price of the tied products supplied to the tenant; and, secondly, when an economic event occurs that is beyond the tenant’s control and has a significant impact on the tenant’s ability to operate the pub. I am aware that there will be a consultation on those last two triggers, which I welcome. But I am concerned that the Government may not be going far enough to reassure the pub-owning companies, and I ask my noble friend the Minister to consider a permit to have an exception from the MRO for a particular period of time in the case that a pub-owning company makes a significant investment in that pub. This is for the following reasons.

Pub-owning companies have to be shown that their investment will be secure, viable and provide a satisfactory rate of return over a period of time. In the south-east, for example, there have been investments of as much as £300,000 to £400,000 in pubs where the rate of return is calculated over a period of time—often a long period of time, well beyond five years. A trigger point, however well intentioned, creates a chilling effect. It may, at worst, stop an investment and, at best, it will cause the pub-owning company to lower the investment and perceived risk if the rate of return it needs to secure is over a shorter period because there is a trigger date looming. This is a clear unintended consequence which I am sure the Minister will have considered.

Having alluded primarily in my remarks to funds for developing or renovating pubs, which my noble friend Lord Hodgson also referred to, let us also consider another very important point for pubs: cash flow. Tied tenants are unquestionably grateful for the important financial support during fallow periods of sales, which typically occur for on-trade beer sales from January to late February and October to November each year. Without an MRO, the tied tenant is paying less rent, thereby lowering his annual fixed costs as he will be buying less beer from the company. Such fallow periods include periods when roads may be unexpectedly closed by the council or a snowstorm prevents custom. A trigger point that disfavoured the pub company could mean that there was less room for manoeuvre in negotiations.

Pub companies invest £200 million across the sector each year. Banks are not yet stepping up to the plate to support pubs sufficiently. They still perceive the pub sector as a risky bet when it comes to lending. A director of a finance company was recently quoted as saying that a considerable number of loan applications from viable SMEs were being declined by the high street banks because the application “fails to meet the criteria” or is “outside the bank policy guidelines”. We have all heard this in other, unrelated debates.

[Lord Snape]

Can the noble Lord tell us of any pubcos which are financially successful under the present arrangement? At present, business is as bad for the pubcos as it is for the tenants. No one is making a great deal of money.

[Viscount Younger of Leckie]

I thank the noble Lord, Lord Snape, for his comment, but I would like to make the point. The gist of my argument is that at the end of the day, the pub company has a choice about where it invests its money. It needs to be sure in investing its money—which it would obviously want to do to support each and every pub—that it is tied down to an amount for a particular period. The pubcos have their shareholders and their employees to think about in terms of that investment.

[Lord Snape]

I apologise for interrupting again. My point was in response to the noble Lord’s comment about the banks being reluctant to lend to SMEs. I presume he puts pubcos into that category. Is that not because the model has proved to be unsuccessful and, from a financial point of view, would amount to a very bad risk for the bank?

[Viscount Younger of Leckie]

We perhaps need to talk about individual cases, but it is generally perceived that because of the crisis in 2008, banks have changed their lending criteria. Naturally enough, many pubs are small businesses and they are suffering in the same way as other non-pub small businesses. I am making a general point about the banks’ ability to lend.

[Lord Snape]

I am sorry to interrupt the noble Lord for the third time. To take two examples—Enterprise Inns and Punch Taverns—the big pubcos have declared appalling financial results. They are selling off the pubs because they are in such a financial mess. It is not surprising in those circumstances that they find it very difficult to borrow money.

[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.

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[Lord Whitty]

My Lords, I have a number of amendments in this huge group. I should point out that none of them applies to Clause 41, which, strictly speaking, is what the noble Baroness’s amendment relates to, but I have a number that apply to Clause 42: Amendments 69ZC, 71A, 72A, 74ZA, 74ZB, 87A to 87C and 89ZA. However, in view of the way this discussion is going, and my earlier points, I hope the Committee will forgive me for straying somewhat wider. For the avoidance of any doubt, I have no interests to declare, ancestral or otherwise, except as a consumer—and even then, not in January, which is probably why I am in such a bad mood.

The Committee probably should be grateful to the noble Lord, Lord Hodgson, for explaining the structure of the industry and how it works, and those situations where the tied arrangement has worked very well for both sides, but it was an explanation that was really from the point of view of the large pubcos. He also explained the context in which they work—the economic context, the social changes and so forth—and that the whole industry is under some significant pressure. But my concern in this area is for those small businesses—and they are small businesses—of the tenants who are in tied or partially tied accommodation. This Bill is called the Small Business, Enterprise and Employment Bill; it is not called the big brewers’ restrictive contracts and exploitation Bill. Were it so, it might have been closer to what some Members of the Committee appear to be wanting.

The Minister and the Government have to recognise that the Bill we are dealing with, and Clause 42 as brought over from the Commons, is a result of a quite unusual political event and a quite unusual level of lobbying, if you like, on behalf of those small businesses we are talking about. Actually, in substantive terms, it is the first major defeat that this Government have suffered as a coalition. I think, therefore, that we should take seriously what the Commons have sent to us rather than trying to redraft virtually the totality of it, even though the Government, as the Minister has made clear, accept that MRO should be in there. I would also point out to noble Lords that this is not saying that this is the end of tied tenancies; it is simply putting those tied tenancies on a fairer basis. I know that there are those—I suspect my noble friend Lord Snape is one of them—who wish to abolish tied tenancies in total. But this is in a sense much more of a compromise position.

[Lord Snape]

I would be grateful if my noble friend would not portray me as being a raving left-winger on these matters. I am not seeking to abolish the tie completely; like most people, I just want a fairer system than we have at present.

[Lord Whitty]

In that case, my noble friend and I are on exactly the same point in the ideological spectrum—as ever. We are discussing these as amendments to the pre-existing text that we received from the Commons. Government Amendment 89A effectively rewrites that proposition from the Commons.

At Second Reading the Minister said on behalf of the Government that there were things that needed to be done to ensure that the proposition was going to be workable and did not have unintended consequences. I understand that, and that means there are parts of the noble Baroness’s amendment that I would be in favour of. But under the amendment as we now have it—and we have not had it for very long; the fact that we are debating it today puts us in some difficulty given that the consultation hitherto, as I said earlier, has been somewhat attenuated—the Government’s changes in detail do a number of things. They delay the implementation because whereas the proposition adopted by the Commons set the situation on the MRO in primary legislation, therefore bringing it into effect at the earliest point when the Bill came into law, we are, instead, reliant on the drafting of the code and the bringing forward of secondary legislation.

The Government’s amendments also change a number of the trigger points, thereby diluting the effectiveness of the MRO proposition. Amendment 89A changes the threshold because it confuses the issue of tied pubs with all tenanted pubs. The Pubs Code ought to relate to all relationships between the pubcos and their tenants, whether they are tied or not. The MRO relates to the tied pubs but the threshold of defining who this applies to should be the size of the company as a whole, which includes all sorts of tenancies. Restricting it to tied tenancies lays open the possibility of them ending one or two ties to get below the 500 mark. I do not suppose I could prove it in a court of law, but there are indications that some of the pubcos are looking to split their company structure so they would not hit the 500 mark for tied tenancies. We ought not to lay that temptation before them. The Government’s proposition fails to recognise that there is a distinction between how a Pubs Code—which I think we are all in support of—operates and the MRO option, which relates only to tied tenants. I hope, therefore, that my propositions do a number of things. They separate out the issue of the code from that of the MRO. The code is set out clearly in Clause 41 and, at the beginning of Clause 42, the MRO coming into effect is not dependent on the code. The amendments in my name would also change the definition of the threshold, although most of that comes up in a later group, in relation to Clause 66.

I do not like the procedure on this Bill because the Government have misjudged the mood, not just in the Commons and among those tied tenancies and other organisations which have pressed for this. They have succumbed unnecessarily to pressure from the larger breweries. There is no need for some of the changes to the proposition that we have received. There is, therefore, a need to reinforce those rather than go in the opposite direction, which the Government’s amendments are doing. What came to us from the Commons was not perfect, but the Government are proposing to make it worse. For that reason, we all need to take a step back and look at what we agree on in the original proposition, the amendments we are discussing today and the Government’s proposed complete redraft. We need to see whether we could, in discussion with all sides of the industry, come up with something closer to an agreement in time for Report or, possibly, send it back to the Commons and let them sort it out.

We are in an unfortunate position today. This is a complex group of amendments and none of us understands all the issues. Whatever comes out of this is going to be pretty unsatisfactory and not a good basis on which to go to Report at this point in a parliamentary Session. This does need sorting: it needs to be workable and I agree with the noble Baroness that we do not want to see unintended consequences. However, we need to be clearer as to what the consequences are that have led to the propositions in the Government’s redraft.

I hope that the Government take a step back and talk to everyone concerned. The easiest way to do that would be to withdraw all the amendments today. If the Government will not do that, we are probably in for a fairly rocky time between now and Report. If we have not met at least the overwhelming spirit of what the Commons decided, the Bill will be back in the Commons and we are in for ping-pong on the Bill. I cannot believe that the Government’s business managers really want that. There is a way to deal with this quietly and consensually. It may not work, but it might, and it would get the Government out of an awful lot of trouble. As usual, I am trying to be helpful to the Government, and I hope that they heed my words and those of my noble friends.

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[Baroness Neville-Rolfe]

I thank the noble Lord for raising that point. There is a link to the stocking requirement, which I shall come on to talk about, as he suggests. I am not suggesting that investment is the easiest thing to deal with, because we all want investment in this important industry.

Perhaps I can mention a couple of final points before I move on from investment. One is my noble friend Lord Younger’s point about cash flow, which is a good point. If a tied tenant expresses an interest in choosing MRO, the pub company can make the argument about the benefits of the tie—for example, in managing tenant cash flow. That freedom will still exist. At that point, the tenant can choose to remain in a tied agreement. I am grateful to the noble Lord, Lord Mendelsohn, for entering the fray on this issue and suggesting a way forward on the question of securing pub company investment in pubs. I am happy to look at that further.

Further, enabling tenants to forgo the MRO in exchange for a promise of investment may risk intimidation of a pub in difficulty. That will probably not occur often, but it was a concern that we considered in trying to balance these things.

I turn to Amendment 89AA. I believe that it is designed to help to define a significant price increase in relation to a price increase that would trigger an MRO. It is important to get that definition right. It needs to be fair to pub companies and tenants alike. That is why the Government propose to consult on the definition and set the detail out in secondary legislation. I confirm that reference to wholesale price lists will be used in our consultation proposals for that definition.

Amendments 89AB and 89AC amend the MRO trigger for circumstances outside the tenant’s control that affect trade. The noble Lords opposite wish to confirm that all four of the conditions set out in subsection (9) of the proposed new clause in government Amendment 89A must be met for this trigger to be engaged. I can confirm that the current drafting of the clause delivers this effect.

Amendment 89AD relates to the same change of circumstances trigger and proposes to replace,

“an impact on the level of trade”,

with,

“an impact on the level of profitability”,

as the measure for that trigger. We consider that a focus on the tenant’s ability to trade addresses the key issues that affect the fair balance of risk and reward between pub company and tenant. The government amendments ensure that where changes in local economic circumstances affect tenant income, the protection of the MRO trigger will apply. To focus instead on profit would bring in issues such as rates, energy prices, wages and salaries. These issues could further impact on the income of the tenant but there is likely to be minimal impact. The amendments also introduce more complexity in terms of definition and measurement of a significant impact.

I believe that through Amendment 89AE, the noble Lords opposite are seeking to confirm that on the sale of a pub the other triggers for MRO would still apply. Where the new owner of the pub is covered by the code, then this is the case. Where the pub company purchasing the pub is below the threshold, the tenant will not have the MRO option but will have the protection of the voluntary industry code. This is consistent with the Government’s acceptance of the will of the other place to remove family brewers from the scope of our measures.

Amendment 89AF would introduce a power for the Secretary of State to provide an MRO trigger on transfer of title or administration in two specific circumstances. The first is if avoidance of MRO was the “sole or significant” reason for transfer of title or administration. The second is where,

“fewer than 500 pubs … are part of a group or have similar ownership to other companies”,

which own more than 500. I will deal later with the detail of the Government’s reasons for removing the transfer of title and administration trigger, but first I will focus on the specifics of the Opposition’s amendment.

We think it is extremely unlikely that the serious step of administration would be used to avoid MRO. No company considers insolvency lightly. Where a company is in financial difficulty, it will seek professional advice from an insolvency practitioner. It may be advised to restructure the business, which could involve selling off some parts of it. However, entering administration to avoid MRO would not achieve the objectives of administration, which is to rescue the business. For this reason, an insolvency practitioner would not recommend administration. It is also hard to imagine that pub companies would sell off high numbers of pubs purely to take themselves outside the scope of MRO and the code. Most of the pub companies in scope have over 1,000 pubs, so that would be a drastic step. I reassure noble Lords that where a tied pub is sold to another company covered by the code, MRO protections would continue to apply.

The amendment tabled would also provide a power to bring companies with fewer than 500 pubs into the scope of the code where they were part of a group or had similar ownership to other companies that cumulatively own more than 500 pubs. We share the noble Lords’ concern about the potential for gaming—for example, through the break-up of a pub company to avoid the threshold—but I confirm again that the Government have provided this protection in Clause 69(2). I am afraid that we are not clear whether there are companies with fewer than 500 pubs that have similar ownership to companies with more than 500. Nor, if there were, is there evidence that they should be brought into scope with reference to a concept of similar ownership.

Amendment 80, tabled by my noble friend Lord Hodgson, seeks to remove two of the trigger points in the MRO clause so that tenants will not have the right to MRO if their pub is sold or the pub-owning company goes into administration. The Government’s amendments should address my noble friend’s concern. In the case of the transfer of title trigger, the Government consider that other, more proportionate protections exist for tenants when their pub is sold to another owner, as any new owner would be bound by the tenant’s existing contractual rights. If the sale makes little difference to the pub, there is no problem. If it makes a significant difference to the trading position, another MRO trigger is already available—the trigger for circumstances outside the tenant’s control. The inclusion of the transfer of title trigger would have the unintended consequence of making the sale of pubs as going concerns less appealing to potential buyers, leading to fewer pubs and fewer pub tenancies. For these reasons, the Government wish to remove this trigger from the Bill.

The Government’s amended clauses also remove the trigger when a pub-owning company goes into administration. During administration, the company in administration may continue to operate. Tenants will continue to have their existing obligations towards the company in administration, and the company will continue to have its existing obligations to the tenants, acting through the administrator. If any of the other triggers for MRO are met during this period, such as if the company brings in a significant price increase, the tenant will still have the right to MRO. The primary aim of administration is to rescue the company, and this preserves jobs as well as value. Giving all the pub-owning company’s tenants the right to MRO at this critical point would be likely to reduce the value of the pub company’s estate. Pub-owning companies below the threshold are unlikely to buy the company’s pubs if the tenant could opt for the MRO option during the course of the sale. This would reduce the chances of rescuing the pub-owning company and could ultimately push the company into liquidation. Clearly, this would not be in the interests of the tied tenants, employees and suppliers of the former business and the creditors.

I want to clear up something which was raised by the noble Lord, Lord Snape. He expressed concern that the Government are trying to deny existing tenants the right to MRO. This is not the case. We have merely sought to remove two of the triggers to avoid unintended consequences that are detrimental to tenants. I should be happy to discuss this further with the noble Lord, as we are in the same place on objectives.

[Lord Snape]

I thought that it was the wicked noble Lord, Lord Hodgson, who was seeking to deny tenants this particular protection, not the Government.

[Baroness Neville-Rolfe]

Perhaps I can move on to further amendments.

The market rent only amendment introduced in the other place made provision to allow brewers who own tied pubs to require any tied tenants of theirs who elect to exercise MRO to continue to sell the brewery’s products, so long as the tenant may buy them from any source. Amendment 91ZA, which I am bringing forward today, provides in Clause 65 that stocking requirements, which satisfy the conditions in that clause, do not constitute a tie, so they can be included in an MRO offer. Under such a stocking requirement brewers can require their pub tenants to sell their products, limited to beer and cider. This focuses the measures on what pub-owning companies tell us are the products that concern them. Under Amendment 91ZA, the tenant must be able to buy this beer or cider from any source and be able to sell beer and cider produced by other companies.

I thank my noble friend Lord Hodgson for Amendment 69. I agree that the MRO provisions largely remove the need for the parallel rent assessment. However, the MRO option is available only to tenants with an existing tied agreement with their pub-owning company. As prospective tied tenants do not have the right to an MRO offer, we intend to retain the protection of the parallel rent assessment for them. This means that prospective tenants may request a parallel rent assessment, following rent negotiations with their pub company, upon paying a fee of £200. Together with the transparency provisions of the Pubs Code, this will ensure that prospective tenants can make an informed decision on whether a particular tied deal is fair and right for them. We also intend that those tenants who have contracted out of the Landlord and Tenant Act will have the protection of the parallel rent assessment in any negotiations on a new lease at their existing pub. This is because those tenants do not have a right to renew their lease and so will not have the right to the MRO option when they negotiate a further deal. I agree that the parallel rent provisions are no longer required for existing tied tenants who now have the MRO option, and Amendments 69ZA and 69ZB, which I have tabled, would deliver this.

I apologise for the marathon, but when I said that the Government were committed to MRO I really meant it. The government amendments before us are designed to make it workable. Unless we amend the clause, we risk ending up with an Act that is so anomalous and open to legal challenge that no Government, whatever their make-up, would be able to implement it effectively. Surely this is not the outcome that noble Lords are seeking. I urge the Committee to accept these amendments so that we have a legally robust foundation on which to build the continuing discussions ahead of Report. In the spirit of the discussion, I ask the noble Lord, Lord Whitty, who has the first amendment, whether he is now content for us to move the government amendments.

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[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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Debate on whether Clause 42 should stand part of the Bill.

[Lord Snape]

I will be extremely brief, as the Minister has dealt with most of the points that arose from the amendments. There is a nagging feeling that what we are going to approve now is not what the House of Commons actually wanted. The fact is that—surprisingly, at this stage of a Parliament—the Commons defeated the Government on a fairly basic principle with regard to this Bill.

At Second Reading, the Minister accepted on the part of the Government the will of the Commons and said, basically, that the Government would adopt the principles that the Commons had advocated with regard to pub codes and publicans. With respect, that is not what we are getting today; what we thought was there in the Bill has now become a consultative period and what will amount to secondary legislation. I put it to the Minister, and to the Committee at large, that at this stage of this Parliament what we are doing is not what the Commons wanted us to. I can see that questions will be asked at that end of the building about our procedures here.

We have only a short time before the general election on 7 May, after which there will be a new Government, of whatever political hue or hues. That will mean there is a considerable amount of time before consideration takes place and the Minister’s undertakings to the Committee today are brought into force. I put it to the Minister that before Report we should look again at the two Clause 42s, the old one and the new, and see if there are parts of the old one that really ought to be incorporated into the new one, if only to ease the feeling outside this place that whatever happens over the next year or 14 months will water down the agreements that we thought had been reached as a result of the Commons decision. It is unusual, to say the least, that a Government should be defeated on something like this.

I address my closing remarks to the noble Lord, Lord Hodgson, in particular: he should not think that the decision was arrived at because of pressure from CAMRA or any other body. I think that many Conservative Members of the other place looked at what was happening to their own local in their own town or village and decided that that was why they felt Greg Mulholland’s amendment ought to be accepted. I hope I can get some assurances from the Minister that there will be some discussions with other people before Report so that we can see some of the watering down that we perceive in the difference between the two Clause 42s being rectified.

[Lord Hodgson of Astley Abbotts]

Once again, the trade is under pressure and the noble Lord assumes that it is all due to the tie. I wish it were that simple. The fact is that there are real difficulties for our pubs, for the reasons that I have explained. Trying to put more pressure on one particular part of the industry will not help it, I fear.

[Lord Snape]

Again, I accept that, but the noble Lord must accept that when Back-Benchers rebel in the way that Back-Benchers rebelled in the other place on a piece of legislation such as this, those rebels share a great many concerns. I put it no higher than that. I asked the Minister for an undertaking that she will look again at the differences between the two clauses and see whether we can toughen up new Clause 42 in the way that I believe the House of Commons intended in the first place.

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[Lord Snape]

I thank the Minister for that undertaking, and for the way that she has conducted the Committee so far. I did not even object to the noble Lord, Lord Hodgson, being present in the same room; we might teach him something about the pub trade that he does not know, although that is difficult to imagine.

Clause 42 agreed.

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[Lord Hodgson of Astley Abbotts]

Amendments 94 and 95 once again concern Clause 67, the definition clause—in particular, the definition of a tenancy in Clause 67(2). Amendment 94 would remove line 43, the words,

“includes a tenancy at will”,

from the provisions of the code. A tenancy at will is essentially a short-term informal agreement which imposes no timescale on either side. It would therefore seem illogical to impose the relatively heavy-duty encompassing arrangements of the code in such circumstances, which either side can abrogate at any time. For the same reason, Amendment 95 would exclude from the code short-term temporary agreements by the wording:

“The definition of tenancy … excludes temporary agreement where the tenant has occupied the same pub premises for less than twelve months”.

There are many reasons why individuals take on a pub under temporary agreements. For example, earlier I referred to the hard work and long hours required to run a successful pub. Some people find the experience not entirely to their liking and give up. Others, perhaps more wisely, decide to give the experience a try for a few months to see how it fits with their lifestyle and whether they really enjoy it. They do so under a temporary agreement. It surely cannot be logical to apply the administrative burden of the new regulatory regime in such circumstances.

There are those who argue that that will provide a loophole to evade the new regime—the noble Lord, Lord Snape, will no doubt be on his feet in a second. I accept the existence of that suspicion. The answer must be to draft the code or the primary legislation so that temporary agreements cannot last more than 12 months and that one temporary agreement with the same premises and tenant cannot follow another. That will give people the opportunity to dip their toe into the water and see how they like it, without having to go through a lot of administrative hassle. That is a simpler, better and less costly way to encourage tenants to come forward and see whether they like it without having to take on all the administrative requirements of the code. In that spirit, I beg to move.

[Lord Snape]

My Lords, I enter the debate with some trepidation after the way that it was introduced. I, too, will be very brief. I am grateful to the noble Lord, Lord Hodgson, for making my speech for me. He underlined the dangers of the amendment. Tenancies at will are where part of the problem lies. I go back to my daughter and son-in-law’s experience. They think that it must be wonderful to have a tenancy on a country pub with ivy round the door, great customers and all the rest of it. Of course, they will be treated very well by the pubcos. They will be looked after; their delivery will come on the proper day; lots of things will be done on their behalf. After a year, once they sign up, they will find out the reality of the situation. It is at that stage that many problems arise, despite the blandishments of the noble Lord, Lord Hodgson, so I hope that despite his honeyed words, the Minister will resist the temptation. I say to him: nice try but it will not wash, I am afraid.

[Baroness Neville-Rolfe]

My Lords, I thank my noble friend Lord Hodgson for his amendment on tenancies at will. I was very glad also to hear from the noble Lord, Lord Snape, given his great experience in the industry.

I agree with my noble friend that tenancy at will agreements are important in enabling pub companies to cover short-term gaps, to keep pubs trading in between tenants. They also allow the company time to complete due diligence on a new longer-term tenant. Temporary agreements can be useful to a prospective tenant as a trial run, prior to committing to a longer-term agreement. I have known ex-senior civil servants who have taken on pubs and found them quite a challenge.

In the other place, my honourable friend Jo Swinson committed to consider calls to exempt genuinely short-term agreements from the Pubs Code. These calls came from pub companies and some tenant groups. I can announce today that the Government will use the power in Clause 68 to exclude from the code tenancies at will and temporary agreements that do not extend beyond a certain limited period. This is to ensure that agreements that are meant to be temporary do not run on for long periods of time as a way of avoiding the code. This does not require an amendment to the Bill but, as part of the consultation on secondary legislation, we will consult on the length of agreements that should be exempted.

We have heard different views from stakeholders as to the length—including 12 months, as proposed by my noble friend—but we have also heard calls for six and nine months. Therefore, we will consult more widely on the length of any exemption period before bringing forward regulations. I hope my noble friend will feel able to withdraw his amendment.

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[Lord Hodgson of Astley Abbotts]

My Lords, on a rather sour note, I am afraid that that was a very disappointing response. To say that it is a loophole, this arrangement with revenue sharing does not come within the tied tenancy arrangements, as envisaged. The tension in the tie is the rent you pay and the price you pay for the prize.

[Lord Snape]

I have never heard of one but I am sure the noble Lord can tell us.

[Lord Hodgson of Astley Abbotts]

There are probably 400 or 500. The idea is that it is a very easy way for a tenant to start in the pub trade and he shares the risk as he has a revenue-sharing arrangement. Unless the Government say that they will require McDonald’s and others to offer other people’s products, there is no argument for discriminating against pubs that are franchises as long as they have franchises that match what happens in McDonald’s, pizza franchise companies and the coffee companies.

It is just a way of driving the pubs into a corner and finding ways that they cannot live with. The arrangements are used frequently by many other industries, and if pubcos are to prosper they must be able to use similar new developments and not be trapped in what is essentially a framework that has existed for hundreds of years. It was an innovative idea by pubcos to get away from the problems that have bedevilled us all this afternoon. I shall come back on this strongly as it has been too quickly and too easily brushed aside. But, for tonight, I beg leave to withdraw the amendment.