Written evidence from The Forum of Private Business (PCA0001)

The Pubs code

Assumption

Although I was not involved in the introduction of the pub code and the thought processes behind its writing, I feel it is safe to assume that as with any Regulation, it was written in response to the poor behaviour of the main pub operating businesses, particularly in their relationship with their tenants.

The main aims of the code in “preventing unfair business practices” and in “making tenants of the pub co.’s no worse off than the free of tie” would seem to support this.

Background

Following the Government introduced Beer orders in the 80’s when breweries were limited to the size of their pub estate, there was the unexpected result, where UK brewers found there was more value in their pub estate and operating that, than in brewing beer. This saw companies like Greenall Whitley closing their brewery and running a retail pub operation instead.

This led to the rise of the pub operating companies, these pub retailers used their buying power and were fed by a large number of people wanting to be tenants, many of them ex-service people and police officers who had a romantic view of operating a pub. We saw the rapid growth of these companies based acquisition and cheap and freely available money. The pub co.’s Business development managers are very good at painting a very rosy picture for prospective tenants, often supported by inaccurate figures, they feed off the desire of many naïve people who have the dream of operating a pub of their own.

The financial situation with these pub operating companies can be clearly demonstrated by Punch taverns, who after the financial crash of 2008 were valued at £500 million but carried debts of 3.5 billion pounds, these debts were largely racked up by CEO Giles Thorley’s plans to expand ambitiously via easily available debt.

After the crash the pub co.’s sold many pubs off to service these debts and also tightened their tenancy arrangements to increase the income stream from their tenanted estate. This has led to the situation where many tenants earn less than the living wage, with CAMRA estimating the average earnings for tenants being £10k a year.

The code

The code has a fundamental flaw in it, it seems to assume that with the code implemented and the PCA in place to support it, that the pub co.’s would change their behaviour and grant the MRO option included in the code to their tenants, this would mean the tenants pay a fair rent and are free to buy products and services from wherever they want.

It is estimated that the average loss of revenue to a pub co from granting an MRO to a tenant, from loss of wet sale revenue would be £80k a year, so commercially they will fight tooth and claw to avoid this large drop in revenue.

This is in complete contrast to the grocery code and the Grocery code adjudicator who is dealing with large supermarkets who want to work with her to effectively implement the grocery code. 

The pub co.’s on the other hand have no interest in observing the code and are more interested in creating a window of time where they can create new business models for their pubs in order to avoid MRO deals.

We at the Forum believe that no true MRO deals have been agreed since the implementation of the code and the introduction of the adjudicator.

Currently if a tenant decides to opt for the MRO option the pub co will put as many obstacles in the way, so that it can to delay and frustrate the process, to use a phrase from the Grocery code adjudicator, the pub co.’s keep their tenants in a state of permanent jeopardy.  This means that when the pub co finally offers the tenant a compromise deal, they are so worn down and confused that they accept it, what they have accepted, to be clear, is not an MRO option as envisaged in the code, but from the tenants point of view it is a fairer deal than their previous agreement. Most tenants do not possess the knowledge or have access to the resources to negotiate with a pub co that does not want to grant a full MRO agreement. As most of these deals are confidential the pub co can go on to claim it is an MRO deal, without this being questioned.

If the pubs code adjudicator gets involve he has no power to adjudicate, he can only arbitrate, this has no precedent or memory so they have to look at and deal with each case individually. If both parties would waive confidentiality then this would not be the case, but the pub co.’s have made it clear that they will not agree to this. If the pub code adjudicator makes an arbitration and the pub co appeals against the decision it then goes to the high court leaving the individual tenant liable for the risk, in terms of time and money, bearing in mind their lack of resources compared to the pub co.’s they will pursue it no further.

Conclusion

The conclusion I would draw from this is that the code does not work and the pub code adjudicator is impotent, therefore something needs to be done.  The code has a review between the minister and adjudicator scheduled for 2019, but I believe the code allows for an earlier review if the adjudicator feels it is required. The code needs strengthening and the Adjudicator needs to be given greater powers to adjudicate, otherwise I feel the tenanted trade, as we know it will disappear altogether.

We would ask that the committee ask the following 3 questions as we feel they cut to the core of the failure of the code and the adjudicator role

1. How many eligible MRO tenants have achieved an MRO award that fits the principle “that the tied tenant shall be no worse off than the free of tie” and how was that principle measured ?
1. Why is this important?, If the answer is none the code has failed, if the answer is a handful the code has failed, if the adjudicator doesn’t know that would also seem to imply failure as the office of the PCA can’t tell the committee if it’s working or not.
2. If it is accepted that the “better negotiation power” of Tied Tenants, they can ask for a Market rent only option, has resulted in their position being improved, does the PCA consider that the principle of “no worse off” has been achieved and if so, again how has this been measured ?
1. This is important because the adjudicator seems happy that tenants are better off than they were before the code was introduced, because of the compromise solutions being reached between dissatisfied tenants and the POB’s, But to be clear they are not the Market rent only options as envisaged by the code, “that POB tenants would be no worse off than the free of tie” and they are being achieved by the POBs gaming the code using the type of  “bad business practice” the code and adjudicator was supposed to address.
3. Why has Paul Newby failed to notify Greg Clarke as to the undeniable gaming of the legislation by the POBs so it can be strengthened under Regulation 40 of The Enterprise Act, created for just this scenario ?

22 May 2018