With the Cambridge Beer Festival kicking off this week, what better time to delve into the commercial property issues facing the Pub industry?

To start off the series, we are reviewing one of CAMRA’s greatest campaigning successes of recent years – the passing of The Pubs Code.

Introduced by The Small Business, Enterprise and Employment Act 2015, The Pubs Code etc. Regulations 2016 (better known as “The Pubs Code”) had a major impact in the sector. The purpose of The Pubs Code was to level the playing field somewhat between tied tenants (who are contractually bound to purchase their beer and other goods from their landlord) and Pub Owning Businesses (POBs). It only applies to the very largest POBs, who own 500 or more tied pubs – a definition which currently covers Greene King, Marston’s, Star Pubs and Bars, Punch Taverns, EI Group and Admiral.

At the heart of The Pubs Code are two aims:

• to ensure fair and lawful dealings between pub-owning businesses and their tied tenants
• that tied tenants should be no worse off than they would be if they were not subject to any product or service tie.

With these aims in mind, the two biggest shake ups brought about by The Pubs Code were in relation to:

1. Rent assessments and MROs
2. The Pubs Code Adjudicator.

Rent Assessments and MROs

The Pubs Code gives tied tenants the right to request a rent assessment if they haven’t had a review for 5 years. Receiving a rent assessment proposal provides tied tenants the right to request a Market Rent Only lease (aka an MRO) – meaning the tenant goes free-of-tie. Tenants can also request an MRO at the renewal of a tenancy, when a tied product goes up steeply in value, or where a “trigger event” occurs (something beyond the tenant’s control which was not reasonably foreseeable, and which has a significant impact on trade).

The significance of the MRO option can’t be overstated. It frees tenants from the beer ties and they then occupy the pub on market rent terms, rather than by way of ‘wet rent’. They are then free to purchase their beer and other supplies from the open market and at open market rates. This is a dramatic change in the sector.

The Pubs Code Adjudicator

In addition to the Rent Assessments and MRO option introduced by the code, it also appointed the Pubs Code Adjudicator to help settle disputes between tied tenants and POBs.

Here’s what the Pubs Code Adjudicator himself has to say about process:

The license for this video is available here.

The Adjudicator’s awards are binding.

The tied tenant’s adverse costs exposure is normally limited to a maximum of £2,000 (unless they acted vexatiously). The POB faces unlimited costs.

However, there is also a £200 fee for referring the dispute, and there can be ongoing cost implications of the arbitration proceedings, as tied tenants would be wise to consider taking professional advice to assist in the process.

If you are involved in a dispute that needs to be referred to the Pubs Code Adjudicator, property dispute resolution solicitor Nigel Maguire can help.

Three years on

Introduced in July 2016, The Pubs Code has had some time to settle in. Obviously it has been unpopular with POBs, who have been busy seeking to reduce its impact through a variety of means.

Speculation at the time of its introduction included that POBs close to the 500 tied pubs mark would cease acquiring new properties, to ensure their estates remained outside of The Pubs Code requirements.

It was also anticipated that instead of agreeing an MRO, POBs would simply take back the pub under the provisions of the Landlord and Tenant Act 1954 (“the ‘54 Act”), and manage it themselves. When protected by the ’54 Act commercial tenants have the right to remain in occupation after the end of the term, and the right to a new lease – but there are exceptions to this, including where the Landlord intends to occupy the premises themselves.

Taking back possession under the “no fault” provisions of the ‘54 Act could be costly as it requires the payment of compensation of between 1 and 2 times the rateable value, but from a commercial perspective it could prove a cost worth taking. For more information on the security of tenure provisions of the Landlord and Tenant Act 1954, and the grounds on which Landlord’s may take back a property from a tenant, feel free to contact us to discuss further.

To date, it’s difficult to ascertain to what extent POBs have used such methods, or how successful they have been. What is true is that there have been less tied tenants opting for the MRO option than anticipated, but the reasons for this are yet to be seen.

The Pubs Code hasn’t been without its criticism from tenants either. Tied tenants are reporting that The Pubs Code has been ineffective in levelling the playing field, and left too many loopholes open to Pub-Operating Businesses to circumvent the regulations.

Picking up this point, CAMRA states:

“It is clear that some pub owning businesses are exploiting gaps in the Pubs Code and not abiding by the spirit of the legislation. CAMRA is calling on the Government to review the Pubs Code urgently to make sure that pub tenants are getting the fair deal that the Code was intended to deliver.”

While CAMRA consider that certain operators are circumventing the rules, it’s clear that The Pubs Code has shaken up the sector and has gone someway to redressing the balance between Pub-Owning Businesses and their tenants. As a customer that can only be a good thing. I’ll drink to that.