Rob Hastie Talks About The Pubs Code

Rob Hastie Talks About The Pubs Code

11 January 2022

The Pubs Code has, since 2016, changed the relationship between tied pub landlords and their tenants. I hope with these articles to shed some light on what is a complex area of the law…

Summary

Large landlords of tied pubs are subject to regulation under the Pubs Code.

The Code is founded on two principles:

  • Fair and lawful dealing.
  • That a tied tenant should be no worse off than if they were not subject to a tie.

Large landlords have to abide by a Code of Practice.

Their tenants have the option to take a free of tie tenancy at various points.

The Pubs Code Adjudicator decides disputes (or appoints someone to do so) and monitors compliance.


Ringing the changes (slowly) – Government’s proposals to amend the Pubs Code

4th February 2022

The Government has recently published the draft regulations to amend the Pubs Code following their 2019 review. They are titled “The Small Business, Enterprise and Employment Act 2015 and Pubs Code etc. (Amendment) Regulations 2021” and are due to come into force on 1 April 2022.

I would rank the proposed changes to the Code in order of significance, as follows:-

1. Giving the parties more space to negotiate in the MRO process. At present the tenant has as little as 14 days to consider/get advice on the MRO tenancy offer before the last date to refer a dispute to arbitration. That is too short and is leading to cases being referred to arbitration which are frequently settled by negotiation in the following months. The proposals are for a three-month “resolution period” after the MRO tenancy offer. At the end of that period the pub-owning business can make a revised MRO proposal, which will replace their first response. This ‘negotiation space’ is a sensible change for all parties. The tenant has the option of bringing the resolution period to an end early should they wish to. The proposal should lead to many more cases being resolved without recourse to arbitration.

2. Obligation to seek to agree terms and rent. The amendments include an express obligation on both parties to seek to agree terms. This codifies what the PCA has always encouraged in their guidance. There is, however, no clear sanction for a failure to comply, particularly in relation to tenants who do not engage in negotiations.

3. Allowing annual price increases. A tenant is entitled to request MRO if their tied prices increase more than a certain percentage (depending on the type of product) above CPI. The present formula uses a 13-month comparison period, meaning that the pub-owning business can only increase prices every 13 months rather than annually. The price increase date falling back a month every year creates confusion and difficulties in planning. The ability to make price rises annually is preferable.

4. Shorter qualification time to be a pub-owning business. Under the existing rules a pub company could own 500 tied pubs for up to 18 months before they would become a “pub-owning business”. Under the proposals the maximum period will be reduced by three months. However, in the six years the Code has been in force we have not seen a new pub-owning business outside of the six existing groups. With the recent sale of Hawthorn (the largest tied pub owner below 500) to Admiral Taverns (already covered by the Code), it looks unlikely that there will be a new pub-owning business in the near future.

5. To include a rent quote with the MRO lease terms.  Pub-owning businesses already provide a rent quote with their MRO proposal. This would therefore encode what is already normal practice.

6. When a Code protected pub is sold, the pub-owning business must tell the PCA who they have sold it to. Presumably the PCA will write to the new owner to inform them that their tenant will have the protection of parts of the Code (‘extended protection’) until the next rent review is completed or the end of the lease. The new owner will not be required to notify the PCA of the end of the extended protection period.

The Government also confirmed in their consultation response the changes it does not intend to pursue. Again in terms of order of significance:

A. MRO terms will still have to be common. MRO terms have to be common in free of tie pub leases in England and Wales, as well as being reasonable. The “commonality test” is there to ensure that the MRO terms are rooted in the commercial free of tie lease world. Since the introduction of the Code, the commonality test has thrown up some issues. Firstly, commonality is quite an ill-defined concept. Secondly, the terms of free of tie pub leases show a high degree of variance. Thirdly, terms have to be common on their own and in combination with other terms. Despite these issues, the Government recognised that the commonality test does provide more certainty than if the MRO terms only had to be “reasonable”.

B. External price rises could still lead to an MRO event. When deciding what is an “significant increase in price” the present test excludes rises in duty or VAT. However, Pub-owning business are faced with price rises outside their control, such as other tax changes (eg. ‘The Sugar Tax’), increases in delivery charges, import tariffs and the like. The Government considered disregarding those external price rises in the same way as duty and VAT, but rejected the idea. The Government’s justification for keeping external price rises in the calculation is that the rent setting process would be based on assumptions as to future prices, and if there is a substantial increase caused by an external factor, then the tenant should have a chance to consider going free of tie at that stage.

C. No parallel rent assessments (‘PRAs’). The idea behind PRAs is that the tenant can compare a proposed tied rent and a hypothetical free of tie rent side by side. The free of tie rent is hypothetical because PRAs would only apply outside of the MRO process, so there is no free of tie lease on offer. Further, the PRA would need to be accompanied by an explanation of the relevant terms and conditions of the hypothetical free of tie lease. It is therefore questionable whether any value the PRA might provide outweighs the inevitable confusion and administrative burden that PRAs will cause.

D. No voluntary trial tenancies. Such tenancies were not thought to be of use, as there were alternatives (tenancies at will or short agreements) that would serve the purpose.

The process for the Secretary of State’s review of the Pubs Code began in 2019. The second review period ends on 31 March 2022. However, the new regulations from the first review will only take effect on 1 April 2022, after the end of the second review period. Given the 2022 review will not be able to assess the effect of the amended regulations, it would seem unlikely that it would generate further changes.


Limitation periods for Pubs Code arbitration referrals

27th October 2021

A man used to carry a sign up and down Oxford Street which said “The end is nigh”. The key question in relation to the deadline for referrals to the Pubs Code Adjudicator (‘PCA’), and for that matter those fearing an imminent apocalypse, is when exactly is “nigh”? With the Pubs Code (unlike the apocalypse) the answer is “sooner than you think”.

Disputes referable for arbitration under the Pubs Code fall into three categories:

  • Challenges to the terms of the MRO tenancy offered (‘MRO disputes’).
  • Appeals against the MRO rent set by an Independent Assessor (‘IA appeals’).
  • Disputes relating to the non-MRO parts of the Pubs Code such as pre-entry information, rent assessment and Business Development Manager conduct (‘Non-MRO disputes’).

This is a summary of the relevant limitation periods, with key points discussed in greater detail below:

Hastie table

When does time start running?

For calculating the start date, one needs to be aware that the date something is sent is not always the same as the date of service (r.8 of the Pubs Code). Postal/DX service is deemed to take place on the second day after posting, if it is a business day or if not the next business day. Electronic communications or personal service after 4.30pm are deemed served the next business day. Business days exclude Saturdays, Sundays, Good Friday, Christmas Day or any other bank holidays.

With MRO disputes and IA appeals the start date should be easily identifiable as they are based on a specific event.

With Non-MRO disputes it is less certain. In August 2021 the PCA issued advice (which is authoritative but not binding) in relation to Non-MRO Disputes that “The date on which the dispute arises will depend on the circumstances of each case. The PCA would expect the dispute to most usually arise at the time that the alleged breach of the Pubs Code occurred.” There is no clarification as to what circumstances might be “unusual” and cause the dispute to arise after the alleged breach.

At least one tenant has argued that it is the date of their own knowledge of the breach or of the law that is the relevant start date. There are strong arguments in response. Firstly, that interpretation is not supported by the wording of sections 49 of the SBEEA 2015, which talks of the time period starting on the first date on which the dispute could have been referred, implying an objective rather than subjective test. Secondly, it would render the limitation period meaningless if a tenant could avoid it by claiming they did not know of a particular fact or law until a later date. Thirdly, the implication of a date of knowledge exception would be complex. The Latent Damage Act 1986 amended the Limitation Act 1980 to introduce a “date of knowledge” test for negligence claims, which runs to over 20 detailed clauses and sub-clauses.

Another potential argument a tenant may raise is as to whether a Non-MRO Dispute is a one-off or is continuing, and that if it is a continuing breach, then time would not start to run. However, section 49 provides that time starts running on the first date the tenant could have referred the dispute to the PCA, which indicates that where the alleged breach is based on a continuing state of affairs or an omission (say the failure to take certain action) time will start running on the date the state of affairs or omission is alleged to have first occurred.

The PCA’s advice is useful clarification as far as it goes, but the limitation period for Non-MRO disputes is likely to be an area of further contention.

How long is the limitation period?

The limitation periods for referrals of MRO Disputes and IA Appeals are 14 days, although the period for MRO Disputes will almost certainly be relaxed when the Government publishes its proposals for reform of the Code following its 2019 review.

In relation to the time limit for Non-MRO Disputes, there are two stages and two limitation periods. The tenant is required to serve a pre-action notice of dispute on the pub-owning business and they then have to wait 21 days before issuing the referral to arbitration. The last day for serving such a pre-action notice is 4 months after the breach. Assuming the tenant has taken that first step, they then have to issue a referral within 4 months and 21 days of the breach.

It is possible for parties to enter into “standstill agreements” under which the pub-owning business agrees to stop the clock running to give space for settlement talks. Either side can usually terminate such agreements by a short notice or in the tenant’s case by a referral for arbitration.

In what was effectively a universal standstill agreement, the PCA organised a series of declarations in relation to the Covid 19 lockdowns, by which the pub-owning businesses agreed to delay the starting dates of various limitation periods.

What happens when the time expires?

Neither the courts nor the PCA have the power to extend the legislative deadlines. Under s.12 of the Arbitration Act 1996 the court has the power to extend the deadlines under arbitration agreements, but s.97 of the 1996 Act expressly excludes that provision from applying to Statutory Arbitrations.  The PCA confirmed in a decision published as Quarter 1 2019 5 that “There is no power under the Pubs Code statutory framework for an arbitrator to extend any time limits set out in the legislation.“

Mostly the Code does not allow tenants to start processes again, but there are situations where the tenant can restart a rent assessment and then a MRO procedure by a fresh request and the tenant should take professional advice thereon.

If the tenant is represented by an adviser, and they are at fault for missing a deadline which causes loss, then a claim could be brought against the adviser for negligence. This is one of the reasons why the tenant should check from the outset that their adviser has professional negligence insurance.

Conclusion

The Pubs Code contains limitation period traps for the unwary. The time periods are short and the consequence of failing to comply are usually fatal. Waiting until the last moment is risky. As Shakespeare once said (although not one of his best lines) “Better three hours too soon than a minute too late.”


Pubs Code Notices

The timeliness, accuracy and validity of notices keep property lawyers awake at 3am. A simple mistake in a notice, a wrong date or name, could mean an unhappy client, a negligence claim and a long conversation with their insurers.

In 1997 the House of Lords provided some comfort for such legal insomniacs in the case of Mannai Investment Company Limited v Eagle Star Life Assurance Company Limited, which found that errors which the “reasonable recipient” would have no reasonable doubt as to what they actually meant, would not invalidate a notice.

It has since been confirmed that Mannai can apply to statutory notices, provided the notice complies with the statutory requirements or is of substantially the same effect (Pease v Carter [2020]).

In 2021 the Court of Appeal provided further comfort in the case of TFS Stores Ltd v The Designer Retail Outlet Centres (Mansfield) General Partner Ltd and Ors, which found that declarations relating to contracting out of the Landlord and Tenant Act 1954 did not need to be perfect to be valid.

The trend is therefore towards looking at whether notices or declarations substantially comply with the rules, even if they contain errors. However, reliance on such cases is very much the last resort and they will not save all notices.

Who should serve or be served?

The “tied pub tenant” means all of the tenants under a tenancy (s.70(3) of the 2015 Act). Therefore, if there are two or more individuals the notice has to be from all of them.

Problems can arise when only one of two or more joint tenants has served notice. The question arises as to whether it can be assumed that the single tenant is representing all of the tenants. It is likely that assumption will be made, in the absence of evidence to the contrary. However, if, for instance, one of the tenants is known to be abroad or in dispute with the other tenant, then there would need to be an enquiry into whether all tenants are supportive of the action. The PCA has found that an agent can serve a notice on the tied pub tenant’s behalf.

I do not consider it was the intention of the legislator that the Pubs Code would prevent a tied pub tenant from appointing an agent to act on their behalf. Such a situation could have unintended consequences. This could mean for example that a tied pub tenant who is temporarily incapacitated and who could not act within the time limits through an agent would be unable to take up rights afforded to them under the Pubs Code. lt would also have the effect of potentially discouraging tied pub tenants from seeking independent advice and representation”.

Again there may be issues with whether the agent has authority from all of the tenants, but in the absence of contrary evidence, the valid appointment of the agent is likely to be assumed.

Pub companies frequently have complex group structures. However, the “pub-owning business” for the purposes of the Code is the company that is the landlord under the tied pub tenancy (s.69 of the 2015 Act). It is not the parent or a group company of the landlord, although the Code does make provision for such other companies to be involved in certain circumstances.

In my experience, the approach of the pub-owning businesses has not been to challenge notices addressed to the parent company. Under the principle in Mannai, it would only be in exceptional circumstances that a landlord would be confused as to who was the intended recipient of a notice under the Code.

What form should the notice take?

I will take as the example an MRO notice. Under r.23 of the Code, the tied pub tenant’s MRO notice must be in writing (which can include email) and include:

  • The tenant’s name, postal address, email address (if any) and telephone number;
  • The date on which the notice is being sent;
  • The name of the tied pub and its address;
  • The date of the alleged MRO event; and
  • A description of the MRO event (ie rent assessment proposal, renewal notice, significant increase in price or change in local circumstances having a significant impact on trade).

The PCA has produced a form to complete, but it is not compulsory to use that form.

The PCA has found that the absence of an email address or phone number did not invalidate an MRO notice. Problems with the date given for the MRO event and its description have been found to be more significant (see Award Summary 2017_2).
Where should it be sent?
Pub-owning businesses have designated email addresses for the service of Code documents. If using postal service, then the notice should go to the registered office of the recipient.
If the tied pub tenant serves a notice by email, then it can be assumed that any documents in response can be sent to the same email address.

When should it be sent?

There is a trap for the unwary who may assume that time periods are calculated ignoring the date of the circumstance that prompts a notice (‘the prompt’). Lawyers are used to the Civil Procedure Rules, which provide that the date of the prompt is not usually included in the calculation of time. For example, if the prompt date is ignored, then a document which must be served within 21 days of a prompt on 1 June, needs to be served on or before 22 June.

Under the Code some time periods are described as beginning with the day of the prompt. As explained in the court bible, the White Book, “if an order etc. states that an action must be done no later than a period “beginning with” a particular date, that date is included. Zoan v Rouamba [2000] 1 WLR 1509”

As an example, under regulation 23(2) of the Code, an MRO notice must be received by the pub-owning business within the period of 21 days beginning with the day on which the MRO event occurred. If the MRO event is on 1 June the MRO Notice must be served on or before 21 June 2021. An MRO Notice on 22 June would be out of time.

Just to be confusing there are other time periods under the Code that run from the day after the prompt.

There is no jurisdiction for the Court or the Arbitrator to vary the statutory time periods.

How should it be sent?

In my experience by far the most common form of service is by email.

The Code does not prescribe methods of service and it will always be for the party serving the document to prove service.

The Code at regulation 8 does set out deemed dates for receipt by reference to various modes of service, namely:

  • Postal options (1st class and DX) – 2nd day after posting, provided that is a “business day” and if not then the next business day; and
  • More direct options (email, fax, personal service and leaving at premises) – same day, provided it is a business day and before 4.30pm and if not then next business day).

Business days do not include weekends or bank holidays.

In the case of New Inn Public House Walton Ltd v Ei Group Plc the PCA found that a tied pub tenant had not proven that the MRO Notice had been sent by post on the date they asserted:

By sending a MRO notice a tenant seeks to assert a statutory right. It is an important document, and if not using trackable post (or even obtaining proof of posting) and/or email a tenant would knowingly be failing to ensure it had independently verifiable proof of service. This would have been sufficiently clear to the Claimant, who has a history of corresponding with the Respondent by email. Even when a person is sure of their recollection, the possibility of administrative error, mistake or omission cannot be discounted when such proof of service is not obtained, and it would have been readily available to the Claimant.

In a nutshell…

The safest path with notices is to serve earlier than the last possible day, use more than one method of service if possible, make sure to keep a proper record and get professional advice. That way it is your professional adviser that has the sleepless nights.


Statutory Arbitration

5th July 2021

With the Government’s announcement of plans to introduce statutory arbitration for Covid-19 lockdown period rent arrears, I thought it would be an appropriate time to talk about how statutory arbitration works in the context of the Pubs Code etc Regulations 2016 (‘the Code’).

Introduction

Arbitration is a means of resolving disputes which has been around for centuries.

Most arbitration cases arise because the parties agree in a contract to be bound by the decision of a third party independent arbitrator in relation to any dispute arising from that contract. This is usually termed “commercial arbitration”.

Statutory arbitration is different in that the arbitration procedure is imposed on the parties by a statute or other enactment, rather than being something they agree to.

In England and Wales, both types of arbitration are governed by the Arbitration Act 1996 (‘the 1996 Act’).

Commercial arbitration

The following are some of the main features of commercial arbitration compared to litigation through the courts:-

  • Privacy and confidentiality are usually maintained (whereas court proceedings are usually in public);
  • The decision maker can be an expert in the field. This means that one does not have to spend four days in court explaining to a judge the process of pub rent valuation;
  • There is not normally a formal hearing/trial;
  • It can be quicker than court proceedings, although there is no provision in arbitral proceedings for an application to strike out or obtain summary judgment;
  • The cost of the award itself is more expensive than the court process, as the parties have to pay for the arbitrator on a time basis, which is likely to be higher than the equivalent court fees;
  • The parties have more control of the procedure and directions to be adopted, than in court proceedings that run on the court’s rules;
  • Arbitrators have the power to order remedies similar to those that a court would award, such as payment of money, declarations or injunctive relief (s.48 of the 1996 Act). They do not have the power to order specific performance of a land contract unless the contract specifically grants them that power.
  • Awards are binding and enforceable through the courts.
  • Awards can be appealed to the High Court, but only on an error of law or serious irregularity in procedure; and
  • Awards do not create a precedent for other arbitrators.

Statutory arbitration in general

Statutory arbitration occurs in many diverse areas. Examples are under the Water Act 1991, New Roads and Street Works Act 1991, Friendly Societies Act 1992, Agricultural Tenancies Act 1995, and the Financial Services and Markets Act 2000

Statutory arbitration falls under r.94-98 of the 1996 Act.  

Section 94 provides that “(1) The provisions of Part I apply to every arbitration under an enactment (a ‘statutory arbitration’), whether the enactment was passed or made before or after the commencement of this Act, subject to the adaptations and exclusions specified in sections 95 to 98… (2) The provisions of Part I do not apply to a statutory arbitration if or to the extent that their application (a) is inconsistent with the provisions of the enactment concerned, with any rules or procedure authorised or recognised by it, or (b) is excluded by any other enactment.”

The provisions in the 1996 Act that apply to commercial arbitrations, apply to statutory arbitrations:

  • as if the arbitration were pursuant to an arbitration agreement and as if the enactment were that agreement, and
  • as if the persons by and against whom a claim subject to arbitration in pursuance of the enactment may be or has been made were parties to that agreement. (s.95)

The arbitrator appointed under the statute can decide whether the enactment applies to the dispute in question and usually has the same duties and powers as an arbitrator in a commercial arbitration.

Section 97(c) of the 1996 Act provides for the following differences from a commercial arbitration:

  • The death of a party may discharge a statutory arbitration;
  • There is no power for the court to extend the time for bringing the statutory arbitration under s.12 of the 1996 Act; and
  • Any provision that an award is a condition precedent to bringing court proceedings cannot cease to have effect by court order. For instance, the enactment that brings in statutory arbitration for Covid rent is likely to require the parties to enter into arbitration as a precondition of terminating the lease or serving insolvency proceedings. The court would have no discretion to waive such a precondition.

Statutory arbitration under the Code

Save for some very limited exceptions, any dispute that arises in relation to compliance with the Code is referable for statutory arbitration.

The referral is to the Pubs Code Adjudicator (‘PCA’), who has the right to arbitrate the dispute themselves or (more commonly) appoint an alternative arbitrator.

The Code expects that the Chartered Institute of Arbitrators (‘CIArb’) Rules will apply to the statutory arbitration unless the arbitrator orders otherwise.

Statutory arbitration under the Code compares to commercial arbitration as follows:

  • Confidentiality. The awards in relation to Code disputes are published on the PCA’s website in an unredacted, redacted or, if the tied pub tenant does not consent to publication, summary form. There is usually a delay of 6 to 9 months from award to publication;
  • Expertise. Although there are arbitrators who have now dealt with 2 or 3 referrals, and who have a professional background dealing with public houses, it would be hard to describe any appointee as an expert in the Code itself. The backgrounds of the appointees are highly variable. On one occasion we had a nonagenarian engineer appointed to arbitrate a Code dispute. It would save time and cost if the PCA could form a panel of appointees who would develop their expertise and experience;
  • Hearings. Referrals under the Code are usually dealt with on a “paper-only” basis. There has only been one formal in-person hearing in the cases that I have dealt with under the Code;
  • Speed. Cases under the Code are now usually resolved within a year, although the early cases did take longer to resolve as the issues were being arbitrated for the first time. This can be compared to a lease renewal under the Landlord and Tenant Act 1954 through the courts which would take 18 months to 2 years on average;
  • Costs. Arbitrators charge on the basis of hourly rates, which have been between £170 to £650ph. As stated above, there are no experts on the Code, so the hourly rate largely depends on what the arbitrator’s rate is for their normal work. Some consistency in arbitrator’s hourly rates would be welcome. The Code has “one way cost shifting” which means that in most cases the pub-owning business will have to pay the arbitrator’s costs and bear most of their own costs. There is an exception if the tied pub tenant’s referral has been vexatious. In the hundreds of arbitration cases that I have dealt with under the Code I have only had one finding of a vexatious referral;
  • Control. The parties remain in control of the process, although the PCA has set out standards for the arbitrators that she appoints, which say that the process (after any initial stay) should last no longer than 7 months;
  • Powers. The powers of the arbitrator are limited by the Code, because the Code does not provide a legal cause of action for damages (Womack v Ei Group Ltd Quarter 1 2020 1) and the arbitrator cannot dictate to the pub-owning business the terms of their MRO lease offer (Punch Partnerships (PTL) Ltd and Ors v The Highwayman Hotel (Kidlington) Ltd (2020)). Also the arbitrator cannot order specific performance of the grant of an MRO lease, as that power is not given to them by the 1996 Act or the Code;
  • Enforceability. Awards are binding between the parties and can be enforced through the courts;
  • Appeals. It was suggested by some tenant’s representatives, that because article 34(2) of the CIArb Rules bars an appeal to the courts, awards under the Code could not be so appealed. The High Court in the Highwayman case decided that the bar on appeals did not apply because that part of the CIArb rules did not apply and the parties had not elected to be bound by the CIArb rules; and
  • Precedent. Awards, even those of the PCA, are not binding precedent on subsequent arbitrators.

Conclusion

There are significant differences between commercial arbitration and statutory arbitration under the Code, which arise mainly from the specific drafting of the legislation. For statutory arbitration of Covid period rent arrears, much will depend on how the legislation sets out the procedure, arbitrator’s powers and the parties’ rights of appeal.


Ties and Stocking Requirements

11th June 2021

It is a distinguishing feature of the British pub sector that leases contain obligations on tenants relating to their purchases of alcohol. This article looks at how the Small Business Enterprise and Employment Act 2015 (‘2015 Act’) and Pubs Code approaches those contractual obligations.

The tie

The Pubs Code only applies to pubs let on a tied tenancy.  The tie is defined by s.68 of the 2015 Act as a contractual obligation that some or all of the alcohol to be sold at the premises is supplied by the landlord or a group company, or a supplier nominated by them.

Historically, the tie was developed by brewers to ensure that the tenants at the pubs owned by the brewer sold only their beer. If you went into a Bass pub, you would only see Bass products.

By 1989 the “big six” brewers owned most of the pubs in the UK. Their dominance of local and national markets was felt to be restricting customer choice and the ability of smaller brewers to enter the market. The Government introduced the “Beer Orders” which led to a separation of the ownership of a large number of pubs from the brewers. It led to the growth of “pub companies” who owned pubs, but bought beer from a wider range of suppliers, giving more choice for publicans and consumers. It contributed to the boom in small and micro brewers in the last 20 years.

The Pubs Code is the latest Government intervention, and applies to the new “big six” pub groups, half of which are brewers and half non-brewers. It gives the tied tenant the right to be free of the tie and just pay rent (ie “Market Rent Only” or “MRO”).

Vince Cable, in the Government consultation that preceded the 2015 Act stated “I would like to be clear that I am not proposing to abolish the beer tie. When operated as envisaged and fairly, it is a valid business model being used responsibly by companies both large and small. Were it to be removed, the British brewing industry could be significantly disadvantaged”.

Perhaps as a result of the concern expressed in that quote, the Pubs Code somewhat favours the brewers, by allowing them to still impose a ‘stocking requirement’ on those tenants who elect to go free of tie through the MRO procedure…

Stocking requirement

A stocking requirement is a commitment by the tenant to stock a certain range of brands produced by the landlord.

Section 68(7) of the 2015 Act defines a contractual obligation to be a stocking requirement if:

  • It relates only to beer or cider (or both) produced by the landlord or by a person who is a group undertaking in relation to the landlord,
  • It does not require the tied pub tenant to procure the beer or cider from any particular supplier, and
  • It does not prevent the tied pub tenant from selling at the premises beer or cider produced by a person not mentioned in paragraph (a) (whether or not it restricts such sales).

The stocking requirement is also subject to the general obligation in s.43(4)(iii) of the 2015 Act that the terms of the MRO tenancy do not contain unreasonable terms and conditions.

On the introduction of the Pubs Code, and in its first few years, there was no guidance as to the interpretation of what are reasonable stocking requirements. The Pubs Code Adjudicator (‘PCA’) has stated that:

Stocking requirements are by their nature uncommon in free of tie leases more generally … is a product of the 2015 Act and accordingly will not appear in any leases which pre-date the coming into effect of the new legislative framework (on 21 July 2016).

Since 2018 the PCA has issued a series of decisions in arbitration cases brought by tenants, setting out what she considers to be reasonable stocking requirements, including:-

  • A stocking requirement cannot prevent the sale of “beers or ciders” produced by another person;
  • A stocking requirement that prevents the sale of all but one beer or all but one cider, is not compliant because the 2015 Act uses the plurals “beers or ciders”;
  • There must be the opportunity to purchase each type of beer (ie stout, pale ale etc) from a competitor;
  • If draught products are covered by the stocking requirement, then the agreement needs to provide for draught products from other suppliers to be bought. One cannot simply have bottled lager, for instance, as the competitor for draught lager;
  • The stocking requirement should not make provision for the term to influence the re-selling price; and
  • The clause must be reasonable in the tenant’s particular circumstances.

The stocking requirement provisions of the 2015 Act have been the subject of numerous awards, a High Court appeal and the PCA’s first formal investigation (the conclusions of which have also been appealed/judicially reviewed). It is likely to be a continuing area of dispute.


Am I a “Business Development Manager”?

21st April 2021

I have been a solicitor for over 25 years and more recently a barrister, so have never written “Business Development Manager” (or “BDM” for short) on the job description part of any application form. However, under the Pubs Code, that does not necessarily mean I cannot be a BDM.

BDMs are traditionally the person who acts as the main point of contact between tied publicans and the pub company. Part of their job is to help the tenant develop their pub business, to both parties’ benefit.

The test for who is a BDM under the Code includes “a person who is employed as such by a pub-owning business” and:
any other person who represents the pub-owning business in negotiations with tied pub tenants in connection with …

  • Rent proposals;
  • Rent assessments or assessments of money payable in lieu of rent;
  • Repairs to the tied pub premises;
  • Matters relating to the tied pub tenants’ current or future business plans;

Under the Code, pub companies must ensure their BDMs deal with tied pub tenants in a fair and lawful manner, are trained annually in the Code and provide the tenant with meeting notes within 14 days of any discussions dealing with issues (i) to (iv) above.

An example of how the test has been applied was the case of Whitby v Star Pubs & Bars Quarter 4 2019 2:

  • An external surveyor was retained by Star to represent them on an October 2016 rent review.
  • Star argued that the surveyor was not a BDM as they were only instructed to advise Star and to make submissions to the arbitrator as to the rent.
  • After the rent review was finished, the tenant complained to the Pubs Code Adjudicator (‘PCA’) that the surveyor’s conduct in the arbitration was not fair and lawful, in breach of the Code.
  • The PCA appointed an external arbitrator who found:
  1. That the surveyor did not have to be an employee of Star to be a BDM;
  2. There could be more than one BDM at any one time;
  3. The surveyor’s role was similar to that of a lawyer representing their client;
  4. The surveyor was involved in negotiations as they had made three without prejudice offers as to rent and had a meeting directly with the tenant;
  5. The surveyor was a BDM;
  6. He could therefore review the conduct and submissions of the surveyor in the rent review arbitration to determine whether it fell short of “fair and lawful dealing”; and
  7. The surveyor’s conduct was not unfair or unlawful.

Such arbitration awards are not binding on future arbitrators and there is one point I would take issue with the arbitrator in this case: It is wrong to find that a surveyor who acts in negotiations in the past as a BDM, remains a BDM in other contexts.

It is likely that a surveyor who sends offers and meets with the tenant to discuss terms, is acting as a negotiator and may therefore be classed as a BDM in relation to those negotiations.

However, when the same surveyor goes on to make submissions to a third party tribunal, like an arbitrator, they are acting in the role of advocate, and are not representing the pub company in negotiations. In relation to those submissions the surveyor is not a BDM.

The RICS Guidance Note on Surveyor Advocates sets out the professional ethical obligations of surveyors in making submissions to tribunals. It also states that the surveyor may be acting in more than one role at different times (including negotiator, case manager, expert witness, adviser and witness of fact) and “should be aware at all times which role is being adopted and differentiate between them as necessary”. When a surveyor makes submissions they are not acting in the role of negotiator.

The Code obligation on BDMs is to “deal with” tied pub tenants in a fair and lawful manner. That relates to direct interactions with the tenant on the relevant subjects and not to submissions to a tribunal.

It would be bizarre if different Code duties applied to a surveyor advocate who happened to have been involved in earlier negotiations, compared to one who had not.

Am I a BDM?

It is possible, if and when I am negotiating with the tenant in relation to rent, repair issues or (which is unlikely) business plans, that I am a BDM, but the vast majority of the time I am not.

If anyone should think that makes me (or the surveyor) free to be deal unfairly and unlawfully when not negotiating, there are the very serious professional ethics obligations placed upon me by the weighty tome that is the Bar Standards Board Handbook, and the surveyor in the Whitby case would be bound by the RICS professional standards.


What is a pub?

12th January 2021

It may seem obvious, but the Pubs Code only applies to pubs. It does not apply to restaurants, cafes or take-aways etc.

Despite being around for over a thousand years, there is no settled definition of what a pub is. With the growth of “gastro-pubs”, “bistros”, “kitchens” etc it can be very hard to tell the difference between a pub and other types of licensed venues.

The  definition of a pub used by the Code is that “the main activity or one of the main activities carried on at the premises is the retail sale of alcohol to members of the public for consumption on the premises.”

Jo Swinson, the minister promoting the Code, made clear on 30 October 2014 that the definition was intended “to make sure that restaurants are not improperly covered by the Pubs Code and importantly, that tied tenants of so-called gastropubs, which sell food, receive the protections we intend.”

In the next village to me there is a venue called “The Black Horse”. It used to be a village pub, but in the last 20 years I would say it has become a restaurant. I can tell because there are tablecloths, you have to book a table, there is little room for “vertical drinking”, it has a wine menu, and people dress quite smartly to go to it. Also it calls itself a restaurant. However, I know some venues that might be described as “gastro-pubs” that are virtually identical in their operation. The debate about whether a venue is a pub or restaurant is becoming a classic British argument, like whether the evening meal is “dinner” or “tea” or whether a scotch egg is a substantial meal.

The fact is that over the last 30 years some pubs have evolved to be virtually identical to restaurants and there is no clear dividing line between them.

The definition used by the Code attempts to make a distinction, but it is vague. There is no explanation of how substantial the sale of alcohol has to be, in order to qualify as a “main activity”, and previous legislation like the Licensing Acts and Landlord and Tenant Act 1954 are of limited assistance.

There has been no case reported on the definition, but in my view the key question is the proportion of alcohol sold that is not ancillary to dining.

In the pandemic there have been times when pubs in tier 2 were only allowed to open if they operated as a restaurant, with drinks being served at the table with meals. Sales of drinks with meals are therefore the activity of a restaurant, and, for the purposes of assessing whether the test of a pub is established under the Code, sales of alcohol with food should be ignored.

The key distinguishing feature of a “pub” is whether sales of alcohol to non-diners can be described as a “main activity” of the venue. That will require a consideration of its contribution to turnover, the space set aside for non-diners’ drinking and the marketing of the venue.

It will always be a matter of judgment on the facts of the particular venue and will continue to spur debate.

PS – I’m from Essex so its “dinner” (but I call it “tea” to keep in with the locals) and in my book a scotch egg is not a substantial meal.


The Pubs Code

Summary

  • Large landlords of tied pubs are subject to regulation under the Pubs Code.
  • The Code is founded on two principles:
    • Fair and lawful dealing.
    • That a tied tenant should be no worse off than if they were not subject to a tie.
  • Large landlords have to abide by a Code of Practice.
  • Their tenants have the option to take a free of tie tenancy at various points.
  • The Pubs Code Adjudicator decides disputes (or appoints someone to do so) and monitors compliance.

A bit more depth

Who

A company is a ‘pub-owning business’ if it, or companies in its group, owns 500 or more tied pubs in England and Wales. There are presently six regulated businesses – Ei Group Ltd, Star Pubs & Bars, Greene King, Marstons, Punch and Admiral.

A smaller landlord company can also become subject to some of the rules in the Code if it buys a pub from one of the six pub-owning businesses.

A ‘tied pub’ is one that has to purchase some or all of its alcohol from the landlord or the landlord’s nominee.

The Code applies to most forms of tied tenancy and licence.

Why

Campaigners and individual tied tenants convinced the Trade and Industry Select Committee and MPs that they were being treated unfairly by large pub companies and that free of tie tenants were better off.

Whether it was truly “evidence-based legislation” is a matter for debate.

There was never any proper analysis, for instance, of the free of tie tenancy market, and whether they were truly “better off” than tied tenants. It is not a straightforward comparison. For instance, in the Covid pandemic, tied tenants will get more support from their landlords, than free of tie tenants, because a tied landlord has a greater interest in the trading success of the pub.

Where and when

The rules are in the Pubs Code etc Regulations 2016, which was introduced by the Small Business Enterprise and Employment Act 2015.

It came into force on 21 July 2016.

The rules in the Code are supplemented by The Pubs Code (Fees, Costs and Financial Penalties) Regulations 2016 and also by Guidance and Advice issued by the Pubs Code Adjudicator. There are also published arbitration awards that attempt to interpret the rules and apply them to real life scenarios.

The Government will shortly be consulting on whether there should be changes to the Code.

What

The majority of the Code is based on the previous voluntary codes of practice that had developed in the pub industry in previous years. They deal with the information and advice that the tenant should be provided with on pre-entry, rent review, assignment, renewal or at expiry. They contain provisions for the recording of meeting minutes. Although there is an element of the Code “gold plating” sensible provisions by adding time consuming bureaucracy, these provisions of the Code have worked relatively well and seen few disputes referred to arbitration.

The right for a tenant to a free of tie tenancy at certain points of the tenancy (usually at rent review or expiry) have proved the most often disputed provision. The Code was not specific on the question of the form or content of the free of tie tenancy. Pub-owning businesses have looked to standard free of tie leases as a precedent. Tenants have sought to argue that their existing tenancies are more favourable than those free of tie leases and should only be changed to the limited extent required to make them free of tie. The awards received have been a spectrum between those two points.

The Pubs Code Adjudicator, Fiona Dickie, has two roles; arbitrator of individual disputes and regulator. In recent times the Pubs Code Adjudicator has on almost all arbitrations appointed external arbitrators, in order to concentrate on her regulatory role.
The arbitrations are private, but the expectation is that the awards will all eventually be published on the PCA’s website, potentially with redactions to maintain the anonymity of the tenants.
Previous arbitration awards may be persuasive to an arbitrator, but they do not bind them in the way a court would be bound by the decision of a higher court. There have been a few arbitration appeals taken to the High Court which have clarified a small range of issues.

In terms of regulatory action, the PCA is in regular correspondence with the pub-owning businesses, tenants’ groups and others. The PCA has conducted one investigation so far, which led to a £2m fine for one pub-owning business.
For even more depth.

The Pubs Code is a very complex and relatively new piece of legislation. I have been involved in over a hundred referrals, over the last 4 years and a half years. As a resource for myself and the solicitors that instruct me, I have collated the regulations, awards, advices and information into a “Handbook of the Pubs Code”, which at present stands at 658 pages.

If you have a question concerning the Code or any aspect of this article, please do not hesitate to contact me via my clerk, Wayne Stevens. I look forward to working with you soon.

Rob Hastie
Barrister

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