Are the landlord's hands 'tied' under new pub code?
"Tied" pubs refers to a centuries old common agreement between landlords and tenants for the rental of a particular pub.
As part of this agreement, the landlord lets the premises to the tenant for a favourable rent and in return, the tenant is effectively tied in to only purchasing certain products, for example beer or other alcohol beverages, from the landlord. Frequently the landlord will also have a degree of control over the tenant's operation of the premises. This clearly has its benefits and burdens. On the one hand, tenants are receiving a lower rent than they would otherwise obtain at open market value, and from the landlord's perspective they have a guaranteed income from the tenant who is obliged to purchase their products. The flip side is mainly for the tenant, who is not free to explore and obtain the best price for their products, cannot freely operate its business as it wishes, and often pays a disproportionate amount for products to compensate the landlord for the lower rent offered.
The Pubs Code Regulations 2016 ("the Code"), a new enactment expected to come into force in May 2016, aims to give tenants a way out of this tie. These new provisions stem from the Small Business, Enterprise and Employment Act 2015 which requires the Secretary of State to introduce the Code in order to manage the relationship between large pub-landlord businesses and their tied-in tenants. The Government's rationale behind this is the belief that the tie-in agreements have a part to play in the increasing closure of pubs seen over the last decade. Whether or not the agreements have in fact been responsible for this, it's clear that the Code has the potential to shake up the current structure of the pub landlord and tenant market.
The code operates by giving pub tenants the option to essentially free themselves of being tied, by providing such tenants with a 'market rent only' ("MRO") option that entitles tenants to, instead of being tied-in, pay an independently assessed market rent for their pub alongside having the freedom to obtain products from suppliers of their choosing, obligation-free. The landlord's obligation to offer an MRO will apply at certain trigger points, including at the point of lease, tenancy contract or other agreement renewal, or at rent review, or at five years from the date of the previous rent review. Landlords will also have to offer this MRO if at any point the pub-owning business gives notice of, or imposes (whichever falls earliest) a significant increase in the price at which it supplies products, goods or services to the tenant, or when the business transfers title or goes into administration. It's clear from such scenarios that these regulations have tenant protection in mind.
The case will initially only apply to pub landlords who own more than 500 pubs meaning they will be limited in scope, and it remains to be seen exactly how the market rent option will operate. The bigger picture appears to be that by tenants no longer being tied in, this will allow them to freely obtain the best prices available for products, meaning reduced costs for them which will filter down to lower prices for consumers. However, the decision already appears controversial, as Fuller Smith & Turner chief Simon Emeny has publically questioned "what this will achieve and how it will benefit the customer", as well as voicing his concerns of reduced investment and support, alongside pub closures. Fuller Smith & Turner are currently below the threshold with 382 pubs, but will almost certainly fall within the obligations of the Code if further legislation broadens its scope.
If you are a pub landlord or tenant and would like advice or further information in respect of the above, please contact Charles Clay, Principal in our Property Litigation Department.