Research on the pub sector in Scotland phase 1: scoping study

Study to help Scottish Ministers to decide whether legislation on the operation of pub companies in Scotland needs to be introduced.

2. Literature Review

This section provides an overview of the various reports and impact assessments produced as part of the UK Government and UK Parliament's consideration of the issue.

Firstly, it provides some background on the pub industry at a GB level. It follows with a review of key historical reports and impact assessments. Finally, this section provides an update on the most recent developments by summarising the latest voluntary codes of practice developed outside of the Pub Company legislation.

GB Pub Industry Background

The last few decades have seen radical changes in the GB pub industry, with the trade facing a wide range of social, economic and regulatory pressures. The main challenges arise from increased competition from cafes and restaurants and a linked change in the way in which the population looks to purchase and consume alcohol (i.e. increased home consumption).

CGA Strategy has produced a number of general and privately commissioned reports over this period. These highlight some of the legislative and socio-economic drivers behind the contraction of the pub market [7] . The decline has been significant over the last 30 years, from almost 70,000 pubs in 1982 to about 48,000 in 2013 [8] .

This downward trend is also apparent in Scotland. Between 2005 and 2015, the market in Scotland showed a clear contraction of -23% (compared to -20% in England & Wales). Overall, the number of pubs trading in Scotland in 2015 was 4,550.

The rate of decline over the period 2005 to 2015 varied across pub types. The decline in total tenanted numbers in Scotland was -15%, a strong fall but almost half the rate seen in England & Wales at -27%. Independent Free Trade changes in comparison show a decline in Scotland of -29% compared to a fall in England & Wales of -10%. [9]

This shows that over the last 10 years, pub numbers declined continuously across all pub types both at a GB level, but also in Scotland specifically. The implication of all the above is the pub market is suffering from something more fundamental than simple unfair disadvantage in its commercial behaviour.

Changes in availability of different pub operational types between Scotland and England & Wales result from the different structure of the trade in each market. For example, oversupply of tenanted pub types in England & Wales has led to a greater percentage of closures.

Figures quoted so far stated reported progress over the last decade, i.e. from 2005 to 2015. However, the number of pubs started to decline from 1980. An investigation in 2010 by the Office of Fair Trade ( OFT), responding to a super complaint made by the Campaign for Real Ale ( CAMRA), found that there was still competition in the UK pub market. "At a national, regional and local level, the evidence indicates that there is a large number of competing pub outlets owned by different operators and that there is competition and a choice between different pubs." [10]

The results of their investigation clearly suggested that consumers were continuing to benefit from a large degree of competition and choice between pubs. This led to the subsequent consideration from the OFT that issues in relation to the negotiation processes between pub companies and licensees were not expected to act to the detriment of consumers.

The structure of the Scottish pub sector is significantly different to that operating within England & Wales (see Table 1 below). In Scotland, the majority of pubs are categorised as Independent Free Trade (64% vs 43% in England & Wales). A smaller number operate in the leased/ tenanted trade (17% vs 39% in England &Wales). The number of pubs under the operation of Pub Companies, that would be covered by a MRO legislation as the one in England & Wales, are 500 in Scotland. This represents 11% of all pubs in Scotland.

Table 1: Characteristics and number of Pubs Operating in Scotland and England & Wales

Ownership Managed by Buys beer from Scotland England & Wales
Independent Free Trade Individual Individual Any supplier 3,150 64% 21,700 43%
Managed pubs Pub Co/ Brewer Pub Co/ Brewer manager Pub Co/ Brewer 650 13% 7,500 15%
Tied tenanted/ leased pubs Pub Co & Other Individual Pub Co & other 850 17% 19,500 39%
of those owned by Pub Companies

538 11% 15,000 30%
Free of tie tenanted/leased pubs Pub Co & Other Individual Any supplier 250 5% 1,300 3%
Total Pubs 4,900 50,000

[Source: Scottish Beer and Pub Association ( SBPA) estimates 2015]

Bearing in mind the differences in the structure of the Scottish Pub Sector, the Scottish Government commissioned this study to understand the issues faced by the industry (particularly in the tenanted sector where legislative change already exists in England & Wales). This was to ensure there was a robust evidence base to support any future action.

Review of Key Historical reporting/ impact assessments

Historical UK Government & Industry Responses regarding 'Unfairness of Landlord and Tenant Relationships':

The origins of the current Pub Company business model trace back to the investigation into the supply of beer conducted by the Monopolies & Mergers Commission, commencing in December 1986 and finally enacted in December 1989. Compliance concluded in November 1991, with the disposal of pubs that exceeded the given allowance as stipulated in the Act. In addition, the Landlord and Tenant Acts of 1985 (Section 11) & 1987 did provide for certain conditions under which agreements between pub landlords and lessees/ tenants in England & Wales could be amended, or renewed outside of contracted dates. This became a factor, and an embedded part of the subsequent inquiries and legislation specifically into the pub tie.

The 'Beer Orders' legislation - which was enacted in all of GB - created a restriction on any brewing company owning more than an agreed number of licensed premises. The intention was to help increase competition within brewing, wholesaling and retailing. Because of this legislation, the Pub Company emerged in both England & Wales and Scotland. The long term effect of this was such that by 2000, a follow-up report by the Office of Fair Trading concluded on a rescinding of the Orders. 2003 saw the revocation of the Orders, based on these having no remaining relevance within the current industry environment of that time. [11]

Activity in the UK Parliament

Since then, criticism and concerns regarding the perceived 'unfairness' (primarily costs of rent and prices of those drinks the tenant is contractually tied to purchase) of the relationships between Pub Companies and tenants in England & Wales have seen regular Governmental interventions - in the form of investigations and reports.

Overview of Select Committee Inquiries

The initial Trade and Industry Committee report for England & Wales published in December 2004 [12] found that the sector was competitive, but did raise issues over the imbalance between the powers of the Pub Companies in relation to the individual tenant. These inequalities led to a request for revision of the BBPA voluntary Pub Company code of conduct. At this point, the consensus was that voluntary regulation remained the best way forward.

June 2008 saw the launch by the Business and Enterprise Committee ( BEC) of a short inquiry on the continued validity of the previous 2004 report for England & Wales. This inquiry was completed in May 2009, with delays created "chiefly because of the lack of agreement among our witnesses on every point." Complications arose from the significant rise in pub closures. Other recent legislative measures that may have influenced the closures, such as the smoking ban, became a focus of issue for the pub companies and industry organisations such as the BBPA.

Evidence provided to BEC suggested that the wholesale prices offered to tied lessees by pub companies had increased at a higher rate than that to freeholders. [13] .

Recommendations made by BEC referred the matter to the Competition Commission, with a provisional view of limitations on the tie to ensure fair competition within the pub market. The key suggestion was to request a further urgent investigation into the possible implication of restrictions to the tie. The recommendation focused on local brewers operating small tied estates.

Developments during the course of late 2009/ early 2010 required mediation talks between key players. The BBPA published a new Framework Code of Practice in 2010. The Committee issued a follow up report in March 2010 [14] . The results of this report pushed for a resolution via a recommendation for formal legislative action if the reported issues continued, "should those problems persist beyond June 2011 we will not hesitate to recommend that legislation to provide statutory regulation be introduced".

The UK Government responded to these recommendations by announcing a set of supporting measures in England & Wales to community pubs. These included business assistance, industry standards and local authority action - with a reiteration of the deadline of June 2011 for the wider industry to improve the current situation. At this point, the Business, Innovation and Skills Committee would take a view on whether the measures taken were sufficient "or whether statutory regulation was required".

The resulting inquiry launched in June 2011 by the BIS Committee was completed and published in September 2011 [15] . The main findings of the report were:

  • "… a high level of acrimony within the industry" with " claims and counter-claims from both sides"
  • A poor relationship between the two key players - the BBPA and IPC (the umbrella body representing lessees)
  • The process for pub companies to revise their codes of practice in line with the new BBPA framework code proved to be very slow
  • The treatment of flow monitoring equipment: The Governments stated request (see HC 503 2009-10) to ensure that the National Weights and Measurements Laboratory calibrated all such measuring equipment. The use of flowmeter equipment in pubs was a contention. Certain parties believed the flowmeters were sufficiently accurate to make assessments in disputes, whilst other sections of the industry believed they were not accurate enough. The point of the ruling applied to diffuse this contention.
  • Little effective sanction for Pub Companies who refused to comply with the new codes within the accreditation procedure
  • Most importantly - the revised codes of practice for England & Wales showed little evidence of providing a major, lasting improvement in the Pub Company/ tenant relationship

Based on the above, and the prevailing opinion of the Committee, statutory regulation appeared the way forward.

After a further lengthy period of submissions and debate from all parties, the Secretary of State wrote to the Committee in January 2013. This confirmed that a formal consultation on establishing a statutory code and an independent adjudicator, to enforce the code in England & Wales, would commence in spring of that year. This appeared to fundamentally shift the Government position from the voluntary approach advocated by the Secretary of State to the Parliamentary Committee at the end of 2012 towards statutory enforcement in January 2013.

The outline statutory framework provided the following remit for the proposed Adjudicator:

  • Arbitrate individual disputes
  • Carry out investigations based on complaints received
  • Where the Code breaches occurred, impose sanctions on the relevant company
  • Publish guidance on when and how investigations will proceed
  • Advise Pub Companies and licensees on the Code
  • Report back annually on the Adjudicators work
  • Recommend any changes to the Code considered necessary

The consultation document published in April 2013 invited responses by June of the same year. Analysis of responses to the consultation exercise were published in December 2013 [16] . The responses received broadly stated that there was a requirement for the following:

  • Governmental regulation of the relationship between Pub Companies and tenants
  • Confirmation of a need for a statutory code and independent adjudicator
  • Ensuring a fair treatment for pub tenants through a strengthening of the proposed statutory code
  • Policy to apply to all Pub Companies with over 500 premises
  • Consideration of the opportunity for a Free of Tie option, even if this meant paying a higher rent

On 3 June 2014, the UK Government published its response to the previous year's consultation. This stated clearly an intention to legislate at the earliest opportunity by establishing a Statutory Code and Adjudicator to cover the tenanted sector (for Pub Companies with over 500 pubs) [17] in England & Wales.

In setting out the rationale for intervention, BIS Ministers said, "The evidence we have received shows that, while there is widespread responsible practice in the industry, many tied tenants continue to face unfair treatment and hardship. Self-regulation has not been able to effect the step change desperately needed in the industry to ensure that all tied tenants are treated fairly." [18]

However, the passage of the legislation through Parliament did result in some significant changes to the original provisions suggested by BIS. The majority of the original primary recommendations were retained, but a focus of the changes was the introduction of a Market Rent Only ( MRO) option. It was decided that this would be the preferred option to take into consideration strength of feeling on the issue from Parliament. This resulted in a revised Impact Assessment (published in January 2015) of the proposed policy based on the legislative changes enacted as the Bill went through Parliament.

Primary Legislation introduced in England & Wales on the 26 th March 2015 created a Code and Adjudicator. Further primary legislation was required to address additional issues and Part 4 of The Small Business, Enterprise and Employment Act 2015 provided the enabling powers [19] .

The England & Wales legislation also allowed the option for Pub Company tenants to have a Market Rent Only ( MRO) agreement if unhappy with their current tie arrangement. There are also other add-ons to ensure the MRO concept is workable, through various protections to both parties. The role of these clauses was to ensure that both tenants and Pub Companies understood their legal responsibilities to each other in the context of any move towards an individual MRO option and that neither would be unduly disadvantaged as a result.

Delays to the originally planned secondary legislation (via the Enterprise Act 2016) were due to amendments required to ensure inclusion of all relevant businesses within the code. These delays illustrated the difficulties and lengthy processes experienced in finalising the required legislation in England & Wales.

Recent developments - Voluntary Codes of Practice

Bringing the evaluation up to date, the Independent Family Brewers of Britain ( IFBB) and BBPA published a new set of codes of practice for leased/ tenanted pubs and Pub Companies (with fewer than 500 pubs) in July 2016. One produced for lessees and one for tenants, with individual codes for England & Wales and Scotland.

The main similarities across both these codes are:

  • The same arbitration services - PIRRS (for rents) and PICAS (for other disputes) will still apply, with the British Institute of Innkeeping ( BII) administering the service as previously.
  • It is a requirement of IFBB and BBPA that all members abide by the code. Where relevant businesses are not currently members of either organisation, discussions are underway between both the members and associations involved to resolve this.
  • Pub Companies will no longer need to produce codes for accreditation in future - providing a more efficient approach to self-regulation.

The implications for this new code are still unclear. Industry expectation is that the transition will be a straightforward process for lessees and tenants alike. The consensus is that all parties (from a wider trade perspective) appear to be in broad agreement and willing to work with licensees within the code.

In terms of general provisions, the voluntary codes for England & Wales, and for Scotland, are very similar with most sections being identical. However, there are two key differences, which are necessary to consider when comparing the codes. Firstly, in England & Wales there are separate codes for tenancies and leases. These combine into a single code in Scotland to take into account the relatively small percentage of long leases here.

More importantly in Scotland, the Landlord & Tenant Act does not apply so references to it have not been included in the Scottish code. There is no right to renew agreements outside of contracted dates in Scotland for tenants and lessees. This makes the ability to include an MRO option within an agreement untenable in the current context. The 500 pubs in Scotland under the operational management could only be offered a Free of Tie option at the time of their next tenancy/ lease renewal.


At the beginning of proceedings in 2004, there was little apparent appetite for government to undertake any kind of legislative measures on the pub tie in England & Wales. Despite known issues in the Pub Company/ tenant relationship, the government deemed commitments provided by the wider industry and trade associations to industry self-regulation sufficient at that time.

By 2008, and the initial Business & Enterprise Committee ( BEC) inquiry, the landscape of the pub industry had changed significantly. The scenario created jointly by legislation such as the Smoking Ban and global recession brought the issues faced by many tenants far more sharply into focus. The need for the Pub Companies to look at how they might deal with their own changed financial position also increased the pressures in the already challenged relationship between the two parties.

While considering the potential limitations to the tie, to ensure fair competition, the focus remained on continued self-governance of the issue. A revised BBPA Framework Code of Practice in 2010 assisted with this aim. By this time however, the relationship between the two parties had significantly declined and made the opportunity for internal regulation increasingly difficult to maintain [20] .

By the time of the BIS inquiry of June 2011, given the position taken by the parties involved, the only way to ensure this now intractable situation could be resolved was via legislative intervention.

Through lengthy periods of submission and debate the tide of governmental, wider industry, and public opinion, led to the move towards statutory enforcement from the beginning of 2013 onwards. The fact that full enactment of the primary legislation took three years shows both the complexity of the issue from an industry perspective and the deep rooted mistrust that built up between the parties involved.

Efforts have continued by industry bodies such as the BBPA and Independent Family Brewers of Britain ( IFBB) to offer more practical, workable solutions within the framework of voluntary codes.


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