Tied Pubs - Scottish Pubs Code - part 1: consultation analysis

Executive summary

Background

The Tied Pubs (Scotland) Act 2021 requires the Scottish Government to create a Scottish Pubs Code for tied pubs. The Scottish Pubs Code will govern the relationship between tied pub tenants and their pub owning companies. The Scottish Government is currently consulting to develop a Scottish Pubs Code for tied pubs. A written consultation is being issued in two parts, to provide the sector with early certainty on key aspects of the code. The first written consultation covers the Market Rent Only (MRO) lease and guest beer agreement aspects. The purpose of this report is to present the findings from the first written consultation.

The consultation was hosted online on Citizen Space and was live from 8 November 2021 to 17 January 2022.

Consultation response and sample

Thirty-four responses were received in total, including 20 from organisations and 14 from individuals. Respondent types included:

• 7 tied pub tenants with one tenancy
• 4 tied pub tenants with multiple tenancies
• 6 pub-owning businesses
• 1 brewery
• 8 representative organisations
• 1 other organisation
• 2 consumers
• 4 other

Findings

The key theme running throughout the findings is the difference in views between pub-owning businesses and tied pub tenants. The latter broadly welcomed the proposals around MRO leases and guest beer agreements, seeing them as addressing real problems in the sector and rebalancing the relationship between them and their landlords.

Pub-owning businesses were however sceptical overall and had a number of concerns. Regarding MRO leases, they worried about unintended consequences that could negatively impact the industry and potentially offer tied pub tenants advantages that they might not achieve if seeking a free-of-tie lease on the open market.

MRO leases

• Most respondents overall felt that MRO leases should be offered as new or substantially altered leases only when both parties agree. Tied pub tenants were especially supportive, whereas pub-owning businesses were more sceptical. They generally believed the change in the nature of the agreement between a tied lease and MRO lease was significant enough to warrant a new or substantially altered lease. They also worried that a deed of variation could result in the tied pub tenant being presented with opportunities not available on the open market.
• Support was generally strong for the proposed unreasonable terms in an MRO lease. Pub-owning businesses however tended to object to: deposit requirements more onerous than in the existing lease, requirements to pay rent in advance more onerous than in the existing lease, a term triggering dilapidations requirements in the existing lease or imposing dilapidations requirements more onerous than in the existing lease, and tenant repairing liabilities more onerous than in the existing lease except where the MRO lease offered is for a period of 5 years or more, or with the consent of the tied pub tenant.
• Regarding exemptions, tied pub tenants overall opposed the idea that 'an MRO lease need not be offered for 5 years when agreement has been reached for a pub-owning business to invest £35,000 or 1.5 times annual rent, whichever is higher', whereas pub-owning businesses supported it. Tenants worried it could create a loophole allowing landlords to continually roll over the exemption by investing £35,000 every five years. They also considered £35,000 a small investment, and wanted more clarity on what qualified as investment (e.g. they felt maintenance and compliance work should not qualify). Pub-owning businesses however felt that five years was a reasonable time-frame to realise a return on investment. The proposal for a seven year exemption however was unpopular with both tied pub tenants and pub-owning businesses. They felt the proposal was arbitrary and the rationale unclear. Regarding other proposed exemptions, there was strong support regarding short-term tenancies with more mixed views on other proposals.
• There was strong support for including the new rent, how terms of existing lease need to change and the legal steps required in the MRO offer.
• Tied pub tenants mostly agreed with a proposed requirement to offer the MRO lease within four weeks of request whilst pub-owning businesses disagreed. Some businesses were concerned about dealing with a flurry of MRO lease requests when the Code comes into force.
• There was strong support for setting out a time period for negotiation in the Code. Generally, tied pub tenants said the proposed time period (8 weeks, extendable up to 4 weeks by mutual agreement) was too long or about right, whereas pub-owning businesses were more likely to feel it was too short.
• Regarding rent assessments, there was general agreement that the assessor should be a RICS member or fellow, and also with the proposed arrangements for rent assessment for an MRO lease. Some however questioned the consistency of RICS valuations and wanted to ensure RICS assessors were familiar with the industry and local markets e.g. in rural areas.

Guest beer agreements

• Tied pub tenants all agreed with the policy aims, but pub-owning businesses nearly all disagreed. Supporters felt this would improve consumer choice and improve routes to market for smaller brewers, but landlords questioned whether these were issues that needed addressing and felt they already offered good choice to tied pub tenants and good routes to market.
• The Scottish Government proposed that guest beer agreements should be for beers with small production capacity which will support small brewers and improve consumer choice. There was concern that the focus on production levels as the key qualifying characteristic for guest beers would not achieve the policy objectives. Some felt the focus should be on the nature of the brewer (e.g. its size and/or locality) rather than the production level, otherwise big brewers could misuse the system by deliberately capping production levels on certain beers. Three respondents specifically suggested that the definition used in small brewer's relief should be the qualifying characteristic.
• The 60,000 hectolitre production level proposed for brands of beer to be eligible for guest beer, was also seen as arbitrary, possibly too high in comparison to Scottish craft beer production levels, and potentially difficult for publicans to monitor in order to keep track of which beers qualify and which do not. The production level is taken from the UK Government's Small Brewers' Relief (a tax relief) which is currently available to any brewer that produces less than 60,000 hectolitres of beer a year. Whilst not an exact comparison, it gives an indication of what might be a small production value.
• Looking at proposed exemptions, there was again variation between pub-owning businesses, who tended to agree with them, and tied pub tenants who tended to disagree. However, some pub-owning businesses believed that in practice the exemptions would not apply. In their view most tied pub tenants would ask for a guest beer agreement, and leases would therefore soon all include the provision as standard.
• Both pub-owning businesses and tied pub tenants had an interest in ensuring the process of applying for a guest beer agreement was as quick and simple as possible.

Business and Regulatory Impact Assessment (BRIA)

Pub-owning businesses expressed concerns about the partial BRIA. They felt it was too optimistic and envisaged a number of unintended consequences following the introduction of the Code which they felt the BRIA did not cover adequately. Some concerns were around the impact of the Covid-19 pandemic on the industry and a consequent need, in their view, to revisit the financial memoranda and impact assessments the Bill was based on.

A research paper by Europe Economics^[1] submitted to the consultation claimed to identify two main omissions in the BRIA:

• No clear identification of the impacts and the range of unintended effects the different options are likely to trigger.
• The BRIA assumes no reaction from stakeholders in response to the envisaged regulatory change or impacts in the medium to long run.