Decision

Punch – Award Summary – June 2022 - 2

Published 31 August 2022

Applies to England and Wales

Publisher’s Note: The Pubs Code Adjudicator encourages openness and transparency in the operation of the Pubs Code etc. Regulations 2016. Publication of awards made in Pubs Code arbitrations, or summaries of those awards, enables the industry to better understand previous decisions and consider how the Pubs Code is being applied in individual cases. Neither the Pubs Code Adjudicator nor an arbitrator is bound to follow published awards in applying the law, but such awards can be used to support the industry’s consideration of the proper interpretation of the Pubs Code. Parties are encouraged to take independent professional advice about their situation.

The outcome of an arbitration is based on its own facts and the evidence produced in the case and is not binding in other cases where the landlord and tenant are not the same. The Pubs Code Adjudicator does expect a regulated pub-owning business to consider its understanding of the law in light of each award that makes a finding on the interpretation of the statutory framework and to adjust its behaviour towards tenants as appropriate. The publication of an arbitration award or an award summary does not mean the Pubs Code Adjudicator endorses the decision and it does not form legal advice about any issue.

This summary is provided to assist in understanding the arbitration decision. It does not form part of the decision or reasons for the decision.

This summary can be considered alongside the PCA’s Regulatory Compliance Handbook, which makes clear the minimum steps the PCA will expect a POB to take in satisfying itself that its proposed MRO terms meet the Pubs Code tests on commonality and reasonableness. These steps include completing a ‘MRO Compliance Record and Declaration’ with full information about how the POB justifies its MRO proposal, which will be its primary evidence of compliance and which the TPT can obtain.

1. Summary of Findings

The arbitrator held that an upward only rent review clause (“UORRC”) contained in a Market Rent Only (“MRO”) offer by the Pub Owning Business (“the POB”) was not unreasonable for the purposes of 31(2)(c) of the Pubs Code etc Regulations 2016 (“the Pubs Code”) and s42(3)(a) of the Small Business Enterprise and Employment Act 2015 (“SBEEA 2015”). The arbitrator also considered that the burden of proof for matters under the Pubs Code regime lies upon the party who makes the referral or alleges or asserts the breach as part of that referral. In this case it was the Tied Pub Tenant (“*the TPT”) who had alleged that the POB had breached the Pubs Code.

2. Background

The pub was a tied pub under an existing tied lease. The tied lease contained an upward and downward rent review clause. The tied lease was nearing the end of its term and, as such, the TPT issued a MRO Notice pursuant to regulation 23 of the Pubs Code. The POB responded with an offer of a MRO tenancy for the premises which, amongst other provisions, included an UORRC. As the parties could not resolve this issue by negotiation, the TPT made a referral for arbitration to the Pubs Code Adjudicator (“the PCA”) seeking a decision that the inclusion of the UORRC in the proposed MRO tenancy rendered the MRO offer non-compliant with s43(4)(a) of SBEEA 2015 and regulation 31(2)(c) of the Pubs Code.

3. Relevant Legislation

This case concerns assessing whether the actions of the POB contravened the Pubs Code and SBEEA 2015.

S43(4) of SBEEA 2015 states that, “… A tenancy or licence is MRO-compliant if—(a) taken together with any other contractual agreement entered into by the tied pub tenant with the pub-owning business in connection with the tenancy or licence it […] (iii) does not contain any unreasonable terms or conditions”.—)”. S43(5) of SBEEA 2015 then states that the Pubs Code may specify descriptions of terms and conditions, “… “(b) which are to be regarded as reasonable or unreasonable for the purposes of sub-section (4)”.

In this regard, regulation 31(2)(c) of the Pubs Code then provides examples of unreasonable terms or conditions, stating that, “(2) The terms and conditions of the proposed MRO tenancy, taken together with any other contractual agreement entered into by the [TPT] with the [POB] in connection with the tenancy, are to be regarded as unreasonable for the purposes of section 43(4) of SBEEA 2015 if they—- … (c) are terms which are not common terms in agreements between landlords and pub tenants who are not subject to product or service ties”.

4. Arbitrator’s findings

(1) Burden of Proof

The POB had raised the issue during the arbitration process that matters being asserted by the TPT were for the TPT to prove, and that the burden of proof did not fall on the POB. The arbitrator held that the TPT had the onus of proving that incorporation of the UORRC in the offer was unreasonable, rather than the POB having the onus of proving that incorporation of the UORRC in the offer was reasonable. The arbitrator noted the authority of (1) Punch Partnerships (PTL) Ltd and (2) Star Pubs & Bars Ltd v Jonalt Ltd [2020] EWHC 1376 (Ch) in which it was held that, “…[i]n principle… on the normal rules of the burden of proof, the onus lay on the tenant to establish the breach alleged. Nothing in the statutory framework set out in the [SBEEA] and the Pubs Code suggests a reversal of that burden of proof”.

(2) Reasonableness of UORRC

The TPT had conceded that a UORRC may be common in a free of tie lease, however it contended that the POB’s offer was non-compliant with the Pubs Code on the basis that regardless of whether a UORRC might be common in free of tie leases, given that the TPT’s pre-existing tied lease contained a rent review clause permitting both an upward and downward review the new clause was not reasonable. The TPT argued that whilst the incorporation of an UORRC might be reasonable in other commercial sectors in relation to free of tie leases, in the pub sector an UORRC term is to be considered unreasonable. They submitted that the concept of reasonableness means that the POB may not offer “detrimental terms”, that a UORRC is such a term, and that the incorporation of a UORRC in a free of tie lease represents a significant adverse financial effect to the TPT that may make such a lease unviable for the TPT. The TPT referred to practice in respect of lease renewal under the Landlord and Tenant Act 1954 (“the 1954 Act”), asserting that a court determining lease terms in accordance with that Act would have regard to the terms of the current lease. They argued that the POB had given no justifiable reason for the introduction of an UORRC other than that it was allegedly in line with commercial practice.

The POB asserted that the test of commonality under regulation 31(2)(c) of the Pubs Code must be applied when determining whether UORRC terms are unreasonable. The POB also asserted that questions of commonality and reasonableness are to be assessed by reference to comparable free of tie leases and not to tied leases. The POB made this submission with reliance on the case of Ei Group plc v Clarke & Minnett [2020] EWHC 1858 (Ch) and other authorities contending that the proper comparison under the Pubs Code regime when it comes to lease renewals is not the existing tied lease, but rather with other free of tie leases. The POB contended that, because UORRCs are common in the free of tie sector, they were not treating the TPT unfairly or unlawfully by the offer incorporating this type of rent review clause. It submitted that, because UORRCs are present in the vast majority of free of tie leases, any new entrant to the free of tie market would or should expect a lease incorporating an UORRC.

The arbitrator noted that the court in Clarke & Minnett drew a distinction between the position under the Pubs Code and SBEEA 2105 on the one hand and the 1954 Act on the other. The arbitrator considered that their assessment of the evidence under SBEEA 2015 and the Pubs Code was not affected by the position in relation to lease renewal under the 1954 Act. and considered that the regulatory framework of SBEEA 2015 and the Pubs Code does not require a comparison between the existing tied lease and the proposed term in the replace MRO lease for the purpose of determining whether it would leave the tenant ‘worse off’.

The arbitrator considered that test of reasonableness includes but is not limited to the question of commonality, finding that the test of reasonableness is open-ended and depends on the facts of the case in question, the nature and quality of the evidence produced by the parties and the arbitrator’s assessment of that evidence. The arbitrator noted that the evidence served by the TPT was about UORRC terms in general, rather than being about their position in this case and why it would be a detrimental term for them. It was held that the TPT had not presented evidence to establish that the inclusion of the UORRC was unreasonable in this case or otherwise failed to comply with s.43(4) of the SBEEA or regulation 31(2)(c) of the Pubs Code.

5. Decision

The Arbitrator held that, on the evidence, and having due regard to the statutory framework and lines of authority cited, the TPT had failed to establish that the inclusion of the UORRC was an unreasonable term in the proposed MRO lease. As such, the arbitrator further held that the MRO proposal was compliant under the SBEEA and the Pubs Code.

6. Costs

In the absence of a finding that a TPT’s reference to arbitration is vexatious, a POB is liable for the arbitrator’s fees and expenses. The POB in this case did not seek to argue that the TPT’s referral was vexatious and the arbitrator ordered that the POB pay their reasonable fees and expenses.