Decision

Award Summary – June 2020 - 1

Published 8 December 2021

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.

1. Summary of Awards

This arbitration referral was about whether the pub owning business (“POB) had provided a Market Rent Only (“MRO”) compliant tenancy to the tied pub tenant (“TPT”). The TPT referred the proposed tenancy to the PCA on the basis that some of the terms and conditions of the MRO proposed tenancy were unreasonable and that the POB’s choice of vehicle for the MRO tenancy, namely a new tenancy, as opposed to a deed of variation was also unreasonable. The arbitrator issued 2 awards in this arbitration. A summary of the awards is set out below. The dispute related to whether the pub-owning business (“POB”) had sent the tied pub tenant (“TPT”) a rent assessment proposal (“RAP”) that complied with the information requirements under Schedule 2 of the Pubs Code (“the Code”).

2. Summary of findings

The arbitrator held that the Market Rent Only (“MRO”) proposal was not compliant because it contained unreasonable terms relating to the following issues:

• Choice of MRO vehicle

• Stocking requirements

• Other specific terms in the proposed MRO tenancy including insurance and gaming machines and payment for the pub owning business’s (“POB”) improvements to utilities.

The arbitrator found that because some of the terms were unreasonable, their individual and combined effect rendered the entire proposed MRO tenancy non-compliant. The arbitrator also found that the use of a new tenancy as the MRO vehicle rather than entering into a Deed of Variation, together with the consequent Stamp Duty Land Tax (“SDLT”) liabilities, was also unreasonable.

3. Factual Background

The TPT sent an MRO notice to the POB, requesting an MRO proposal under regulation 23 of the Pubs Code. The POB sent the tenant a full response under regulation 29 of the Pubs Code, including a proposed MRO tenancy.

The TPT disputed the terms of the proposed tenancy and made a referral to the Pubs Code Adjudicator under regulation 32 of the Pubs Code.

4. The issues in dispute and findings

4.1 Unreasonable MRO terms and conditions

The TPT argued that the proposed MRO tenancy provided by the POB was non-compliant, and in particular that some of the terms it contained were unreasonable under regulation 31(2)(c) of the Pubs Code in that they were not common terms in agreements between landlords and pub tenants who are not subject to product or service ties.

4.2 The choice of MRO vehicle

The TPT also argued that the choice by the POB of using a new tenancy, instead of a Deed of Variation, was of itself non-compliant and that the POB had not provided good reasons for its choice.

In relation to whether the use of a new tenancy rather than a Deed of Variation was of itself non-compliant, the arbitrator noted the case of EI Group PLC and Unique Pub Properties Limited [BL-2018-000019] and explained that an MRO compliant tenancy can be offered by either a new tenancy/lease or a Deed of Variation. The arbitrator explained that it is for the POB to make a reasonable choice as to the vehicle to be used. The key question was whether the new terms (whichever vehicle is used) “individually and collectively are demonstrably reasonable in the relevant circumstances and are consistent with the core principles of the Pubs Code.”

The TPT argued that the insistence on a new tenancy gave rise to SDLT liabilities and that the POB offered no compensation for that extra cost. The POB argued in response that a Deed of Variation would most likely involve an increased rent and could equally lead to SDLT liabilities. The arbitrator stated that if the POB tried to impose new and unattractive terms with the effect of creating a disincentive for the TPT to take on the new tenancy free of tie and thereby maintain the tie by indirect means, that was a mischief which the 2015 Act was designed to avoid. The arbitrator explained that the burden of proof was on the POB to demonstrate that its offer of a new tenancy (as opposed to a Deed of Variation) and its choice of terms were reasonable and compliant choices for delivering an MRO proposal in the circumstances of the case, including articulating good and fair reasons for them.

The arbitrator stated that there was no evidence that the POB had provided any reasons, fair or otherwise, to the TPT for proposing a new tenancy rather than a Deed of Variation. There was no evidence that the POB considered at any stage whether the proposed terms were reasonable in the circumstances of the case and/or were common in the free of tie market, which was contrary to the PCA’s Advice Note of March 2018. Instead, the POB concentrated in the arbitration pleadings on its right to make that vehicle choice, particularly in the context of its case that the new terms did not disadvantage the TPT. The POB had not shown that its offer of a new tenancy was a reasonable choice for delivering an MRO proposal in the circumstances of this case. The arbitrator therefore concluded that if the terms in the proposed lease disadvantaged the TPT, then the arbitrator was entitled to find that the choice of a new tenancy vehicle was itself non-compliant and the tenancy was non-compliant for containing unreasonable terms and conditions.

4.3 SDLT implications

The TPT argued that insisting on a new tenancy would give rise to SDLT liabilities.

In relation to SDLT, the arbitrator was satisfied that the TPT was correct that a new MRO tenancy could in principle give rise to an SDLT liability for the TPT. The arbitrator was not satisfied that a Deed of Variation would have any or any similar SDLT effect. Therefore, the arbitrator found on the balance of probabilities that the SDLT factor was a likely cost to the TPT and would disadvantage them. The arbitrator stated that the POB had put forward no argument to support the absence of reasonable terms which would mitigate the actual or potential effect of SDLT liabilities on the TPT.

The arbitrator concluded that on the facts, no sufficient reasons had been put forward for the choice of a new tenancy as the MRO vehicle and this use disadvantaged the TPT with regard to at least SDLT liabilities. Due to the lack of evidence before him, the arbitrator refused to make any findings in relation to whether the POB’s proposals would lead to any loss of leaseholder value and/or whether any such loss would be mitigated by use of a Deed of Variation. The arbitrator instead ordered the parties to try and agree suitable alternative terms, or otherwise reserved the right to determine suitable terms following further submissions on the extent of the arbitrator’s powers to do so, and the receipt of expert evidence.

4.4 The title of the proposed tenancy

The TPT also argued that the fact that the proposed tenancy was headed “Market Rent Option Lease (…)”, indicated to the reader (including any potential purchaser of the business or assignee of the lease) that the tenancy had statutory status, rendering the tenancy non-compliant as it had not “been through any statutory process”.

The arbitrator held that there was no merit in the TPT’s claim relating to the tenancy being headed “Market Rent Option Lease (…)”. The arbitrator stated that it was appropriate for the POB to adopt this title and that it did not of itself render the MRO offer non-compliant. The mere use of this title was neither a breach of the principles of “fair and lawful dealing” and “no worse off” nor a “term or condition” for the purposes of section 43(4)(iii) of the 2015 Act.

4.5 Stocking requirements

The TPT raised the issue as to whether the stocking requirements met the definition in the 2015 Act and if so, whether they were reasonable.

The arbitrator referred to section 68(7) of the 2015 Act which defines a contractual obligation to be a permitted stocking requirement, if it (1) 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; (2) does not require the TPT to procure the beer or cider from any particular supplier; and (3) does not prevent the TPT from selling at the premises beer or cider produced by a person not mentioned in (1), whether or not it restricts such sales. The arbitrator observed that the above provisions were broad and allowed the POB to protect its route to market and restricted the ability of free of tie tenants to have total freedom in relation to the products they stock.

The proposed provisions in the new tenancy included, for example, the requirement for the TPT to ensure that for the duration of the tenancy term at least 60% of their keg taps dispensed the POB’s keg brands and that the TPT offered for sale at least one of the POB’s cask brands. The proposed tenancy also included a clause giving the POB the ability to waive or vary the stocking requirements to be less onerous on the TPT.

Due to the lack of evidence before him, the arbitrator refused to make any findings in relation to the alleged reduction in leasehold value arising from the stocking requirements proposed in the new lease. The arbitrator also declined to rule on whether the proposed stocking requirements were anti-competitive, stating that this was outside of his jurisdiction under the 2015 Act. The arbitrator, however, observed that, if the stocking requirements fall within the statutory definition, they are in principle permitted by the Pubs Code and the 2015 Act as long as they are reasonable in the circumstances.

In this case, the arbitrator found that the proposed stocking requirements did fall within the definition in section 68(7) of the 2015 Act. In relation to whether certain specific terms of the proposed stocking requirements were reasonable, the arbitrator did not find that the term giving the POB the ability to waive the stocking requirements should be construed as making reasonable any terms which would otherwise be held as unreasonable. The arbitrator also found that there was insufficient evidence before him to determine what constituted a reasonable stocking requirement for this particular pub and specifically whether the 60% provision for keg brands passed the reasonableness test. The arbitrator held that some of the other proposed stocking requirements (about suspension and revocation of suspension of stocking requirements and a moving population of products and group undertakings) were non-compliant.

4.6 Other terms in the proposed MRO tenancy

The TPT asserted that further specific terms in the proposed tenancy were unreasonable and/or uncommon contrary to regulation 31(2)(c) of the Pubs Code and in some instances no similar terms could be found in the existing tenancy. The arbitrator stated that the legislation did not mandate that a compliant MRO proposal should be in the same terms as the tied tenancy (save for the tie) and that the core principles of the Pubs Code applied.

In relation to the insurance provisions, which required the TPT to pay for the costs of any professional valuation of the premises for insurance purposes prepared every 3 years during the term, the arbitrator observed that the proposed insurance terms, in relation to valuation for insurance purposes, were in fact comparable to the provisions under the existing tenancy and therefore found for the POB in relation to this issue. However, in relation to the insurance risk clauses which had been widened, the arbitrator held that those terms were non-compliant.

In relation to the gaming machines provisions, the TPT argued that the relevant definition was widened in the new proposed tenancy so as to include internet connections. The POB argued that this change was simply an update in light of the recent technical innovations. The arbitrator observed that there was no reference to the existing position in the pleaded arbitration cases and held that these terms were non-compliant.

In relation to the terms in the new proposed tenancy concerning fixing notices to the building, the arbitrator held that they were no more onerous than the existing ones and therefore found them to be compliant. Similarly, in relation to the superior lease terms, requiring the TPT to observe and perform the tenant’s obligations contained or referred to in any lease which was superior to the proposed MRO tenancy, the arbitrator found those provisions to be compliant since the existing tenancy contained provisions of similar legal effect.

In relation to the decoration term, the arbitrator was persuaded by the POB’s arguments that such terms are common in free of tie commercial tenancies. The arbitrator therefore found the decoration term to be compliant.

The new proposed tenancy also included provisions requiring the TPT to pay for periodic inspections, repairs and/or improvements which the POB may from time to time carry out to the gas and other utility installations. The arbitrator was not persuaded on the evidence that such terms were reasonable and/or common. The potential cost to the TPT was clear, making it worse off and the arbitrator therefore held that the terms were also non-compliant.

Following the arbitrator’s First Award that the POB’s proposed MRO tenancy was not compliant the POB sent a Deed of Variation to the TPT. This was rejected by the TPT because it contained allegedly non-compliant terms.

Following the First Award two relevant cases were published: (1) Punch Partnerships Limited & another v The Highwayman Hotel (Kidlington Limited) [2020] EWHC 714 (Ch) (“The Highwayman”) and (2) Punch Partnerships Limited & another v Jonalt Ltd [2020] EWHC 1376 (Ch) (“Jonalt”).

The POB argued that regulation 33(2) provides an arbitrator with the power to only order a revised response but not the power to decide the terms of an MRO-compliant proposal. The POB relied on the cases of the Highwayman and Jonalt to support this interpretation. The TPT argued that this interpretation may not achieve what the Pubs Code is intended to achieve, and the POB should not be able to decide the terms.

The Arbitrator held that the POB must provide a revised response within the meaning of regulation 33(2) of the Pubs Code in the form of a Deed of Variation.

The arbitrator agreed that under regulation 33(2) an arbitrator has no power to decide the terms of an MRO-compliant proposal but can only order the POB to provide a revised response. The arbitrator found that he was clearly bound by the cases of The Highwayman and Jonalt.