Decision

Award Summary – June 2021 - 1

Published 27 August 2021

Applies to England and Wales

Award Issued: 2021

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 the findings

The POB was successful in arguing that annual RPI rent increase clauses, subject to a collar and a cap, are both a common term in Free of Tie agreements within the meaning of regulation 31(2)(c) of the Pubs Code etc. Regulations 2016 (“the Pubs Code”) and reasonable within the meaning of section 43(4)(iii) Small Business, Enterprise and Employment Act 2015 (“the 2015 Act”).

2. Factual background

Prior to making their decision, the arbitrator did not consider that sufficient evidence had been provided to them to enable them to decide on the issues in question. The arbitrator therefore suggested appointing an expert in accordance with section 37(1)(a)(i) Arbitration Act 1996 to write a report, which both parties agreed to. The expert report was circulated between the parties when they were given the opportunity to make submissions based on the report. The arbitrator based his decision on the expert report, and the parties’ submissions in response to it.

3. The dispute

The arbitrator determined that it was for them to decide the following issues in the dispute:

• Whether annual RPI increases, subject to a collar and a cap, are:

1. Common terms in Free of Tie pub leases within the meaning of regulation 31(2)(c) of the Pubs Code; and
2. Reasonable within the meaning of section 43(4)(iii) of the 2015 Act.

• If RPI increases are unreasonable, whether:

1. Upward and downward rent reviews are common in Free of Tie pub leases, with reference to regulation 31(2)(c) of the Pubs Code;

2. Upward only rent reviews are reasonable under section 43 of the 2015 Act; and

3. Three yearly rent review cycles are:

   a. Common in Free of Tie pub leases under regulation 31(2)(c) of the Pubs Code; and

   b. Reasonable under section 43 of the 2015 Act.

The TPT argued that for a clause to be considered ‘common’ it needed to be contained in a ‘majority’ of leases.

It was not disputed between the POB and the TPT that what is reasonable for one pub may not be reasonable for another, and that individual circumstances should be taken into account when considering reasonableness. The POB submitted however that it was unlikely a clause which was contained in half of all commercial pub leases would be unreasonable.

4. The applicable law

The arbitrator was able to appoint an expert to report to all parties pursuant to s.37(1) Arbitration Act 1996 and allowed the parties the reasonable opportunity to comment on that report before making a final decision.

Section 43 of the 2015 Act sets out criteria for the MRO tenancy to be compliant including that it must not contain any unreasonable terms or conditions and does not contain any product or service tie other than insurance in connection with the tied pub. This is further supported by regulation 31(2) of the Pubs Code which prohibits one-way break clauses imposing a service tie (other than in relation to buildings insurance for the premises) and prohibits including terms which are not common terms in Free of Tie agreements between landlords and pub tenants.

The POB referred the arbitrator to the case of Ei Group Ltd v Clarke and Minnett [2020] EWHC 1858 (Ch) where it was held by the Judge that it was wrong in law to regard differences between the tied lease and the proposed lease as a benchmark for assessing whether what is proposed is reasonable.

5. The arbitrator’s findings

5.1 Common

It was held that the interpretation of ‘common’ did not need to be a majority, but instead should be the Oxford English Dictionary definition meaning, “occurring, found or done often; not rare”. The annual RPI increase clause was therefore held to be common based on the expert evidence.

5.2 Reasonable

The arbitrator was not persuaded by the TPT’s arguments that the RPI increase clause was unreasonable.
In summary, it was decided that:

1. Annual RPI increases, subject to a collar and a cap, are common in Free of Tie pub leases; and

2. Annual RPI rent increases are reasonable within the meaning of section 43(4)(iii) of the Act.