Decision

Award Summary January 2020 1

Published 26 April 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 should be read in conjunction with the Pubs Code: Stocking requirement - Clarification note issued by the Department for Business, Energy and Industrial Strategy which sets out the Department’s view that a market rent only compliant tenancy can include a stocking requirement (if reasonable), as well as the PCA’s Advice Note on Stocking Requirements

The PCA’s view that in law a market rent only compliant tenancy can include a reasonable stocking requirement is explained in footnote 43 to paragraph 31.3 on page 42 of her investigation report into the conduct of Star Pubs & Bars.

1. 1. Summary of findings

The arbitrator ruled that the pub-owning business’s (“POB”) response to the tied pub tenant’s (“TPT”) Market Rent Only (“MRO”) notice did not comply with regulation 29(3) of the Pubs Code etc. Regulations 2016 (“the Pubs Code”) because the proposed tenancy was not MRO-compliant. The arbitrator therefore ordered the POB to provide a revised response to the TPT within 28 days, pursuant to regulation 33(2) of the Pubs Code.

2. 2. Factual background

The TPT sent a MRO notice to the POB and the POB responded to the TPT enclosing a proposed draft MRO lease.

The TPT made a referral to the Pubs Code Adjudicator (PCA) contending that the proposed lease was not MRO-compliant within the meaning of section 43(4) of the Small Business, Enterprise and Employment Act 2015 (“the 2015 Act”).

3. 3. The dispute

The TPT asserted that the POB’s response to the TPT’s request for a MRO option was not a valid full response compliant with regulation 29(3)(b) of the Pubs Code because the regulation required the POB’s response to include a MRO-compliant form of tenancy. The TPT argued that the POB had submitted a form of tenancy which contained unreasonable terms contrary to section 43(a)(iii) of the 2015 Act, in particular, the terms relating to the rental periods, redecoration obligations, rent review and stocking requirements. The TPT also questioned the POB’s choice to offer a new lease rather than a Deed of Variation (“DOV”) and the consequent SDLT implications of the new proposed tenancy.

4. 4. The law

The arbitrator considered that the TPT, having made the referral, had the burden of proving on the balance of probabilities that the proposed tenancy terms were unreasonable. The test of reasonableness depends on the context of the business relationship, and the individual circumstances of the pub, the landlord and the tenant.

Regulation 31(2)(c) of the Pubs Code provides that the terms of the proposed MRO tenancy, taken together with any other contractual agreement entered into by the TPT and the POB in connection with the tenancy, are to be regarded as unreasonable for the purposes of section 43(4) of the 2015 Act if they are terms which are not common terms in agreements between landlords and pub tenants in the open market. The arbitrator noted that the test of reasonableness must also be applied with regard to the overriding principle of “fair and lawful dealing” by POBs in relation to their TPTs as well as the principle that the TPTs should not be worse off than they would be if they were not subject to any product or service tie.

These provisions were reiterated in the PCA’s Advice Note, “Market Rent Only Compliant Proposals” published in March 2018 (“the Note”). The arbitrator considered that while they were required to make an independent decision on the law in the case before them, they should have regard to the PCA’s advice contained in the Note, observing that the Note also gives examples of matters which may be relevant in deciding whether terms are unreasonable:

• Whether there are fair reasons for the POB’s choice of the MRO vehicle, and fair reasons for proposing any new terms;
• The terms of existing tenancies in the sector, bearing in mind matters such as the location of the pub, the nature of trade and any existing contractual relationship between the parties;
• Whether there is an effective choice between staying tied and going free of tie available to the TPT; and
• Where the POB’s choice to offer the MRO proposal by way of a new tenancy adversely impacts the TPT and whether the tenancy terms should be drafted to reduce or remove that impact.

5. 5. Decisions

5.1 MRO Vehicle: new tenancy or DOV

In relation to the choice of MRO vehicle, the TPT asserted that the proposed tenancy sought to vary the terms of the existing lease to a greater extent than was necessary. The POB submitted that a MRO tenancy constituted a significantly different business relationship to a tied relationship, so required very different terms. The POB denied that it had taken advantage of the TPT’s weaker negotiating position, and pointed out that the TPT had provided no actual evidence that the choice to present a new lease, rather than a DOV would be detrimental to the TPT, and had only made bare assertions that there would be greater registration costs at the Land Registry and potentially increased Stamp Duty Land Tax (“SDLT”) fees to pay.

The TPT asserted that the POB had failed to provide any reasons in support of its choice of a new tenancy agreement, and had not negotiated in good faith, contrary to the principle of fair and lawful dealing, and contrary to the Note which specified that the POB should give the TPT reasons for the suggested terms when negotiating towards an MRO option.

The arbitrator found in relation to the MRO vehicle that the usual procedure when responding to a MRO notice would be for the POB to offer its standard-form tenancy (and not a DOV) in accordance with regulation 29 of the Pubs Code. The arbitrator, however, accepted that there might be cases were a DOV is more appropriate (such as the cases of TPTs under pre-2003 leases who might incur an additional liability for SDLT). The arbitrator also observed that there was no rule or practice which required an MRO proposal to match the terms of the existing tenancy.

In relation to the SDLT and Land Registry fees, the arbitrator held that there was no evidence that such fees would make it unreasonable for the POB to offer a new tenancy, although the arbitrator stressed that he had invited the parties to adduce expert evidence on this subject, which neither party had done.

5.2 Quarterly payments in advance

The proposed MRO tenancy provided that rent was payable in quarterly instalments in advance, whereas the existing lease required payments monthly in advance. The TPT asserted that this change would have an adverse impact on its cash flow and was therefore unreasonable. However, the POB argued that the TPT had presented no evidence of any adverse cash-flow effect and argued that quarterly payment of rent was common in free of tie leases. The TPT argued that the relevant clause specifying the frequency of rent payments should be held to be unreasonable not because it was uncommon but because of the POB’s failure to adjust the terms to provide for transition from monthly to quarterly payment of rent.

The arbitrator held that it was evident from the minutes of the business review meetings that cash-flow was a critical consideration in the TPT’s business; the imposition of the new rental period could therefore amount to a breach of the “fair & lawful” and “no worse off” principles. In the arbitrator’s judgement, the POB should have adjusted the terms of the proposed tenancy to provide for a gradual transition from monthly to quarterly payments and the POB’s failure to do so rendered the relevant term unreasonable, and which in turn rendered the proposed tenancy not MRO-compliant.

5.3 New redecoration clause

The TPT also argued against the redecoration clause in the new proposed tenancy, saying that it was more onerous than the terms of the existing lease. They said that the POB should have justified the departure from the existing lease. The POB argued in response that it was at liberty to propose a separate, new lease on different terms, so long as they were not unreasonable.

The arbitrator found for the POB. He observed that the proposed provision was slightly more onerous than the existing one, but that any real differences between the two was insignificant. Furthermore, the proposed provisions requiring redecoration in the last three months of the term were agreed to be common terms in free of tie tenancies.

5.4 New rent review clause

The rent review clause in the proposed MRO tenancy provided that in the event of any disagreement on a rent review, a surveyor was to be appointed to determine the reviewed rent, acting either as an expert or as an arbitrator, to be decided by the POB. By contrast, the existing lease provided that if a rent review was not agreed, it would be referred to the Pubs Independent Rent Review Scheme (“PIRRS”) or, in default, either party could refer it to arbitration. The POB asserted that PIRRS option was only available in respect of tied tenancies.

The TPT also argued against the new rent review clause being ‘upwards only’ whereas under the existing lease rent could move upwards or downwards following a rent review. The POB noted that the MRO rent could be referred to an independent assessor in accordance with the Pubs Code. To demonstrate that such provisions were common, the POB also provided an extract from their database listing more than 150 free of tie tenancies, the majority of which contained upwards only rent review provisions.

The arbitrator held that the availability of independent rent assessment did not negate the effect of an upwards only rent review. Although an independent assessor could reflect the upwards only review in the initial assessment of the rent by reducing the initial rent in accordance if appropriate, that would not protect the TPT against the risk of a future downturn in the market, possibly occurring after a first rent review, or after renewal under the Landlord and Tenant Act 1954. However, the arbitrator accepted the evidence from the POB’s database showing that upwards only rent review provisions were contained in the majority of the free of tie leases within the POB’s estate. The arbitrator also noted that whilst upwards only rent reviews were not permitted in tied pub tenancies, they were not prohibited in MRO-compliant tenancies.

5.5 Potential dilapidations claim

The TPT argued that if the proposed new tenancy was granted with the existing tenancy being surrendered, the TPT would be at risk of an immediate claim for dilapidations. The POB denied that this would be the effect of the surrender of the old tenancy and the grant of the new proposed tenancy, and that in fact any risk of a claim for dilapidations would be deferred to the fifth year of the new tenancy.

The arbitrator held that the TPT’s allegations appeared to be based on a misreading of the proposed tenancy. Having read the proposed terms, the arbitrator was satisfied that the TPT would not be exposed to the risk of an immediate claim for dilapidations.

5.6 Stocking requirements

The TPT argued that the stocking requirements in the proposed MRO lease were unreasonable. Under the previous lease, the TPT was permitted to stock and sell a wide variety of products from other brewers, although they had to be purchased from the landlord. The TPT argued that its business was built on a free trade platform which facilitated stocking decisions based on the competitiveness of brewers’ products, and that the proposed tenancy terms would unreasonably reduce the TPT’s trading flexibility. The POB responded saying that the proposed stocking requirements under the new lease had been drafted with the particular circumstances of the TPT’s business in mind (as a “premium style” pub). The POB also argued that the proposed stocking requirements were necessary for the POB to maintain its “route to market”.

The arbitrator held that stocking requirements were not common terms in agreements between landlords and pub tenants who are not subject to product or service ties, and therefore that any term or condition which imposed a stocking requirement should be regarded as unreasonable for the purposes of section 43 of the 2015 Act. The arbitrator considered that if the POB’s arguments that stocking requirements ought not to be regarded as unreasonable by reason of regulation 31(2)(c) were correct the PCA ought to explicitly approve the use of stocking requirements in new MRO tenancies if that was the case. The principal purpose of Part 4 of the 2015 Act and the Pubs Code is to enable the TPTs to opt out of part of the control of their landlords; the imposition of a stocking requirement might well be regarded as maintaining some of that control.
The arbitrator further held that in this case, the stocking requirements would impose an excessive rigidity onto the TPT’s ability to select brands and manage its business as it saw fit, since at least one of the aspects of the proposed stocking requirements under the proposed tenancy was unreasonable.

5.7 Conclusion

Having considered the proposed lease as a whole, as well as the particular terms which had been disputed by the TPT, the arbitrator held that the proposed lease was not MRO-compliant because the clauses which the arbitrator found to be unreasonable were unreasonable both individually and cumulatively.