Decision

Award Summary – November 2022 – 2

Updated 29 August 2023

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

The tied-pub tenant (the TPT) referred a dispute to Arbitration in relation to whether the Pub Owning Business (the POB)’s proposal for a Market Rent Only lease (the MRO Proposal) constituted ‘a full response’ in compliance with regulation 29(3)(b) of the Pubs Code etc. Regulations 2016 (the Pubs Code). The TPT raised five issues regarding the form and substance of the MRO Proposal. The Arbitrator found in favour of the POB.

2. Factual background

The TPT received the MRO Proposal from the POB in quarter 3 of 2021. The MRO Proposal provided for the agreement to be documented in the form of a new lease from the POB rather than by way of a Deed of Variation (DOV). The TPT argued that this was an unreasonable proposal, and also took issue with the MRO Proposal on the basis that it contained terms which were unreasonable and uncommon and therefore contrary to both regulation 31(2)(c) of the Pubs Code and section 43(4)(a)(iii) of Small Business, Enterprise and Employment Act 2015 (the SBEEA 2015).

3. Issues

The five issues referred for arbitration were:

(1) Whether the MRO Proposal should be documented by way of DoV or a new Lease;

(2) Whether the proposed length of the term of the MRO Proposal was reasonable;

(3) Whether the inclusion of uncapped annual RPI increases in the MRO Proposal was reasonable;

(4) The extent to which 5 yearly upward only rent reviews are common in Free of Tie (FOT) leases; and

(5) Whether the proposed terms underpinning the Basis of Review are reasonable and common.

4. The relevant legislation

S42(3) of SBEEA 2015 provides that the Pubs Code is to be consistent with “(a) the principle of fair and lawful dealing by pub-owning businesses in relation to their tied pub tenants; (b) the principle that tied pub tenants should not be worse off than they would be if they were not subject to any product or service tie.”

S43(2) of SBEEA 2015 provides that a “market rent only option means the option for the tied pub tenant- (a) to occupy the tied pub under a tenancy or licence which is MRO compliant, and (b) to pay in respect of that occupation – (i) such rent as may be agreed between the pub owning business and the tied pub tenant in accordance with the MRO procedure (see section 43(4)), or (ii) failing such agreement, the market rent.”.

S43(4) of SBEEA 2015 also provides 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: (i)contains such terms and conditions as may be required by virtue of subsection (5)(a),(ii)does not contain any product or service tie other than one in respect of insurance in connection with the tied pub, and (iii)does not contain any unreasonable terms or conditions, and (b)it is not a tenancy at will.”

S43(5) of SBEEA 2015 provides that “The Pubs Code may specify descriptions of terms and conditions— (a) which are required to be contained in a tenancy or licence for it to be MRO-

compliant; (b) which are to be regarded as reasonable or unreasonable for the purposes of subsection”.

Regulation 31(2) of the Pubs Code outlines some examples of terms and conditions which are to be regarded as unreasonable for the purposes of s43(4) of SBEEA 2015.

5. Arbitrator’s Findings

Issue 1 – Whether the MRO should be in the form of a DoV or New Lease

Whilst the TPT asserted that the choice of a new lease instead of a DoV was unreasonable and could be used as a tool to impose onerous terms on TPTs, the POB asserted that entering into a new lease reflected the different relationship model under a MRO tenancy, and denied that there was or would be any adverse impact on the TPT through the entry into a new lease. The arbitrator observed that tied and FOT tenancies are treated as different creatures by the SBEEA 2015 and the Code, and the definition of a MRO compliant tenancy (in Section 43(4) and (5)) makes no reference to the terms of the existing tied tenancy. The TPT had not particularised their claim that the choice of MRO vehicle had increased their costs, and the arbitrator preferred the view put forward by the Respondent that the costs position was neutral. The Arbitrator found that the form of a new lease for the MRO was reasonable in the circumstances.

Issue 2 – The length of the MRO tenancy

The TPT noted the proposed term mirrored the residual term of the existing tied lease (that being a period greater than 5 years). Whilst the TPT acknowledged that regulation 30(2) of the Pubs Code provided that the term of a MRO proposal must be for at least as long as the remaining term of the existing tied lease, the TPT submitted that the duration of the term should also be considered in the context of reasonableness and commonality. The TPT also contended that if a term of 5 years was found to be common, it must in addition be reasonable and the TPT asserted that FOT tenants in the open market were commonly offered significantly longer terms compared to the TPT which would mean the TPT would be considered worse off.

The POB relied on Punch Partnerships (PTL) Ltd and Another v The Highwayman Hotel (Kidlington) Ltd [2020] EWHC 714 (Ch) where it was decided that an arbitrator did not have the power to impose a particular term such as the length of term of the MRO lease when determining an appeal under the Pubs Code. The POB referred to the minimum requirement that the MRO tenancy must be for at least as long as the remaining term of the existing lease. It presented expert evidence considering publicly accessible documents relating to lengths of term offered by other POBs.

Based on the parties’ submissions, the Arbitrator found in favour of the POB that the proposed length of term was neither uncommon nor unreasonable.

Issue 3 – Annual Uncapped RPI Increases

The TPT submitted that the provision for uncapped annual RPI increase was not common as a concept in FOT leases and, as such, was contrary to regulation 31(2)(c) of the Pubs Code, and that the most common method of review was cyclical open market rent reviews. The TPT also sought to rely upon various published arbitration award summaries, including one where it was found that a cap of 5% was unreasonable in current market conditions at the prevailing time. It submitted that even if uncapped RPI increases were common, they still need to be reasonable, arguing that RPI has been superseded by CPI and is usually much higher than CPI. The TPT further asserted that the adverse impact of uncapped annual RPI increases would be further compounded if cyclical rent reviews were removed.

The POB disputed that annual uncapped RPI increases are not common and not reasonable, and argued that there is an overwhelming body of RPI linked evidence in comparison to evidence of CPI based indexation. Both parties submitted evidence concerning review terms in example FOT leases.

The Arbitrator stated that in this case the Respondent’s evidence was not wholly persuasive given that much of it pre-dated the Pubs Code, but that the realistically comparable evidence submitted by the Claimant was limited. On balance they preferred the evidence submitted by the POB and made a finding that the annual uncapped RPI increase was not uncommon in FOT leases. They also considered that in this case they were not persuaded by the TPT’s assertions that the RPI indexation was unreasonable.

Issue 4 – The extent to which 5 yearly upward only rent reviews are common in FOT Leases

The TPT made submissions that upward and downward open market rent reviews were both common and reasonable in FOT leases. However, the POB submitted that upward only open market rent reviews were prevalent in FOT leases. The Arbitrator observed that the TPT had not submitted any evidence in support of their assertion that upward or downward rent reviews were common in FOT leases and, as such, found in favour of the POB that cyclical upward only open market rent reviews were common in FOT leases. They also considered that such a term is not unreasonable. However, the Arbitrator was not persuaded that a combination of uncapped annual RPI increases and 5 yearly upward only open market rent reviews (though not uncommon in the very small cross section of the free of tie market in relation to which the POB produced evidence), was reasonable in a MRO tenancy. The arbitrator noted that the POB had offered to remove the provision for open market rent reviews.

Issue 5 – Basis of Review Assumptions and Disregards

The TPT alleged that the effect of drafting within the proposed MRO lease would be to produce a “headline rent” upon review, making the relevant clause not common. The TPT claimed that a provision which produces a headline rent is contrary to the core Pubs Code principles of fair and lawful dealing and that tied tenants should be no worse off, as other FOT tenants are seemingly able to negotiate better terms with rent review clauses which do not produce headline rents on review. The POB argued that ‘headline rent’ issues would not arise as the pub would be being let out as a fully fitted space. The Arbitrator was not persuaded that the drafting would produce a headline rent, and decided that the TPT’s assertion that the provision is unreasonable was unproven.