Decision

Ei Group - Award Summary - February 2022 - 2

Published 16 May 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.

1. Summary of Findings

The Arbitrator held that a proposed tenancy sent by a Pub Owning Business (“POB”) in response to a Market Rent Only (“MRO”) notice by a Tied Pub Tenant (“TPT”) under the Pubs Code etc Regulations 2016 (“the Pubs Code”) contained terms that were non-compliant with the Pubs Code, and therefore directed the POB to provide a revised response to the TPT addressing those issues.

2. Background

The TPT served a MRO notice on the POB, following which the POB provided to the TPT what it said was a ‘full response’ for the purposes of regulation 29(3) of the Pubs Code. However, the TPT did not accept that the response from the POB was a ‘full response’ due to alleged non-compliances, and referred the matter to the PCA for arbitration on the issue of whether the POB’s response was compliant with the Pubs Code.

3. Issues

The Arbitrator considered that there were five main areas at issue between the parties for determination:

(1) Whether the proposed methods of delivering the MRO lease were reasonable

(2) Whether several proposed provisions of the MRO lease were reasonable

(3) Whether upward and downward cyclical rent reviews were considered common in free of tied pub leases; and

(4) Whether COVID-19 rent abatement clauses were considered common in free of tie pub leases

(5) Whether the POB provided a full response to the TPT’s MRO request

This case concerned terms of MRO agreements and the extent to which the terms and conditions of such agreements are to be regarded as unreasonable. The Arbitrator had regard to the Small Business Enterprise & Employment Act 2015 (the “SBEEA”) and the Pubs Code.

4. Arbitrator’s findings

(1) Methods of delivering the MRO lease

The POB had offered to provide a MRO lease either by way of the grant of either a new lease or a deed of variation by reference to the existing lease. The TPT argued that both of these proposed methods would cause the TPT to incur a detriment. The TPT submitted that the grant of a new lease would give rise to a requirement to pay Stamp Duty Land Tax, preclude the TPT from benefiting from ‘overlap relief’, would open the TPT to a claim for dilapidations; and, a deed of variation by reference to the existing lease approach would be a long and expensive document to produce.

The TPT therefore argued that a simpler ‘line by line’ form of deed of variation should instead be adopted, and provided an example of such a deed of variation with its statement of claim.

The POB subsequently indicated in its statement of defence that it was prepared to agree a ‘line by line’ deed of variation of the type proposed by the TPT. As such, the Arbitrator held that a new MRO response would be required, as neither a new lease nor a deed of variation by reference to the existing lease would be compliant in this instance.

(2) Reasonableness of proposed MRO provisions

As part of the case management of the referral, the Arbitrator agreed to appoint an expert witness to assist with the determination of these issues and whether the proposed terms were common in free of tie leases.

Quarterly rent payments

The TPT argued that that it would cause detriment to its working capital to be required to pay the rent quarterly in advance, when the tied lease provided for monthly payments. The POB submitted that it had offered a personal concession in this case that the TPT pay rent monthly, but also argued that quarterly rent in advance was a common requirement in free of tie leases.

The Arbitrator noted that a personal concession had been offered to the TPT to continue to pay rent monthly in this case. However, considered that the proposed quarterly rent provision could not be regarded as unreasonable, noting the expert evidence before them that it is a common term in agreements that are not subject to product or service ties.

25% rent deposits

The TPT argued it would be made worse off if a 3-month rent deposit provision was made a term of the MRO agreement, as there was no such provision in the tied lease. The POB contended that quarterly rent requirements are common in free of tie leases, and that any impact on the TPT would be mitigated by a personal concession that to the TPT to pay no deposit.

The Arbitrator noted the expert evidence before him that the majority of free of tie leases require a deposit, but that where tenants are converting from tied arrangements, landlords can be more flexible. The Arbitrator considered that a requirement for a deposit is reasonable in the marketplace, and bearing in mind the personal concession that the POB had offered to the TPT, found that the deposit requirement could not be regarded as unreasonable.

Insurance provisions

The TPT argued that the proposed MRO terms contained onerous insurance provisions. The POB contended that the risks identified are the same as the risks being insured against now. The Arbitrator noted the expert evidence that it is common for a landlord to re-charge building insurance and to cover two years loss of rent. The Arbitrator held the insurance terms to be reasonable.

Proposed adjustment of rent using RPI subject to a 5% cap

The TPT argued that the introduction of a cap and collar applied to an annual increase in rent using RPI was unreasonable and that RPI indexation would very likely create a rental burden that does not bear any relationship to the market rent of the property. The POB contended that RPI increases follow the requirements of investors, are more common in modern leases, are not more or less onerous than cyclical upward only reviews, and prevent steep increases in rent, with the cap also preventing the adverse effect of short-term spikes in RPI.

The Arbitrator relied upon the expert evidence and found that the use of RPI rent increases is common in the market and not unreasonable. However, in current market conditions  the proposed cap rate of 5% was unreasonable.

(3) Upward and downward cyclical rent reviews

The TPT had proposed that the terms of the new MRO agreement should provide for upwards/downward and downwards rent reviews. The POB opposed this arguing that upward/downwards rent reviews are uncommon in free of tie leases. After considering the expert evidence, the Arbitrator held that upward/downward rent reviews were uncommon in free of tie leases.

(4) COVID-19 rent abatement

The TPT argued that provision should be introduced into the MRO lease for rent suspension during statutory pub closures, together with suitable insurance, and/or a tenant only break clause on six months’ notice, to reflect the events of the COVID-19 pandemic. Expert evidence on this point stated that it was too soon to say whether such terms might become common, but that in the expert’s experience such clauses were at present not in the majority of leases, although referred to them occasionally being introduced by way of a personal side letter. As a result, the Arbitrator held that COVID-19 rent abatement clauses were not common in free of tie agreements between pub landlords and tenants.

(5) POB’s response to the MRO notice

The TPT argued that, pursuant to regulation 29(3)(b) of the Pubs Code, a POB must send a full response which is MRO compliant, and that as there were terms in the MRO agreement which were non-compliant, the response could not be considered a ‘full response’. Whilst the Arbitrator acknowledged that some of the terms of the proposed MRO agreement were non-compliant, they considered that, just because some of the proposed MRO terms were not held to be MRO-compliant, this did not automatically result in the POB having failed to serve a full response in the first instance.

5. Decision

The Arbitrator held that the MRO tenancy options of either the grant of a new lease or a deed of variation by reference to the existing lease, as well as the proposed 5% cap rate on annual RPI rent increases were non-compliant, and therefore directed the POB to provide a revised MRO response to address both issues.