There are a lot of points to be considered in these papers. There are contentious points on almost every page and I am not going to be able to do justice to them all. Nonetheless, this commentary identifies some areas of concern and reflects my views. Other commentators have rightly drawn attention to some surprising errors – none of which engender any great confidence – and many have decried yet more red tape for a sector which must be one of the more heavily regulated sectors in the economy and which cannot really afford yet more cost and compliance issues. In the end it is likely to be the consumer who pays the major part of the cost for all of this and, set against declining volumes and profitability in the sector, some of this could and should be avoided.

More investment needed
This is put into particularly sharp focus when you consider that the key to the problems in the sector is better and more investment in pubs and recruitment and training of people with the necessary skills sets to develop pubs and pub businesses to meet the requirements of an ever more demanding customer base, which wants something different from what they have been offered up to now.

The difficulties which are currently being encountered in the pub sector (and the Government quite rightly accepts that these have largely been caused by the current economic difficulties) are not solved by appropriating pubco profit and transferring it to the tenant.  The key to resolution of the issues facing the sector is increased levels of investment.  Will the estimated transfer, in each year, from pubco to tenants of £102 million solve this problem? (Assessments actually suggest a possible high of £234m in each year, but with a possible low of £nil – if it were assumed that the statutory code has no effect at all). I don’t think so and the Government isn’t sure either.  In the impact assessment the Government says:

“Increasing licensees’ share of profits is likely to have a small positive impact on investment and the long term health of the pubs industry.  Licensee’s (sic) will have a greater incentive to invest and this is likely to more than offset the reduction in pub owning companies’ incentive to invest investment (sic). This is because licensees are better placed to invest and are less short termist” 

This seems to be, at best, extremely unlikely and, at worst, laughable. The most likely outcome of a transfer of profit to tenants is that they will simply pocket it; after all, why should they invest? This is particularly true in the case of short-term tenancies. The consultation, in this context, draws no distinction between shorter and longer term tenancies.  This, of course, may satisfy the political lobby (at the heart of this consultation) who would be pleased to see a statutory appropriation of profit to licensees.  The Government accepts that there is uncertainty in the size of the transfer from pub owning companies to licensees, but the effect of this is unlikely to be the investment in people and property which the sector so desperately needs to meet the requirements of an increasingly demanding and sophisticated population.   The Government appears to accept the need to anticipate the changes that this will cause, but sales and fragmentation of the sector are all too likely, and that is before we get to insolvencies.

There are many points to consider and it is not possible to cover all points in these notes; however some of the points of particular interest follow.

The limit of 500 Pubs
The proposal is that the Statutory Code will apply to all pub companies holding 500 pubs.  For any company with 500 pubs the Code will apply to all non-managed pubs (what this means is explained below).  This means that if you have 600 pubs of which 150 are let then the Code will apply to that 150.  If you then sell 101 pubs but keep the 150 leased or tenanted pubs you are not bound by the Code.  Clear?

Why 500?
The Government reports that significantly fewer complaints have been made about pub companies below this level.  This, it should be said, relates to complaints made to BII over a 3 year period.  The Government says that while this does not represent the full scale of the problem “it is reasonable to consider that the relevant proportion of complaints reflects the industry as a whole”.  How do they know this?  Can it really be true that the Code results from the number – rather than the validity or quality – of complaints to BII? It rather looks as if this is a methodology prepared with a view to ensuring the family brewers are excluded from the Code.

If legislation takes a year to enact, and there are no complaints to the BII about a company in that time, is it accepted that the pub company in question does not need to comply with the Code? 

Our commentary on the BIS consultation paper and impact assessment on pub companies and tenants was barely hot off the press when a clarification from the BII gave a rather different perspective on the 500 pub limit. READ what this was all about.

Pubco groups and the Beer Orders model
The consultation paper says that this definition applies at the top level of a group and all group companies would be taken into account.  It would not, therefore, be possible to spread the number of outlets across a number of subsidiary companies and thereby escape the legislation.  However, it is worth bearing in mind that the Beer Orders (of blessed memory) treated a company in which the brewer (then thought to be the problem in much the same way as pub companies are thought to be the problem now) held a 15% interest in the voting rights in another company as part of the group for the purposes of the Beer Orders.  Accordingly, if the pub company in question held 14% of the voting rights in another company it was disregarded for their purposes.  This is bound to be considered in this case.  Watch this space!

Non-managed – what does this mean?
It means the category of pubs which are not run by a manager who is an employee.  The Code will cover all other pubs and this includes free of tie outlets.  It is also likely to include what are becoming termed in the industry as franchised pubs and there are two reasons for this:

• The operator is not likely to be an employee but is more likely to be engaged under a contract for services.
• Many of the operations currently stated, colloquially and in the press, to be franchises are not true franchises at all.  A true franchise enables the operators to run his own business under the brand or name of the franchisor.  The need for the grant of requisite intellectual property rights tells us that in many cases pub companies are not genuine franchisors at all.

It also follows that if you were thinking of avoiding all of this on the basis of entering into a contract for services with an operator (and not an employment contract) or labelling a tenancy as a franchise you are unlikely to be successful.

The identity of the tenant
Little attention has been paid to the identity of the tenant.

The transfer of value to the tenant has been referred to elsewhere in this note but the consultees must make the point that not all tenants need protection. As an example, multiple corporate tenants are perfectly capable of deciding for themselves whether a deal is right for them and what the correct levels of rent and discount are. Every pub company has tenants who are making six figure sums each year out of their pubs – is it right that there be a statutory appropriation of the pub companies profits to them? Do their finance directors need the protection normally afforded to consumers?  I don’t think so!  

Is this an attack on the tie?
According to Vince Cable the answer to this, expressly set out in his foreword, is that there is no proposal to abolish the trading tie.  Nonetheless, the proposals do include the following:

• A guest beer option
• Information from flow monitoring equipment, even if completely reliable, may not be used to determine whether a tenant is complying with the trading tie (for information this is set out in the draft statutory code part 4 paragraph 30)
• Whether the Code should include a mandatory free of tie option.

These points may not amount to abolition of the tie but, if they are confirmed, would make major inroads into it and readers may be interested to note:

• The reference to the guest beer does not expressly refer to cask-conditioned beer (which the late and largely unlamented Beer Orders did).  If this is not confined to cask-conditioned beer the likely effect will be to subvert the tie as large discounts provided by larger suppliers will  transfer financial benefits and incentives to the operator but most likely at the cost of customer choice, particularly local choice.
• No adequate information is given for the contention that flow-monitoring equipment cannot be used in enforcement proceedings against a tenant where it is reliable.  Accordingly, if you are bound by the Code you cannot rely on information provided by flow-monitoring equipment.  Conversely, if you are not bound by the Code you can!
• The Government sets out its views on the free of tie option and these are set out in paragraphs 5.25 onwards.  The Government expressly says that a mandatory free of tie option with enforced open market reviews may be one possible way of achieving the core principles.  The Government considers the possibility that pub companies who are also brewers could allow their tenants etc to buy beers from whosoever they wished.  Allegedly this would preserve the brewers’ route to market while removing the opportunity for the pub company brewer to charge excessive prices and allow the tenant to buy beer at an open market rate. Any reader will consider this to be more than little naive!  The Government does go on to say that an alternative way of achieving the core principle of fairness etc is to simply state that higher beer prices due to the tie must be directly compensated for by lower rent and/or other genuine quantifiable countervailing benefits. Nonetheless it is rather difficult to reconcile this with Vince Cable’s assertion above.

The machine tie
The Government states that “it agrees… that the gaming machine tie serves no good purpose”.  The Government is, therefore, proposing that the machine tie should be abolished in its entirety.  At the risk of labouring an obvious point this will apply to those bound by the Code but, seemingly, not those obliged to observe the Code.  Accordingly, the Government’s position would appear to be that the machine tie serves no good purpose where the pub company owns more than 500 pubs but does serve a good purpose where the pub company owns less than 500 pubs.  Consider whether the following are good reasons for the machine tie:

• The pub company will normally vet the machine supplier in order to ensure that they are reliable suppliers and have the necessary financial stability to provide a good service.  This is not normally open to an individual tenant or other operators.
• In years gone by the Government was keen for there to be a machine tie in order to protect individual operators from unscrupulous criminal elements within the sector.  It was considered that larger companies would be able to stand up to petty and not so petty criminals in a way that a local tenant might not be able to.  It would be nice to think that this is no longer a relevant consideration.
• Pub companies will generally be able to ensure better quality of service in terms of call outs, repairs etc than an individual tenant may be able to achieve.
• Pub companies are likely to be able to use their financial muscle to provide better bargains and better deals for tenants and other operators than an individual tenant or other operator could negotiate on his or her own.
• Every pub company knows that machines are often used for money laundering. Removal of control by pub companies makes this ever harder to police.
• An important but generally overlooked role of pub companies has been to evaluate the information from machine suppliers across an estate or at least a wide range of outlets.  This information relates, specifically, to the levels of take in machines achieved by the rate of introduction of new models and rotation of machines all with a view to optimising income.  There is a cost to this but, seemingly, this service will now be denied to tenants or other operators.

SCORFA
Those with long memories will recall this being introduced as a concept in 1984 in the EEC Block Exemption Regulation 1984/83.  This is an acronym which stands for “special commercial or financial advantages”.  The essence of this is that in return for special commercial or financial advantages the tenant will accept the trading tie.  This concept was repealed in the two subsequent block exemptions but successive committees (BEC and BISC) have treated this as enshrined in law or at least that it should be.  The refinement added is that this should be a genuine or countervailing benefit and this is set out by the Government in paragraph 5.20.  The methodologies put forward in the consultation paper and impact assessment cannot easily be repeated here but will be familiar to many readers. Some elements of the methodologies are very strange and will clearly need refinement.  Two points only are made here:

• SCORFA must be identified and a value placed on this. This is easy in the case of tangible benefits but not at all easy  – and not fully recognised in the consultation paper and impact assessment – in respect less tangible benefits such as business support which goes beyond rent holidays etc
• The methodologies contained in the consultation paper and impact assessment do not obviously take adequate account of the allocation of risk to the pub companies.  The Government expressly states the need to address the issues of risk and reward and an issue will be how to include in this a return for the pub company  based on the following:

1. The pub company has used shareholders funds to buy an asset.
2. The pub company is responsible for obtaining the best return it can on that asset.
3. It allows an operator (who may be unproven in the trade) to take control of that asset and that operator may fail or under perform.
4. The cost of entry into the business is relatively low and is more affordable than some other comparable opportunities.  It is certainly lower and more affordable than entry into other arrangements such as some franchises.
5. Part of the pub company’s return is wet margin and if tenant fails or underperforms then the pub company suffers accordingly.  It shares in shortfall and gains and its returns go down or up in tandem with the operator.
6. If the tenant fails and hands the pub back the pub company has to pick up the pieces. The papers seem to assume that there is little or no downside for the pub company.

How do you quantify the value in this?  We take, as a given, that rent is settled at a rate which directly reflects the realisable trading levels at the outlet and is a reflection of market conditions. Pub companies are not able to settle rent ignoring market conditions. Moreover, there is likely to be a common price list for products.  Putting a value on this will most likely be a challenge but it is critical for pub companies that they are able to do so.

If you are not required to comply with the Code what might this mean for you?
The consultation paper and impact assessment show that a comparatively limited number of companies will be required to comply with the Code.  These will include Admiral, Enterprise, Punch, Greene King, Marstons and Star (formerly Scottish & Newcastle).  Wellington and Trust Inns are also mentioned but I do not know whether these companies are in fact likely to be bound by the Code or not.  The following considerations should be born in mind by those who are not likely to be bound by the Code:

• It is likely to be the case that you do not want to be bound by the Code and should do whatever you can to avoid it.  The estimated transfer of value from pub companies to licensees in each year is estimated at £102 million (actually this is merely the best estimate of the impact of the change and the highest estimate is £234 million per annum).  Quite apart from that the cost of the adjudicator in each year is estimated at £900,000 (but, again, that is the best estimate and the highest estimate is £1.5 million) and, in any event, there are set up costs for the adjudicator – estimated at £150,000 but this could be increased to £220,000.  In addition there are the one-off costs and continuing costs for the pub companies themselves.  The impact assessment estimates £1 million for each of the relevant companies to set up a training programme etc and to make the necessary adjustments (paragraph 61) and then estimates running costs, each, of £168,000 per annum. My view is that these are likely to prove under-estimates.  Worth avoiding if you can!
• What will happen to the existing Framework Code and PIRRS and PICAS and, possibly, PAS.  The Government recognises that self-regulation has had some positive impact and supports the continuation of these mechanisms until legislation can be put into place.  The Government also considers that it would be beneficial if companies below the threshold and who do not have to comply with the Code continue with the self-regulatory regime.  However, is there any real point to this?  The answer to this, very strongly is “yes” because the Government expressly states that whether or not smaller companies (their term) are willing to operate such a regime is likely to influence its decision to set the threshold at 500 pubs!
• Again, the burden of cost for smaller companies is likely to increase because the larger companies will not pay to support the voluntary self-regulation regime.  This, in its way, is a bit of a blow bearing in mind that the Government has already said (see paragraph 4.12) that “significantly fewer complaints” have been made about smaller companies below that level and actually produces some statistics to show this.  They go on to say that the number of complaints to BII in relation to smaller companies are running at the rate of about 10%.  Accordingly, unfair as it seems, smaller companies would be best advised to support the existing self-regulatory regime even though there will be a higher burden of cost on them and, seemingly by the Government’s own admission, they are not the real problem!
• The Government will consider that a voluntary commitment by smaller companies to use the arbitration function of the adjudicator to resolve disputes is possible.  One of the points that would need to be considered is the cost of using the adjudication function and whether this will duplicate any financial contribution to existing self-regulation which, as stated above, is likely to increase.
• The impact assessment does recognise the possibility of unintended consequences to their actions.  This has certainly been the lesson from history, particularly the Beer Orders, but, see paragraph 77, the impact of the proposed legislation may be underestimated as pub owning companies below the 500 pub threshold may also be affected.  It is, obviously, the case that as companies who are bound by the Code change their model and improve the offer to licensees smaller companies may have to do the same in order to compete.  Although the transfer value from pub companies to operators is estimated (albeit the best estimate) at £102 million per annum this is probably not taking into account the impact on smaller companies.  Accordingly, each smaller company would have to consider, very carefully, a calculation of the value of the special commercial or financial advantages given to tenants so that its business and business model can be properly protected.
• References to the guest beer do not expressly state cask-conditioned products.  It would be an advantage to the smaller companies who are brewers if a cask-conditioned exemption to the tie were allowed.
• I cannot see, logically, why a smaller company should be exempt from the ban on machine ties.  Nonetheless, the proposal is that smaller companies could retain the machine tie and, bearing in mind this is an important income stream for smaller companies, its abolition would be unfortunate.
• Smaller companies will not be required to comply with the Code and, specifically, will not be prohibited from using evidence from flow- monitoring equipment in enforcement proceedings against tenants.  This is entirely sensible although issues may remain in relation to the reliability of the evidence produced.

An expensive risk to take
With its high turnover of staff, the hospitality and leisure industry is very attractive to migrant workers -and indeed the industry relies heavily on them.  However, the examples above demonstrate that you must be careful about who you employ. Illegal working both undercuts British workers and may cause dishonest employers to take advantage by paying poorly and ignoring health and safety measures.  The UK Border Agency carries out regular intelligence-led investigations and takes firm action against employers who flout the law. At up to £10,000 per worker you employ illegally, it doesn’t take much for this to add up to a very significant fine.

The key points to note are: 

• Employers face a civil penalty of up to £10,000 for each illegal worker they employ.
• Employers will have a statutory excuse if relevant documents are checked before a potential employee starts work.
• Employers must check the validity of documents provided by prospective employees and comply with verification, retention, copying and recording requirements.
• There is also a criminal offence of knowingly employing an illegal worker, the penalty for which is a custodial sentence      of up to 2 years’ imprisonment and/or an unlimited fine.
• A company can be liable for knowingly employing an illegal worker where an individual, who has responsibility within the company for an aspect of the employment, is aware that the employee is working illegally. A director or manager will be regarded as having committed the offence personally if the offence was committed with their consent or connivance.

Employees only
The legislation applies only to employees and not the self employed, agency or contract workers. However be aware that a casual worker may be considered an employee even where there is no written contract. Where there is any doubt, you should look to establish the defence for that person rather than risking conviction for employing an illegal worker.

Relevant documents
If you carry out the required document checks correctly before you employ a worker then you will have a “statutory excuse” against payment of a fine if it turns out that the individual is an illegal worker after all.

There are 2 lists of documents which can be checked.  The documents on List A show that the employee has an ongoing right to work in the UK and if you check the document correctly it gives you a statutory excuse for the duration of the persons work with you.  Documents on List B show a right to work in the UK for a limited time and to be covered by the statutory excuse you must repeat the document check at least every 12 months.

The lists are set out in the UKBA Employer guide together with pictures of the relevant documents.

Verification and copying requirements

You are required to take certain steps in relation to the documents you are required to see before an employee starts work with you:

• Accept only an original document;
• Take all reasonable steps to check the validity of the document;
• If the document contains a photograph you must be satisfied that the photograph is a photograph of the prospective employee;
• If the document contains a date of birth you must be satisfied that this is consistent with the appearance of the employee;
• Take all reasonable steps to check that the employee is the owner of the document;
• Check that entry and expiry dates have not been passed;
• Check any endorsements to see that the person can do the type of work that you are offering;
• Copy the document and retain the copy securely for not less than 2 years after the end of the employment;
• If the document is a passport or other travel document you must copy the following pages in a format which cannot be subsequently altered: the front cover and any page containing: the holder’s details including nationality, the holder’s photograph, the holder’s signature, the date of expiry, and a UK Government endorsement indicating that the holder has an entitlement to enter or remain in the UK and undertake the work in question.
• If the document is not a passport or other travel document you must take a copy of the whole document in a format which cannot be subsequently altered.

If you have partially complied with these requirements then the penalty will be reduced. This will be the case if you have, for example, copied one of two documents required or have copied only part of a specified document. However, the statutory excuse for the penalty will not apply if you know that you are employing an illegal migrant.

Repeat checks
You will need to undertake repeat document checks at least once a year for employees who have limited leave to enter or remain in the United Kingdom, for the statutory excuse to remain valid.  Each time these are carried out they must follow the specified steps and you must keep a record of the date of such checks.

Biometric Residence Permits
Biometric residence permits have been issued to non-EEA nationals since 2008 and are now in wide circulation.  These BRPs make document checking simpler for employers.  A BRP is the size of a credit card and holds a person’s fingerprints and photograph. You can carry out an online check on the validity of a BRP and the person’s right to work in the UK.  Details of how to check a person’s right to work using their BRP can be found HERE

Right to Work Checklist
The UKBA employer’s guide includes a Right to Work Checklist which is ideal to download and complete and keep on file each time you take on a new employee so that you know that you have completed the required checks each time. See Appendix A

Knowingly employing an illegal migrant
There is a separate criminal offence of “knowingly” employing an illegal worker. This offence carries a custodial sentence of up to 2 years imprisonment and/or an unlimited fine. A company can be liable if a person who has responsibility within the company for an aspect of the employment knew that the employee was working illegally.  For example, if a bar manager at one of your managed houses knowingly employs an illegal worker the company will be liable.

Director’s liability
A director, officer or manager will be regarded as having committed the offence as well as the company if the offence is committed with their consent or connivance. The person liable will need to have been involved in the overall management of the company. Clearly this will be of great concern to directors in the pub trade. As a director or manager of a managed house pub company you may feel concerned that you have insufficient control over whether bar managers are recruiting illegal immigrant bar staff. The thought that you could be prosecuted personally for consenting to employ illegal workers is a real but daunting one. Directors need to ensure that they and the company are protected by having the right policies and procedures in place – see good practice below.

Good practice – protecting yourself
To avoid having to pay severe penalties under the new measures you should check that all workers are legal and be seen to be doing so.  You should consider adopting the following good practices:

• Build the checks set out above into your recruitment procedure and implement them in a way which is not discriminatory.
• Check documents before an employee starts work and make the production of such documents a condition of employment.
• The best way of directors protecting themselves and the company from liability is to have a central recruitment policy, endorsed and monitored by directors, which details the checks to be carried out and requires those responsible for      recruiting to carry these out. The policy should state that employees will be disciplined for not carrying out the relevant checks and summarily dismissed for knowingly employing an illegal worker. The implementation of the policy should be reviewed and monitored regularly. Provided good records are kept directors, officers and managers should be able to show  that they did not consent to the employment of an illegal worker.
• Record keeping is very important in proving that you have checked the relevant documents and carried out the required verification and copying.  If you cannot produce a record of having carried out a check prior to recruitment you will be treated as having carried out no check at all and the full penalty will be payable.

Avoiding race discrimination issues
It is essential to check entitlement to work in the UK. However, this should not be done in a discriminatory way – so do not ask only those who appear to be foreign whether they have the right to work in the UK. Ask all job applicants the same question at the same stage of the recruitment process and don’t assume a person is an illegal worker if they can’t produce a document. Suggest they go to a Citizens Advice Bureau for further advice on what to do. Finally, monitor your recruitment practices taking account of equality issues.

A code of practice on avoiding discrimination issues while preventing illegal working can be found HERE

Break clauses in leases can be hard to get and easy to lose. The rule of strict compliance means break notices need to be drafted and served, and break conditions complied with, to the letter.

Even very minor errors can invalidate a valuable break right. The whole break process is an adversarial contest between the landlord and the tenant, especially in the current economic climate. It is a process where the landlord’s and tenant’s interests are diametrically opposed – the landlord does not want to be left with empty premises with rates and other liabilities, and the tenant will be looking for an exit to reduce its property liabilities.

Negotiating break clauses
Care needs to be taken in making any break right clear and unconditional. Absolute break conditions requiring the tenant to have paid “all rents” or complied with “all covenants” are almost impossible to comply with.

An “all rents” condition requires not only principal rent, but also service charge, insurance rent, penalties such as default interest on any late payments and any other sums due under the lease to be settled. Such sums will need to be settled even if not demanded or in dispute.

An “all covenants clause” would require the tenant to ensure in particular that the property is returned repaired, decorated and reinstated exactly as required by the lease. A landlord could use very minor details (for example, a decorator having applied two coats of paint instead of three) to invalidate a break right. A landlord is under no duty to assist a tenant in complying with break conditions. In fact, often landlords may stay silent, serve a schedule of dilapidations at the last minute or serve a rent demand at the property once the tenant has vacated. The landlord’s motive is irrelevant to the court.

Unconditional break rights
Tenants and their legal advisers should therefore negotiate hard for an unconditional break right. If conditions are accepted, these should be limited to the payment of principal rent demanded and the handing over of the property free of third party occupiers.

Beware ‘vacant possession’
In relation to the latter, the landlord may require “vacant possession”. The tenant should be aware, if this wording is accepted, that this condition can be breached if chattels and rubbish are left behind. Or (as happened in a recent case) workmen employed by the tenant access the property after the break date, with the knowledge of the landlord, to finish off dilapidation works – which will of course ultimately be to the benefit of the landlord.

Initiating the break process
A tenant with a break right coming up should start thinking about this well in advance. Often between 6-12 months’ notice will need to be given to exercise the break and time will be of the essence.

Care needs to be taken to ensure the break notice is drafted and served exactly as required by the lease. The notice will need to be served by the legal tenant on the legal landlord – if a group or subsidiary company serves the notice, because it actually occupies the property or manages the affairs of the legal tenant, a break notice will be invalid – even if the landlord is fully aware of the arrangements. It is also possible that the original landlord may have changed; your legal advisers must check the identity of the current legal landlord. This will involve carrying out searches at the Land Registry and Companies House. Tenants have lost break rights serving notices on landlords’ agents or landlord group companies issuing rent demands.

Keep to the letter of the lease
Bear in mind: “if the [notice] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”
Lord Hoffman in a leading House of Lords case

Saving a defective break notice
This is not easy to do. The tenant can rely on the leading case of Mannai which stated minor defects in notices will not invalidate the notice, if the reasonable recipient, with knowledge of the factual and contextual background, would not be perplexed by the error.

Although this is an objective principle of law, success will depend on the particular facts of the case and this principle has not always been consistently applied by the courts. The other defences available are to argue that the landlord, on the facts, has waived a strict compliance condition or is “estopped” from relying on a strict legal right because it has given a contrary assurance to a tenant which the tenant has relied on to its detriment. While there is no certainty any of these defences would succeed, they have been successfully used to save break clauses or reach a settlement with the landlord. However, you are now in litigation territory which is ideally not where you want to be.

Some practical tips

• Diarise when a break notice needs to be served and get in touch with your legal adviser well in advance of this date to do an audit of your lease terms and draw up a check list of what action is required. Provide your legal adviser with copies of the latest rent demands served for the purposes of the legal due diligence in relation to the service of the break notice.
• If a break is conditional on compliance with repairing, redecoration and reinstatement obligations, instruct an independent building surveyor to prepare a schedule of necessary works in advance of critical dates.
• Check your own records to make sure you are up to date with rent and all arrears and also any interest accrued on arrears have been settled.  Ask the landlord for a financial statement – though bear in mind the tenant cannot rely on the landlord to get this right. If there is any doubt overpay and do not apportion sums if the break date falls between rent payment dates (i.e. make a full quarter’s payment in advance). Then try and recover overpayments after the break date.
• It is important the landlord receives all payments due in cleared funds on or before the break date.
• Make sure the process of vacating the premises, clearing rubbish and chattels, returning keys and handing the site with vacant possession are well managed and done in advance. Take steps to protect the premises from squatters but any security shutters or caretaker will need to be removed on the break date.

A change in emphasis
It has recently been announced that the new plans mean that the industry will have greater responsibility for and involvement in regulation.  The key difference will be a change to regulation of security businesses by the SIA rather than individuals.  It will be a criminal offence for a business to provide security services if it is not regulated by the SIA.

Under the new regime, businesses will be responsible for carrying out a licence application process for each of its employees which must include confirming the individual’s identity, address history, qualifications and right to work in the UK.  Checks will be carried out through an SIA trusted partner.  The SIA will continue to carry out checks on criminality.  Legislation should be in place by the end of 2013 so that the SIA can commence regulation of businesses in Spring 2014.

The Approved Contractor Scheme will not continue but it is thought that ACS companies will be best placed to become a regulated business under the new regime.

The position currently is that the SIA continues to regulate the security industry and it continues to be illegal for doorstaff to operate without an SIA licence.

We will update you when new legislation is announced.  In the meantime, more information can be found on the SIA web site

22 April 2013: The government has published its terms of reference today for the consultation on pubco and tenant relations, together with an impact assessment. The government seeks views by 14 June and proposes that the new Code will apply to all pub companies with more than 500 pubs. Vince Cable says he does not propose to abolish the tie, however. When we have digested the consultation paper we will publish our views on the potential impact on the sector -  watch this space!

Confusion follows contradiction

The much publicised public consultation on tenanted pubco regulation proposed by Vince Cable was expected to start by the end of March, or certainly by the first week of April.

On 7 April the Mail on Sunday claimed that Chancellor George Osborne had vetoed plans, stepping in amid Treasury claims that the changes could strangle the industry with red tape and put up the price of a pint.

This in turn appears to have led shadow pubs minister Toby Perkins to write to Vince Cable, expressing his alarm over the report and asking for an urgent written response on what action will be taken to bring forward this legislation “as quickly as possible”. Whilst Toby Perkins seems to have pre-judged the issue in assuming that legislation will be introduced following the consultation, there appears to have been no substantive response from Cable.

Just to complete a very confused picture, it has been reported that the Speaker of the House of Commons, John Bercow, has suggested that reports that George Osborne may have overridden plans to introduce a statutory code may be wide of the mark.

Since then a  BIS spokesman confirmed to the trade press that the Government intends to carry out a consultation “shortly” – but no comment was made as whether the terms of reference for the consultation have been settled or are still to be settled. So we still await the process to kick off.

Fear of the unknown?
The evidence available suggests that the Treasury are taking a close interest in this matter. This may follow recent comments attributed to the Chancellor in the trade press, as well as the recent reduction in duty. The Treasury are likely to be fully aware that previous legislation produced some unintended consequences, which they will be keen to avoid in this case, in order to safeguard the long term health of an industry which employs many.

The key issue for the sector is whether the model on which the tenanted and leased sector bases its business is to be radically changed. This is what critics of the sector want to happen. Greg Mulholland has been quoted as saying that the model operated by the pub companies is “simply not fair” although he exempts family brewers from this - even though most of them use the same basic model. If consultation leads to major and radical change within the pub industry the Government is, no doubt, keen to understand what impact such changes may have.

Underlying contradictions
This isn’t the first confusing turn of events. The announcement on 8 January of the consultation, with a view to there being a statutory code and an adjudicator, contained some surprising contradictions. Not least, having said in November 2011 that the distinction should not be primarily by size, but by lease or tenancy, the Government has since announced the dividing line is the ownership of 500 pubs!

Whilst cynics say the consulation just won’t happen, Greg Mulholland is convinced there is “a very strong will in Parliament to reform the company system…” It appears there a possible reason for delay may be a fear of the unknown, in terms of it being hard to predict the full ramifications that any legislation could have.

Nevertheless, it is by no means clear that the consultation will be postponed indefinitely, and it may just mean that the terms of reference are being more closely scrutinised, prior to a date being finally set for the process to commence.

It is imperative for hygiene reasons that mice are effectively controlled where food is being stored and prepared.  To ensure that you don’t fall foul of the law you need to be able to prove that you adopt and follow good food hygiene practice, so record keeping is essential.

Record Keeping
Food outlets must have in place a written Food Safety Management Procedure based on the principles of HACCP (hazard analysis critical control point).  You must keep documentary evidence of your procedures, keep them up to date and keep records of regular inspections.

The Government has produced useful guidance on pest control and inspections which can be adapted for your premises.

Enforcement
The Local Authority is responsible for enforcing food hygiene regulations.  If, following an inspection, your premises are found to have a pest problem you may be served with either:

• A hygiene improvement notice – setting out certain things that you need to do to comply if your business is breaking the law; this gives you a chance to put things right.
• A hygiene emergency prohibition notice.  In more serious cases this can forbid the use of equipment or premises if there is a risk of “injury to health”.  The issue of such a notice must be approved by a court.  A further certificate is issued removing the prohibition once inspectors are happy that the defect has been remedied.  You can appeal against the issue of an emergency notice and you are entitled to compensation if a notice has been wrongly issued.

Inspectors can also recommend prosecution in serious cases which can result in closure, fines or even a period of imprisonment.

Make sure you take action
The key point about the case of the Portsmouth licensees was that they had already been given a chance to close the pub and clean it, but when inspectors carried out further inspections standards had not improved dramatically.  If inspectors highlight an issue with hygiene and give you a chance to put things right it is imperative that you do so at the earliest opportunity in order to avoid prosecution and a potentially large fine.

Further guidance
The Food Standards Agency has produced a useful food hygiene guide for cafes and restaurants.

Restrictions on the right for Romanians and Bulgarians to work in the UK, when they became EU members on 1 January 2007, could only be imposed for 7 years – so these will be lifted at the end of December 2013.

Because restrictions were put in place to stem the immigration tide, employers should expect the law to be enforced rigorously. A civil penalty of up to £10,000 can be imposed in respect of each illegal migrant worker that you employ.  In more serious cases, particularly where migrants are deliberately used, there is a criminal offence which carries a maximum sentence of 2 years imprisonment and/or an unlimited fine. Therefore you should be careful to check and keep copies of the necessary documentation to avoid incurring penalties.

Workers from Bulgaria and Romania

The restrictions on Bulgarian and Romanian workers will not be lifted until the end of this year.  In the meantime a Bulgarian or Romanian worker will need to obtain an accession worker card before they start work for you unless they are exempt from the need to do so (see below).  You may also need to obtain a work permit for them before they can apply for the accession worker card.  You should not allow a worker to start work for you until they have received their card.

As an employer it is your duty to ensure that an employee has the right to work in the UK by checking their documents before you employ them.  You will then have a statutory defence if it turns out ultimately that the employee is an illegal worker.  In order to have a statutory defence before the worker starts work you must see and keep a copy of an acceptable document which shows that the worker has the right to work in the UK.

If a Romanian or Bulgarian worker tells you that they are exempt from authorisation then you will need to see a valid exemption registration certificate as evidence of this and you will need to keep a copy of this.

If you employ a worker illegally then both you and the employee will be guilty of a criminal offence.  You may be fined up to £10,000.  The fine ordered is payable for each person found to have been employed illegally.

Avoiding race discrimination issues 

• It is essential to check that an employee is entitled to work in the UK however, this should not be done in a discriminatory way; eg: do not ask only those who appear to be foreign whether they have the right to work in the UK. Ask all job applicants the  same question at the same stage of the recruitment process.
•  Don’t assume a person is an illegal worker if they can’t produce a document. Suggest they go to a Citizens Advice Bureau for further advice on what to do.
• Monitor your recruitment practices taking account of equality issues.
• Adopting a policy of favouring immigrant workers over local staff may result in conflict with the workforce and an increased risk of harassment or discrimination claims.

Useful Guidance 

Our article ‘Authorities crack down on illegal workers’ gives more detail about the checks you must undertake

The UK Border Agency website includes a user friendly guide to assist employers to check that they are not employing workers illegally.

You run a very successful restaurant in the city centre.  You lease the building from a property company and have fitted it out and branded it as one of your chain.  There are steps up to the front door of the restaurant with a handrail to one side.  There has never been a handrail to the other side. In the recent cold weather the mortar between some of the paving slabs making up the steps cracked causing some of them to work loose.  The landlord has an obligation in the lease for maintenance and repair.  As soon as you noticed the slabs were loose you contacted the landlord and asked them to repair the steps as a matter of urgency.  However, there has been some delay in the slabs being re-fixed and in the meantime a customer has tripped on one of the loose ones and broken her ankle.  She claims that the steps were dangerous and also that had there been a handrail on both sides of the steps it would have stopped her from tripping. Who is likely to be liable to pay compensation?

The landlord’s responsibilities

An occupier has a duty to visitors on his premises under the Occupier’s Liability Act 1957.  However, in a recent case (Drysdale v Hedges) the court has confirmed that this duty is not intended to apply to a landlord because a landlord’s duty statutory liability is set out in S.4 Defective Premises Act 1972 and it is not intended that a landlord should have liability under both pieces of legislation.

Where there is an obligation in the lease on the landlord to repair and maintain property, S.4 Defective Premises Act gives a landlord a duty to “take reasonable care to ensure that tenants and third parties are reasonably safe from injury to them or their property caused by a relevant defect in the property”. Often the liability of the landlord to repair a defect will only crystalise once the tenant has reported the defect to the landlord.  In this case, the loose slabs would be a “relevant defect” under the DPA and were reported to the landlord so it is in breach of its statutory duty under DPA and the customer may bring a claim for damages against the landlord.

A landlord also has a duty at common law to take reasonable care not to create an unnecessary risk of injury.  In Drysdale v Hedges a missing handrail was considered dangerous but as the tenant had rented the premises with no handrail in place the landlord was not under a duty to make the premises safe by installing one.

The tenant’s responsibilities

The injured customer may well have a claim against your landlord for failing to repair the damaged steps once you had notified him of the need to do so.  However, as the tenant of the premises and as an employer you also owe a duty to protect the health and safety of your staff and customers.   If you negligently breach this duty of care an injured party can claim damages.  In addition you have obligations under statute, for example, the Health and Safety at Work Act 1974 and the Occupier’s Liability Acts, a breach of which can lead to you being prosecuted in the magistrates or Crown Court where you may be fined and/or sentenced to a period in prison.

When defending a claim against you it is important for you to be able to demonstrate that you have carried out regular risk assessments at the premises and that you have taken all reasonable steps to avoid accident and injury.  For example, once the steps had become dangerous it would not be enough for you to report this to the landlord and require him to fix the defect as a matter of urgency.  You would also need to make the steps safe for customers by, for example, taping off the damaged steps or requiring customers to enter the premises by a different route until the steps have been mended.  The customer in question is also likely to bring a negligence claim against you as the restaurant operator as you continued to allow the steps to be used once you knew that they were dangerous.

More information

For further detail on your duty to protect your staff and customers from trips and falls see Kimbells’ article How dangerous are your premises? 

According to the BII, theft costs retail industries £4.2 billion per year.  Clearly a large proportion of this is customer theft, but it is closely followed by employee theft.  Having the right policies and procedures in place to detect and deal with employee theft could help you see a rise in profits.

Theft comes in many guises in the pub, hotel and bar trade.  Your bar manager may, for example, pour himself a pint after work without paying for it, take money straight from the till or ring cheap drinks into the till, serve more expensive ones and pocket the difference. Staff might also steal bottles from you – cash and bottles are most often taken off the premises with the rubbish in bin bags.

When does theft entitle you to dismiss an employee and, if so, can you dismiss them on the spot?

When to take action
The first issue you will need to consider when you are informed of an incident is the conduct itself. Has your employee done something relatively minor, such as helping themselves to a drink or free meal at the end of his shift? If so, you may feel that in the first instance this can be dealt with by simply having a word with the employee.  If the employee has done something more serious e.g. taken money from the till then you will need to consider disciplinary action.  You will also need to consider suspending the employee with pay pending a full investigation.

Disciplinary procedure
As an employer contemplating the dismissal of an employee the question of unfair dismissal will always be a concern.  As you may be aware, there are 5 statutory fair reasons for dismissal.  In order to show that a dismissal was fair one of these 5 reasons for dismissal must apply and you must act reasonably in all the circumstances in dismissing the employee.

Misconduct
The relevant statutory reason in the case of theft at work will be misconduct.  The starting point when you are dealing with any employee misconduct is your company disciplinary procedure which will give examples of what is regarded as misconduct and gross misconduct.  As it is such a common occurrence, you should ensure that your disciplinary procedure specifically covers employee theft at work.

As well as having a potentially fair reason to dismiss your employee you will need to ensure that you follow a fair disciplinary procedure prior to any dismissal.  The first stage of your procedure is to carry out a full and thorough investigation.

Suspension
You may need to consider suspending an employee pending investigation. The period of suspension should be as short as is possible and should be kept under regular review. Suspension should be a way for you to carry out an investigation, not a form of punishment for the employee. Unless there is a clear contractual right to do so, you will not be entitled to suspend without pay.

Investigation
If the offence occurs in the workplace you may have CCTV or witness evidence to consider.  You should collect as much evidence as possible. As part of your investigation, you should meet with the employee concerned to obtain their version of events. If, during the investigation, CCTV footage is collected and is to be used as evidence, thought should be given to assess whether the footage is conclusive; it may need to be reviewed in light of any further evidence presented.

If, following initial investigation, you consider the matter serious enough to move to a disciplinary, you should invite the employee to a formal disciplinary meeting, at which the employee has a right to be accompanied.  The disciplinary process must be carried out fairly and objectively.  Before the disciplinary meeting the evidence gathered during the investigation should be sent to the employee.

Disciplinary Meeting
It is important at this meeting that the employee should be given a chance to provide their version of events and state any mitigating circumstances. If, after the investigation and hearing, you form a reasonable belief that the employee has committed a theft from the workplace you should confirm your decision to them, as well as the sanction being imposed, both in person and in writing, and inform the employee of their right to appeal.

Gross Misconduct
If your employee has committed an act of gross misconduct such as serious theft then you will have the right to dismiss him without notice or any payment in lieu of his notice period.  However, you should note that gross misconduct does not mean that you can dismiss the employee on the spot.  You still need to go through a fair procedure i.e. suspend the employee, carry out an investigation and hold a disciplinary hearing prior to concluding that the conduct amounts to gross misconduct entitling you to summarily dismiss him.

Police Investigation
Even though there is no legal obligation on you as an employer to refer an employee’s conduct to the police, you may feel that you have a moral duty to do so. Indeed the BII are encouraging publicans to involve the police so that staff who are fired by you can’t just go and get a job in the pub in the next street and start stealing from there.  If you refer the matter to the police then it will be up to them to commence and continue their investigations.  These investigations do not circumvent the need for you to carry out your own investigations and conduct your disciplinary procedure. Indeed, you should not wait until the police have concluded their investigations before proceeding with the disciplinary procedure. Further, even if the police decide not to charge the employee, this should not have a bearing on your disciplinary decision.

Practical Points
To discourage employee theft and thus avoid loss of revenue you should therefore check that your disciplinary procedure adequately covers theft.  You should also make it clear to staff that theft is taken very seriously by the business and that action will be taken – which may include dismissal and involvement of police.

This is despite the fact that PICAS is now in place – and has found against pubcos in 2 out of 3 cases – and version 5 of the Code of Practice has been incorporated into leases and tenancies. (*Key elements for self regulation, defined in November 2011, are reiterated at the end of this commentary)

Background: questions to the trade
Vince Cable asked a number of questions in November 2012 of trade organisations, including BPPA, BII, ALMR, FLVA, IPC: -

• What action had been taken to promote awareness of PICAS
• What action had been taken / is planned by large pubcos (with 500 or more outlets) to maintain awareness of rights of licensees under the code introduced during 2011, and to ensure awareness of specific improvements such as training, rents, insurance, PICAS etc
• What progress had BII made in preparation for their code of reaccreditation role and what is the status of necessary agreements with the industry on how the reaccreditation process would work
• What action is being taken under the leadership of the BII to set up a Pub Advisory Service further to the service set up under Chris Wright and others.

The 19 submissions
As a result, 19 submissions were received by the Government from the trade.

If examples of bad behaviour by pub companies and particular hardship cases were expected, then the reaction will be one of disappointment – although admittedly Vince Cable did not ask specifically for evidence of hardship.

Points of note in these submissions include:

Hardship cases

• One hardship case arose relating to Steven Corbett in respect of an Enterprise lease – but this was back in 2009.
• Another involved Russell Stone relating to his involvement in PICAS – although not happy with the pub company behaviour, he confirmed the PICAS award and findings were satisfactory, which can be read as an endorsement of that body.
• A copy of a letter from Simon Townsend (COO of Enterprise) to Vince Cable on 5 November 2012 refers to a letter to Keith Barron (Chair of the Parliamentary Standards and Privileges Committee) regarding Brian Binley having evidence of Enterprise misleading tenants, but not then producing evidence referred to.
• Simon Townsend also refers to Greg Mulholland’s allegation on 22 August 2011 of 30 serious detailed complaints against pub companies, with 17 involving Enterprise – but again with no response. It would be interesting to hear if Simon did ever receive a response to either of these points, as disclosures do not reveal if this information was received by Enterprise.

Awareness of Codes of Practice
Quite a lot of respondents said there was limited awareness and promotion of Codes of Practice. Curiously, there is evidence to show that the large pub companies wrote to tenants before 31 December 2011 to confirm that they would consider themselves to be bound by the Codes of Practice.  A number posted Codes on their websites and there is some evidence that they have been incorporated into the recruitment process for new tenants.  Several issues arose out of this:

• Did the tenancy or lease have to be varied by Deed of Variation to incorporate the Codes of Practice?  There did not seem to be any uniform view but quite a lot of heat and light was generated as to whether or not these leases and tenancies required to be varied by a Deed of Variation (so as to be sure that successors in title were bound).
• Some respondents were not actually aware that there were particular Company Codes as well as the Industry Framework Code and appear to have got the two mixed up.

PICAS
A number of persons indicated that knowledge of PICAS was more limited than it should be and PICAS was perceived to be heavily weighted to pubcos.  PICAS, set up in January 2012, has been hearing cases since last summer, so it is still rather early to decide whether it will work well or not.  Vince Cable has appeared to suggest that it was “working well”.  As PICAS was, essentially, set up by BBPA alongside PIRRS it was inevitable that it might not be seen as truly independent.

Pub Advisory Service
One of the Government’s recommendations is for a Pubs Advisory Service to ensure that new entrants to the trade receive proper training and full understanding of what they are letting themselves in for.  Apparently this was to be set up under BII but not a great deal of progress seems to have been made on this.

Some conclusions

• The majority of the key elements for self-regulation appear to have been achieved but there are some significant gaps.  It is quite clear that the Industry Framework Code does appear to have been made legally binding and PICAS has been set up.  Limited progress appears to have been made for settling the 3 yearly reaccreditation process for Company Codes, but as the 3 year end date is a long way off, this is not yet critical.  Very limited progress has been made to set up an effective Pubs Advisory Service, which was to be administered by the BII but made available to non-members as well.  It is also the case that the strengthened Framework Code (referred to variously as version 6) has not actually been implemented nor agreement reached on it. It seems the order of events was to settle the Frame Work Code, a governing body and then PAS.
• The history of Government intervention in the sector has not been a happy one.  One respondent to Vince Cable stated that the pubco supplied model had been investigated no fewer than 26 times since 1966, 22 times in the UK and 4 in the EU.  If this is true it could not be said that any of these investigations has been a conspicuous success.  Although the queries raised by Vince Cable in his statement are primarily directed at pub companies owning 500 or more public houses, what the impact of further Government intervention will be, overall, is hard to envisage.  Furthermore it is by no means obvious why the line has been drawn at 500 outlets rather than, say, 400 or 600.  It is interesting to note that the draft of the Tied Public Houses (Code of Practice) Bill dated March 2011 “to be brought in by… G Mulholland” did contain an exemption for pubcos with less than 500 pubs for the free of tie option and also the guest “Real Ale” exemption from the tie.  So this is could be where the figure of 500 came from.
• Evidence supplied in the submissions clearly indicates that operators are not making enough money out of pubs.  Whether legislation is the answer to this is not obvious; certainly it is not clear that any of the steps suggested in the Government’s response of Vince Cable’s questionnaire really would promote operator profitability.  Operator profitability is, in any event, going to be difficult to achieve in the light of comments made or attributed to EIP which showed that Government/HMRC takes an annual (but scarcely credible) £145,000 in VAT duty and other taxes from each pub in the Enterprise estate.  Whether this is true across the board in the UK is not confirmed, but it does seem possible that the single biggest beneficiary of pubco trade is the Government!
• What many of the respondents want is the free of tie option and a market rent based on that.  Vince Cable has said that he wants to enshrine in law the principle that a tied tenant should be in a no worse position than a free of tie tenant (which goes some way short of the request) but it is worth bearing in mind that there is no current law to that effect in the UK or the EU.  Vince Cable has also said that he wants an overarching fair dealing provision but that must, of course, mean fair dealing for the pubco as well as for the operator.  Further thoughts on this to follow!

*Key elements for self regulation
November 2011

• Industry framework code to be made legally binding
• PICAS to be set up under PIRRS
• 3 yearly accreditation process for company codes to be set up
• A new pubs advisory service (PAS) - A strengthened framework code with particular focus on FRI leases.

Join the debate
To follow the debate and our ongoing commentary on developments, join our Linkedin Group – Heads Up: The Statutory Code