What to make of the draft Pubs Code Regulations

More unintended consequences?

The long anticipated draft of the Regulations has now been published, and whilst still subject to a consultation, there are some important points to note:

1. The draft Regulations draw extensively on both the Industry Framework Code Version 6 and the draft Pubs Code published in June 2014, [so realistically there are unlikely to be major changes to its final form.] It would be unrealistic to expect major changes to the draft of the Pubs Code Regulations now published. Are the draft Regulations different and separate from the Pubs Code Regulations??
2. The draft is complicated and provisions relating to the MRO are difficult to follow – particularly where they have to tie in with the renewal procedure for tenancies and leases under the Landlord and Tenant Act 1954. To give a flavour of this complexity, one section alone (in the space of 10 lines!) contains the following terms – “MRO procedure”, “MRO start date”, “notification period”, “full response”, “negotiation period” and “independent assessment period” – all of which are defined terms. This is surpassed by a section which contains references to a “proposed MRO tenancy” and also “MRO proposed tenancy”- which, apparently, mean different things!Some tidying up and simplification might help everyone.
3. There are also some gaps in the Regulations. One of the issues raised in Parliamentary debate and referred in Hansard is the issue of what exactly a “tied pub” is. In the House of Lords it was expressly stated (28 January 2015) that the definition should not inadvertently capture restaurants or hotels and a right was reserved for the Secretary of State to provide that the Pubs Code would not apply to tied pubs of a specified description, as well as tied pub tenants (again, of a specified description). Although the draft Code does exempt tenancies at will and shorter term agreements, as well as pub franchise agreements (see below), no space is left for any more precise definition. We can only hope the Government decides, as a result of the consultation, to say precisely what it means.
4. A careful reading of the draft Regulations will inevitably draw the conclusion that a very high burden of responsibility has been placed on the pub owning business and that an awful lot of risk has been reallocated to them also.

What might be the consequence of this?

• Any pub owning business is likely to take much more care in approving new tenants. Paradoxically, the most likely of the unintended consequences might be to reduce the opportunities for new entrants to the trade.

• A reduction in innovation could result. One of the more surprising points to emerge in recent times is that the tied tenanted sector is likely to generate more new ideas and some of these have noticeably come from new entrants to the sector.

• Why would a pub owning business want to grant a longer term tied lease? [is this now an option or a requirement? It seems that GM is dismissing this below.] There is the possibility that this might lead to a reduction in the numbers offered in the market place. This point was put at a recent industry event by Peter Hansen to Greg Mulholland, who described it as a “deluded” question on the basis that (my words) there is no great demand for these longer leases. How does he know that?

• Pub owning businesses will adopt new structures and models to suit both them and the operators. None of these are likely to be particularly new and some of them were tried extensively in the pre-Beer Orders era and in its aftermath. The draft Regulations do not show any recognition of the options that are available and there will surely be a list of issues to be dealt with in the inevitable Amendment Regulations.

• Multiple operators do not need the protection of this Code and can decide for themselves what they will or will not agree to. Many of them will opt for FOT leases and tenancies, possibly squeezing out single site operators and new entrants – who will increasingly find that the better sites are not available to them.

• Sales will result as pub owning businesses sell off pubs that do not fit for whatever reason and the tenants will find themselves owned by companies that do not have to comply with the Regulations. What a great result that would be!

There remain some fundamental questions which require to be answered and it is not obvious that the Code in its final form is going to provide satisfactory answers. In the first of two commentaries we’ll be looking at a few of these questions including:

1. What is a pub?
2. What is a tied pub?
3. What is a service tie?
4. Landlord and Tenant Act renewals

The second commentary, to be published shortly, will consider:

1. Tenancies at will and short agreements
2. Transitional arrangements
3. Franchise agreements
4. Deposits

To read the first commentary, click the read more button below.