When the MRO rears its head

Recovering possession – issues for pub owning businesses

As a result of the Pubs Code, a tenant with a tied tenancy from such a pub owning business has the right to serve an MRO (Market Rent Option) notice when the tenancy is to be renewed.

Many pub owning businesses will consider the MRO to be undesirable and will be keen to avoid it if possible. To do so they may consider whether it is possible to refuse the grant of a new tenancy on any of the grounds specified in the Landlord and Tenant Act 1954 so as to avoid the possibility of the MRO being taken up by the tenant.

One of the more obvious grounds for refusing the grant of a new tenancy lies in the ability of the pub owning business, as landlord, to oppose an application on the ground that they intend to occupy the premises, “for the purposes of a business to be carried on by him therein”

Deceptively simple words, but the basis of considerable litigation – we will examine these more closely and consider how arrangements can fall within these words and thereby satisfy the requirements of the 1954 Act.

Backdrop

Generally outlets in the pub sector are either managed or let – although various attempts have been made to use franchise style agreements (there is material doubt as to whether some were true franchises at all) and certain types of “host” agreements. Some of these continue, but attention is likely to focus on whether the particular types of agreements which a pub owning business wants to enter can give grounds for refusing renewal of the lease or tenancy.

Particular issues have been

  • Does the business at the pub have to be carried out by an employee of the pub owning business?
  • Is it possible to enter into a commercial or management agreement for a third party to run the business for the pub owning business?
  • Do the terms of the commercial or management agreement matter? After all, it would be possible for the income to be applied in a manner which mirrors the application of income under a lease or tenancy and allocates business risk between the parties in a similar way.
  • How does a franchise arrangement in the style currently used by some pub owning businesses tie in with this?

Guidance from previous cases

In answering some of these questions, it is worth asking whether any of this has happened before, and in fact some of these issues were explored in the case of Chez Gerrard v Greene and more recently, unlikely as it may appear, in Humber Oil Terminals Trustee Limited v Associated British Ports.

The Chez Gerrard case

A short summary of the facts in Chez Gerrard v Greene will explain the point.

Chez Gerrard were well known restaurateurs whose lease came to an end. Their landlord, a Liberian shipping company, opposed the grant of a new tenancy on the grounds that it wanted to occupy the premises for the purpose of a restaurant business. The Liberian shipping company had passed a board resolution to that effect and had shown the proposition to a retained expert – who was a would-be participant as well. He had expressed the view that the restaurant would generate a substantial, but unspecified, trading profit which, after deducting his own take, would be likely to leave what the Liberian shipping company could regard as a sufficient surplus. The costings of the expert were not complete but the court still thought this was a reliable factor in coming to the conclusion that the prospects of the intention being put into effect were perfectly feasible.

We can draw the following from the case report:

  • The facts of the case make it sound as if the proposal by the expert was for a commercial or management agreement to be entered into and no point appears to have been taken that the would-be participant had to be an employee.
  • The board resolution did refer to employment of a supervising manager but this was not drawing a distinction between the employed or the self-employed and could have referred to the manager employed by the operator.
  • No clear point was taken about where the business risk would lie although it appears from the case report that the operator would, first, get his take leaving the balance or surplus to the Liberian shipping company to “take account of other non-trading profit deductions”.
  • The description of the way the operating profit was applied could mirror the financial arrangements in many leased and tenanted pubs.

There is no reason why a manager has to be an employee. This is consistent with earlier case law which tells us that premises can be occupied by a tenant even where the actual occupiers are not employees (in the best known case on the point the judge thought it was a “borderline” case).  It is perfectly reasonable, for tax or other purposes, for an individual to want to carry on business through the medium of a limited company and for the limited company to procure the services of the individual. These types of arrangements are commonplace in the pub and hospitality sector.

Humber Oil Terminals

This leads to Humber Oil Terminals Trustee Limited v Associated British Ports. This appears, at first glance, a surprising authority in the pub sector and the facts of the case need not be dwelt on. Very simply, the tenant of the Immingham Oil Terminal wanted to renew its lease but the landlord, Associated British Ports, opposed the renewal on the ground that it wanted to operate the Immingham Oil Terminal itself.

There is quite a lot more to the case, but the part we are interested in was how the Associated British Ports intended to occupy the Immingham Oil Terminal itself. It would, potentially, have been difficult for Associated British Ports to have occupied the premises because the tenant was entitled to remove a large amount of installed equipment, pipelines and infrastructure (the replacement cost was estimated at £60m and was estimated as likely to take 2 years). The important point for us is that the court accepted that the intention of Associated British Ports to occupy was demonstrated by the “likelihood” that they would enter into a commercial or management agreement of some kind with the current operator to operate Immingham Oil Terminal on its behalf.

It follows from all of this that:

  • The commercial or management agreement referred to does not have to be a contract of employment (a company cannot be an employee).
  • The court did not appear to think it appropriate to consider how the operating profits might be applied between Associated British Ports and the operator.
  • The court did not think it relevant to address where business risks might fall under any such arrangement.

What are the outstanding questions?

Neither case dealt with the issue of the identity of the person making supplies for VAT purposes. You might have thought that this would be the person in occupation of the premises. After all, if you go to a pub and have a meal, drinks, stay overnight and then get a VAT receipt you would reasonably think that the person shown on the receipt as the person making those supplies would be the person in occupation of the premises. This does not, though, fit with Humber Oil Terminals, although the specific point is not mentioned in the judgment. In that case, the context suggests that the operator of Immingham Oil Terminal, on behalf of Associated British Ports, under the commercial or management agreement, would be the person making VAT supplies and not Associated British Ports.  We would then need to revisit what “occupation” means in this context.

Occupation is a matter of fact and no two cases are the same.  While physical occupation is not required every day, the right to occupation must be clear and an element of control is necessary.

Conclusions

There is a lot more case law on this point than is set out in this article but, as applied to the pub sector, the following conclusions can be drawn:

  1. You can satisfy the test set out under LTA 1954 without the business being run by your employee.
  1. You can satisfy the requirement by intending to enter in to a commercial or management agreement with a third party.
  1. Any agreement you enter in to must not give exclusive possession to the operator.
  1. You must ensure that you do have a physical presence or at least a right to this and the detail of this will be important (and could cover items such as keys, security, ownership of fixtures and fittings, business rates, decorating, repairs, utilities and services such as cellar cooling maintenance and gas and electrics certification).
  1. You must retain control of the premises (opening hours etc) and those using the premises.
  1. The services which the operator has to supply must be clear from the commercial or management agreement and which require to be carried out at the premises.
  1. Time and effort spent on operating the pub must be detailed in the commercial or management agreement (and this will need to include particular provisions where the operator is a multiple operator).
  1. A commercial or management agreement can contain financial provisions which mirror the terms of a tied tenancy although care must be taken to ensure this does not look like a sham.
  1. The court does not appear to be interested in the terms of the commercial or management agreement which allocate business risk between the parties.
  1. The fact that the operator may be the person making supplies for VAT purposes is not necessarily a fatal blow to any such arrangements. It is, however, an important point and would have to be viewed as part of the overall contract and, specifically, in the context of the points set out above.

It is worth bearing in mind that none of these points should be dealt with in isolation and any commercial or management agreement must be viewed in the round. However all or any of these points are likely to be important.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.