The Pubs Code and pricing for tied products
If there is one issue which consistently creates tensions between pub companies and their tenants it is that of the prices which tenants have to pay for tied products.
The level of rent in a lease or tenancy is inextricably linked to the prices payable for tied products and, in theory at least, there is nothing wrong with lower rents and lower discounts as against higher rents and higher discounts. The tenant has to be able to make a proper business return and, in theory at least, it should not matter how the final figure is arrived at.
In practice pricing does cause a problem for the following reasons:
- Rent is usually settled in advance often for up to five years head (albeit subject to indexation or open market review).
- Prices for tied products are usually not settled in advance. Quite apart from unforeseeable changes in excise duty and VAT, the pub owning business will usually refer to a wholesale price list or, where specific prices are mentioned, these are only settled for a period of time, often not more than one year ahead.
- It has long been the case that price lists relate to a region or are national and do not always reflect prices which are appropriate in the area.
- An open market rent normally takes into account local conditions and truly comparable evidence can be hard to come by. In addition all you need is one or more high or unrealistic rental prices agreed to be paid by a new ill-advised tenant to distort the market. Even then, it is still possible for a successful operator to set the bar higher both for himself and others. Set against that, trying to insulate the pub from property market conditions is probably not going to be fair to the pub owning business. This, in itself, is a major issue.
- When unforeseen events occur a fair adjustment of the rent and pricing structure may be difficult.
- List prices shown on regional or national price lists appear to be charged relatively infrequently and, more often than not, the prices are discounted from the price list and by large amounts. Many observers have wondered why nominal prices are set so high when they are then discounted. However, the default position is often that the prices shown on the price list will apply.
- If prices payable by the tenant are set by reference to the price list there is nothing, in the absence of an express contractual provision, to prevent the pub company or supplier changing the prices in the price list from time to time to whatever it likes. This might be reflected in the rent on open market review (but not indexation of rent) and this will be at a point in the future – whereas the price increase is now.
- Discount offers normally apply for a period of time and margin maintenance provisions are very unusual. A curious feature of the revised scheme for Inntrepreneur tenants (casting your mind back in time) was that the discounts were not guaranteed over the remainder of the lease term (although it appears that they were renewed annually by agreement).
- Rent reviews do not always take the uncertainty over future pricing in to account when setting the new rent.
- Charging a tenant a free of tie price can lead to a higher market rent but that higher fixed outgoing can be a bigger business risk for the tenant.
The legal position
What has the law had to say about this and, in particular, resolving the tension over pricing of tied products? In short, not very much. The first suggestion from case law is that there must be an implication of reasonableness. The second is that the prices must be genuine prices at which the tied products are offered to be sold to retailers generally. None of this takes into account the circumstances of the tenant or deals with the system of discounts from the prices shown in the price list, let alone reallocation of business risk.
This has not proved to be very satisfactory; the Pubs Code can be read as the latest attempt to deal with this and is based on a new principle, namely that the tied pub tenant should be no worse off than the free-of-tie tenant.
How has the situation changed when it comes to pricing issues now that the Pubs Code is in place? We will take a look at each of the following elements in turn, giving you a brief overview of the situation, commentary on the situation and what it means to you:
- The impact of Brexit – will this change the rules when it comes to competition law
- The balance of power – achieving the principle of fairness
- The consequences of price changes – triggers for increases
- Rent reviews and price increases – actions and points to note
- The market rent option – concerns and conclusions to be drawn
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.