Since the inception of the Pubs Code there has been strong focus on the number of trigger events affecting the regulated pub companies, as a measure of gauging their exposure to tied pub tenants exercising the MRO option.
For example in Ei Group’s 2016 Investor Presentation it stated that “Specified trigger events allow tied tenants to opt for MRO”. It also said that there were “463 lease rent review and renewal events due in year to 30 September 2018”, before explaining that “we have reduced long-term tied leases (> 5 years) from 3,035 to 2,069 (32%) at 30 September 2017”.
The implication of this is that the main trigger events that might arise during the life of a tied tenancy, as a consequence of the terms and status of the tied tenancies or leases, are rent reviews and lease renewals. If this is correct then the risk of the MRO option being triggered by a tied tenant could be mitigated by shortening the life of tenancies and having them contracted out of the security of tenure provisions contained in the Landlord and Tenant Act 1954.
Is this right?
Regulation 66 of the Pubs Code, which is tucked away in the back of the Code suggests otherwise. This concerns the provision of rent assessments and consists of nine sub-regulations, the second of which says:
“A tied pub tenant may request, on or before the 5-year anniversary date, a rent assessment or an assessment of money payable in lieu of rent under regulation 19(2)(a) if, and only if:
- No rent assessment/or assessment of money payable in lieu of rent has been concluded before the date of the request; and
- No rent review has been concluded within the period of 5 years ending with the date of the request.”
The 5-year anniversary date is defined to mean “the date which is 5 years after the commencement date” (the latter being when the Pubs Code came into force – 21 July 2016).
There is no exclusion for tied tenancies granted before 21 July 2016, and no exclusion for tied tenancies granted after 21 July 2016, so provided that the tied pub tenant has not concluded a rent assessment at all, or a rent review within the period of 5 years leading up to the request for a rent assessment, then it can try and pursue the MRO option at any time.
To do so only the two statutory conditions need to be met: there needs to have been no rent assessment concluded at all, and no rent review concluded in the last five years.
So, for example, a tied pub tenant can enter into a 5 year contracted out tenancy on day one, and request a rent assessment on day two.
So what is going on?
This begs the question, why focus on removing rent reviews and lease renewal events at all?
Surely the bigger risk is tied pub tenants being able to request a rent assessment at any time after entering into a contracted out tenancy?
Rather than mitigating risk by converting protected long term tenancies into short term contracted out tenancies, a regulated pub company might just be employing distraction tactics, instead of conducting effective mitigation.
An effective mitigation strategy
An example of an effective mitigation strategy would be for the regulated pub company to enter into an investment agreement with the tied pub tenant, by investing twice the rent payable in the last financial year or 12 months preceding the date of the investment agreement. This is one of the regulated methods of avoiding the risk of the MRO option being exercised.
But there has been no real focus on this since the inception of the Pubs Code.
Or a smelly distraction?
Red herrings were just smelly kippers, cured in brine or heavily smoked, according to Wikipedia, and in the pamphlet Nashe’s Lenten Stuffe, published in 1599 by the Elizabethan writer Thomas Nashe, it was said that: “Next, to draw on hounds to a scent, to a red herring skin there is nothing comparable.”
The phrase red herring appears to derive from a hunting distraction, whether advertent or inadvertent. Presenting conversion to short term contracted out tenancies as effective MRO mitigation might just be such a red herring.
Will distraction last?
However it is in the nature of distraction that it may not last, especially where tied pub tenants’ concentration may quickly return to the real underlying issue of the ratio of reward they receive, given the impending costs pressures facing the entirety of the sector.
The real problem for those who carry the most exposure to tied pub tenants is that:
- money is about to become tight, if it isn’t already;
- the law, time and numbers (i.e. bulk) are on the side of tied pub tenants in providing opportunity; and
- there are indications that the Adjudicator’s office might have begun to finish grinding gears.
If this is right then 2018 might be an interesting year. Although the tie can work well in recessionary times, because of its in-built flexibility on the “wet rent”, this could result in inactivity for underperforming tied tenants, and a search for opportunity for performing tied tenants.
