This article is set against the background outlined in our first in the series, “The trading tie; where it all began”, which puts the whole topic in context.
What does it mean and does it still matter?
SCORFA is an acronym for Special Commercial or Financial Advantages. It first appeared in Regulation 1984/83 – which is the block exemption which applied to brewers and pub company ties prior to May 2000 and which was replaced by the current block exemption (Regulation 2790/99). SCORFA was not repeated in the current block exemption which in any event is due to come to an end in May 2010. If the SCORFA provision came to an end 10 years ago then it shouldn’t matter now, should it? Or is it possible that the underlying principles might still apply?
TISC and BEC
Oddly, the House of Commons Trade and Industry Committee report – published in December 2004 – used the SCORFA terminology as if it was still current at that time. In particular TISC said:
“Pubcos do not deny that their tied tenants pay higher wholesale beer prices than other public house operators. The offset or, “countervailing benefit”, to the tenant is in the form of a lower than commercial, or free of tie, dry rent and special or financial advantages (SCORFA). Under EU competition law, contracts containing an exclusive purchasing obligation, such as the beer tie, have only ever been permitted if they provide such “countervailing benefits”. The theory is that the net cost of the beer tie to the tenants makes them no worse off than if they were free of tie”.
This paragraph contains a number of controversial comments, some of which are dealt with below. However the TISC report does appear to suggest that the benefits that the tenant receives, in terms of reduced rent etc should be genuinely “countervailing benefits” (that is, benefits which offset the higher prices paid by tied tenants for drinks). By contrast the BEC report appears to go one step further and underlines the suggestion that calculations: “do not take account of the additional income stream the pubco gains through profit on the tie”
It goes on to say that:
“….while the decrease in the lessee’s income is absolute [this is the suggestion that the effect of the beer tie on basic rent is that both pubco and lessee take a lower income] the pubco has £110 from that part of that discount on its barrelage it has not passed on to the lessee. The reduction in rent is accompanied by a reduction in the lessee’s profit but an increase in the pubco’s overall revenue”.
This would appear to go some way beyond what SCORFA was originally intended to say because it suggests that you should consider what the brewer or pubco makes out of the trade tie rather than just ensure that the tenant receives benefits which are comparable in value to the cost to him of the tie.
Why exactly was SCORFA introduced in the previous block exemption?
The previous Regulations had taken the view that beer supply agreements (and fuel service station agreements) required different treatment because of peculiarities of the markets in question. The previous Regulation assumed that the beer suppliers or landlords would confer on the licensee special commercial advantages by contributing to, for example, financing, granting loans on favourable terms, equipping them with a site or premises for business, providing them with equipment or undertaking other investments for their benefit. In return for that the licensee would enter into a long term purchasing obligation.
It can be seen that this appeared to justify the tie in terms of the advantages conferred by the brewer or pub company on the licensee. However, nobody actually said, and no case has specifically stated, that the benefits conferred on the licensee (whether under a tenancy or free trade arrangement) should genuinely be “countervailing” benefits. Still less had it ever been decided that there should be an equality of return for the brewer and the pubco on the one hand and the licensee on the other hand. To do so would be to strike at the heart of the negotiation between the parties.
Readers may not be surprised to hear that CAMRA suggested, as part of its super complaint to the Office of Fair Trading, that the OFT should adopt a principle of ensuring that a tied lessee is “no worse off” than a free of tie pub business as a way of ensuring that a “fair share” of the benefits of a tied lease agreement (such as the discounts available to pubcos as a result of the large volumes of beer that they purchase from brewers) are passed on to lessees in the form of lower prices for beer and other tied products.
The OFT did not completely answer this point but did say that the evidence to them suggested that the property rent differential for tied lessees as against free of tie lessees and other free houses provided a “considerable” (the words ”countervailing” and “equal” were not used) offset to the higher wholesale prices paid by tied lessees. The OFT then detailed a number of other support services. It did say that the benefits to the lessees were not the same in every case and, because of the difficulty of valuing these benefits in the hands of the tenant, the OFT had focussed on the costs that pub companies and brewers had incurred in providing these benefits rather than the estimated value of the benefits to the licensee.
What does all of this mean now?
The SCORFA principle says that there have to be compensating benefits to lessees or free trade customers who accept ties or exclusive trading arrangements. This does not, however, mean that there has to be an equality of return between a brewer or pub company on the one hand and tenant or free trade customer on the other – which is what CAMRA and, to some extent BEC, seem to suggest. It remains to be seen whether the EU will clarify the position on this when it completes its review of current block exemption in May 2010.
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.