The Business Innovation and Skills Committee of the House of Commons published a report on 4 March 2010 following an apparently “strong reaction” to the 2009 BEC report – which led to a subsequent evidence session.

The report of the Business Innovation and Skills Committee (BISC) was published on 4 March 2010 and is likely to leave many critics of the trade tie profoundly disappointed.  There is a marked change of tone between the BEC report published in May 2009 and this latest BISC report, to the point that the reader may well wonder what exactly has happened (possible clues to the answer to this lie in the transcript of the hearings). 

Over the past year a great deal of heat and light has been generated on the subject of the trade tie and the report suggests that BISC has retreated some distance from the position it took under BEC.  In May 2009 BEC recommended “the Secretary of State refer the matter to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position”.  BEC went on to say “we recommend an urgent investigation”.

Now BISC gives the sector until June 2011 for “self-regulated reform” and “if it does not deliver on its reforms by June 2011 then government intervention will be necessary”. Peter Luff has accepted (see Publican website) that BISC cannot force a Competition Commission reference and thinks the best hope is to get the pubcos to introduce effective codes. You can decide for yourself whether this is a retreat or a threat – or both – but it would be sensible to take some actions now. The question is: what actions?

What should the industry be doing?
The article published in June 2009 set out a number of actions that should be taken, which remain valid.  There are a number of other issues that may now be taken into account:

–  The Framework Code of Practice:   BISC appears to support the new Code of Practice and accepts it is a “ modest step in the right direction”. The overall conclusion seems to be that it is a basis on which to work but that brewers and pubcos should do more and use this as a base on which to build.

Action required is that everyone should have their own code of practice tailored to their situation but which, as a minimum, meets the requirements of the Framework Code and this means that lease or tenancy documents have to change to comply with it.

– The Trade Tie:  In the course of the last 6 months, a well known commentator on industry matters stated that he had no objection to the trading tie as such but he did have objections to the effect of trading ties.  This is the sort of distinction which would warm any lawyer’s heart.  However, the thought that the government would take any steps, now, to change the trading tie was always fanciful.  This is quite apart from the fact that there will shortly be a general election which may, or may not, result in a change of government. 

The fact is that the format of the trading tie will be dictated by the provisions of any new block exemption from Article 101 (formerly Article 85 then Article 81) of the EC Treaty and the present block exemption expires on 31 May 2010.  Readers of this website will be familiar with this and also the fact that legislation (eg the Competition Act 1998) ties UK competition law very closely to EC law. 

Accordingly, any suggestion that the government should legislate on the format of trading ties in a manner which might be inconsistent with the provisions of any future block exemption from Article 101 is not credible.  Readers may be interested to note that paragraph 5 of BISC report specifically states that the committee wishes “to make it absolutely clear that….. many of the problems the sector faces are completely unrelated to the tie”.  They do go on to say that there may be too many public houses in the UK but do not appear to have accepted, specifically, that major contributory factors to problems within the sector are caused by excessive costs of compliance with regulatory requirements, the beer duty escalator legislation, not to mention unsustainably low pricing from supermarkets as well as the impact of the smoking ban.

Action  required – it is probably best to wait until May and the European decision to decide if you should change the tie in your documents

– Transparency:  A recurrent theme in the earlier BEC report was that pub companies were profiting while tenants were suffering.  The BEC report put forward transparency as a matter of critical importance and the industry generally appears to have accepted this.  Transparency is a theme throughout the Code of Practice and all operators within the sector would be well advised to follow this. 

Action required – ensure processes do have the relevant degree of transparency although this brings some attendant risks (you may have to give some “health warnings” in respect of some of the things you say and do).

– Rent Reviews:  It also recommends deeds of variation to change upward only rent reviews to up or down reviews. 

Action required – you should change your documents to reflect this.

– AWPs: Paragraph 54 of BISC expressly states that AWP income should be removed from the divisible balance and this is referred to in the Code of Practice.  This suggests that the arguments in relation to AWP machines have been, as to part at least, lost.  Nonetheless, this may be a relatively small price to pay set against the possibility of losing the AWP machine tie.

Action required – change your consent documents

– Flow Monitoring: The admissibility of data from flow monitoring equipment has been the subject of some detailed discussion and the recommendation is that there must be physical evidence and not merely a signed “confession” by the lessee.  Nonetheless, short of removal of products from the premises, a note recording the fact that products bought outside the tie have been found on the premises will often be the only way of recording this.  Individual company’s codes of practice could easily deal with this issue and set out the process likely to be followed when offending products are located.

Action required – change your code of practice.
And in addition…
Every pub company or regional brewer should consider the following:

– A decision has to be made to say whether their own code of practice will be legally binding.  Clearly some effort will have to be made to ensure that the terms of each individual code of practice are consistent both with the Framework Code and the terms of the lease or tenancy.

– Codes of practice should set out what countervailing benefits are available to the tenant in return for the trading tie.  The general principle appears to have been accepted that a tied tenant should be no worse off than a free of tie tenant and, in its rent setting proposals, RICS is reported to have accepted this.  Similarly RICS guidance on rent-setting will deal with the issue of the divisible balance and how this should be treated at the outset and also on rent review. 

Other issues will include the treatment of tenant’s improvements and the way in which these are disregarded.  It will be necessary for some changes to be made to documents in the light of these proposals and, clearly, the individual codes of practice must be consistent with the terms of the lease.

– The Pub Independent Rent Review Scheme (PIRRS) appeared to have received general approval although some comment was made that this is a scheme which could be extended beyond rent reviews (notwithstanding its name). 

Action required – deeds of variation and revised forms of tenancy agreement will be required in order to ensure that PIRRS provisions are included in a tenancy agreement.

In conclusion, this may represent a step by the industry towards winning the argument that there are benefits to trading ties.  It also suggests that the industry has made a number of positive steps since May 2009 but the stated threat of BISC must be taken seriously otherwise the same issues will be debated again in 2011.

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.