Since the introduction of the Pubs Code in 2016 tied pub tenants, whose landlords own 500 or more tied pubs in England and Wales, have been able to request a market rent only (“MRO”) lease on the occurrence of certain “trigger events”. However, many tenants have faced underhand tactics by their landlords aimed at making the MRO option an unattractive prospect.
If you are considering serving an MRO Notice on your pub landlord, you should be aware of the following:
1. High Rents
The Pubs Code Adjudicator (“PCA”) has made it clear that landlords should offer tenants a fair market rent. Landlords should not seek to maintain their existing profit margins by demanding an unreasonably high rent in the MRO proposal. However, tenants have frequently reported being offered significantly higher rents as a term of the MRO proposal.
The Pubs Code gives a tenant the right to have their MRO rent determined by an Independent Assessor. This right is essential for tenants to ensure that they are paying a fair rent when they agree to the MRO proposal offered by their landlord.
We advise any tenant considering a new agreement with their landlord, whether it be an MRO lease or a new tied deal, to obtain expert advice relating to the fair market rent payable. For further details, please contact Mike Hughes at email@example.com.
2. Failing to engage in meaningful negotiations
When a landlord offers a tenant an MRO proposal the tenant has 14 days to raise any concerns that they have with the terms. This is a very tight timescale. If the tenant fails to refer the matter to the PCA within this time, the tenant will lose their right to alter the terms of the MRO proposal. If the landlord refuses to engage in meaningful negotiations with the tenant during that period, referral to the PCA is almost inevitable.
It is important that a tenant obtains legal advice on the terms of their MRO proposal as soon as it is provided to them, so that any issues can be raised at the earliest opportunity.
3. Terms not commonly found in free of tie leases
Landlords will insist that the terms of their MRO proposal are common commercial terms in the free of tie market. If a landlord is unwilling to negotiate or vary the terms of the MRO proposal, it may be necessary to refer the matter to the PCA for determination.
Whether or not the terms are unreasonable will be considered by the PCA on a case by case basis. The PCA has confirmed that there is no standard “one fits all” MRO tenancy that a landlord can claim is reasonable in all circumstances. What is reasonable for one pub tenant, may not be reasonable for another.
If the matter is referred to the PCA, and the tenant claims that particular terms in the MRO proposal are unreasonable, it will be up to the landlord to demonstrate why the term is not unreasonable.
4. Significant upfront payments
There are a number of ways in which landlords can make the MRO option appear economically unappealing. One of these is by insisting upon substantial upfront payments, for example, requesting large rent deposits from the tenant and including a term in the MRO proposal which requires the tenant to pay the landlord’s legal fees in relation to the preparation and completion of the lease.
A number of landlords have informed tenants seeking an MRO tenancy that they will issue a terminal schedule of dilapidations on the grant of the new tenancy agreement. The PCA has publically criticised this tactic, referring to it as an “adversarial weapon”.
It is important that negotiations are entered into with the landlord and an agreement is reached at an early stage which limits the additional costs that the tied-tenant will face on the grant of the MRO tenancy.
5. Insisting on new tenancy agreement
Pub companies have made it clear that they do not accept that an MRO proposal can be dealt with by way of a deed of variation. However, legislation does not preclude the MRO tenancy being dealt with this way. The PCA has made it clear that, in certain circumstances, a deed of variation may be the appropriate vehicle for the MRO proposal – although it is not the default option.
One thing that tenants should be aware of is that a deed of variation cannot be entered into if the tenant wishes to extend the length of their existing lease term. If a tenant is looking to enter into a longer lease term with the pub company, the MRO proposal will have to be dealt with by way of a new tenancy agreement.
6. Individual negotiations
It is highly likely that, once an MRO Notice has been served on the pub company, the landlord will approach the tenant with tied deals for discussions. As the MRO referral progresses, the terms of these tied deals often become more and more attractive. One tactic that tenants should be aware of is the use of multiple price lists by the pub company, some of which are marked as confidential and will only be released on the signing of a non-disclosure agreement.
While the tied-tenant may start the MRO process focused on achieving a free of tie tenancy, a tenant should always consider what option will be the most financially and commercially viable. In some instances, it may be that a new tied offer from the pub company ends up being more attractive than the perceived benefits of an MRO tenancy.
Photo by John Murzaku