The Pubs Code etc. Regulations 2016 (“the Pubs Code”) came into force on 21 July 2016. The Pubs Code introduced certain “trigger events” which would enable a tied pub tenant (TPT) to request a market rent only (“MRO)” tenancy from their landlord. In the event that the TPT and the pub owning business (“POB”) are unable to agree on the terms of the MRO tenancy, a referral can be made by either party to the Pubs Code Adjudicator (“PCA”).
The PCA will determine the matters in dispute and issue what is known as an “arbitration award”. Initially, the contents of these arbitration awards was confidential. However, earlier this year the PCA agreed terms to waive confidentiality. The purpose of publishing these awards is to increase the transparency of the MRO process and to help TPTs to understand the extent of the rights they have under the Pubs Code.
On 19 December 2018 the first PCA arbitration awards were published. TPTs need to make sure that they are aware of the issues raised in the arbitration awards, and we have prepared a brief summary of the key points as follows:
- A main point of disagreement in the MRO procedure has been whether or not an MRO tenancy should be dealt with by way of a new lease or a deed of variation. In the published awards, the PCA has made it clear that a deed of variation is not a default option. Both a deed of variation and a new tenancy are capable of being MRO compliant.
However, the PCA has specified that the MRO vehicle will be subject to the test of reasonableness. This is an important requirement, as the POB will have to demonstrate that their choice of MRO vehicle is fair in all of the circumstances. It therefore appears that the decision as to whether an MRO tenancy is best dealt with by way of a new tenancy, or a deed of variation, will hang on the facts of each individual case. Key considerations may include the burden of additional liabilities on the TPT, such as a terminal dilapidations claim, SDLT charges and the requirement to pay a rent deposit and/or legal fees to the POB.
- The PCA has stated that the existing lease terms are not the starting point for an MRO tenancy. This means that a TPT is unlikely to be able to successfully argue that the terms of the MRO tenancy should mirror those of the existing lease.
However, the PCA has also made it clear that it will not always be reasonable to change the terms of the existing lease, provided that they are compatible with the terms of a free of tie lease. Therefore, the terms of the existing lease will be a relevant consideration and the TPT will need to provide clear reasons as to why they should be taken into account.
- A key requirement for an MRO tenancy is that the terms are reasonable. The PCA has explained that the decision as to whether or not a term is reasonable will be based on all of the circumstances that are (or ought to be) known by the parties.
This explanation is particularly important for TPTs. The PCA has made it clear that what is deemed reasonable for one pub, may not be reasonable for another. There is no standard “one fits all” MRO tenancy that the POB can claim is reasonable in all circumstances.
It is particularly interesting that in one of the published arbitration awards, the PCA criticised the POB in question for failing to provide evidence of the matters it had taken into consideration when deciding whether or not the terms of the MRO tenancy were reasonable or compliant.
Those that have been involved in the MRO process will be aware that POBs have relied on providing template leases as evidence of the reasonableness of proposed MRO terms. However, the PCA has determined that these template leases do not demonstrate that the terms are common or reasonable. The PCA is now required to show evidence of how prevalent the terms are in the free of tie market as a whole, and for how long they have been used. The POB will also need to provide fair reasons for proposing the MRO terms.
- The PCA has stressed that the impact of the MRO terms on both the TPT and the POB will need to be considered. Both parties will need to focus on achieving a balanced outcome. The MRO terms, and choice of vehicle, will need to be fair from both parties’ perspectives.
- The arbitration awards have confirmed that the MRO procedure is not comparable to open market negotiations. One of the key principles that the PCA has put forward is that the POB should not take advantage of a TPT who has limited negotiating power.
The Pubs Code was introduced to provide TPTs with a viable option for achieving a free of tie tenancy, and the POB must not act in any way that would frustrate parliament’s intention. The MRO procedure must be seen as an accessible and achievable choice for the TPT.The PCA has criticised POBs for failing to comply with this requirement. For example, the PCA has faulted a POB for providing the TPT with a leaflet entitled “MRO Cost Comparison” which provided a subjective and misleading assessment of the free of tie procedure. Furthermore, a POB who confirmed that a terminal schedule of dilapidations would be issued on grant of a new MRO tenancy was heavily criticised for its inflexibility and accused of using this tactic as an “adversarial weapon.”
It therefore appears that the PCA will be strict in ensuring that a POB does not take unfair advantage of any perceived imbalance between the TPT and POB.
There can be no doubt that it has taken the PCA far too long to release these first published awards and that the awards are long, legalistic and difficult to understand. However, as we have identified above, Pubhelp.org have considered the published awards and understand how to use the principles established to interpret them to a pub tenant’s individual circumstances.
PubHelp.org are experts in the Market Rent Only procedure. For more information on any of the issues discussed above, or for further advice, please contact Rob Cooke at Pubhelp.org on firstname.lastname@example.org or 0333 3235 295