Award Summary – September 2019 - 3
Published 11 February 2022
Applies to England and Wales
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Publisher’s Note: The Pubs Code Adjudicator encourages openness and transparency in the operation of the Pubs Code etc. Regulations 2016. Publication of awards made in Pubs Code arbitrations, or summaries of those awards, enables the industry to better understand previous decisions and consider how the Pubs Code is being applied in individual cases. Neither the Pubs Code Adjudicator nor an arbitrator is bound to follow published awards in applying the law, but such awards can be used to support the industry’s consideration of the proper interpretation of the Pubs Code. Parties are encouraged to take independent professional advice about their situation.
The outcome of an arbitration is based on its own facts and the evidence produced in the case and is not binding in other cases where the landlord and tenant are not the same. The Pubs Code Adjudicator does expect a regulated pub-owning business to consider its understanding of the law in light of each award that makes a finding on the interpretation of the statutory framework and to adjust its behaviour towards tenants as appropriate. The publication of an arbitration award or an award summary does not mean the Pubs Code Adjudicator endorses the decision and it does not form legal advice about any issue.
This summary is provided to assist in understanding the arbitration decision. It does not form part of the decision or reasons for the decision.
Subsequent to this award the PCA conducted an investigation into matters including stocking requirements. For further information about this, including the binding recommendations placed on Star, the investigation report can be accessed here.
1. Summary of Findings
The arbitrator found that the proposed Market Rent Only (“MRO”) agreement was not MRO-compliant because it contained unreasonable terms and/or conditions in respect of both the proposed term of the agreement and the proposed repair and decoration obligations in the context of the proposed lease term. The arbitrator held that the stocking requirement put forward by the Pub Owning Business (“POB”) was reasonable.
The POB was ordered to provide a revised MRO proposal to the tied pub tenant (“TPT”).
2. Background
The TPT requested a MRO proposal in connection with a rent review under the tied lease. The POB served a full response proposing terms of a new MRO lease in 2018 (“the First Offer”). The TPT alleged that the POB’s proposal was not compliant because it did not satisfy Regulation 31(2)(c) of the Pubs Code etc. Regulations 2016 (“the Pubs Code”) and section 43(4)(a) of SBEEA 2015.
During the arbitration proceedings the POB subsequently provided the TPT with a second offer (“the Second Offer”). The POB intended the Second Offer to address where the First Offer had not been compliant.
3. Relevant Legislation and Rules
Section 43(4)(a) of the Small Business, Enterprise and Employment Act 2015 confirms that a tenancy or licence is MRO-compliant if taken together with any other contractual agreement entered into by the TPT with the POB in connection with the tenancy or licence if it:
i. contains any terms and conditions specified as required in the Pubs Code. etc Regulations 2016 (“Pubs Code”);
ii. does not contain any product or service tie other than one in respect of insurance in connection with the tied pub; and
iii. does not contain any unreasonable terms or conditions.
Regulation 31(2) of the Pubs Code provides that the terms and conditions of the proposed MRO-compliant tenancy are to be regarded as unreasonable if they:
a. insert into the tenancy a break clause which is exercisable only by the POB;
b. impose a service tie in respect of insurance other than buildings insurance in connection with the premises to which the tenancy relates; or
c. are terms which are not common terms in agreements between landlords and pub tenants who are not subject to product or service ties.
The arbitrator referred to the March 2018 PCA Advice Note ‘Market Rent Only – compliant proposals’, which can be viewed here.
4. Arbitrator’s Findings
4.1 Issue 1 - Stocking Requirement
Whilst a stocking requirement in a lease can form part of a MRO proposal the TPT claimed that the proposed stocking requirement was unreasonable.
The TPT argued that the terms and conditions of the proposed tenancy were unreasonable and the stocking requirement should be removed.
The POB submitted that in formulating the MRO offers it had considered the circumstances of the pub in order to assess what a reasonable stocking requirement would be.
The arbitrator rejected the TPT’s claim that the stocking requirement should be removed. In reaching this decision the arbitrator considered that the POB had explained its commitment to ensuring the stocking requirement offered was compliant and consistent with the pub’s circumstances and ensuring the reasonableness of any potential stocking requirement in consideration of such matters. The arbitrator also found that the POB had provided evidence of how it framed its stocking requirement in relation to the premises to account for the pub’s market segment, product categories, optimal product range and local market.
The arbitrator also held that the Second Offer did not substantially change the product mix and did not prevent the TPT from choosing what other cask brands to stock. Consequently, the arbitrator concluded that the Second Offer allowed the TPT purchasing flexibility and was reasonable.
4.2 Issue 2 - MRO Agreement Term
The proposed MRO agreement was a fixed term of 3 years which was not a rolling agreement and so the TPT claimed this was unreasonable.
The TPT’s current tenancy was a rolling tenancy agreement, but both the First and Second Offers made by the POB were fixed term agreements.
The TPT would have to agree the renewal at the end of the three-year period rather than the lease automatically continuing. Consequently, the arbitrator considered that the proposed arrangement was less attractive than the terms contained within the existing tied lease and therefore likely to persuade the TPT, to stay tied.
The arbitrator held that the POB’s Second Offer was not MRO-compliant because the POB has proposed a new tenancy rather than a deed of variation for the MRO proposal without giving sufficient reasons for doing so and in so doing the POB disadvantaged the TPT by introducing unreasonable terms and/or conditions.
4.3 Issue 3 - MRO Agreement Type
The proposed MRO agreement made the TPT responsible for all repairs and obliged the TPT to put the pub in good repair. The TPT argued that, since the present lease did not impose such a burdensome repair liability, it was unreasonable to increase the TPT’s risk exposure.
The POB introduced more burdensome repair and decoration obligations in the Second Offer and so the TPT argued that since the present tied lease did not impose such a burdensome repair liability, that it was unreasonable to increase the TPT’s risk exposure. The POB argued that in the open market, full repairing and insuring terms are standard for free of tie leases.
The arbitrator considered that that the commercial relationship between tenant and pub owning business on service of a MRO Notice is different to negotiations on the open market. The core Code principles mean that the Respondent must act in good faith and cannot take advantage of the tenant’s limited power to negotiate effectively. In the Second Offer there was an absence of merited reasoning in support of the more burdensome repair and decoration obligations. The arbitrator found that the burden of the repair and decoration obligations was also exacerbated by the 3-year fixed term basis of the Second Offer which thereby necessitated both external and internal decoration before the determination of the “Term”, i.e., 3 years.
The arbitrator held that the repair and decoration obligations expressed within the First and Second Offers were unreasonably more burdensome than those provided within the existing agreement. Further the POB had not taken into consideration that the relationship between it and the TPT is different to negotiations on the open market and the POB had unreasonably rendered the MRO terms unattractive with the consequence of encouraging the TPT to stay tied.
The arbitrator concluded that the POB’s Second Offer was not MRO-compliant because it contained unreasonable repair and decoration provisions in respect of the term of the proposed MRO lease.