Tenancies & Leases Guide: The Tie

Pub leases are coming under tough scrutiny reports Michelle Perrett, while Phil Mellows puts the beer tie into historical perspective.

A parliamentary investigation, the possibility of tough legislation on rents and the well-publicised civil law case of Crehan vs Inntrepreneur have put pub leases in the spotlight.

It began in May when deputy prime minister John Prescott launched an investigation into the relationship between landlord and tenant. Although not directed at the pub trade in particular, the consultation will consider ending upward-only rent reviews.

This could be the first step towards legislation to introduce more flexible lease agreements and to ensure landlords negotiate fairly with tenants - as well as the end of upward-only rent clauses.

Then Reading University released a report, stating that many tenancies are still subject to upward-only rent review clauses and other restrictions in their leases. It claims that the pub industry's voluntary code of practice, launched in April 2002 to provide guidelines to good practice in negotiations, had failed to be effective.

Then, only two weeks after Mr Prescott's announcement, the tenanted and leased sector received another shock as MPs launched an investigation which could hypothetically end the beer tie for tenanted pubs.

The House of Commons' trade and industry committee revealed it was to probe the link between wholesale beer prices and those charged by major pub companies.

It is currently conducting a range of meetings in Parliament to canvass views of licensees and pubcos and has been "inundated" with 330 pieces of written evidence - the majority from licensees.

Many are concerned that beer tie agreements make it hard for them to make a decent living. They claim they are being squeezed out of the market by high beer prices and high rents charged by pub companies, arguing that they cannot compete with freehouses and managed pubs which can offer cheaper beer.

According to the results of a poll of 600 licensees on thePublican.com, 75 per cent of licencees believe the landlord and tenant relationship is weighted in favour of the landlord.

Licensees lashed out at pubcos calling them "arrogant" and "bullies" as they addressed MPs during the first oral evidence session held on June 22. They said pubcos were squeezing all they could out of tenants and that the cost of beer compared to rent no longer offered a fair balance.

To put even more pressure on the tied house system, at the end of May former licensee of the Inntrepreneur Pub Company Bernie Crehan won his case in the Court of Appeal, which ruled his beer tie had been in breach of European competition law.

The licensee, who operated the Phoenix and Cock Inn pubs in Staines between 1991-93, claimed his businesses failed because of a restrictive tie agreement that allowed the company to maximise rent while supplier Courage maximised beer prices. While the case was a landmark victory for licensees, it will go forward to a further appeal stage at the House of Lords next year.

Many licensees hope these moves will have some impact on the trade and industry committee's investigation.

Whether we are really facing the end of beer tie agreements and upward-only rent clauses remains to be seen. It seems the large pub companies will have to exercise some caution in future and offer licensees a range of agreements that are considered fair - otherwise they could find themselves facing legislation forcing them to do so.

The trade-off between beer cost and low rents​

The brewery tie was originally introduced by brewers to ensure that those who ran the pubs they owned sold their beer exclusively.

In a sense it represents a throwback to the days when brewers saw pubs as little more than guaranteed outlets for their products. The tie was essential to maintain their volumes.

In return for their loyalty, tenants paid rents that are very low by today's standards.

Today's pub industry, however, is a very different kind of place. Beer volumes have declined and to succeed commercially, pubs must offer customers a much wider set of products and services.

When the 1989 Beer Orders sought to loosen the tie with legislation, the big brewers were forced to dispose of 11,000 pubs between them. This allowed their tenants to buy in guest ale, and merely served to accelerate a process that was already under way.

The Inntrepreneur 20-year lease had been launched in 1988. While the industry generally concedes that, in the context of straitened economic circumstances it was a punitive deal as far as many lessees were concerned, it pioneered a model of a business relationship that has come to dominate the industry.

Essentially the long lease was designed to encourage a more entrepreneurial, less conservative breed of publican, incentivised to do whatever was necessary to create a successful business in an increasingly competitive environment.

Most leased and tenanted pubs are no longer owned by brewers and logic might suggest that the tie should be abolished.

But the reality was that the new pubcos continued to be contracted to buy their beer from certain brewers so the tie remained in force - although, over time, the choice of products the major companies tie their licensees to has broadened considerably.

Lessees' real complaint is no longer so much about choice as the prices they are forced to pay.

There is a trade-off, however, between the tie and rent. Lessees and tenants who are tied in as far as beer is concerned - and often other products - can expect to pay a rent that is below the usual market rate.

For the pubco this calculation is factored into the heart of their business model. If they were no longer able to operate a tie for tenants and lessees, rents would soar. What licensees gain on the swings, they will lose on the roundabouts.

Have a look at which pubco is offering which deal - click here​ for our full listings.