Leases: clause and effect

Tim Sykes, chairman of the Association of Licensed Multiple Retailers, has called for a set of "standard compulsory clauses" to be inserted in pubco leases to allow a more even profit share. Below the Morning Advertiser reports his speech to last week's ALMR Business Day"

I intend to cover one single policy point — the Association's proposal to resolve the continuing stand-off between landlords and their tied lessees.

But before I consider that, I stress that our other main concern is the impact of taxation on our industry. We must never forget that the Government takes 40% more profit out of the average pub than its operator and its landlord combined — calculated at a colossal £85,000 per pub per year. We have an unanswerable case to put to Government and this is well summed up in the Beer Group's Community Pub Report, but ministers will wriggle like mad to get off that hook and we must not allow them to point at internal industry issues as an excuse for inaction.

Only by putting our own house in order can we successfully lobby political and other audiences — and that's the focus of this speech. The 10 years following the last recession —and the launch of the ALMR — were characterised by a relatively booming economy, a confident consumer, and the organic expansion of the pub companies — particularly Enterprise Inns and Punch, but latterly S&NPE and Admiral. In very broad terms the multiple lessees were content to share an ever-increasing cake — not necessarily a fair share, but more profits nevertheless.

But by 2004 it was becoming clear that there were business pressures on tied lessees and that these were sufficient for the Trade & Industry Select Committee to investigate the concentration of pub ownership in a few companies and, by extension the tie itself and the rents model.

The committee's headline recommendations are well known; it called for an improved code of practice, for the abandonment of upward-only rent reviews, and the end of the AWP tie. Most significantly the committee said that it was not persuaded that the tie itself was a problem — but it did reserve judgment on its operation. In 2006 the ALMR realigned itself in such a way that the two principal pubcos became supplier associates rather than operator members and this gave the ALMR more authority to represent the interests of multiple lessees.

This we did by holding meetings with the principal pubcos at which ALMR members debated face to face the key issues that needed resolving — or at least airing. There were modest successes from these meetings but we did at least open an effective channel to exchange views. But the pressures on lessees did not go away and of course by 2007 the economic boom was not only stalling — it was looking like going bust.

Stark inequalities​

So the inequalities of the tied lease model were becoming more stark — the cake was getting smaller and the lessees' slice of it was less and less acceptable. This triggered the most recent select committee inquiry to which the ALMR gave written evidence that the pubco model wasn't working well and especially so in a declining market where it lacked flexibility other than through the sacrifice of lessees' profitability.

We noted that, while some companies had abandoned the principle of upwards-only rents, this had actually seldom been confirmed in writing in the lease — other than sometimes by a contractual side letter whose cost had to be borne by the lessee!

This was part of our response to the question on codes of practice where we observed that the BII recognition of pubco codes extended only to their clarity, not to their inherent fairness. We reminded the committee that the pubcos still continued to tie the fruit machines and we gave evidence about the unequal profit share.

We certainly noted that the pubcos were less and less prepared to share their beer discounts with their lessees. But in spite of all this we still believed that further legislative intervention in the industry would be unhelpful — successive governments not having an unblemished record when trying to adjust how markets operate.

Since December the issue of pubcos and the tie has rarely been out of the news. Some of this is down to the campaigning of the Fair Pint group and some to the headlines in the financial press. The committee has been deliberating and we understand that the report will be published shortly. We have no means of knowing what the report will contain but it is noteworthy that Lindsay Hoyle MP, a member of that committee, has put down his own Early Day Motion calling for the tie to be outlawed.

In the meantime, ALMR's council, with helpful contributions from the wider membership, has carried on developing our own policy, which is written up as a document to be released to members and the press after this meeting.

The first element of this is that the ALMR does not challenge the legality of the tie nor indeed is against the tie itself — especially in so far as it relates to brewers who own their own pubs or indeed to the smaller companies with their tenancy agreements. But we do believe that the time has now come to rebalance the landlord/lessee relationship and reform the way in which the product tie operates.

On this basis the ALMR would challenge the pubcos' usual requirement for compulsory supply agreements on long, fully repairing and insuring leases and proposes that lessees should have the opportunity to choose lease terms that properly reflect the open market, and then

to be able to enter into separate supply arrangements — a tied lease or a free lease.

Fairer split​

There is a vital need to ensure a fairer share of the economic benefits for lessees and the division of profits accruing from the individual outlet.

That will require both parties to be more open about the income they gain from all income streams within the business, the true operating costs they incur and the long-term investment they make in the outlet.

This can be achieved through all sides working together to deliver a more equitable business partnership. We believe this is achievable and a pragmatic solution to the current state of impasse. We are not describing our suggestion as a code of practice. A legally binding code would require Government intervention and there is perhaps a surfeit of codes anyway from the individual companies involved.

We would, as I have said, prefer that all long pub leases be offered with either a tie or free of tie but that cannot be quickly delivered. In the meantime what ALMR is proposing is that all full repairing and insuring tied leases are required to include a list of "standard compulsory clauses" that address the continuing fair distribution of the economic benefit between the landlord and the lessee.

We believe that the list of these clauses will complement and extend the BII-approved codes which, notwithstanding their kite-marked clarity, will always be open to interpretation and negotiation. The clauses will require the remedies to be binding and legally enforceable forthwith.

These clauses would pick up and confirm the full removal of upward-only rent review clauses, the automatic RPI increases in rent from existing leases and the removal of the machine tie from the long leases of national pub companies. This list could be pretty extensive and we suggest that a working group, drawn from stakeholders and assisted by professional advisors, under an independent chairman, could assemble and publish this list of standard compulsory clauses during this summer.

We do have to wait and see what the Bec report contains, but I am

reasonably sure that the pubcos in particular will be ready to welcome any suggestion that averts an official investigation.

They should, therefore, be prepared to adopt the standard com-pulsory clauses. We would go on to suggest that this could be underpinned by trade associations requiring their members that offer such leases to comply, and for there to be universal advice to tied lessees not

to sign leases