PUBS CODE

Agreement over Lords debate outcome

By Ellie Bothwell contact

- Last updated on GMT

Houses of Parliament: The Government said exemptions to the MRO option will be consulted on separately to the Bill
Houses of Parliament: The Government said exemptions to the MRO option will be consulted on separately to the Bill

Related tags: Pubs code, House of lords

The Government appears to have achieved the impossible in drafting a pubs code that is welcomed by both representatives of tenants and pub companies alike.

In a rare moment of agreement, both sides of the controversial pubs code debate said they were pleased with the Government’s announcement that exemptions to the market-rent only option will be consulted on separately to the Bill and introduced as secondary legislation.

Business Minister Baroness Neville-Rolfe said during the House of Lords report stage yesterday the Government will use secondary legislation to allow tenants and pubcos to agree a waiver for MRO in cases where pubcos are willing to make “significant investments”.

She also said she would use existing powers within the pubs code to exempt “genuine franchise agreements” from the MRO clause.

Amendments calling for similar measures to be enshrined within the pubs code were withdrawn after Baroness Neville-Rolfe’s announcement.

'Government deserves praise'

Greg Mulholland, co-ordinator of the Fair Deal for Your Local campaign group, who tabled the original MRO clause, thanked Business, Innovation & Skills Ministers in both houses and civil servants “for the way they engaged and consulted” over the past few weeks.

​The Government deserve praise for honouring their promise to respect the will of the House of Commons and we now have a genuine, clear, deliverable and legal market rent only option that tied pubco tenants can pursue at specified trigger points, which is what we had campaigned for,” he said. 

"It is also sensible that certain complicated issues are subject to the consultation over the detail of the statutory code, including genuine franchised pubs. I look forward to engaging in this with all sustainable companies and associations to help get this right.” 

Brigid Simmonds, chief executive of the British Beer & Pub Association, also welcomed the announcement and said she was pleased the Government recognised the need to ensure the legislation does not deter capital investment in pubs and does not cover franchise agreements.

​Whilst those who opt for a MRO option have the absolute right to source finance from anywhere, those who wish to remain tied should equally have the right to choose a partnership with their pub company and defer MRO in return for substantial capital investment.  We look forward to the consultation in due course.

“There is no point in offering MRO to a franchise where no rent is paid, so we are pleased that the Government has now recognised this and seeks to exempt these types of agreement from MRO in secondary legislation,” she said.

Yesterday, the Government also successfully introduced an amendment that extends the protections of the code – apart from the MRO option – to tenants whose pub is sold by a “code company” to one outside the code.

Simmonds said while this will involve greater cost, it is “considerably better” than the proposal that such licensees would retain the right to MRO, which she claims would have led to “no pubs changing hands”. 

Parallel-rent assessments

However, she said she is concerned about the re-introduction of parallel rent assessments (PRAs) for existing licensees “who of course now have the option of MRO”. 

“Comparing the profitability of a tied pub with a free-of-tie pub is not easy as has already been highlighted by RICS.  It is essential that there is a link between a PRA and an MRO calculation which is both simple and easy to understand for both the pub company and licensee,” she said.

Kate Nicholls, chief executive at the Association of Licensed Multiple Retailers, said: “Government Ministers and officials are to be applauded for the intensive and exhaustive consultation they have engaged in over the past three months. This has been inclusive, detailed and probing and has ensured that we now have a workable and practical solution which will help to underpin investment in the sector as well as long-term sustainable growth.

"Much of the detail of how the proposed new powers will work and their implementation on the ground has yet to be determined and we look forward to continuing the productive dialogue with all stakeholders to ensure that this careful balance is maintained going forward.”

The Bill will complete its Third Reading in the House of Lords next week before returning to the Commons.

Related topics: Legislation

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Accuracy

Posted by Interested Observer,

Chris: One man's "straining at gnats and swallowing camels" is another's attempt to clarify the facts and correct errors. If someone quotes figures, for example, which are out by about 100% (or 50% depending on direction) then I think it's worth a comment or two!

On the first part of your first post I would paraphrase all those sections you now quote as "take into account when valuing the rent the condition of the property and the repairing obligations in the lease". That's a long way from "assuming that a FRI leased pub is in good repair" which is what you claimed.

On the second part of your first post I still see no reference in the guidelines providing any guidance as to the level of repairs allowance, contrary to what you claimed.

(I'm not sure that there can be an industry standard % for repairs - the four storey Victorian pile is a far cry from the newly built two storey box - each building must be assessed individually.)

How much should be allowed is a thorny question - if I were the prospective tenant I might add up the cost of anything that might reasonably require replacement (wiring or central heating boilers for example) during my tenure, divide that by the length of the lease and use that as my opening position for a pa allowance, along with "licks of paint" for the items which wouldn't require replacement (the newly surfaced car park or recently replaced roof for example).

Then in one respect at least the symmetry of the relationship is perfect - at the outset of a lease either party can refuse the other's terms, or negotiate a non perfect but acceptable position for both.

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Where do dilapidation funds come from?

Posted by Chris Lindesay,

IO

I do not propose to enter into one of your "straining at gnats and swallowing camels" discussions - but glancing through the RICS guidelines the requirement to take cognisance of the state of repair and obligations of various parties are referred to in the following places.

2.5, 5.1 step 4 (b), 6.2 bullet 4, 7.8, 7.17

To my mind this guidance amounts to a requirement to consider the condition of the property and for any Hypothetical assessment of FMT being based on the property being in "Good repair" or at least being rented on that basis - whether it is in "good repair" or not is another matter.

Which is entirely the point.

Should the valuer, when considering a carpark with a pothole in it,

a) allow a budget of £16,000 for scarifying etc.. to be funded out of the divisible balance when setting the rent?
Or

b) is a (lick of paint) Ind Std% of turnover sufficient.

If the IndStd% of turnover includes recognition that a carpark needs full resurfacing say every 15 years and it was last resurfaced 10 years ago then there should be a fund available covering 66% of the cost of the work accumulated from the carparks share of the IndStd% of turnover that has not been spent in the past 10 years - apart from patching, if there is not then the full cost of the ongoing obligations must be allowed out of the ongoing revenue account which will massively reduce the divisible balance as the strategic maintenance budget has to be funded out of current trading revenue.

Otherwise how are these strategic repairs to be funded?

As long as the rental valuation and the outgoing dilapidations valuation methodology is consistent there is no problem.

I think David's point is that this is frequently not the case and the condition of the building tends to be glossed over when negotiating a lease inception but a different view it taken at the other end of the relationship.

This is hardly surprising when one considers the relative asymmetry of the relationship.

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At first glance

Posted by Interested Observer,

Chris: I can't find anything in the RICS guidelines about the "good repair" assumption, nor on the "lick of paint" budget.

Perhaps I'm looking at the wrong document, linked from here:

https://www.bii.org/documents/703

If so, where should I be looking; if not on which pages are these references?

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