Business Advice

Q&A: Pubs code and MRO option

By Simon Clarke

- Last updated on GMT

Simon Clarke: Offers advice on the MRO
Simon Clarke: Offers advice on the MRO

Related tags: Mro option, Leasehold estate, Landlord, Mro

Last month, the Small Business, Enterprise & Employment Bill received Royal Assent, with the Government confirming that the pubs code will come into force before the end of May 2016. Fair Pint campaigner and chartered surveyor Simon Clarke provides guidance on what the market rent-only (MRO) option will mean for tenants

What is the MRO option?

Upon tenant request, the granting of a free-of-tie rent and an ending of all product and service ties, with the exception of insurance, and pubco direct involvement in the trading operations of your property.

Do all pubcos and brewers have to offer MRO?

No. Only pubcos and brewers with 500-plus tied pubs in their total ownership will have to offer the MRO option. This includes Enterprise Inns, Punch Taverns, Admiral Taverns, Greene King, Heineken and Marston’s.

Is MRO mandatory?

MRO can be taken up at the election of the tenant, either at rent review or at lease renewal. The option is not retrospective. If either your lease renewal or rent review falls earlier than the ratification of the pubs code, then it is likely that you will not be eligible to take up the MRO option until the next review or renewal. There may be other trigger points where an MRO option could be initiated.

To be a ‘trigger’, an event would need to be beyond the control of the tied pub tenant, that was not reasonably foreseeable, has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub, and is of a description specified in the pubs code, yet to be agreed.

If my pubco plans to invest in my site, will I still be able to trigger the MRO option?

There may be circumstances where the MRO option could be deferred, yet to be considered in the consultation process. There is a possibility that in exchange for a significant investment, the MRO option could be deferred but not negated. The pubco may make an offer, but the tenant is not bound to accept.

Is the MRO option automatically a good thing?

If discounting is revised in your favour to such an extent that the taking up of MRO is not of substantial financial advantage, then you might wish to stay with your current level of relationship with your pubco. Certainly there is a large level of unknowns until the system has ‘found its feet’ and there have been some sample test cases which would underscore the procedures linked with the MRO option.

My tenancy/lease agreement expires later this year. Will I be covered by the new legislation?

No. Until that pubs code is finalised, envisaged at the earliest, May 2016, the legislation does not apply.

Is there any way I can benefit from the legislation before it comes into force?

Not directly. At rent review and lease renewal there will be an opportunity to contend that the open market rental value may be affected by the expectancy of up and coming legislation. While you may not be able to take the MRO option, you may be able to argue that the tied rent should reflect its availability in the future. Indirectly, this may have a knock-on effect on tied rents with pub owning businesses that are not covered by the legislation.

Can I opt in and then opt out of MRO option?

If you take up the MRO option then a deed of variation or even a new lease will be granted (you will have to pay for the ‘reasonable’ legal costs associated). The bill does not restrain the parties from discussing and potentially agreeing alternative terms, be they tied or otherwise, in the future.

How is the new rent calculated?

I would envisage the calculation of MRO rent would be much the same as the calculation of tied rent — the primary difference being the level of gross profit that can be achieved under the particular circumstances. There may be other issues to consider, for example, any benefits that are provided by the pubco or brewer that may be withdrawn after the MRO option is taken.

Does the new rent replace the wet rent, or pubco wholesale contribution?

The extent of the current pubco wet rent, or wholesale contribution, has no bearing on the profits test valuation. It is very probable that the new MRO rent will be less than the combination of tied rent and wet rent previously demanded by the pubco or brewer.

Will my rent go down?

Unlikely if the current tied rent has been correctly set at proper market level. If, however, you have not had your market rent reviewed for, say, five years and it has been index linked for those five years, then it is possible that you could be due a reduction in your supply-tied rent. Only at that point of revision of the supply-tied market rent, should the MRO option be considered.

What if my lease has an upwards-only rent review clause?

Most modern leases have this provision. Upwards and downwards revision of your current rent is only available through the IFC or COP, neither of which will apply to the MRO option. The new MRO rent is likely to be subject to inflationary increases and upward only rent reviews unless you have had the upwards only rent review removed by deed of variation.

Would I get the same discounts as the pubcos?

Highly unlikely as the level of standard discounting would never be made available to the individual free trading tenant. You would, however, be entitled to acquire at the free-of-tie, open-market price and take advantage of any special offers or discounts brewers and wholesalers may be offering. We consider this free-of-tie price will be substantially less than the tied price most tenants are paying.

Will I always get substantial free trade discounts?

If you deal with the major brewery companies, there is a strong likelihood that you will get substantial discounting although, as outlined above, not the same size of discount that has been negotiated by the pubcos. Being free-of-tie, you can deal with whom you like which includes local and regional brewery companies and a variety of wholesalers.

Whilst, it is unlikely that the little local ‘craft brewer’, can offer you any discounts of substance off their free of tie wholesale prices, these prices are in some cases almost half the price being charged under the tied regime. There are a large number of regional brewery companies whose level of general discounting is surprisingly low, they may find they need to compete to maintain the same level of free trade business.

Will I have one ordering point and one beer delivery drop as I have with my present pubco?

If you choose to deal with only one large brewery company or one specific wholesale outlet, then you will be certain of having one order point and generally, one weekly delivery, assuing you are tied on all products. However, if you choose to have several different suppliers, all of them will have their own separate order points and all of them will arrange for their individual weekly deliveries and the collection of empty barrels.

Is there a standard free trade price list?

No. You will have to negotiate the best price that you can achieve if you deal direct with brewery companies. If you choose to have your deliveries from a specific wholesaler, then there will be one price list and no negotiation (with the exception of volume-related discounting) concerning the established price list.

Can I join a buying consortium?

It is quite possible that as the take-up of the MRO option increases and using relevant social media, you will probably find that there is a buying consortium in your immediate area which will, of course, greatly help the strength of bargaining power and level of ultimate discounts.

Will my new suppliers automatically take the cost of my beer supply by direct debit on the day of delivery?

Although you can set up a direct debit relationship with your new suppliers, you will generally find that you have 30 days’ credit for the payment of supplies.

What will happen to flow monitoring equipment?

The pubco or brewer has the right under the terms of many tied agreements to install flow monitoring equipment to monitor dispense of draught products. There seems to be little point in continuing to maintain and service this equipment once a tenant has chosen the MRO option and as such we would envisage pubco’s and brewers will consider removing the equipment.

How is me taking up MRO likely to affect my relationship with my pubco?

The relationship should become one of strictly landlord and tenant, more like any normal commercial lease or tenancy. You will be bound by similar terms, for repair and maintenance for example, but the all tied terms will be severed (with the exception of insurance). You will not be bound to acquire products from the pubco. The pubco will probably sever any commercial or financial benefits it offers under its tied terms, although the point many have made is that these supposed benefits do not outweigh the over-inflated tied prices.

You will need to carefully consider how much value you place upon the products and services offered to you by your pubco, and whether the advantages countervail the disadvantages, before opting for the MRO option.

Where do I stand on the protection of pubco codes of practice and the industry framework code?

Neither will apply if you elect for an MRO option.

Will I lose my SCORFA benefits?

Benefits currently offered by the pubco or brewer are generally discretionary and to that end they may choose to continue them or withdraw them. the pubcos have maintained these benefits have a significant value in which case their removal would have the effect of lowering the resultant rent.

What will happen to my regional manager or business development manager?

The pubco or brewer may offer to maintain a BDM relationship as the new MRO rent would be assessed on the basis of a pub’s profitability. A pragmatic and proactive pubco or brewer would seek to work with their MRO tenants in an attempt to increase the pubs’ potential profitability and thereby increase the prospect of a higher rent in the future in conjunction with increased tenants’ earnings.

Is this the death knell of the supply-tie?

Certainly not. The MRO Option would appear to be very attractive indeed for wet-led properties, with the balance of attractiveness decreasing as the scale of non wet product sales increases. If, however, the pubcos offer an exciting and financially viable package that supports their supply-tie continuing, then there would be no need to exercise MRO option.

If I do not think my landlord is being fair in calculating the MRO option, who can I turn to?

You should seek genuinely independent professional advice from a specialist chartered surveyor who cannot be inferred as having any form of professional conflict of interest, i.e. he or his firm had, or still does, accept work / instructions from your pubco or brewer landlord or other pubcos/brewers.

If all else fails – then what?

It is proposed the Pubs Code will have ultimate third party referral to an Adjudicator. The identity, scope and power of this individual, and their identity, is not yet known.

If you have any further questions on the MRO option, contact the Pubs Advisory Service on 0203 651 3351.

Related topics: Legislation

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Posted by ken nason,

Thanks for the confirmation.

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Remain Curious

Posted by Dave Mountford,

You can remain curious for all I care Ken - I have much better things to do than worry about your opinion or that of your mate

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Posted by ken nason,

No comment on the persona of PAS being a benevolent group of caring individuals as opposed to a business pure and simple or on the position of independence only being the domain of those who work with or for tenants.

I am curious by the silence so far.

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