Spotlight: When is MRO not MRO?

By Michelle Perrett

- Last updated on GMT

Confusing elements: controversy has stalked the pubs code at every stage
Confusing elements: controversy has stalked the pubs code at every stage

Related tags: Pubs code, Leasehold estate, Landlord

Controversy has stalked the pubs code at every stage. But one of the most confusing elements is licensees’ access to the market-rent-only (MRO) option. Here, we look at how this part of the legislation is progressing, or not, in some cases.

There is no sign of an end to the fighting or distrust over the terms of the pubs code as the recent case of Paul Crossman of the Swan in Bishops-thorpe, York, demonstrates. His experience has exposed yet another issue, or potential loophole, within the process.

Crossman says he was forced to negotiate outside the code to remain in his pub on a free-of-tie lease. He was issued with a Section 25 notice by his pubco Punch, which said it would not be renewing the lease because it was taking the premises back under its own management – something the pubco has the right to do.

Pubcos can reclaim a pub by issuing such a notice under the Landlord and Tenant Act 1954, which allows it to renew or terminate an agreement at the end of a lease. Termination has to meet certain legal requirements such as taking the premises back for management (See property pages 68-69 for more information).

After a year of negotiation, Crossman finally agreed a free-of-tie lease but even his own lawyer and Punch labelled it as MRO (market-rent-only option) – despite the fact it was agreed outside the pubs code.

There has been concern that use of this type of Section 25 is growing as pubcos start to expand their own managed operations.

Use of Calderbank letters

In August, the pubs code adjudicator (PCA) Paul Newby raised concerns about one unnamed pubco using Calderbank letters, which could be used as a way of “frustrating” licensees’ access to the pubs code and MRO.

These letters detail a settlement offer made by one party to end a dis-pute and are usually labelled “without prejudice”.

While there is no accusation that pubcos are acting illegally, the question is whether these loopholes are hindering licensees and their access to MRO?

Crossman argues this was the situation in his case, but he is the first to admit that the pubs code is what forced negotiation to free the tie. He also points out he was known as one of the campaigners for the code and had already expressed an interest in MRO.

The result was that he had already planned to issue a Section 26 notice, indicating he intended to stay in the pub and wanted MRO.

“I just knew we had to get out of the beer tie or the pub was done for,” he says.

However, he says he was beaten to it as a representative for Punch was standing outside the pub early in the morning 12 months before the renewal was due with the Section 25 notice in hand.

“Punch’s argument was that it wanted to take this pub back into its own management. For us to oppose this we would have had to take lease renewal proceedings against Punch and put our case in front of a court and say we are contesting,” he argues. “There is a heavy risk involved and if you lose you are open to paying the opposition’s court costs. It is only once you have successfully contested the lease renewal proceedings that it becomes a trigger point for MRO.”

He calls the situation “complicated” and says it carries an enormous risk for the licensee.

However, he was prepared to go to court and challenge Punch and its Falcon division agreement to see whether it was code-compliant.

In its defence, Punch reviewed its position with Crossman and, after discussions, agreed to deal with the matter as an MRO process.

A spokeswoman for Punch said: “Through discussion with our publican and review of our position, we agreed to treat the matter in line with the MRO request received and allow the publican to explore a free-of-tie option as would be the case should the MRO request have been a live matter.

“While, procedurally, the matter deviated slightly, it has proceeded in line with our MRO process for publicans wishing to take on a new free-of-tie MRO lease.”

Now the deal is done, Crossman is relieved that the pub can continue to trade, but has a concern that the rent is higher than it would have been through MRO and that it is being used as an example of an MRO rent for other pubs.

Worryingly high costs

What is the market-rent-only (MRO) option?

Association of Licensed Multiple Retailers chief executive Kate Nicholls says: “MRO refers to the right of a tied tenant to ask their landlord company for a comparable MRO proposal in certain rent negotiations.

“This allows the tied tenant to compare two rent and agreement offers and to have the process by which the final terms are agreed subject to strict regulatory timetables and controls, and, ultimately, arbitration by the pubs code adjudicator.

“The term refers to an option and, technically, an agreement comes out at the end of that process, however, there will be many market-rent or free-of-tie agreements reached that start with an MRO trigger but don’t complete the process.”

Simon Clarke, pubco campaigner and licensee of the Eagle Ale House in Battersea, south London, says: “Essentially MRO is tied tenants exercising their right under the legislation to have their products and services ties severed in exchange for an independently assessed rent.

“There is no reason why any other terms need to be altered because all other terms in tied agreements are common with those found in free-of-tie agreements.”

British Beer & Pub Association chief executive Brigid Simmonds says: “To achieve clarity, we need both guidance and decisions on pending cases, particularly around what constitutes an MRO agreement.”

Another issue highlighted by the case is that the costs involved in the negotiation process are outside the financial capacity of most licensees. Crossman says it costs more than £50,000 for him to agree the free-of-tie lease.

The downside of having to negotiate a new lease was that he had to finalise his current lease, including dilapidations, pay rent up front, and pay for other costs such as surveyor and
legal fees.

“The fact that it is still worth doing shows how much I was losing through the beer tie. We had to find £37,000 on the day to settle up and pay forthcoming rent and £4,000 stamp duty and that does not include dilapidations or lawyer and surveyor costs,” he says. “These are enormous sums of money – it is eye-watering.”

His experience emphasises the sheer complexity of the legislation.

And as a consequence, licensees are still struggling to get access to MRO despite the fact the rules have been in place for more than a year.

Guild of Master Victuallers chairman Alex Frear says pubcos have used numerous tactics to subvert the code and deny tenants a genuine MRO.

“Even when a tenant gets as far as an initial offer, it is accompanied by a plethora of conditions designed to deter any take up,” he argues.

“Where such onerous conditions have been challenged, the PCA has been incredibly slow to respond and in many cases, the tenants simply run out of time and/or money to pur-sue the matter.”

One major problem, he argues, is that the long time-frame for resolution usually results in a deal being done between parties before the PCA addresses the issues.

Frear is concerned that this procedure protects the pubcos from any precedent being set.

He says: “While these deals are better than the tenant would have previously been able to get, they are not MRO because they are not independently assessed within the code.”

He also argues pubcos are “very happy” to allow deals to be referred to as MRO and point to a low take-up as being evidence of how good the tied deals are.

Federation of Licensed Victuallers’ Associations operations director Martin Caffrey agrees that pubcos have been putting obstacles in the way of licensees wanting MRO with as many “twists and turns” as they can.

He says one major obstacle is that when the PCA finally rules for an MRO agreement, the licensee will still have to negotiate backdated rent for the interim period.

Blocking licensees’ access

A recent report commissioned by the PCA found evidence that pub-owning businesses were blocking licensees’ access to MRO, prompting Newby to write to the pubcos for a response. The PCA hopes to provide an update on this in the autumn.

Caffrey adds: “The other thing I fear is that even if we get a decision out of the PCA it will be challenged. It is so unfair that the tenants cannot get the lost income. It concerns me that a lot of people are beginning to wonder if it is worth the effort.”

However, there is one positive in that once the MRO process has started, pubcos are willing to negotiate over rents and discounts, he says.

Campaigners remain vociferous in their criticism of the pubcos’ behaviour and accuse the PCA of failing to act.

But Section 25s are perfectly legal and although they might not follow the intent of the legislation, pubcos are within their rights to use these tools.

The British Beer & Pub Association chief executive Brigid Simmonds has already defended pubcos by claiming they are not dragging their heels over MRO.

“Pub operators are operating under the legislation in good faith when it comes to negotiating free-of-tie agreements,” she says.

“However, frustrations are understandable because the legislation is new, complex and lacking clarity in some areas. There are issues to be resolved over interpreting the new rules and managing differing expectations. There is little doubt, for example, that free-of-tie agreements will have terms that more closely reflect commercial rental agreements elsewhere in the high street.”

Demonised as malcontents

However, while pressure continues on the whole process, licensees are still finding themselves struggling to get MRO.

“In this industry no one listens to licensees and we are dismissed and demonised as a rabble of malcontents and bitter failures if we dare to speak out,” warns Crossman.

“You have to get out there, you have to get educated and take the fight to them at the moment. You can’t rely on anyone in the industry to do it for you, not even the adjudicator’s office. You will have to fight for whatever deal you can get at the moment.”              

Pubs code adjudicator’s standpoint

The right to request the market-rent-only (MRO) option under the pubs code arises if one of four events occurs. One of those is at renewal of the tenancy. For the purposes of the pubs code, renewal occurs in relation to a tenancy protected by the Landlord and Tenant Act 1954 either where the tied pub tenant (TPT) receives a Section 25 notice from the pub-owning businesses (POB), or the POB receives a Section 26 notice from the TPT.

In either case, if the renewal is challenged, the timetable for providing an MRO full response begins once the court has made an order for a new tenancy.

Therefore, a TPT who has served an MRO notice at renewal, and who has established their statutory right to a new tenancy, has the same pubs code rights to choose between a tied and MRO tenancy as any other TPT pursuing a right to request MRO.

Related topics: Property law, Legislation

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