The Government has recently restated its intention to review Part II of that Act, which allows for the continuation and statutory renewal of protected tenancies, as part of its plan for how high streets and town centres can adapt and thrive after the Covid-19 pandemic. But what could this review mean for the pubs code?
Pubs code rights at renewal
Tied tenants benefit from important rights at statutory renewal. This includes a rent proposal on request and an updated schedule of condition in light of any maintenance, repair or improvement works completed on the premises during the term. Statutory renewal of the tied tenancy under the LTA 1954 is also one of the gateways to market-rent-only (MRO) option.
There is a lot of difference between how new lease terms are decided at statutory renewal and in the MRO process. At renewal, the parties negotiate new tied terms or the court orders them taking into account the existing terms. In marked contrast, MRO terms are proposed by one party, the pub company, with the limitation that they must be reasonable. The arbitrator does not have the power to determine what they should be.
Interestingly, however, of the substantial number of arbitration disputes over MRO lease terms, the number which relate to MRO at renewal has been found to be small compared with those at mid-term rent review. So, when both tied and free-of-tie terms are to play for, this may support agreement in the round.
The purchase of Ei Group by Stonegate, an exclusively managed operation, exemplifies the potential for an increase in the size of managed estates. The “no fault” grounds for opposing renewal under the LTA 1954 include the pub company’s intention to take the pub back into its own management (though statutory compensation applies).
The Secretary of State in the Statutory Review of the pubs code recognised pub companies have “legitimate rights over their property and a responsibility to their shareholders and investors to secure returns”, and might adapt their operations in response to regulation.
The pubs code therefore has the potential to result in substantive changes to the market, but it is important to understand how this might impact on the MRO process. Other potential changes in the market may include reliance on more new tenancies without statutory protection, or on shorter initial terms.
Pub company taking back
Concern over the property being taken back might be a factor in a tenant’s decision whether to pursue MRO at renewal. It would be a breach of the pubs code for a pub company to subject a tied tenant to detriment on the ground that they exercise, or attempt to exercise, a pubs code right.
A pub company which receives the tenant’s renewal notice may, by the time it has to decide whether to oppose it, already know if the tenant has served a MRO notice. A pub company cannot decide to take a pub back into management because a tenant serves a MRO notice, when the pub company would not otherwise have done so. To do so would be in breach of the pubs code. Of course, a free-of-tie tenant is not covered by the pubs code. Future renewal might therefore be a concern for tenants considering MRO, particularly if the MRO term offered is short.
If a tied tenant can be offered longer security of tenure under a renewed tied lease than a MRO lease, that may impact on their choice. At statutory renewal the court takes into account the term of the existing lease in deciding the term of the new one, subject to a maximum of 15 years.
The High Court in 2020 agreed with my decision in an arbitration that at MRO the lease term must be “reasonable”, and not just at least as long as the remaining term of the tied lease. If the MRO term is what remains of a longer tied lease, this is something I’ve told the pub company they should make the court aware of in respect of a subsequent statutory renewal. The court considers all relevant circumstances in deciding the renewal term.
What can be done about these issues?
There are clearly a lot of issues here, and they are not straightforward to resolve. I’ll be looking to raise them both in the review of the 1954 Act and next year’s statutory review of the pubs code. The potential for tension between these statutory frameworks and opportunity for alignment needs to be properly considered.
Better transparency of a pub company’s decisions might help tenants in this area, and I’ll be looking into this further. Pub companies should have good evidence that a decision to oppose renewal has been made independent of any code right a tenant may have. They run the risk of enforcement action by me if they do not, including investigation. The tenant may also bring a breach of the code to arbitration.