I remarked the number of tied tenants using it had reduced year on year since the pubs code was introduced, despite the pubs code adjudicator’s (PCA) measures to improve the process. There were more than 11,500 tied pubs covered by the code at its inception (and more than 8,500 five years later), with only around 1,200 MRO notices accepted by pub-owning businesses (POBs) over that time.
MRO process in improving tied deals
The best way of delivering parliament’s intention that tied tenants should be no worse off than if they were free of tie is through those tenants using the MRO process to compare the tied and free of tie offers.
The MRO process can be used by any tied tenant when renegotiating their rent under the pubs code. While it can be the gateway to trading free of tie, some tenants have used it as an extra lever to get the best tied deal. I’ve published a tenant story about one who used the MRO process to negotiate reduced tied rent and discounts worth about £65,000 a year.
Use of the MRO process as a routine part of any tied rent review could become much more common. Given the impact of the pandemic on trading, it is more important than ever that when tenants renegotiate their tied rents under the pubs code, they can use every tool in their toolkit.
Information from tenants tells me there are still challenges when serving a MRO notice. My task is to consider how this can be made easier for tenants, and I am proposing several measures covering how to remove different barriers and unnecessary disincentives that may be putting tied tenants off using the MRO.
Before taking any steps to bring these changes into force, I have issued a consultation document so the tied trade and interested parties can consider my proposals and let me have their views.
The MRO rent offer made by the pub company needs to be fair and realistic. If it isn’t, the value to the tenant of the right to compare the tied and MRO options is diminished. Lengthy (as well as costly) negotiations over the rent may be needed or a tenant may even be put off pursuing the MRO process entirely. My proposal is to require the pub company to show how it had reached its rent offer. This could be by way of evidence including a trading forecast, barrelage assumptions, and a profit and loss statement including an elemental breakdown of additional turnover such as food, rooms and gaming machines. A fully informed tenant would be better able to consider the rent or negotiate on it.
The MRO market rent as defined for the pubs code does not disregard tenants’ improvements, though the tied rent terms will usually do so. This makes it harder to compare the two rents and a tenant may not be clear if and how the pub company is including tenants’ improvements in their rent offer. I am, therefore, consulting on requiring pub companies to be explicit with tenants about this.
Reducing up-front costs to tenants
The consultation looks at some of the costs that tenants may have to find to take the MRO option. Sometimes a pub company asks tenants to deal with terminal dilapidations where the MRO proposal is for a new tenancy. Some may want a tenant to pay a commercial deposit under the terms of the MRO offer, and to move to less frequent rent payments. This means a tenant may have to find ready cash to take up the MRO option.
Though the MRO represents a new commercial agreement with the pub company, I want to understand if it would be appropriate to issue guidance requiring the tenant to have a minimum period of a year to transition to any new deposit and rental payment periods, and to prohibit dilapidations from forming a part of the MRO proposal. The pub company would be expected to rely on the terms of the existing and/or new MRO tenancy to address any issues of repair at the pub.
Pubs code and renewal interaction
In another recent Morning Advertiser column, I talked about the overlapping timelines of the pubs code at MRO and statutory renewal. Given these interconnected processes, a tenant sending a MRO notice after serving their section 26 notice at renewal could then receive a landlord’s hostile notice to oppose renewal. There is, therefore, scope for the tenant to suspect the two things are linked. A pub company deciding to take a pub back into management simply because a tenant had served a MRO notice would be a breach of the pubs code.
I am not saying that this has happened in any particular case but, clearly, overlapping timelines leave room for tenant suspicion and this may be a deterrent to using the MRO process. To give tenants confidence to go ahead with a request for a MRO option, I am consulting on guidance that would require appropriate record keeping and transparency from pub companies, and by BDMs in their conversations with tenants in relation to renewal. This can provide an evidence trail should the I need to consider regulatory steps in relation to any possible link.
The benefits of consistency
Consistency in the pub companies’ approaches would enable the PCA to publicise simple and clear messages to tenants about what the MRO would mean for them. Tenants, who are often unrepresented, may then be more likely to find out about their rights or take advice about serving a MRO notice. The areas I am consulting about have been the source of disputes brought to the PCA. Removing barriers and greater consistency may lead to fewer disputes and a speedier MRO process.
Any measures need to be fair to both tenants and pub companies and avoid any unintended consequences. This is why I am consulting. I hope you will read the consultation document and if you have responses to the questions I pose in it, please let me have them by 10 December 2021.
This column is intended to aid industry understanding about the pubs code and its impact. Nothing in it should be understood as a substitute for the pubs code legal framework.