Two key parts of the code come into play – an agreed exception from market-rent-only (MRO) option rights in exchange for a significant investment by the pub company and new tenants’ rights to information about pub company investment.
So why was this exception to MRO rights introduced? During the passage of the Small Business, Enterprise and Employment Act, the Government acted on reports of uncertainty as to whether a tied tenant might, after a pub company investment, take the opportunity to seek the MRO option. The concern was that this might discourage investment by pub companies in tied pubs.
The pubs code therefore provides an agreed exception from MRO rights at rent assessment and renewal in return for a significant investment in a tied pub. This allows landlord and tenant to agree to defer the point at which MRO is available at these events for an agreed maximum period of up to seven years.
But there are important safeguards for tenants. There must be a written investment agreement that meets a number of tests to prevent tenants being pressurised or any loophole in their rights being created. The tenant still has a right to one contractual rent review during the investment period, and it does not affect their right to MRO where there has been a significant increase in price of products or services under the tie, or a trigger event has occurred that has a significant impact on trade.
The amount of the investment must be significant – broadly speaking, it must be worth at least two years’ rent under the tenancy. Work required under the tenancy terms, like repairs or maintenance, is excluded. The investment must also meet all the exception requirements set out in the pubs code. It must be in relation to a project intended to change the trading environment, nature or capacity of the pub and designed to increase its trade and profit. Before the agreement is signed, the pub company must show the tenant how the investment would achieve all these outcomes with, for example, a reasonable two-year forecast profit and loss statement.
The investment agreement must be specific about the works, completion dates and estimated costs, and confirm the tenant has had the opportunity to get their own estimates and has obtained independent professional advice. In general terms, except in the case of delay outside the pub company’s control, if the works are not completed within 12 months (or by a later agreed date), the investment agreement is of no effect and the tenant’s full MRO rights return. Disputes about investment agreements can be brought to the pubs code adjudicator (PCA) for arbitration.
Looking at the data provided by the regulated pub companies in their latest compliance reports to the PCA, it seems the use of the investment exception from MRO rights has been relatively stable since the start of the pubs code in 2016. Greene King and Star Pubs & Bars have consistently made the most investments to which the MRO exception applied. In the last financial year, around 5% of their pubs which would have qualified for MRO rights at renewal or rent assessment were subject to the investment exception.
In the last statutory review of the pubs code, views were expressed on whether the financial threshold discourages smaller investments and whether the seven-year waiver period is too short to get a return on larger ones. However, the Government decided there was no case to dilute tenants’ rights and change the current provisions.
Information on improvements
The pubs code makes sure a new tenant is informed about any proposed investment in the pub to carry out necessary maintenance, repair or improvement before signing their agreement, including a short agreement. I have talked about these rights in a previous Morning Advertiser column and where the investment or improvement will be significant, a sketch or artist’s plan of the proposed works must be provided to the tenant.
Prospective tenants in negotiation to take on a tied pub must also be given the regulated pub company’s policy for investing, including jointly investing, in improvements and refurbishments to the pub. This must include details of how any investment that is being contemplated at that time could potentially affect the rent and other payments under the tenancy.
It is important that while tenants make the most of pub company investment, they also understand what this means for their pubs code rights. To help with this, I’ve just published a new factsheet about the investment exception. If anyone has any queries, they can also speak to their code compliance officer or email my office at firstname.lastname@example.org.
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.