Big changes for the MRO process

This is good news for tenants. Parliament has made amendments​ to the pubs code effective 1 April 2022. These include major changes to the market-rent-only (MRO) process. Tenants should be aware of these as they create better opportunities for them to agree the MRO terms with their pub company and make the need for arbitration less likely.

Pubs code amendments

Before these changes, under the pubs code the tied tenant could have as little as 14 days after receiving the pub company’s MRO offer to negotiate the terms and decide whether to refer them to the PCA for arbitration if they could not be agreed. Though the strict statutory timetable kept the MRO process moving, that short period for many tenants was not long enough to reach a deal. So the tenant was forced to arbitrate if they wanted to preserve their MRO rights. That meant the formality and often unnecessary cost of legal proceedings, when most cases settled anyway before the arbitrator reached a decision.

Under the amended pubs code, a tied tenant who receives a MRO proposal will have a three-month resolution period to consider it and negotiate with the pub company about the terms and rent. Both parties have a duty to seek to reach an agreement. The tenant has the option to halt the resolution period after it has lasted at least 21 days. Once the resolution period has ended the pub company can make an updated MRO offer within 7 days to reflect the negotiations. Only once that 7 days is over does the clock start ticking, whereby the tied tenant has 21 days to refer the latest MRO terms to the PCA for arbitration or (if those terms are agreed but the rent is not) to refer that rent to the independent assessor. The tenant needs to act quicker if the pub company does not send a MRO offer at all, perhaps because it disputes the tenant’s right to one.

PCA to issue guidance

In addition to those Code amendments, I am intending to make more changes to how the MRO process works for tenants by issuing guidance. I have taken industry views on this by carrying out a consultation, and last month I published my response​. This will be formal guidance which by law would have to be considered in deciding on pub company compliance with the pubs code.

This guidance will specify information that the pub company must provide in support of its proposed MRO rent. The pubs code amendments require that rent to be offered with the proposed MRO tenancy terms. My guidance will oblige pub companies to provide a consistent minimum level of information and evidence to support the rent offer, to enable the tied tenant to understand how it has been calculated. That transparency should make it easier for tenants to negotiate effectively.

I also intend to issue guidance about how pub companies should approach the offer of a transition to any increased deposit or rent payments in advance under a MRO tenancy. This will provide clarity that such transition periods should be offered in most cases. I am also minded to use this guidance to make clear that requiring dilapidations to be completed as a condition of taking a MRO tenancy could be unreasonable unless the pub company can put forward a compelling justification for doing so in that particular case. These steps should help to make sure tenants are not put off taking the MRO option because of the money they would have to find upfront. Tenants should always consider getting good quality advice on the process.

Tied tenants cannot be subjected to detriment by a pub company for exercising their Code rights. I am also considering guidance emphasising that the PCA would expect the pub company to keep a record of reasons for its decisions on code issues, including whether to oppose renewal of a tied tenancy on the ground that it wishes to take the property back into management. The PCA could consider any absence of such reasons in deciding whether there had been a breach of the code.

Statutory review period ends

Every three years the operation of the pubs code is reviewed by the Secretary of State. The next such review will look at the period which ended on 31 March 2022, and the industry will be invited to submit evidence. Amongst concerns I hear raised about the pubs code is how the market, and in particular pub company operating models, may be changing in response to it. This will likely be the subject of some evidence from stakeholders in the next review. The tenant of a five-year tenancy without a statutory or contractual right to renew will not have the right to MRO at the end of the term and will not benefit from the entitlement under the pubs code to a rent assessment at least every five years.

In the last statutory review, the Secretary of State recognised that businesses might adapt operating models in response to regulation and that it was possible the code had influenced their decisions on the type of lease or management arrangement. But he found it was too early to assess the extent to which the code has driven these changes and how widespread any impact is across all regulated pub companies. Now we are another three years on, any unintended consequences of the code, and whether they risk significantly undermining its objectives, may be clearer.

The 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.​