I am delighted to say Ipsos has now reached the target of 1,200 tied tenants in our annual survey to understand attitudes to their regulated pub company, the code and the PCA. I expect to be able to release the results shortly. Thank you again to all who took part. Thanks also to the many tied tenants who stopped to speak to me and my team at the Northern Restaurant & Bar event in Manchester last week and talk about their Code rights. It was great to see you.
Another big milestone has been last week’s publication of new statutory guidance on the market-rent-only (MRO) option process to the regulated pub companies, in force from 1 May 2023. This guidance is in response to some pub companies approaching MRO in a way that means there are financial hurdles for tenants (which in the pubs code means lessees also) to access the free of tie option. I aim to remove these, as they can either prevent or put them off using their MRO right.
This valuable right allows tied tenants, at certain gateways (typically rent review or renewal) to go free of tie. It gives those entitled a real opportunity to strengthen their hand in rent negotiations, even if they want to remain tied. This right of the operator to walk away from the tie is an important incentive for the pub company to ensure they are no worse off than if they were free of tie, and that they are treated fairly in the business relationship.
A tenant considering going free of tie by using the MRO process will want to take into account all of the costs involved. Two big questions for them will be “what will the free of tie rent be?” and “are there any upfront costs?”. My new guidance is aimed at ensuring pub companies all take consistent approaches to answering these questions and removing financial barriers to MRO.
Clarity around the free-of-tie rent offer
My guidance requires the pub company to give a justified and fully analysed free of tie rent offer when a MRO notice is served. The guidance sets out the minimum information in support of the free-of-tie rent the pub company must provide, which includes a detailed profits valuation, barrelage assumptions and more.
Unlike when valuing the tied rent, there is no requirement for tenant improvements to be disregarded from the MRO rent. So, this guidance ensures that the pub company is clear whether they have been disregarded. All of this should mean that the tenant can more easily compare the MRO option with the tied offer when they have the right to renegotiate their tied rent.
A tied tenant may be put off using the MRO process if there is a condition that they pay large upfront costs for a deposit or rent in advance. But by law all terms and conditions of the MRO offer must be reasonable. My guidance means that the pub company should usually offer a gradual build-up to such costs. If it doesn’t do that, it would need strong justification and its MRO offer may not be reasonable.
Also clear in the guidance is that, where the MRO offer is for a brand-new agreement, a tenant won’t normally be required to complete terminal dilapidations or statutory compliance works as a condition of accepting it. Those costs can discourage a tenant from going through the MRO process and I want to make it easier for them to do so. Because the pub company can ensure the tenant fulfils any legal and contractual maintenance obligations under the tied or free of tie agreement, strong justification would be needed to require payment for dilapidations to be reasonable. Read the guidance for the full detail - it does all this and more to boost tenant confidence to use their MRO rights.
Stonegate offering to remove non-compliant MRO terms
Also key to MRO compliance is that the terms of the pub company’s MRO offer must be common in the free of tie market. Parliament intended that the terms would follow the market, and not be novel or unusual. Stonegate recently acknowledged that it has not, and never has been, common to find upward only open market rent reviews and annual RPI rent increases in the same free of tie agreement. Before its acquisition, Ei Group offered this combination of terms until it stopped in 2019 as a result of an expert’s view.
In response to the PCA’s intervention, Stonegate has written to its lessees on these terms offering to remove the upward only open market rent review from their agreement (with a financial contribution towards the tenant’s legal costs). In any event, it hasn’t and won’t enforce the upwards only open market rent reviews where there are also annual RPI reviews. I welcome the certainty Stonegate is offering to its MRO operators by acknowledging previous non-compliance and taking steps to put this right. Anyone affected who has concerns can contact Stonegate’s Code Compliance Officer, James Richards.
This column is intended to aid industry understanding about the pubs code and its impact. Nothing in it should be understood to be a substitute for the pubs code legal framework.