How will the Pubs Code 2016 affect those buying a pub?

If you’re thinking of buying a leasehold pub owned by one of the big pub companies you may well be wondering about the implications of the forthcoming Pubs Code Regulations, due to take effect in the Summer of 2016. The Code (being introduced by the Small Business, Enterprise and Employment Act 2015) aims to regulate the relationship between tied pub tenants and the large pub-owning businesses (pubcos) which rent the pubs to them and sell them tied products. In doing so, the Pubs Code 2016 will almost certainly create a significant shake-up for the industry and for those looking to buy or sell a pub business. To understand why, it’s important to understand the Regulations in the context of current issues affecting the pub industry.

Freehold vs leasehold pub

There’s no denying it’s been a tough time for the pub industry over recent years. Changing social habits, cheap supermarket alcohol, a ban on smoking and the economic downturn have all combined to suck the life, soul and profit out of many pubs across the UK. Once bastions of the local community, many pubs now lie derelict and boarded up, or have been converted into shops, offices, apartments, or the ubiquitous Tesco Metro stores.

Independent freehold pubs have, by and large, weathered the storm more successfully. Freehouse publicans have had the freedom to tap into the growing interest for speciality craft beers; many have also diversified to provide food, entertainment and a community hub for local groups and events. However, for publicans tied to one of the large pubcos (companies owning more than 500 pubs: currently Punch, Greene King, Enterprise, Admiral, Marston’s and Star Pubs and Bars), the story has been very different.

The tyranny of the beer tie

Many tenants of these pubcos have argued that their landlords are putting otherwise successful pubs out of business by demanding excessively high rents and beer prices. The ‘beer tie’, or ‘wet rent’ forces leasehold publicans to buy their beer, and other drinks, at a premium from their pubco, making it incredibly hard for them to remain competitive. Stories also abound of pubcos failing to carry out repairs to leased premises, delaying rent review negotiations and even harassing vulnerable tenants in financial difficulty. Some disenfranchised and exhausted tenants have simply given up the struggle and called time on their pub business. But the introduction of the Pubs Code 2016 promises to change all that.

Pubs Code 2016: a seismic change for the pub industry

The main thrust of the Pubs Code Regulations 2016 is to alter the balance of power between pubcos and their tenants by giving tenants the option to have their rent reassessed if they haven’t had a review for at least 5 years, and to request a market rent only (MRO) option, allowing them to go free of tie and buy their products on the open market.

For many, this is a welcome and long overdue redress of an inequitable system. Election of the MRO option will give tenants greater control of their business and finances by releasing them from all product and service ties and also from direct involvement of their landlord in the trading operations of the pub. As well as having the freedom to choose which products to sell in their pub, tenants will be entitled to a new 5-year lease (or a term equivalent to the original tied lease if longer).

What will the Pubs Code mean for those buying a leasehold pub?

If you are thinking about, or in the process of, buying a leasehold pub belonging to one of the large pubcos, the Pubs Code will not initially affect the type of business model you inherit. You will, as part of the purchase process, still be required to accept an assignment of the seller’s existing lease. That lease will undoubtedly contain non-negotiable terms that tie you in to buying your beer and other products from the pubco landlord. As the new tenant, you will be obliged to comply with those terms and to buy those products at the prices stated.

However, as part of your purchase negotiations it will be important to pay particular attention both to the remaining term of the lease and to the provisions which relate to rent review dates. This is because tenants who are tied will, following the introduction of the Pubs Code Regulations, have the right to request an MRO assessment either on renewal of their lease agreement at the end of the term or, if earlier, at their next rent review (which should be no longer than 5 years). So, once you have taken up tenancy of your pub, you will have to wait to receive your landlord’s new rent or renewal proposal before you can request an MRO assessment. You will then have 21 days within which to decide a) whether to continue as a tied tenant on the pubco’s standard terms b) whether to try and negotiate a partial tie release or c) whether to make an MRO request.

If you’re not happy with the constraints of the tied arrangement and choose to make an MRO request, the landlord must respond with an MRO proposal within 28 days. You will then have 56 days within which to agree a free of tie rent, failing which the matter will be referred to a newly appointed independent adjudicator.

There are only two other situations introduced by the Pubs Code which may trigger a tenant’s right to request an MRO assessment. These are a) if at any time your pubco introduces a price increase on tied products which is in excess of the relevant Product Price Index, or b) if at any time there is a ‘substantial change in circumstances’ of an economic, environmental or employment nature that threatens a long-term negative impact on trade for your pub or pubs in the immediate local area, or as a direct consequence of changes in the tie imposed by the pubco. Where there are disputes between a tenant and pubco as to whether either of these triggering events has occurred, these will also be referred to the independent adjudicator.

Is buying a pub a good idea?

Many pundits claim that the pub industry is an industry in crisis. But for every boarded up pub there is still a pub success story. Those coming to the industry with good commercial acumen, a willingness to diversify and bags of energy and enthusiasm, can most certainly create a successful pub business, whether freehold or leasehold. And whilst it still remains to be seen what happens in practice, the Pubs Code 2016 should definitely give pubco tenants greater power to control their own destiny.

Nevertheless, in return for agreeing to a market rent only option, pubcos will inevitably seek to reduce their obligations to tenants in their new lease.  Such new lease terms are, for example, likely to place the burden of responsibility for repairing the premises squarely with the tenant and also to remove other common benefits such as the provision of business development support. In fact, as an MRO tenant it is likely that the only communication you will receive from the owning company will relate to property inspections and rent collection. For those already savvy with the pub industry, the withdrawal of such benefits may not be an issue but, if you looking to buy your first pub business, you need to take this lack of support into consideration.

The Association of Licensed Multiple Retailers, the British Institute of Innkeeping and the Federation of Licensed Victuallers Association will be running conferences about the new Pubs Code legislation across the country in the coming months, so keep an eye on their websites for details.

Pub Buyers’ Agreements: the devil’s in the detail

Clearly, in all cases, if you’re planning to buy your own pub, whether it be freehold or leasehold, it’s still important to get the terms of your lease and sale and purchase agreement checked by a specialist business solicitor who understands the pub industry, can help you identify the possible risks and negotiate the best price. At least you will then start your business venture with your eyes wide open and on a commercially sound footing, giving you the best possible chance of success. And that has to be worth raising a glass to.