HC 26-I [Incorporating HC 1183-i, Session 2007-08]

Published on 13 May 2009 by authority of the House of Commons London: The Stationery Office Limited

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House of Commons

Business and Enterprise Committee

Pub Companies

Seventh Report of Session 2008–09

Volume I

Report, together with formal minutes

Ordered by the House of Commons to be printed 21 April 2009

The Business & Enterprise Committee

The Business & Enterprise Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Enterprise & Regulatory Reform.

Current membership

Peter Luff MP (Conservative, Mid Worcestershire) (Chairman) Mr Adrian Bailey MP (Labour, West Bromwich West) Roger Berry MP (Labour, Kingswood) Mr Brian Binley MP (Conservative, Northampton South) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride MP (Conservative, Bromsgrove) Anne Moffat MP (Labour, East Lothian) Mr Mark Oaten MP (Liberal Democrat, Winchester) Lembit Öpik MP (Liberal Democrat, Montgomeryshire) Mr Anthony Wright MP (Labour, Great Yarmouth)

Powers

The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via http://www.parliament.uk/parliamentary_committees/parliamentary_committees

Publications

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/bec

Committee staff

The current staff of the Committee are: Eve Samson (Clerk), Janna Jessee (Inquiry Manager), Louise Whitley (Inquiry Manager), Anita Fuki (Senior Committee Assistant), Eleanor Scarnell (Committee Assistant) and Jim Hudson (Committee Support Assistant).

Contacts

All correspondence should be addressed to the Clerks of the Business and Enterprise Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is becom@parliament.uk

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Contents

Report Page

Summary 3

1 Introduction 5 What is a pubco? 8 The 2004 Inquiry 9

The Inquiry 9 Conclusions and Recommendations in 2004 10

The responses 12 The Government 12 The Pub Companies 12 The lessees’ response in 2008–09 13

Pub closures 13

2 Is the rental system fair? 18 ‘Dry’ rent 18

Transparency 20 A fair valuation? 21 Trading history 21 Availability of comparables 24

A new valuation method? 25 Rent reviews 25 Upward only rent review and RPI clauses 28

3 Ties 30 Beer tie 30

Beer prices and discounts 30 Is the beer tie accounted for in the ‘dry rent’ calculation? 31

Distribution benefits and purchasing power 34 Enforcing the tie 36 Amusement with prizes income 38 Other ties 40

Insurance 40

4 Benefits of the pubco tied model 42 Low cost entry and opportunity for entrepreneurs 42 Business support and services 44

Management support for lessees 44 Training courses 46

Financial assistance 46 A fair share of profits? 48

Lessee profits 49 Lessees’ attitude to being ‘tied’ 51

5 Dispute resolution 54

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Legal remedies 58 Conclusion 59

6 Competition issues 61 The Monopolies and Mergers Commission investigation 61 The Office of Fair Trading’s position 65 The Legal position 68

Article 81(1) EC Treaty and Chapter I Competition Act 1998 68 Article 82 EC Treaty & Chapter II Competition Act 1998 70

7 Conclusion 72

Conclusions and recommendations 73

Formal Minutes 80

Witnesses 81

List of written evidence 81

List of Reports from the Committee during the current Parliament 84

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Summary

Our Report deals with the relationship between pub companies and their lessees. There have been many recent reports about the decline of the pub as an institution; we do not pretend to deal with all the issues raised by this work. It is clear there are many pressures on any retail business, and pubs are challenged by changing consumer preferences, changes in the regulatory framework and general economic circumstances. The problems of the pub industry cannot all be attributed to a particular ownership model. Our investigation has had a very specific focus.

We were particularly interested in those companies which operate a tied estate, whose operations have frequently been criticised on the grounds that they are unfair to lessees, who not only have to pay rent, but are also forced to buy beer at higher prices than those they could obtain elsewhere. Those who support the system maintain that the tie gives pubcos an incentive to support their lessees through providing advice and services, and that the revenue stream from the beer tie means that basic rents are lower than they would otherwise be, and potential lessees have a low cost entry into the business.

The Trade and Industry Committee's 2004 Report considered that there was a balance between disadvantages and the benefits of the tied system, although there was an imbalance of bargaining power between pubcos and their lessees. The Committee put forward a number of recommendations intended to improve the relationship between the two parties, and we were interested to see the extent to which those recommendations have been implemented, and the extent to which problems had been solved.

Our call for evidence gave us two irreconcilable pictures of the industry. The first presented a picture in which pubcos operating the tie were able to give their lessees considerable support, and in which the admittedly higher costs of tied products were offset by lower rental and extra support and services. The second picture, which came from individual lessees and from campaign groups, was of an industry in which the higher costs imposed by ties meant that lessees were at a disadvantage to free of tie competitors and pubcos used their superior bargaining power to exploit lessees, in many cases failing to carry out their contractual duties, while refusing to give lessees in difficulties any leeway.

Evidence was submitted by lessees of many pubcos, and we were concerned by the consistency of their stories. On the other hand, disputes between lessees and landlords are not unusual, and we recognised that a satisfied lessee would be less likely to contact the Committee. Accordingly, we commissioned our own survey to determine whether the evidence we received from individual lessees was typical of feelings in the industry, or whether it was the result of particular individual problems. Our investigation showed that the majority of lessees of tied pubcos did not consider their pubco added value to them and were dissatisfied with their pubco; 78% of lessees were dissatisfied with the tie. 67% of lessees who responded to the survey said that they earned less than £15,000 per annum. Even where pubs had a turnover of more than £500,000 a year, over 50% of lessees earned less than £15,000. Although we could not investigate the stories told by individual lessees, the survey results gave us confidence that although their cases might be extreme, they were

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not simply a dissatisfied minority.

The problems the Trade and Industry Committee identified four years ago remain. The imbalance of bargaining power persists. The arrangements for assessing rents remain opaque, despite the Trade and Industry Committee's recommendations for greater transparency. Rental assessment should be the basis for negotiation, but incumbent lessees often risk loss of their home as well as their business if they cannot reach agreement. Despite the introduction of improved codes of conduct, there appears to be no effective independent dispute resolution system; only now is such a system being considered. While we are sure that in some cases pubcos have acted fairly and even generously towards their lessees, in many cases they take full advantage of their economic strength. There is a worrying pattern in the evidence presented to us of lack of support for lessees, of verbal agreements not honoured, and, on occasion, of downright bullying.

We have no confidence that the advantages of the tie outweigh its drawbacks. There is an easy way to test this; as leases become due for renewal, the pubcos could and should offer lessees a choice between a free of tie lease and a tied one. This would only be effective if the basis on which rent was assessed was made more transparent.

Given the industry's inability to reform itself in the past, BERR needs to look urgently at the inequalities of bargaining power between pubcos and lessees. Recommendations to improve the transparency of rent assessment should be implemented. The practice of pubcos selling buildings they no longer require with restrictive covenants preventing their use as a pub should be banned.

There are strong indications that the existence of the tie pushes up prices not just to lessees but to consumers. However, we are wary of simply recommending that it should be abolished; such a move might simply increase the power of brewers or distributors. The OFT has declined to act in the past; we recommend that the Secretary of State refer the matter to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position. However, our provisional view is that the tie should be severely limited to ensure there is proper competition in the market. Nonetheless, we note that interventions can have unexpected consequences. The Beer Orders led to the emergence of pubcos. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we recommend an urgent investigation, rather than simply making a policy recommendation.

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1 Introduction 1. Until 1989 many pubs were owned by breweries, but leased to tenants who were ‘tied’ to selling the breweries’ products. This system was broken up because of concerns that brewery dominance was anti-competitive. The legislation which brought this about, known as the ‘Beer Orders’,1 stipulated that breweries should be limited to 2,000 tied pubs. There then emerged a new business model, that of the pub company or ‘pubco’. In this model, a company controls a series of pubs, which it either manages itself, or leases to tenants. Many, although not all, pubco pubs are tied — obliged to buy products, usually beer, supplied by the pubco itself (some pubcos are also breweries and include their own products as part of the tie). Like the brewery pub ownership model, the pubco model and the pubco tie has generated a great deal of criticism. In particular, there have been concerns that pubcos are distorting the market, and that the beer tie constituted unfair competition.

2. In 2004 the Trade and Industry Committee published a report2 on pubcos which, most notably, concluded that:

• No one pubco held a dominant position within the market;

• Small brewers could be disadvantaged by the requirements set by pubcos;

• The cost of ‘beer ties’ were usually balanced by the benefits available to tenants; and

• Splitting the wholesaling and property functions of the pubcos, by removing the beer tie, could lead to the national brewers having a virtual monopoly on the wholesaling of beer, as before the Beer Orders.

However, the Report expressed concerns about the relative commercial strength of pubcos in comparison to the individual tenants; the Committee was not convinced the relationship was entirely fair and made recommendations in an attempt to redress the balance.

3. In June last year we launched what was intended to be a short inquiry to establish whether the conclusions of our predecessor still stood and how its recommendations had been applied. The key questions asked were:

• Has the Licensing Act 2003 had an effect on competition within the market?

• To what extent have revisions to the framework codes of practice met the Committee’s concerns?

• To what extent are the codes applied by the pubcos?

• Is there a need for further regulation of the industry?

1 The Supply of Beer (Tied Estate) Order 1989

This has since been repealed by The Supply of Beer (Tied Estate)(Revocation) Order 2002 and The Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices)(Revocation) Order 2003.

2 Trade and Industry Committee, Second Report of Session 2004-05, Pub Companies. HC 128-I

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4. This inquiry has taken far longer than we had expected, for a variety of reasons, but chiefly because of the lack of agreement among our witnesses on almost every point. We have had to set the pubcos’ defence of their business model against the claims of the campaign groups and the stories of individual lessees. The second has been that the inquiry has taken place at a time when closures among all types of pub are high; we have needed to look carefully to establish to what extent the difficulties of pubco lessees were the product of tough trading conditions, and if it was clear whether pub closures were more or less prevalent within pubco estates. This was not an inquiry into those wider problems and this Report, therefore, addresses them only briefly to put our conclusions into their proper context. This does not mean that the Committee is unconcerned about those other questions and we emphasise that we understand fully the social role of pubs in many local communities, a role to which we attach considerable importance. Indeed, it is this important and sensitive social role — a role shared with post offices, the subject of a separate inquiry by the Committee — that justifies us looking in such detail, during a period of serious recession, at what is a relatively small sector of the economy.

5. Our witnesses were impassioned. The stories we heard from individual lessees were extremely troubling; indeed, many were heart-rending. On the other hand, we initially had 50 complainants from a pool of some 30,000 lessees. We asked the pubcos about some of these complaints and received a different account of events. We were also aware our predecessors had found the advantages of the pubco system balanced the disadvantages. We decided we needed independent evidence that we could be confident was an accurate representation of the overall situation. Accordingly, we commissioned our own survey to try to get a clearer picture of what was happening in the pubco-owned pubs. A thousand publicans were questioned by telephone on a range of matters to do with their business. The sample was chosen by an independent survey company, CGA, and structured to ensure that there was fair coverage of the various businesses in the sector. Although there has been some publicity about the survey recently, we were careful not to publicise it in advance, to ensure our results were unbiased. The results of this survey are examined throughout the report. The questionnaire results are appended to the evidence.3

6. During the course of the inquiry we received over 100 pieces of written evidence; by the end of our inquiry we had had over 70 submissions from lessees. Only one expression of support for a lessee’s pubco was submitted in response to the initial call for evidence. We note that at a very late stage in the inquiry several Enterprise lessees contacted the Chairman expressing their support for the company and giving examples of help they had been offered. This had the appearance of a campaign. Some of the stories show simple naïvety on behalf of lessees. Some of the stories we heard clearly have two sides. Nonetheless we were struck by the consistency of lessees’ complaints about pubco behaviour. This was supported by cases submitted through other MPs’ offices. Committees have power to protect their witnesses if they suffer as a result of giving evidence. However, in many cases it would be difficult to disentangle the extent to which action was taken as a result of evidence to the Committee or as the culmination of a pre-existing dispute between pubco and lessee. Accordingly, we print only evidence that lessees have expressly agreed can be published.

3 Ev 290

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7. We took oral evidence from: Fair Pint Campaign;4 Federation of Small Businesses (FSB); Paul Daly, a publican; Royal Institute of Chartered Surveyors (RICS); David Morgan, a chartered surveyor; Simon Clarke, a publican and chartered surveyor; British Beer and Pub Association(BBPA);5 Association of Licensed Multiple Retailers(ALMR);6 British Institute of Innkeeping (BII);7 Punch Taverns; and Enterprise Inns.

8. In addition we visited Enterprise Inns Headquarters to meet with Regional and Divisional Managers. The Chairman visited the Eagle Ale House in Battersea to see how the tie was monitored and met groups from the Fair Pint Campaign and Marston’s. Staff also visited a Punch Taverns pub to meet the lessee and their Business Relationship Manager. We undertook such a programme of visits and informal contacts because we wished to be as fair as possible to both sides. Punch and Enterprise were chosen to give oral evidence to us simply because of their considerable market share. Not all pubcos submitted evidence to this inquiry; for example we did not receive evidence from either SNPE or Wellington. Our survey showed some differences between individual pubcos, but although we are confident that the overall sample is large enough to give a clear picture of the trends in the business, it would be unfair to read too much into the responses relating to individual pubcos, since the smaller the sample, the greater the risk of distortion. On the other hand it would be equally unfair not to note that responses did vary from one pubco to another.

9. There is one thing we wish to record. Lessees have been assiduous in providing us with verifiable information, including copies of legal documents. In some cases we were not convinced by their interpretation, but we have no doubt that they were entirely open with us. As is noted elsewhere in this Report,8 in evidence to us both Mr Thorley of Punch and Mr Tuppen and Mr Townsend of Enterprise Inns made assertions which, on investigation, proved to give a partial picture, or on one occasion were positively false. We recognise that those giving oral evidence may need to simplify a complex picture, and that slips of the tongue may occur, but these repeated slips have undermined the reliability of their evidence.

10. Most publicity about the problems of the pubco model has focused on the beer tie. However, when complaints are analysed, they go far wider than that. Pubcos claim that their interests and the interests of their lessees are aligned; other witnesses deny that. The constant thread throughout is the imbalance of power between pubcos and lessees; witnesses’ recommendations to abolish the beer tie were made to alter that balance of power. Many other allegations about misuse of power have also been made, and the Committee’s attention has been drawn to a wide range of problems. As we explain below, we are not the right body to determine them all; in this report, we focus on the relationship

4 Fair Pint Campaign define themselves as “a coalition of supply-tied lessees and other industry professionals who

have come together to ensure fairness for the many thousands of tied tenants who are struggling at the hands of their Pubcos.”

5 BBPA is a membership organisation made up of major pub operators; vertically integrated brewers and pub operators; and minor pub operators.

6 ALMR says it is “the only national trade body dedicated solely to representing the needs and concerns of licensed retailers.”

7 BII is the professional body for the licensed retail sector.

8 Para 52, para 71, para 95, para 125

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between pubcos and lessees, the extent to which interests are really aligned, and the overall fairness of the model. We will not seek to judge the conduct of individuals or institutions save where we have first hand knowledge and the evidence is compelling. However, although we do not rely on individual anecdotes, good or bad, we believe the submissions we have been sent, together with our own survey, give us a clear overall picture.

11. A select committee has limited functions. We are not the Competition Commission. Nor are we a full-scale regulatory body. We have neither the resources nor the investigative powers to reach firm conclusions on every issue. Nor do our recommendations carry the force of law. We recognise that complex problems demand investigation, and that if remedies are put forward too hastily, they can produce problems which are far worse than those they sought to solve. It would be irresponsible of us to put forward eye-catching recommendations which we are sure would be eagerly taken up by many in the trade, in the media and in the House, unless we were confident that they would produce the result we desired. The history of the Beer Orders, which transferred ownership of pubs from the brewers to pubcos, suggests we should be wary of such confidence.

12. That said, the results of our survey are disturbing. We recognise that landlords are rarely, if ever, popular with their lessees, but the results are often startlingly clear, this combined with the evidence submitted to the inquiry, suggests that, whatever the effect of the pubco model on competition, which we examine later in this Report, the imbalance of bargaining power and information between pubcos and their lessees has produced a system which is biased against lessees, and needs to be examined in depth. Accordingly this Report examines the industry from first principles rather than being, as we first expected, a simple check on the implementation of the Trade and Industry Committee’s recommendations.

13. We would like to thank those who met members and staff of the Committee on informal visits and those that have submitted to the inquiry, particularly the lessees who gave such frank evidence regarding their situations. We would also like to thank the House of Commons Legal Services Office and our specialist adviser Julian Maitland-Walker for assisting with the inquiry.9

What is a pubco?

14. Pubs can be owned and operated in a variety of ways. At one extreme is the managed pub, in which a company owns a pub, specifies what is sold in it, and hires a salaried manager to run it. At the other is the freehouse, where the individual licensee owns the pub, controls the business, makes the buying decisions and takes the profits. In between is the leased or tenanted pub, in which a licensee pays rent to the owner of the property and is often required to buy at least some categories of products through the landlord — known as being ‘tied’.

9 Extract from the Minutes of the Committee, 4 November 2008

Mr Maitland-Walker’s interests were declared as follows:

“I have specialised in UK and EU competition law for many years and have been involved in advising on competition issues in the beer sector since 1982.Legal confidentiality prevents me from listing specific clients, but I can confirm that I have acted for clients representing all parts of the UK beer supply sector including pubcos, brewers and individual pub licensees.My firm continues to act for such clients.“

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Table 1: Pub Ownership

Pub type Number of outlets

Freehouses 17,200

Leased/Tenanted 30,800

Managed 9,000

Source: Ev 189

15. Pubcos operate two different models of leasing agreements: the short-term tenancy agreement and the long, assignable lease. The long (10–20 year) assignable lease, which has a full repairing obligation, was developed by the pubcos and has taken precedence over the short term tenancy (3–5 year) — developed historically by the brewers. It is this long lease model with which we are mostly concerned, and so throughout this Report we refer to the publican as the lessee. The long assignable lease means that while the lessee does not own the freehold, the lease of the pub can still be an asset for them as they can ‘sell’ on the business by assigning their lease. In such cases, pubcos have a right to approve the new lessee, but cannot reasonably withhold consent, and the financial benefit goes to the person selling the lease.

16. There are many smaller pubcos with fewer than 1,000 outlets, but the main pubcos which own leased and tenanted pubs are:

Table 2: Pubco number of outlets

Number of outlets

Enterprise Inns 7,581

Punch Taverns 7,287

Admiral Taverns 2,386

Marston’s 1,932

Greene King 1,428

Scottish & Newcastle Pub Enterprises (SNPE)

1,205

Wellington 1,028

Source: CGA - These figures include both short term tenancies and long term leases

Of the pubcos listed above, only Wellington does not operate a beer tie. Marston’s, Greene King and SNPE are also brewers.

The 2004 Inquiry

The Inquiry

17. The Trade and Industry Committee carried out an inquiry in 2004 on Pub Companies at the request of the Federation of Small Businesses (FSB). The FSB were concerned that the pubco business model was having a detrimental effect on their tenants and lessees and

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more generally the market for the resale of beer through public houses. Of particular concern were the beer tie and the basis on which pub rents were calculated — the FSB believed that there could be grounds for referring pubcos to the Competition Commission.

18. The Trade and Industry Committee carried out a thorough inquiry into pubcos. It looked into the market definition, competition issues, access to the market for small brewers, distribution of beer and the contractual relationship between pubcos and their tenants which included: the beer tie, rent valuation and reviews, the amusement with prizes (AWP) tie, repair obligations, buildings insurance, assignment, grievance procedures and business support from the pubcos.

Conclusions and Recommendations in 2004

19. The Trade and Industry Committee came to a number of conclusions and made some significant recommendations. In regard to competition concerns, it agreed with the Office of Fair Trading (OFT) that there seemed to be “a reasonable amount of competition between on-trade outlets”10 however, it disagreed with the public house market definition and recommended that the OFT should more accurately define it.11 The Committee also found that there was a “strong possibility of anti-competitive consequences” in the distribution market for beer and asked the OFT to keep it under close and regular scrutiny.12

20. The Committee came to a series of conclusions about the contractual relationship between pubcos and their lessees. Most significantly it found that the “immediately quantifiable cost of the tie is usually balanced by the benefits available to tenants”13 and that it was not clear “that removing the beer tie would make tenants better off”.14 However the Report also recognised that “this does not mean that for every tenant the costs equal the benefits, leading to some tenants getting into financial difficulties. In such cases pubcos could do more to redress the imbalance” and that “some pubcos demonstrated greater sensitivity to tenants’ problems than others”.15 To redress the imbalance the Committee made a number of recommendations centred around updating the BBPA’s Framework Code of Practice16 — on which individual pubcos based their codes. The Committee recommended that the areas the codes should cover were: rent reviews; the role of Business Development Managers (BDMs); complaint and dispute procedures; disclosure and the availability of information; and the taking of legal and professional advice by prospective tenants.17 The Report concluded that “At this stage we do not think a legally binding code of practice necessary, but if the industry does not show signs of accepting and complying

10 HC (2004–05) 128-I para 19

11 HC (2004–05) 128-I para 38

12 HC (2004–05) 128-I para 71

13 HC (2004–05) 128-I para 188

14 HC (2004–05) 128-I para 198

15 HC (2004–05) 128-I para 188

16 As defined by the BII “Codes of Practice are used by companies to tell potential and current lessees/tenants the terms of the business relationship on offer and how that relationship will be conducted”.

17 HC (2004–05) 128-I para 203

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with an adequate voluntary code then the Government should not hesitate to impose a statutory code on it.”18

21. The Pub Companies Report also made some recommendations on specific issues. It recommended that:

• pubcos should reconsider policy on marketing fees;19

• pubcos should allow their tenants more flexibility in the choice of products that they sold to allow greater opportunity for small brewers to participate in the market;20

• there was a need for an inexpensive and efficient system of arbitration or alternative dispute resolution to resolve disputes without imposing legal costs on either side;21

• pubcos should advise their tenants of the average discount they receive when purchasing beer from the breweries, how this compares to the free market discounts available, and how much of their discount pubcos are passing on to their tenants;22

• the AWP tie should be removed;23

• there should be clear guidelines for the rental valuation process and tenants should be provided with a comprehensive breakdown of how their rent was calculated including detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers;24

• the profit assessment should form an addendum to leases, with any subsequent review, to ensure transparency;25

• upward only rent review clauses should be removed from leases and there should be a nation-wide register of rent reviews;26

• the industry should develop a nation-wide register of rent reviews; 27 and

• pubcos should support their tenants in attending training courses.28

18 HC (2004–05) 128-I para 204

19 HC (2004–05) 128-I para 53

20 HC (2004–05) 128-I para 61

21 HC (2004–05) 128-I para 90

22 HC (2004–05) 128-I para 125

23 HC (2004–05) 128-I para 129

24 HC (2004–05) 128-I paras 144 and 145

25 HC (2004–05) 128-I para 145

26 HC (2004–05) 128-I paras 151 and 157

27 HC (2004–05) 128-I para 157

28 HC (2004–05) 128-I para 165

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The responses

The Government

22. Both the Department of Trade and Industry (DTI) and the OFT responded to the Committee’s Report. The DTI said that it would be hard for the Government to impose a statutory Code of Practice upon the industry and that any competition concerns were for the competition authorities.29 The OFT responded that:

• it continually kept market definition in the beer sector under review;

• it had not received any evidence of anti-competitive behaviour amongst distributors; and

• that the contractual difficulties faced by tenants and small brewers did not constitute grounds upon which the OFT could exercise its competition enforcement powers.30

The Pub Companies

23. The main recommendation for an updated code of practice was accepted by the industry. The BBPA drew up a revised Framework Code of Practice which was published towards the end of 2005. Members of the BBPA were then invited to review their own codes to ensure that they were in line with the Framework Code. In addition to this the British Institute of Innkeepers (BII) formed a new company in 2007, to independently benchmark company codes of practice. It did this through its two independent committees, the Steering Committee (which set the criteria for benchmarking) and the Benchmarking Committee (which judged a code against the criteria).

24. We have received positive evidence about the codes of practice and the pubcos’ implementation of them such as from the Association of Licensed Multiple Retailers (ALMR) which said:

The existence and accreditation of the codes is clear evidence of the efforts taken by industry landlords to address the Trade and Industry Select Committee’s concerns. […] They are relatively open and transparent and address many of the concerns of critics of the system.31

25. All the pubcos which responded to our 2008 call for evidence have highlighted how they have adhered to the 2004 recommendations:

• all claimed to have removed upward only rent review clauses from their leases;

• all advocated their training programmes for their lessees and BDMs; and

• all emphasised that they gave rent concessions to struggling lessees.

29 Fourth Special Report of Session 2004–05, Pub Companies: Responses to the Committee’s Second Report of Session

2004–05, HC 434, p1

30 Fourth Special Report of Session 2004–05, Pub Companies: Responses to the Committee’s Second Report of Session 2004–05, HC 434, p2–3

31 Ev 83

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26. In other areas the pubcos were less forthcoming; for example, only Enterprise commented on recommendations regarding marketing fees and the contribution towards the costs of professional advice. There were also recommendations that the pubcos rejected:

• none of the pubcos have removed the AWP machine tie;

• profit assessments for rental valuations have not been appended to leases; and

• pubcos do not advise their tenants on the average discounts they receive from the breweries as this was considered to be “commercially sensitive” information.32

In addition the Committee’s recommendations for a national register of rents and for an inexpensive system of arbitration with independent arbitrators have not been implemented.

The lessees’ response in 2008–09

27. The lessees and their representatives have been far less positive about developments since 2004; in fact much of the evidence from lessees themselves is completely at odds with the evidence from the pubcos. The FSB carried out a survey of its members, following the call for evidence by the Committee, and found that 99% of the 156 members who responded felt their situation in relation to their pubco had not improved since 2004.33 The evidence the Committee received from lessees contained many of the complaints that were heard in 2004: the rental valuation; the beer tie; the AWP tie; and dispute resolution.

Pub closures

28. The economic climate has changed since our predecessors’ Report. The latest figures show that around 39 pubs closed each week in 2008 against just eight a week at the time of the 2004 inquiry.

32 Ev 206, 200

33 Ev 149

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Fig. 1

-8

-2

-6

-27

-39-40

-35

-30

-25

-20

-15

-10

-5

0

2004 2005 2006 2007 2008

Average Weekly Net Pub Closures 2004-08

Source: CGA

29. The BBPA blamed pub closures on the Government for increasing costs for small businesses through new legislation such as licensing reform,34 gambling laws, smoking ban, fire regulations, employment legislation and policy on alcohol taxation.35 It claimed that licensing reform alone had cost the hospitality sector £95 million in additional costs of meeting new conditions imposed by licensing authorities and imposed continuing annual fees of £40 million.36 It also believed that the smoking ban had caused a significant decline in sales in some pubs.37 Moreover the BBPA highlighted the growth in the off-trade sales due to the expansion of off-licence trading hours and a heavily discounted supermarket pricing strategy.38 Enterprise added:

staying at home has become an increasingly attractive option, with huge improvements in at-home entertainment, the massive expansion of internet usage and the impact of supermarket pricing, particularly on alcohol consumption.39

Punch argued “that the current challenging trading environment is the primary contributory factor for any increase in Licensees’ financial distress. The ‘tied’ lease model is not the issue”.40

30. However the responses to our survey demonstrated that lessees disagreed with the pubcos’ analysis of problems in the trade. The main cause perceived by the lessees for their

34 Licensing Act 2003 reformed the system of licensing the sale and supply of alcohol

35 Ev 186

36 Ev 185

37 Ev 185

38 Ev 186

39 Ev 98

40 Ev 161

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financial difficulties was overwhelmingly their pubco — the rent they were charged by their pubco and the price they had to pay for their beer from their pubco.

Fig. 2

Q19 Licensee perceptions on reasons for struggling financially

19%

41%

14%8% 7%

3%8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cost of Rent Price of TiedProducts

Smoking Ban SupermarketPricing

less custom less spend Other

1 Most Important

41% of licensees stated that the price of goods and services due to the beer tie was the single most important factor in terms of their current financial struggleFactors linked with the tie account for 60% of grievances; external economic factors account for 40%

Source: CGA

31. There is no doubt that the sector as a whole is suffering. Pubcos argued that their pubs were in fact less likely to close than others, because the tied model ensured that during difficult trading and economic conditions when beer sales may decline the licensees’ ‘rental’ cost reduced as a result of the variable nature of rent paid through the beer and machine tie. 41 Ted Tuppen, Chief Executive of Enterprise, told us:

The percentage of pubs that are failing in our particular sector is far less because we have this strong vested interest in helping people to succeed.42

Punch and Enterprise highlighted recent comments by the Head of Pubs at Christies & Co43 who said:

High Street rental levels are based on floor areas (ie. pounds per square foot) which has proved inflexible and left many retailers both in the pub sector and across other markets struggling to stay afloat in the current climate.

The support and flexibility of the pubcos has meant that the pain seen on the high street has not been replicated to such an extent across the entire pub industry.44

41 Ev 161

42 Q 227

43 Christies & Co say they are ‘the leading business agents in the hospitality, leisure, care and retail sectors’

44 High street landlords can learn rent lessons from pubcos, Morning Advertiser, 21 January 2009

16

32. The raw data appear to support the pubcos. The BBPA submitted the following table of pub closures which shows that there were more closures in the freehouse sector in the first half of 2008.

Table 3: Pub Closures

Tenure % of closures

Freehouse 55

Managed 12

Leased/tenanted 33

Source: Ev 189

ALMR also commissioned research on pub closure rates from 2003–08. Their data showed that over the period as a whole the cumulative loss in the pubco estate accounted for approximately 46% of all net closures. In contrast, the decline in the independent free trade was 37%.45 Since the free trade is a relatively small section of the market, this again suggested that pubco pubs were less likely to close than were freehouses.

33. However, raw data can be misleading. Closure figures deal with cases where the pub ceases to trade as a pub entirely. Lessees argued that closure figures mask pub failures — where a pubco lessee has failed and gone out of business only to be replaced by the pubco with a new lessee. We were told:

Pubcos argue that fewer tied lease pubs are closing compared to the freehold/free house sector. Certainly fewer close since the pubcos appoint temporary or relief operators to keep the pub open whilst a new tenant is sought. The “churn” in lease premiums probably more than compensates for any lost rents and management cost. The real comparison should be the number of operators (i.e. tenants) who fail and have to leave the business.46

Ted Tuppen, the Chief Executive of Enterprise Inns acknowledged:

…pub failures may not appear in the [pub closure] statistics and I am completely prepared to accept that.47

34. We tried to get an idea of the failure rate in the pubco sector when questioning the Chief Executives of Enterprise Inns and Punch. Ted Tuppen of Enterprise Inns told us that 184 people had been evicted from Enterprise pubs in the last year for breaches of their contract48 and 170 lessees had handed the keys back in because they could not make the business pay.49 Given Enterprise has an estate of some 7,500 pubs, this makes a failure rate

45 Ev 91

46 Ev 155

47 Q 227

48 Q 216

49 Q 225

17

of 4.7%. Giles Thorley told us that there had been 575 pub failures within the Punch estate— a failure rate of nearly 8%. 50

35. It is clear that figures for pub closures do not adequately cover cases where individual lessees go out of business without the pub itself actually closing. We cannot be confident that pubco lessees are less likely to fail than other publicans.

50 Q 218

18

2 Is the rental system fair? 36. Lessees have many complaints about the way in which rent is calculated. This is a complex subject, because as well as receiving an income from the basic rent, pubcos can receive income through requiring lessees to buy a range of products and services through them. The basic rent takes some account of these ‘ties’, but whether it does so to a sufficient extent is one of the main bones of contention. Complaints about the method on which any rent is calculated are frequently and inevitably bound up with complaints about the tie system.

‘Dry’ rent

37. Punch’s introductory guidance to new lessees says “We adopt recognised valuation methods used in the open market”.51 For most pubs basic rent, often referred to as ‘dry rent’, is not determined by price per square footage like many other commercial properties but on a division of ‘fair maintainable trade’ (FMT), that is, the amount of profit that a ‘reasonably efficient operator’ might be expected to generate. The theory of how this should be done is set out by RICS in its valuation guidance.52 According to this FMT should be calculated by estimating the amount a pub could make, looking at factors such as its location and size. In addition the cost of actually running the pub should be estimated by considering costs such as staff, utility bills and the price of beer and other products from the supplier. These estimated costs are then subtracted from the potential turnover to give a balance — the “divisible balance”. This is divided between the lessee and the pubco, normally on a 50/50 basis. However we have received evidence to suggest that the ‘theory’ is not necessarily followed. Nigel Wakefield, a member of the BII, told us following a recent BII rent review road show:

I assumed wrongly that a complex mathematical approach would be implemented to assess rent increases or valuations for individual pubs. I sat there, with total incredulity, whilst one of the so-called top rental valuers told that, his method would be to go two, three or four local pubs within a ten mile radius and ask the landlord what his rent was and by using comparables arrive at a figure, discounting the best and worst pubs.53

38. While setting rent and reviewing rent may be a matter of negotiation, the RICS guidance does becomes important if there is a disagreement between the lessee and their pubco. If the matter goes to arbitration then the theory of FMT is applied to the rental valuation. It accordingly sets the framework for the sector and the negotiations. The FMT model is the focus of much criticism as it is not seen to be evidence-based.54 Even those who support it agree that calculating FMT is not an exact science. In a paper entitled ‘Making Pub Rents More Transparent’, Rob May, the former Chairman of RICS, Trade-

51 Passionate about Pubs, Punch, p 15

52 RICS Valuation Information Paper No. 2: The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland.

53 Ev 270

54 Ev 84

19

Related Valuation Group said, that valuing for sustainable rents “that do not impose excessive costs on the operator nor undervalue the owner’s investment seem to be a ‘judgement of Solomon’ and sometimes they are not judged accurately”.55

39. The Punch website makes clear: “there will always be an element of negotiation around the figures used in the initial calculation.”56 These negotiations are frequently between lessee and a pubco representative57 although it may involve a chartered surveyor on either or both sides. RICS said

With regard to the large pubcos employing Chartered Surveyors, this is a commercial matter, and the engagement of qualified and experienced specialists must be correct. We understand the valuer will be looking to present the best case in negotiation for his ‘client’ the landlord. Similarly, a valuer acting on behalf of a tenant will do everything he can to present his case for the lowest possible rent; this is no different to any rent review negotiation.58

RICS also made clear:

Chartered Surveyors do not create a market. They analyse what the market is transacting. All sale and lease transactions are freely negotiated. Different parties will play to a different agenda. It is the valuer’s task to investigate and analyse such transactions and apply the evidence to a specific situation. In negotiation, the valuer will attempt to agree the best result for his client. Each party is free to walk away from a proposed transaction.59

40. Chartered surveyors may be involved in valuation in two roles — either as the advocate for a client or as an independent arbiter when rents are disputed. Many surveyors will have worked for pubcos. This double function has led to concerns that chartered surveyors involved in arbitration do not necessarily declare their interests, and this was raised in evidence. However Mr Willis, Chair of the Trade-Related Valuation Group of RICS said

Any valuer who is a chartered surveyor who is a specialist in licensed property or any form of the profits valuation is covered by the RICS rules of conduct and the guidelines and the valuation information. Part of that is that he must be experienced. It is integrity and experience in client service which are the fundamental key to the chartered surveyor role.60

41. Lessees must appreciate that if a chartered surveyor is involved in their rent negotiation he or she is acting on behalf of a client and that is a legitimate role. However membership of a chartered institution is no longer considered an automatic guarantee of integrity and certainly not of impartiality; RICS members called on to act

55 Making Pub Rents More Transparent, Rob May, 12 October 2005

56 Passionate about Pubs, Punch, pg 15

57 Ev 214

58 Ev 272

59 Ev 272

60 Q 88

20

in arbitration should be aware of the sensitivity of their situation and must be scrupulous in declaring their interests.

Transparency

42. By whatever means a pubco values a pub, fair negotiations need transparency — a lessee needs to know on what assumptions their rent is based so they can query them in negotiations. This was an issue raised by our predecessors who recommended in 2004 that

Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated. This should reveal the whole detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers.61

Pubcos have told us that they do do this. Admiral said that it “will share its profit and loss assessment”.62 Marston’s said “using their profit-and-loss account, the retailer is taken through the business model.”63 Enterprise told us: “the assumptions used in the construction of rent calculations are disclosed to licensees, together with an estimated and summarised profit and loss account which supports the rent assessment.”64

43. But this was disputed by other witnesses. David Morgan said that he had never found the detail recommended in 2004 included in pubco rental calculations unless a rent review was referred to a third party for resolution.65 He concluded “There is no transparency; it does not exist.”66 ALMR also told us that the ‘headline operating cost figure’ was rarely broken down into its component parts with no justification provided as to how it was arrived at:

It is therefore just an assumption of how much the landlord thinks it will cost to run the pub which is neither transparent nor evidence based. 67

Our survey bears this out. It shows that 44% of the lessees questioned had not seen any form of breakdown of their rent calculations.68 A lessee said that he had written to his pubco 13 times asking for supporting evidence for his rent and it was never supplied.69

44. In addition, as highlighted in Chapter 2, the Trade and Industry Committee’s recommendation that the detailed profit assessment (as described above) should form an addendum to leases to increase transparency70 has not been implemented. In justification Greene King said that there was “a distinct danger of potential mis-representation if a

61 HC (2004–05) 128-I para 145

62 Ev 125

63 Ev 201

64 Ev 102

65 Ev 244

66 Q 91

67 Ev 84

68 Ev 301

69 Ev 134

70 HC (2004–05) 128-I para 145

21

‘guaranteed income’ was indicated.”71 Enterprise said that it disagreed with the recommendation because “it is those assumptions which support the assessment of rent at the date of review which are pertinent, not those used at the time of an earlier assessment.”72

45. Given the inherent subjectivity of the rental valuation method, it is very important that there is transparency about the assumptions on which it has been calculated. We note that there is disagreement between lessee representatives and pubcos over whether the Trade and Industry Committee’s recommendation that “Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated” has been implemented. The evidence that this recommendation has not been fully implemented is confirmed by our survey results which show that 44% of lessees had not been shown a breakdown of how their rent was calculated. This is unacceptable.

A fair valuation?

46. Without transparency, the valuation process is open to abuse and negotiating a fair rent becomes more difficult. A valuation could be carried out in an aggressive manner by manipulating the inputs into the calculations — in particular by under-estimating the running costs of a pub. If the cost percentage is too low, the divisible balance is falsely high: the landlord gets a higher rent and the lessee less profit. ALMR have recently carried out a benchmarking study on operating costs and found that pubcos tend to calculate running costs73 as approximately 30–35% of turnover but in reality they are on average over 52%.74

47. We note that, without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. We recommend that there should be industry guidelines on the average costs of running a pub such as those in the ALMR benchmarking survey. These can be used by lessees as comparators against the rental assessments put forward by their pubco.

Trading history

48. The recommendations on transparency made in the Trade and Industry Committee’s 2004 Report were prompted by evidence from a Morgan Stanley study which found that a third of lessees rated their pubco as less than satisfactory for disclosing all relevant information.75 In 2009 our survey found a similar number of lessees (34%) did not feel sufficiently prepared by information and advice from their pubco before signing their lease.76

71 Ev 206

72 Ev 102

73 For example staff, cleaning, utility bills

74 Ev 84

75 HC (2004–05) 128-I para 97

76 Ev 298

22

49. One area of particular concern was information regarding the past trading history of the pub. While the profits that a ‘reasonably efficient operator’ might be expected to make are by definition a matter of judgement, past trading history is factual and could be used to assess whether the rental valuation was fair. Indeed, the BBPA Framework Code of Practice states that companies should provide “information relating to the trading history of the pub”.77 Pubcos therefore supply information on barrelage and goods supplied to the pub.78

50. It has been suggested that an incumbent lessee should also have access to the previous lessee’s books.79 The situation is complicated because sometimes this commercial relationship is between the lessee who is selling on the lease, and the buyer, rather than between the new lessee and the pubco. Nonetheless, the pubco will have some knowledge of the pub’s history, and is in a position to share the information with the new leaseholder. It is not clear that the relationship is always as open as it should be. For example, Paul Daly told us that he was not provided with any figures when he took on an Enterprise pub through assignment.80

51. We have heard from concerned lessees who have taken on pubco pubs and are failing only to find out that the past few lessees have also failed and that they were not informed of this by the pubco when taking on the lease.81 We questioned the pubcos on this:

Q270 Mr Clapham: On to the rent situation, when a prospective tenant is moving into one of your public houses, do you divulge to them the previous sort of performance of that public house? Do you tell them about the bankruptcies, if there have been any bankruptcies? Do you tell them about the performance of the last person in that public house?

Mr Townsend: I am almost sure that we would not divulge the personal information relating to the prior occupier of a house and the personal financial situation, but the trading history of the pub, absolutely. We will share with them the information that we have available, and that is typically the sales of products that we make into the pub and the share of gaming income that we may have enjoyed from the pub. We do not have access to the pub’s books in the circumstances of either a new let or indeed an assignment. As has wrongly been suggested to this inquiry on an earlier occasion, we do not have access to the tenant’s books.

52. However our survey showed that 36% of lessees did have to provide their accounts to their pubco.82 Of the 230 Enterprise leaseholders questioned, 70 (or 30%) said they had to produce their accounts. We wrote to Enterprise to question their evidence and were told again:

77 Codes of Practice Framework on the granting and operation of tied tenancies and leases, BBPA, Second Revision

(2005), p6

78 Passionate about our pubs, Punch, states that Punch supplies three years barrelage

79 Q 31

80 Q 33

81 Ev 274

82 Ev 303

23

I can confirm that ETI [Enterprise Inns] only obtains access to a lessee’s profit and loss account if the lessee chooses to share such information with ETI. This can occur at any time if the lessee so desires, and is particularly helpful in providing supportive evidence during a rent review negotiation.83

But in the same letter Enterprise went on to tell us:

There are certain circumstances under which such disclosure is obtained by ETI as a mandatory pre-condition. These are —

i) the provision of temporary financial assistance;

ii) an out-of-cycle rent review requested under ETI’s Code of Practice.

In both cases, we require full disclosure of recent trading accounts (last two years if available), stock results and VAT returns as well as evidence of current overhead costs being incurred.

In the new ETI Retail Partnership Tenancy agreement launched in the latter part of 2008, it is a mandatory condition that licensees employ the services of a qualified trade accountant and provide full disclosure of profit and loss accounts to ETI on at least a quarterly basis.84

The oral evidence given to the Committee by Mr Townsend was, at best, partial.

53. The BBPA Framework Code of Practice considers “Precise turnover will not usually be available to the pub company but details of volume purchased from the company directly can be provided”.85 We have no reason to doubt that pubcos are abiding by this limited duty. However, we believe that even if they do not have access to the books of the previous lessees, they should reveal the circumstances in which the pub was left. It could be argued that by providing information about past trading difficulties, pubcos are putting those selling leases at a disadvantage. We do not accept this. While it is perfectly legitimate to accentuate the good things about a business for sale, it is not appropriate to hide material facts. Moreover, the majority of leases in our survey were not assigned, but obtained direct from the pubco; in these cases there is no question of interference in a separate commercial negotiation.

54. We accept that in many cases pubcos do not have access to their lessees’ books. However, they have access to a substantial amount of information about the business of a particular pub, and are likely to have extensive information if a business is in difficulties. Pubcos entering a commercial relationship with a new lessee should be required to share all their information on a pub’s trading history with them.

83 Ev 106

84 Ev 106

85 Codes of Practice Framework on the granting and operation of tied tenancies and leases, BBPA, Second Revision (2005), p6

24

Availability of comparables

55. One way to improve transparency in rental valuations would be if a lessee could compare whether their rent was in line with other similar pubs. Our predecessor Committee recognised this and recommended that there should be a national register of rent reviews to help lessees compare their rents against those of similar pubs.86 This recommendation was not taken up. Mr Willis, the Chairman of RICS’s Trade-Related Valuation Group told us that there was no rental register for any form of commercial property. He said that the reason for this was that no two properties were the same and no two leases were the same so ‘a little knowledge is a very dangerous thing’.87 In response David Morgan argued:

if you have three […] you can get a distortion. If you have 30 pubs they tend to even out a little bit. If you have 300 pubs you then get a general tone. If you have a whole stack of comparables they generally tend to form a pattern and you can interpret the pattern as you will.88

56. David Morgan argued that because comparables were not readily available to lessees a pubco had a “manifestly unfair advantage” as it had:

access to all of the comparables of its own estate, either locally or regionally. There is absolutely no opportunity for a tenant to have access to any of this database and from my personal experience it is never offered for the assistance of the tenant, other than to cherry-pick the very highest examples.89

He gave the example of a case he had recently handled where he asked a pubco representative for the details of a pub owned by the same pubco within close proximity and was refused.90 A lessee told us that he asked his pubco Punch for trading figures of similar pubs to his and was told that there were none available.91

57. Rob Hayward, Chief Executive of the BBPA highlighted that the Valuation Office’s rateable valuations were available as comparables.92 However these do not take account of a tie nor do they take account of living accommodation.93 Mr Willis conceded that “the number of comparables that are provided at the early stages perhaps could be improved”.94

58. A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses. Our predecessor’s recommendation to create a register of rent reviews would have increased transparency. We note it has been disregarded,

86 HC (2004–05) 128-I, para 157

87 Q 92

88 Q 93

89 Ev 245

90 Q 91

91 Ev 258

92 Q 153

93 Ev 283

94 Q 93

25

and neither the pubcos nor RICS have taken any serious action to make sure the rental system is not unfairly biased against the lessee.

A new valuation method?

59. Some witnesses suggested that the fair maintainable profit valuation method should be abandoned. The valuation method used to establish rents for public houses needlessly lacks the transparency and simplicity of the methods used for other commercial properties. As Nick Bish from ALMR said:

It is built on the basis of the tied estate of the old breweries transported into the new model of the leased estate and it does not fit comfortably. We would rather see, […]full commercial leases in the public market where it is based on square footage and comparables and so on. I accept entirely that a pub is a pub and you can turn a chemist into a shoe shop, so the high street is a way of doing things, but the pub is not sufficiently distinct, certainly for a long leased business, not to go down that route.95

60. The rental valuation method for pubs appears to be the product of history and tradition. If it is to be fair, there must be far greater transparency about how rents are calculated to ensure equality between the parties to the negotiations. If this is not improved as a matter of urgency, there are compelling arguments for abandoning the method entirely.

Rent reviews

61. Rent reviews are a subject of particular contention between pubcos and their lessees. The main concern expressed in submissions to the Committee was that, in a time when takings were decreasing, pubcos were still asking for higher rents, despite the notionally shared risks between pubco and lessee.

62. Rent reviews happen on average at five yearly intervals. BBPA explained that the purpose of these were to re-assess rent:

on the basis of the trading pattern of the pub and what could reasonably be expected of the business as it exists at that time. Things to be considered will be changes in demographics, capital investment by the pub owning company or the lessee, general trading conditions and any other relevant factors that have an influence on the revenue of the pub.96

63. Pubcos denied that they were asking for unreasonably high rental increases. Enterprise said that since 2004, it had conducted 4,690 rent reviews and the average annual growth in rent, arising from rent reviews throughout this period, was below inflation at approximately 2.5%. In addition 162 reviews had resulted in permanent rent reductions.97

95 Q 152

96 Ev 185

97 Ev 102

26

Punch told us that more than a third of their rent reviews in the last year had either seen the rents staying the same or going down.98

64. Nick Bish told us that the rent review model was not working because:

in a declining market rents and agreements are based on a five-year period and this seems not flexible enough to cope with, as we are all observing, a steep, some would say potentially catastrophic, decline in the economy.99

However Martin Willis from RICS argued that the rent review system was not peculiar to the pub industry and that difficulties were being faced by most small businesses due to the economic climate:

Essentially the problems that are in the industry at the moment are largely down to the recession which is affecting every other form of commercial property and particularly small businesses. Any business, even a small shop, may well have a five yearly rent review […] It is affecting all small businesses and I believe anybody faced with rent review increases at the moment is having to look at them very closely.100

65. As discussed earlier in this chapter, pubco BDMs normally carry out rent reviews rather than chartered surveyors. It is therefore questionable whether the FMT method is actually carried out correctly or at all at rent review. If there is no transparency and lessees are not given a breakdown of their rental calculations it is hard for them to know. It has been argued that there is no “due diligence” in the process as recommended by our predecessors.101 David Morgan said:

The interface, because it is adversarial, is the BDM or BRM. They are obviously in the business to get the highest rent they are able to get. They are looking after shareholders’ interests and their own job; they are not there to cut the rent down. If they are able to get as high as they are able to, they do.102

He believed that the pubco representative approached rent reviews with three aspirations:

• a sky-high rent demand that only an idiot might accept, but you never know;

• a middle ground rent review that has been authorized by his superiors as a settlement level that can be justified internally; and

• an ultimately lowest level settlement that is either accepted after significant negotiation processes have been exhausted, or by third party referral.103

66. There are certainly indications that in preparing rent reviews, pubcos work out the figures backwards from the rent which they are seeking. A lessee told us:

98 Q 273

99 Q 137

100 Q 55

101 HC (2004-05) 128-I

102 Q 91

103 Ev 244

27

Enterprise Inns continually manipulated the costs and other variables to support a desired rental figure. Rather than input appropriate variables to determine a rental level, they worked backwards from a sought after rent until the calculation fits their requirements.104

He supplied us with the calculations his pubco had made when his rent was reviewed. In the first calculation there was an income of £5,000 for ‘Machines’ and £500 for ‘Food and Catering’ (being crisps and snacks) however when he pointed out he had no machines the figures were adjusted to take account of this. This second calculation did not show a machine income but the food and catering income had gone up 1,200% to £6,000. The total rent expected remained the same.105

67. A lessee has limited negotiating power in a rent review. Walking away from the business is not easy, particularly since in some cases not just a business but a home is lost. At present, challenging a review formally requires significant resources. That means that transparency in valuation during a rent review is even more important than when a lease is first arranged. It also means that low-cost dispute resolution methods are desirable. There has been some progress on this, which we examine in a later chapter.

Goodwill and improvements

68. Lessees have also complained that rent increases took into account increases in trade following improvements they themselves had made to the business. One lessee told us that having turned around his pub, after a year, his rent was increased by 50% and his pubco told him that “the rent had been set too low for the previous tenant” although there had been no mention of this when he had taken on the pub.106 In another case a lessee was presented with a 100% rental increase at her first five-year review even though there had been no change in the local environment or economy — the only difference being the money she had invested in upgrading, as she put it, an ‘old and shabby building’.107 In principle, trade increase brought about by improvements made by the lessee, above and beyond maintenance of the building, should be disregarded in rent reviews. So too should any increase in trade attributable to the lessee’s goodwill. In practice these factors are hard to disaggregate and seem often not to be disregarded.108

69. David Morgan told us he had never encountered a rent review negotiation that accepted or considered the tenantable goodwill, and that pubcos ‘exploited’ structural alterations.109

70. It is difficult to measure the extent to which trade has increased because of improvements to the premises funded by the lessee. Nonetheless, we consider it is manifestly unfair for pubcos to profit from increases in trade brought about by such

104 Ev 145

105 Ev 144

106 Ev 156

107 Ev 203

108 Ev 159

109 Ev 247

28

changes; here, too, transparency on how rent is calculated and access to figures for comparable premises would properly strengthen the lessee’s negotiating position.

Upward only rent review and RPI clauses

71. The Trade and Industry Committee recommended that upward only rent review (UORR) clauses should be abolished. This appears to be the case for new leases, and the pubcos have assured us that where such clauses remain in existing leases, they will not be enforced. However the Fair Pint Campaign told us that UORR clauses have simply been replaced by annual Retail Price Index (RPI) rental increases.110 This was denied by the pubcos. Enterprise told us:

completely contrary to the evidence that was given by an earlier witness suggesting that we try and negotiate wider conditions in return for removing [UORR clauses], it is absolutely not the case.111

However in our survey 27% of lessees told us that RPI clauses did in fact replace their UORR clause112 — and 17 of these were Enterprise lessees. In addition ALMR have told us that:

where downward rent reviews are agreed on non-RPI leases following negotiation, the pubco has asked for the terms of the lease to be changed to provide for an annual increase in line with RPI, even though the Code of Practice is silent on that point. In some cases, this has nullified the benefit of a rent reduction.113

Once again, the evidence given to the Committee from the pubcos does not quite tally with the information we received from other sources.

72. We have also been told that in some leases it states that if the index decreases rent will remain the same — and not decrease. David Morgan said:

In the Enterprise Inns Retail Partnership Agreement which is now common throughout the entire estate and is the basis of lease agreements in the generality, Schedule 3 contained within that agreement, deals with rent reviews. Schedule 3, Section 1 “Annual Reviews” states in paragraph 1.1 that the rent will be increased by the same percentage as the increase in the Retail Price Index over the 12 month period since the previous annual review date. In paragraph 1.3, it clearly states: “if the index has decreased during the relevant 12 month period, the rent will remain the same”. Quite simply, the rent is not capable of a downwards review until the fifth year.114

However Enterprise said in evidence

110 Ev 220

111 Q 274

112 Ev 302

113 Ev 93

114 Ev 246

29

All new ETI agreements state that rents will be “adjusted” in line with RPI, whether upwards or downwards, and in the current period of rapidly falling inflation this will serve to limit, or even remove, annual increases for licensees with indexed agreements.115

Punch has undertaken to reduce rents if RPI decreases.116

73. Enterprise defended the indexation of rent saying that indexation substantially lessened the likelihood of a significant change to the rent at the time of review, as rent was adjusted to take account of inflation during the period between cyclical reviews. In addition Enterprise said that many people actually preferred the “smoothing” effect of indexation between rent reviews.117 Greene King agreed saying:

The RPI adjustment is seen by tenants as preferential as it enables better financial planning over the term as opposed to a potential ‘hit’ at review.118

74. In contrast, opponents of RPI adjustments argued that they meant, on a compounded basis, rent increased by approximately 25% over the five-year period between rent reviews.119 ALMR highlighted findings by Fleurets which showed that indexing had increased the pubcos share of the divisible balance from 50% to a 55-60% share over a five-year period.120

75. Our witnesses are divided over the merits of annual RPI rental adjustments. The pubcos claim this prevents lessees having to deal with a large increase in the five yearly rent review; lessees consider it a way of gradually increasing pubcos’ share of the profits, and of reducing pubcos’ share of the risk. The evidence is finely balanced, and we are not the appropriate body to resolve the question. Two things are clear; firstly, pubcos’ greater bargaining power has enabled them in at least some cases to insist that upward only rent reviews are replaced by annual rental adjustments in line with RPI; secondly, if rental is linked to RPI it should be done in a way which enables reductions when appropriate.

115 Ev 108

116 Morning Advertiser, 13 February 2009

117 Ev 108

118 Ev 204

119 Ev 245

120 Ev 84

30

3 Ties

Beer tie

76. The nature of the ‘tie’ for a pub will be determined by its lease; there are a number of ties for different products such as wine; soft drinks, beer or spirits. The beer tie, the commonest, is sometimes referred to as ‘wet rent’. As the Trade and Industry Committee said, the notion of ‘wet rent’ is misleading as it is in reality just an additional income stream for pubcos.121 Nonetheless, pubcos, lessees and campaigners clearly see it as a form of rental, and its effects are complex.

77. The tie is an issue of particular contention for the lessees who submitted to the inquiry. Opponents of the tie believe the price lessees are charged for beer through their pubco is causing them financial difficulties and is putting them at a competitive disadvantage to the freehouses and managed pubs. Moreover they argued that rents for tied pubs do not adequately take account of the higher beer costs imposed on lessees by contractually obliging them to buy from pubcos rather than from cheaper sources.

78. Pubcos claim that any extra cost to the licensee is compensated for by lower rents and by the extra support the companies provide for their lessees. We examine these benefits in more detail later in the report.

Beer prices and discounts

79. Although breweries have published ‘list’ prices for their beer, few buyers actually pay this price. Instead, it is commonplace for both pubcos and free houses to negotiate discounts, which can be substantial. Like supermarkets, pubcos can negotiate large discounts from brewers when buying beer because of their large purchasing power. In principle, the greater market power of the pubcos could mean they are able to negotiate such significant discounts from brewers that they can make a profit while supplying beer to their lessees at the same or lower price than a freehouse could buy it. In practice this does not appear to be the case.

80. ALMR have created the following table for us to demonstrate the discounting system:

Table 4: Barrelage Discounts

ALMR estimates (per barrel)

List Price £450 - £480

Pubco discount £210 - £250

Individual free of tie discount £140 - £150

Source: Ev 91

121 HC (2004–05) 128-I, para 81, 118

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81. The pubcos pass some of the discounts on to customers, Giles Thorley told us that Punch has three broad lease agreements involving: high discounts of £95 a barrel; medium-sized discounts of £45 a barrel; and pubs with no discounts at all.122 Enterprise said that approximately 60% of their licensees get some discount.123 A lessee provided us with details of Enterprise’s sliding scale of discounts — there were no discounts for pubs selling under 150 barrels a year, but discounts could be achieved of up to £42.12 a barrel if over 500 barrels a year were sold.124 We note the difference between the highest Enterprise discount of £42.12 and ALMR’s estimate of a free of tie discount of between £140 and £150.

Is the beer tie accounted for in the ‘dry rent’ calculation?

82. The pubcos argued that the higher beer prices paid by lessees in tied houses were compensated for in the dry rent calculations. Punch explained that:

What is important is the actual beer price paid by the Licensee, not the discount or tie. This determines the level of gross profit realised by the Licensee, which then determines the level of rent, being a reflection of the fair maintainable profit for the business. This ensures that the Licensee is not disadvantaged in the market place against free trade operators. If the beer price is higher then the GP is lower, and consequently the level of rent is lower.125

This argument was also put forward by Mr Willis of RICS

the gross profit, […]will clearly take into account any elements of the lease which bring in a tie. It will take into account discounts that are given126

83. There is a great deal of confusion about this point. Rent calculations simply take into account the cost of beer as an input. They do not take account of the additional income stream the pubco gains through profit on the tie. The RICS valuation guidance states:

There has been some suggestion that the reward available to the supplier of tied products should be reflected in some way in the rent assessment. This is not correct. Estimated rental values for each particular business arise only from market evidence and analysis relating to the maintainable income stream derived from the operation of the business in the hands of a reasonably efficient operator.127

84. Although the cost of inputs is taken into account, lessees’ profits are still lower than they would be if they were free of tie. We use a very crude set of figures for ease of understanding; we stress that this is schematic, and that none of the prices are intended to be anything other than notional. Assume two lessees; Mr A’s pub is free of tie, and Ms X operates a tied pub. The brewer’s list price is £450 a barrel. Mr A buys his beer at a

122 Q 293

123 Ev 101

124 Ev 73

125 Ev 165

126 Q 84

127 RICS Valuation Information Paper No. 2: The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland, para 7.8

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discount of £150 per barrel. The pubco has the same £150 discount as Mr A, but sells to Ms X at a discount of £40, i.e. £410 per barrel. The pubco keeps £110 of the discount. The effect of the inputs on the FMT calculations is as follows:

Table 5

Mr A: Pub without beer tie:

Turnover £720

Cost of barrel £300

Divisible balance £420

If divisible balance is split 50/50

The pubco takes - Dry rent £210

The lessee makes - Profit £210

Table 6

Ms X: Pub with Beer tie

Turnover £720

Cost of barrel £410

Divisible balance £310

If divisible balance is split 50/50

The pubco takes - Dry rent £155

The lessee makes - Profit £155

Note - These tables work on the assumption that there are 36 gallons in a barrel. This is the equivalent of 288 pints. Each pint sells for £2.50 net

As this demonstrates, the effect of the beer tie on basic rent is that both pubco and lessee take a lower income. However, while the decrease in the lessee’s income is absolute, the pubco has £110 from that part of the discount on its barrelage it has not passed on to the lessee. The reduction in rent is accompanied by a reduction in the lessee’s profit but an increase in the pubco’s overall revenue. Given this, it is hardly surprising that 82% of lessees from our survey did not believe their rent adequately took account of the beer tie.128

85. We have also not been presented with any substantial evidence that rents for tied pubs are significantly less than that for equivalent free of tie pubs other than a small comparative selection submitted by Enterprise.129 Indeed Paul Daly informed us that the rent he paid for his tied Enterprise pub was actually more than for his free of tie pub and they were only round the corner from each other.130 Our survey does not allow us to compare like for like; we note it shows that leases for the Wellington pub company, which operates free of tie, were higher than for tied estates: however they also show that a significantly greater

128 Ev 302

129 Ev 107

130 Q 30

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proportion of these leases were assigned from the previous lessee rather than being purchased direct from the pubco, suggesting that the likelihood of being able profitably to assign a lease is higher for these free of tie pubs. Moreover, most free of tie pubs are freehold; while they may cost more to acquire, the purchaser gets a tangible asset, rather than a lease which cannot be guaranteed to be assignable.

86. A tied lessee can try to maintain their income by selling beer at a higher price, and there is evidence that this happens.

Table 7: Comparison of beer prices

Industry Punch Taverns

Price Difference

Enterprise Inns

Price Difference

Draught Standard bitter

2.18 2.29 + 11p 2.25 + 7p

Draught Premium Bitter

2.40 2.58 + 18p 2.43 + 3p

Draughtflow Standard Bitter

2.17 2.21 + 14p 2.28 + 11p

Draughtflow Premium Bitter

2.43 2.40 – 3p 2.46 + 3p

Draught Standard Lager

2.43 2.49 + 6p 2.57 + 14p

Draught Premium Lager

2.78 2.86 + 8p 2.85 + 7p

Draught Stout 2.62 2.69 + 7p 2.70 + 8p

Draught Cider 2.50 2.55 + 5p 2.56 + 6p

Source: Numis Securities Travel and Leisure Report 4 December 2008

However this then puts them at a competitive disadvantage to their competitors. If they keep their prices at the industry average their margins are reduced and they are given little room to manoeuvre in an economic downturn — as Morgan Stanley said:

Arguably, [the tie] is exacerbating the volume declines in tied pubs, who are unable to reduce price without taking a significant hit to their cash margins.131

The 2008 Good Pub Guide noted “compared with the average, we found Punch and Enterprise pubs were charging 5% more for beer.”132

87. If the interests of the pubcos operating a tied system and their lessees were truly aligned, one would expect that pubcos would want a system in which the combination of rental costs and beer costs enabled their lessees to supply beer at a price which was competitive with other pubs. This does not seem to be the case.

131 Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008

132 Fiona Stapley and Alisdair Aird, Good Pub Guide 2008, (London, 2008), Introduction

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Distribution benefits and purchasing power

88. Giles Thorley, Chief Executive of Punch, told us a lessee could buy all the products needed from a single point of contact, rather than having to deal with multiple brewers.

Table 8: Top six products in the UK

Product Brand Supplier

Ale Tetley’s Carlsberg

Lager Carling Coors

Cask Ale Greene King IPA Greene King

Cider Bulmer’s Strongbow Heineken

Premium Lager Stella InBev

Stout Guinness Diageo

Source: Punch evidence Q293

He stated that an individual pub would have to “deal with six different suppliers” or “sub-optimise and deal with a wholesaler” to obtain the top six products in the UK (see table above). In comparison he said Punch supplied those six as well as 250 different beers and a whole range of cask ales.133 However we have been told by lessees:

Times have changed since the Beer Orders and there are a number of ‘Brewery-free’ Wholesalers operating in the market place as well as organisations such as the SIBA Direct Delivery scheme which did not exist before. Conversely, at present most of the large pubcos, if not all, outsource their distribution to the Breweries anyway.134

89. Mr Thorley also argued that a further benefit of the pubco model was that lessees were offered “certainty of credit, certainty of terms, no minimum purchase obligations and guaranteed delivery on a 24-hour basis, six days a week”. He concluded that Punch “do provide a very significant service” as they have put in the infrastructure to do so.135 However, the lessees who contacted us did not have such a high opinion of pubcos’ ‘infrastructure’ system.136 A lessee told us:

Deliveries can be out of the declared time slot, they refuse to take all the ‘empties’ and the crew changes week by week. The same draymen rarely deliver twice to the same pub. Hence we get calls asking for directions, they need explanation of the position of the drop, and need baby-sitting in order to do their job.137

133 Q 293

134 Ev 154

135 Q 293

136 Ev 258, 240

137 Ev 216

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In addition lessees were unhappy about additional delivery charges they had to pay if their beer supplies ran out at inopportune moments from a sudden increase in trade.138

90. Punch has extolled the benefit of its purchasing power to us and to lessees.139 The lessees of the Three Compasses Pub said that they were told of Punch’s ‘greater buying power’ when Punch bought out the pubco from which they originally leased their pub, but in the same letter they were informed their prices were going up by 10% — even though Punch had ten times more outlets than their previous landlords.140

91. Lessees felt that the pubcos were not acting fairly in passing on discounts. Paul Daly, who operated both free of tie and tied pubs showed us that what he paid for his drinks through Enterprise for his tied pub was far higher than what he paid for his free of tie pub a few streets away, in spite of Enterprise’s greater market power.141

Table 9: Enterprise price comparison

Coors Enterprise Variance Variance

Product Size Net Price £ Net Price £ £ %

Guinness 11g 90.28 110.75 20.47 23

Carling 11g 64.33 103.46 39.13 61

Grolsch 11g 77.32 119.51 42.19 55

Sol 24 18.04 23.65 5.61 31

Budvar 24 15.99 24.44 8.45 53

330ml coke 24 8.49 9.71 1.22 14

330ml diet coke 24 8.49 12.45 3.96 47

Baby Bitter Lemon schweppes 125ml

24 4.98 6.05 1.07 21

Baby Ginger Ale Can Dry 125ml 24 4.38 6.05 1.67 38

Baby ginger beer schweppes 125ml 24 6.21 7.28 1.07 17

138 Ev 216, 240, 157

139 Ev 155 and Your Path To Success, Brand Management, Punch

140 Ev 154

141 Ev 259

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Baby slim line tonic schweppes 125ml

24 4.38 7.28 2.90 66

Blackcurrant Cordial Schweppes 12x1tr 10.80 14.55 3.75 35

Lime Cordial Schweppes 12x1tr 10.80 14.55 3.75 35

Total 324.49 459.73 135.24 42

Source: Ev 259

92. We believe it is seriously misleading for any pubco to promote to potential lessees that a pubco has benefits from ‘purchasing power’ when that benefit is not passed on to lessees.

Enforcing the tie

93. Whether or not the beer tie has the advantages claimed for it, pubco lessees have entered into an agreement with the company, and must abide by its terms. We agree that buying out of the tie (that is buying beer or other tied items from a supplier other than the pubco) is a breach of contract. Pubcos are entitled to take action if they find their contract has been breached. However it is only reasonable that if lessees are obliged to buy through their pubco systems should be in place to ensure supplementary orders can be supplied quickly and without extra costs when necessary. This is not the case.142

94. Moreover the method used to monitor the lessees’ compliance with the tie must be fair and accurate. Some pubcos rely on a company called Brulines; our evidence suggested that the information derived from its monitoring can be used to enforce large penalties against the lessee.143 The Brulines system measures how much beer is flowing through a pub’s pipes to ensure that more is not being sold than was bought through the pubco — that the lessee is not buying outside the tie. However a number of lessees told us that the system is inaccurate, and claimed that they were being fined for buying out when they had not in fact done so. David Law from The Eagle Ale House in Battersea explained that the system could not differentiate between beer and the water used to clean the pipes.144 In the Eagle’s case the Brulines data was used by the pubco in accusations of ‘buying out’ of the tie but after further analysis it was discovered that the extra volume which had flowed through the pipes was not ‘unaccounted beer’ but water.

95. When questioned on this issue, Giles Thorley, the Chief Executive of Punch told us:

The simple answer, as hopefully most of us will be aware, is that beer is a different density from water, so it actually measures the difference in the density of the

142 See Para 89

143 Ev 240

144 Ev 279

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products, so, therefore, as you are well aware, when you are cleaning a line, that is already factored into the volume that goes through the flow meter.145

Our Chairman visited The Eagle to witness a demonstration of Brulines. It was clear that the essence of the mechanism used by Brulines is a simple wheel which cannot differentiate between densities. Punch have since admitted in a letter two months after the evidence session that “the system does not measure the difference in density of beer versus water.”146 We are disappointed that Punch misled us in oral evidence and that they have not apologised for doing so. In fact Brulines examines records of flows sent to them remotely and make informed value judgements as to which volumes are beer and which water. This is unsatisfactory but is a particular problem for cask beers where more cleaning is required.

96. Leaving aside the question of specific density of beer and water, we have doubts about the basic accuracy of the equipment. Brulines said that it uses the “highly reliable Titan Pelton Wheel flow meter” and that the flow meters “undergo an in-situ calibration process traceable to national standards”.147 Our visit to The Eagle Ale House found that their Brulines ‘account’ bizarrely showed that they had almost 2,000 gallons (around 220 barrels) of beer in stock that had been delivered and not sold over a 12 month period. As Simon Clarke told us: “the implication being we are ‘stockpiling’ beer or possibly selling it wholesale at a mark up on pubco price!”.148

97. It is possible that Brulines equipment is as reliable as the company claims. The difficulty is that there is no independent verification of this. As Brulines itself says “Weights and Measures legislation does not apply to the provision of data by Brulines because the service it provides arises out of business to business transaction and do not impact on the product sold to the end user. In addition, Brulines has always believed that its equipment does not require to be stamped by Trading Standards.”149 Section 7 of the Weights and Measures Act 1985 states that “use for trade” does not include transactions where the sale “is not a sale by retail”. There is no meaning given for “sale by retail”.

98. It is entirely legitimate for a company to seek to ensure that the other party to a contract respects its terms. However, we believe that where a measurement device is used to police this, it should be properly calibrated, and subject to external verification. If necessary, the Weights and Measures Act 1985 should be amended to ensure this. Furthermore, given the impossibility of distinguishing between beer dispensed and sold, beer run off and disposed of preparatory to serving, and water used to clean the lines, we believe pubcos should not be allowed to rely on data from Brulines equipment to enforce claims against lessees accused of buying outside the tie.

145 Q 261

146 Ev 183

147 Ev 117

148 Ev 143

149 Ev 117

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Amusement with prizes income

99. In addition to their income from the beer tie, pubcos can obtain income from other ties, notably that from amusement with prizes machines — the AWP tie. The Trade and Industry Committee recommended that the AWP tie be removed.150 This has not happened.

100. The pubcos argued that the AWP tie was advantageous for their lessees because of their companies’ purchasing power. Giles Thorley of Punch told us that

What we try to do is maximise the number of our pubs that have the betting machines at the best rates and that is the benefit of being able to lease 13,000 machines compared to two for an individual pub.151

However lessees complained that in fact they paid more for their machines through the tie than if they rented them independently. ALMR told us that one of their members was being charged £70 per week rent for a machine in an outlet on an Enterprise lease. The rent for exactly the same machine, provided by the same supplier at the same time in another outlet in his estate operating on a Fuller tenancy was just £53.50.152 Whatever their claims about purchasing power, it is clear that pubco prices are higher than is standard in the industry as the price lists supplied to us from the British Association of Pool Table Operators (BAPTO) demonstrated:

Table 10: AWP machine price comparison

Punch Enterprise AWP Directory (taken from WHAT Amusement Machine?)

Casino Crazy (A1) £77.98 (Band 1) £79.94 £56-£59

Star Wars – A New Hope

(A2) £77.98 (Band 2) £77.63 £56-£59

Rob Da Bank (B3) £70.21 (Band 3) £73.36 £52-£55

Source: Figures taken from evidence supplied by BAPTO which included rent lists from Punch Taverns, Enterprise Inns and AWP showing prices as they stood at December 2008/January 2009.

In addition lessees considered pubcos took too much through the AWP tie. ALMR argued that pubcos not only took half the machine earnings but the machine income was often included within the pub’s net profit in the ‘dry rent’ calculation and so the lessee was being charged twice — effectively only receiving 25% of the machine profit.153

101. The pubcos argued that the AWP tie benefited the lessees because of the support they gave to lessees. Marston’s argued:

150 HC (2004–05) 128-I, para 129

151 Q 298

152 Ev 85

153 Ev 85

39

We believe that this tie adds value to its tenants’ business due to the provision of better machines that are more appealing to customers, have better service and, therefore, generate higher revenue for the tenant. MPC continues to supply extra support to tenants, to ensure that they make the most out of the AWP machines. Our service covers all the legal, licensing and other legislative requirements with operating AWPs. […] Where appropriate, we also give advice on the best location for AWPs and relevant laws.154

However BAPTO155 and Kossway, a supplier of gaming and amusement machines, argued that lessees can quite easily decide for themselves which the best machines for their pubs are and where they should be situated. Kossway said:

If a tenant is deemed fit and proper to run a pub and promote the sale of beers, wines and spirits to the best of his ability, to maintain and keep that pub and pay the rent, then surely he must be deemed as capable of making a simple decision as to whom he wishes to supply his gaming and amusement machines and at what terms. The pubcos’ claim that they provide assistance to the tenant is nonsense. Their real objective is to gain as much income as they can get away with from the gaming and amusement machines sited throughout their tenant’s estates.156

102. The pubcos have suggested that if the tie had been removed, following the Trade and Industry Committee 2004 recommendation, their lessees would have suffered more by the economic downturn and the resulting fall in machine earning. They argued that they have shared the loss of earnings which would not have happened with fixed rent. Enterprise said

Had ETI accepted the 2004 Committee’s recommendation, removed the machine tie and replaced the company’s “lost” income with a supplemental fixed charge, it is clear that ETI licensees would now be worse-off, having exchanged a declining source of income for a fixed cost. No mechanism currently exists by which any such supplemental fixed charge might be reviewed to reflect changing circumstances.157

This rests on the assumption that pubcos would have been compensated by an ongoing fixed charge. Pubcos already have income from dry rent and wet rent. We do not believe that it would be appropriate to impose a fixed charge in return for removing a tie from which lessees received no benefit.

103. In 2004 the Trade and Industry Committee concluded that “In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50% of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed.” That conclusion remains valid.

154 Ev 200

155 Ev 148

156 Ev 70

157 Ev 101

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Other ties

104. Pubcos also receive income through a variety of other ties. Some insist that insurance is arranged through them. Others arrange for licenses, electricity or other services. Ideally, these ties should benefit both the lessee and the pubco; lessees should benefit from having services provided without trouble, possibly at a lower price than they themselves could arrange; whether or not pubcos get a profit stream from these ties, they can be confident that lessees have suitable arrangements in place for matters such as insurance. However, here too there is insufficient transparency, and there can be no certainty that the arrangements benefit both parties in every case.

Insurance

105. Pubcos have put forward their provision of insurance as a form of support for lessees. Enterprise said:

There are two key commitments that we make to every ETI licensee:

We guarantee to provide insurance for every single licensee, including those who would simply not get insurance in the market. This includes those pubs which have recently suffered repeated, and sometimes devastating, flood damage.

We ensure that every pub pays a premium which is appropriate and we guarantee to match the best rate available in the market for cover of equal quality.158

In addition Ted Tuppen told us:

If any licensee can demonstrate that he can get the same cover at a cheaper price, we give him his money back, so we could not make a greater commitment than that. 159

106. Yet the insurance was one of the subjects regularly raised with us in evidence from discontented lessees. A lessee informed us:

we are paying £1054.68 per annum. In the last week I have tried to make a claim for damage due to a burst pipe. […] Admiral now inform me that there is an excess of £1000 on this policy. The damage is not more than £1000 , so I am now that amount out of pocket, from a policy I have no control over, and has never been sighted 160

Moreover Mr Morgan has since written to the Committee stating that:

Enterprise Inns flatly refuse and have refused in every instance of which I am aware, to issue a copy of their insurance policy. We thus have the ultimate Catch 22 which shows the strength of honesty of Mr Tuppen's reply to your Question 297. As far as I am aware, no tenant has been able to obtain a competitive quote, specifically because they are unable to obtain a copy of the Enterprise Inns insurance policy161

158 Ev 106

159 Q 297

160 Ev 217

161 Ev 248

41

From the evidence we have been shown, it appears in some cases insurance covers the entire pubco estate, rather than being associated with individual premises. This obviously has advantages for the pubco. Indeed, some lessees in higher risk premises may also benefit. However, lessees lose control over an important part of their business operations.

107. Lessees particularly resented the fact that some insurance covered the pubco’s losses for up to two years if a pub ceased trading.162 The Fair Pint Campaign told us this extended to cases where a lessee defaulted. This is not quite the case. We have consulted the ABI who confirmed that the leases which have been presented by the Fair Pint Campaign only offer pubco insurance if the lessee is unable to operate due to damage to the building163. They also informed us that to the best of their knowledge no policy insured against a lessee’s default. Nonetheless, the lessee’s insurance appears to confer benefit on the pubco.

108. Pubcos have a right to require that each of their pubs is fully and properly insured. It may well be that the insurance offered through pubcos is as good as or better than any that lessees could arrange directly. Nonetheless, since lessees are frequently not allowed sight of the policy, it is impossible to establish whether this is the case. Moreover, it is also clear that some insurance policies require the lessees to pay for a benefit to the pubco. We do not see why pubcos should not themselves take out insurance against the risks they face directly.

162 Q 23

163 Ev 289

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4 Benefits of the pubco tied model 109. The Trade and Industry Committee concluded that:

On the basis of the evidence presented to us we feel that the immediately quantifiable cost of the tie is usually balanced by the benefits available to tenants.164

Their findings were cautious, and they warned that it was possible benefits were overstated. The pubco tied model does offer benefits to lessees; the question is whether those benefits are as extensive as claimed.

Low cost entry and opportunity for entrepreneurs

110. The ability to lease a pub, rather than having to buy it outright, should provide a low cost entry into the pub industry. Punch provided us with the following comparison of costs for purchasing a freehouse as compared to leasing a tied pub:

Table 11: Capital in-going costs – purchase vs. tied lease

CAPITAL INGOING COSTS

BUY

LEASE

Purchase price £650,000

Loan 70% LTV165

£455,000

Balance £195,000 Deposit ¼ rent £8,000

Stamp Duty 4% £26,000 Stamp Duty £3,048

Fixtures & Fittings

£12,000 Fixtures & Fittings

£12,000

Stock & Glassware

£3,500

Stock & Glassware

£3,500

Total Cash Required

£236,500

Total Cash Required

£26,548

Source: Ev 176

111. However nearly 60% of those who responded to the question “why did you choose your tied pub” in our survey told us the attraction was “the specific pub”.166 Fewer than 25% cited the cost of entry as a factor. It is possible that respondents underestimated the influence the low-cost entry had on their decision, but it is also clear that the lessees choose their business on the basis of the premises available.

164 HC (2004–05) 128-I para 188

165 Loan to Value is the proportion of the value or price of the property (whichever is the lower) that is borrowed on a mortgage

166 59% of lessees said it was the pub itself which was whey they chose their pub, 23% said it was because it was a low cost entry into the pub trade - Ev 299

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Fig. 3

Source: CGA

112. Although those buying a freehold property gain an asset, a lease may also have intrinsic value. One of the advantages put forward for a long assignable lease is that it gives aspiring business people the opportunity to build up a business and sell the lease on at a profit. Greene King said:

experienced operators may be attracted to the lease model because of the financial benefit on assignment. The longer lease agreements clearly benefit successful destinational businesses.167

Punch said that the average premium on assignment in the 12 months up to September 2008 had been £71,000.168 It is clear there is a prospect of profit from this route — our survey showed that the average amount lessees had paid for a pub direct from their pubco was less than they paid if they bought a lease assignment from an existing lessee. However, many lessees do not in fact benefit from the power to assign their lease. Fewer than 30% of those in our survey had actually bought their lease through assignment. Indeed, the ALMR found that the number of new openings in the pubco sector was two thirds lower in 2008 than in 2007 and suggested that whereas previously a pubco lease could easily be assigned to a new operator when the lessee got into trouble, or assigned to a temporary management company this was no longer the case.169 Individual submissions to our inquiry also backed this up — we have heard from lessees who were keen to assign but who were unable to find anyone to take their lease on.170

167 Ev 205

168 Ev 163

169 Ev 91

170 Ev 266

Q7 Why did you choose your tied pub?

0% 10% 20% 30% 40% 50% 60% 70%

%

Other

This specific Pub

No free of tieavailable

Business supportfrom Pubco

Lost cost Entry

Interestingly, licensees who chose a tied pub wanted to run a specific venue which happen to be tiedOnly 2% were looking for free of tie pubs The most common other reasons given were ‘location’ and the low cost entry of running your own business

44

113. Some witnesses considered that the pubco model no longer offered a low-cost route into the system. Lessees told us:

Nearly all new pubco leases attract a premium and many properties require substantial refurbishment. The argument that a tied lease is a lower cost way into the market is rapidly diminishing.171

114. We conclude that pubcos may offer a lower cost route into the industry and the opportunity for a lessee to create or maintain an asset in the assignment value of the lease. However, this benefit is accompanied by uncertainty about the value of the asset which a lessee is purchasing, and the extent to which that value can be maintained. While those who purchase a freehold property may face higher initial outgoings, they obtain a tangible asset. Purchasers of freehold leases have greater commercial freedom.

115. Moreover the attraction of low cost entry should not be overstated: a very significant majority of those who responded to our survey said they were attracted by a particular pub, not a particular business model. Lessees apparently often choose tied pubs simply because they are what are available in their preferred location, or because they are attracted to a particular pub. That would mean that pubcos were, by virtue of their large estates, diminishing competition by forcing those who wish to run pubs into their business model.

Business support and services

116. Pubcos also give their lessees business support, which tied operators linked to the beer tie. Marston’s stated that:

The existence of the tie enables brewers and pub operators to […] provide support services and advice to tenants.172

Punch stated that it believed that the tied model compared favourably with virtually any other business sector, as a result of the high levels of support offered by pub companies.173 Punch, Enterprise and Marston’s have all provided us with lists of services which they believed benefited the lessee in running their pub.174 Simon Townsend from Enterprise told us:

we passionately believe in the tie and we believe that the services that we can provide can help pubs be more successful.175

Management support for lessees

117. Business Development Managers (BDMs) — also known by Enterprise as Regional Managers and Business Relationship Managers by Punch — are the main point of contact

171 Ev 155

172 Ev 198

173 Ev 164

174 Ev 171, 110, 202

175 Q 289

45

between lessees and their pubco. They are put forward by the pubcos as an important part of the ‘support package’ in the pubco model. Ted Tuppen, Chief Executive of Enterprise, told us:

it is this business relationship which was described to me by a licensee, […] who said, “My Regional Manager’s fantastic. We have two superb business reviews every year where we go out around the town, we look at the competition, we look at pricing, we see what we can do to improve the pub and then, if anything goes wrong, I ring her up and she sorts it out”. That, to me, is almost a perfect definition of a regional manager.176

118. We are sure that there are business development managers who do add value in the way pubcos claim. The late submissions from Enterprise lessees have spoken highly of this support and we have no reason to doubt them. However, many lessees who submitted directly to our inquiry were uncomplimentary.177 One lessee told us that when she approached her BDM for help he told her he could get her a council house by evicting her.178 Another told us “our BDM has had no help to offer or any constructive advice, only telling me where he is going for the third holiday of the year”.179 These are only two examples of many, we have also heard from lessees who have complained of bullying and threatening behaviour from their BDMs.180 One lessee told us his BDM:

showed up on Easter Sunday to perform a cellar-check check, demanded to see personal paperwork during a private family wedding, visited my pub with his girlfriend ordering several rounds of drinks without paying.181

119. BDMs are at the sharp end of the relationship between the lessees and the pubco. However lessees have also written to us about their dealings with people higher up within the pubco. To give one example of many, one lessee told us:

I was told by the most senior person I had access to at Marston’s, I had to stay in my pubs until I was bankrupt.182

The evidence we have received from publicans includes repeated reports of delay in opening rent review negotiations, lack of transparency in such negotiations, failure to carry out repairs agreed when a tenancy began, verbal agreements being ignored, and of harassment of lessees when they were vulnerable through bereavement. Some of these reports were given us in confidence, as lessees feared reprisals. Some we put to pubcos with the lessees’ agreement. The Committee does not automatically consider that all those who complain are justified in their complaints, and understands that business relationships can break down. Nonetheless, we were struck by the way in which the pubcos’ responses consistently failed to address the issues raised in the complaints. Not every lessee’s

176 Q 289

177 Ev 282

178 Ev 265

179 Ev 266

180 Ev 158

181 Ev 96

182 Ev 118

46

complaint will be reasonable or justified, but the way in which the same complaints recur in different pieces of evidence convinces us that some pubco business practice is unacceptable.

120. The Trade and Industry Committee found that “the performance of business development managers (BDMs) varied across the industry from excellent to dire.” That conclusion remains valid. The evidence we have received suggests that there are still too many BDMs who offer lessees little or no support, and some who bully or intimidate them. Moreover, some of our evidence suggests that this culture is not limited to BDMs but can reach further up a company.

Training courses

121. Training is put forward by pubcos as a benefit of the tied lease model. Enterprise said that it provided “a wide range of flexible, low-cost and accessible training solutions, together with a money-back guarantee in the event that delegates believe that the course has failed to deliver its value-adding objectives.”183 Greene King said that its training was subsidised, specifically developed for Greene King and was not available to external sources.184

122. Lessees were not so positive about their pubcos’ training courses. A lessee described one course as “laughable”,185 another noted that training courses were offered “at a price, which is comparable to and in some cases greater than the prices in the open market.”186

Financial assistance

123. Pubcos’ size should mean that they are able to give financial assistance to lessees in difficulties. BBPA said that the pubcos had provided between £35 million and £40 million to support lessees during the economic downturn.187 Ted Tuppen told us that during the last year Enterprise had spent £9 million helping 1,453 pubs: around £6,000 per pub.188 It was currently spending approximately £1.4 million per month on financial support for its lessees.189 Punch said it was helping approximately 1,800 of its pubs.190 Indeed our survey shows that over a quarter of lessees surveyed had received some form of financial help from their pubco.191 Several of the late submissions from Enterprise lessees cited such support. However, Nick Bish, Chief Executive of ALMR said:

usually my members’ experience is that this [rent reduction] comes attached with a number of conditions, like introducing a retail price inflation clause into it [the lease]

183 Ev 103

184 Ev 207

185 Ev 218

186 Ev 153

187 Ev 186

188 Q216

189 Ev 119

190 Q 218

191 Ev 310

47

so that the rent goes cranking upwards in spite of the theory of it having come downwards, and possibly there will be conditions to extend the nature of the tie. Say it was only a beer tie, they might want to extend to a wine and spirit tie or an amusement machine tie.192

124. In oral evidence Simon Townsend from Enterprise told us:

there is a sort of urban myth that has been propounded by various parties that the temporary support provided by companies in some way is repayable, and can I make it very clear that, as far as Enterprise is concerned, no amount of the business support that we provide in additional discounts or rental concessions is repayable; that is simply not the case. This is permanent financial assistance over a temporary period of time designed to prevent the business failing.193

Enterprise told us in writing:

I would also reiterate the statement we made in evidence to the inquiry that in providing financial assistance to deserving licensees, whether by adjustment or concession to rent or through additional discounts given, these sums are not refundable to ETI and suggestions to the contrary are entirely false.194

125. Although just under 60% of those who responded to our survey and had had financial help reported that they had been given it without any conditions, the survey also revealed that 24 Enterprise licensees had had an increase in rent after receiving financial help and 18 had had their tie extended so that they were obliged to purchase items such as soft drinks or spirits through the pubco although they had not been tied before.195 When we pushed Enterprise further on this in writing, they told us:

In the majority of cases, we do require a temporary extension to the tie to include wines, spirits and minerals on the basis that this then provides ETI with even greater clarity on the trading performance and sales mix of each business during the period in which financial assistance is provided. In every case where a temporary extension to the tie is required, any additional cost incurred by the licensee is massively outweighed by the benefits of discounts received on beer and cider purchases and in rent concessions.196

It is surprising that the link between financial assistance and the extension of the tie was not made clear in oral evidence. Financial assistance which is offset by an increase in rental or an extension of the tie is, in effect, ‘repayable’ and does not confer the benefit claimed by the pubcos.

126. Not all lessees receive financial help, even when their losses are due to external factors. We have heard from a lessee of a rural pub whose only access road was closed for six

192 Q166

193 Q218

194 Ev 108

195 Ev 310

196 Ev 119

48

weeks,197 a lessee whose pub flooded and was closed for four months198 and a lessee who had a double shooting on the doorstep of their pub,199 none of whom received any temporary rent reduction or financial assistance.

Transparency

127. We have particular concerns about clauses which prevent lessees from showing their contracts to any but specified persons other than with written consent from the pubco. The prohibition appears to extend to legal representatives. This seems to be particularly the case when support packages are agreed. One Enterprise support package contract states:

The terms of this agreement are confidential and you undertake not to disclose its terms to anyone without our written consent; excepting only that you will be able to disclose these terms to your accountants, stock takers and bankers for the purpose of pushing the terms of this agreement into full effect.200

128. Again the issue is transparency. We accept that pubcos are helping their lessees with financial assistance but there are many lessees who appear to be eligible for aid but do not receive it. Pubcos need to make their policies on the administration of financial help clear with a fair and open application process for such assistance. Lessees need to know on what grounds they are turned down.

129. The Trade and Industry Committee found that, on the evidence presented to them, the immediately quantifiable cost of the tie was usually balanced by the benefits available to tenants. From the evidence we have received, we are not so convinced. We are particularly struck by the results of our survey which found that 63% of lessees did not think their pubco added any value. The pubcos offer little support that cannot be found by normal market methods.

A fair share of profits?

130. Proponents of the pub companies argue that their model ensures that profits (and risks) are fairly shared between the pubco and the lessee. Campaigning organisations and lessees are not the only ones to dispute this. Mark Brumby of Blue Oar Securities has claimed Punch and Enterprise have:

ratcheted up rents time and time again and jacked them up to such a point where the pubs are running on a margin which is uneconomic.201

Morgan Stanley also argued that pubcos are ‘taking a bigger share of the pie than their lessees’. Their analysis showed that pubcos profits had risen faster than lessees’ over the last five years. They used the example of Enterprise whose EBITDA202 per pub had risen

197 Ev 266

198 Ev 261

199 Ev 281

200 Ev 228

201 Ev 132

202 Earnings before interest, taxes, depreciation and amortization

49

from £50,000 to £68,000 in the period 2003–07, an increase of 36% but its lessees’ profits had only risen 27% from £37,000 to £47,000.203

Lessee profits

131. The pubcos we saw considered their lessees were fairly rewarded. Punch said it believed the average profitability of their ‘customers’ to be around £29,000 which, with an additional ‘allowance’ taking into account the estimated value of accommodation, made the equivalent ‘salary’ of approximately £38,000.204 Enterprise said the average profit of its licensees was £42,000205 and only 112 of its Licensees were earning profits in the band of £20,000 and below.206 We questioned Enterprise further on the profits of their lessees:

Q276 Mr Clapham: Do you pursue a policy at all now to ensure that your tenants are in receipt of a living wage?

Mr Tuppen: Yes, absolutely. Whenever we look at the potential for a pub, we always consider that there is no point in letting that pub at a level where the tenant cannot survive, and we have made that point on a number of occasions, I think. There is absolutely no point in our maintaining a pub where it is impossible for the tenant to earn a decent living.

132. Our own evidence suggests that many lessees are making an extremely meagre living from the pub business. We were extremely concerned to find from our survey that 67% of lessees who responded said that they earned less than £15,000 per annum.207

203 Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008

204 Ev 180

205 Including a £10,000 average living cost allowance.

206 Q 208

207 Ev 304

50

Fig. 4

Q16 Personal Income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Outlets in Sample

> £60,000

£45,000-£60,000

£30,000-£45,000

£15,000-£30,000

< £15,000

67% of licensees who responded said they earned less than £15,000 per annumOnly 10 licensees out of 788 who answered said they earned over £45,000

Source: CGA

Moreover several witnesses told us that they were losing money through their pubs and therefore had to support the business with income from other sources. One told us:

The pub makes £60, 000 before rent and the pubco takes £86, 000 rent leaving us to fund the £26, 000 shortfall. So not only do we make no money at all but have to pay for the privilege.208

Another told us:

We do not draw a wage from the business and are in receipt of full tax credits, the majority of which goes to Enterprise Inns or business bills. In the last 12 months the business has turned over £128,829 net and we have paid to Enterprise Inns £89,427 which equate to 70% of net turnover.209

An Admiral lessee told us:

My wife and I have taken on full time jobs away from the industry, our pub’s hours have been drastically reduced, we haven’t drawn wages for three months, and we are having to bankroll the business to keep it afloat.210

133. Increasing a pub’s turnover will benefit the pubco as it increases the sale of tied products. To our surprise it does not seem to benefit the lessee to nearly the same extent. We are struck by the fact that only 10 lessees out of the 788 who told us about their

208 Ev 183

209 Ev 264

210 Ev 215

51

turnover and personal income said they earned over £45,000. Where a lessee is part of a couple operating in partnership this income could be split between two. Not only is it clear that many lessees have extremely low earnings, our survey suggests that income level does not necessarily relate to turnover. While more people earned reasonable livings at the higher level of turnover, the relationship between earnings and turnover was not linear. Over 50% of the lessees whose pubs had a turnover of more than £500,000 a year earned less than £15,000. The pubcos may share the risks with their lessees but they do not share the benefits equitably.

Fig. 5

Q15 & Q16 Turnover vs Personal Income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

< £100,000 £100,000 -£200,000

£200,000 -£300,000

£300,000 -£500,000

> £500,000

> £60,000

£45,000 -£60,000

£30,000 -£45,000

£15,000 -£30,000

> £15,000

More than 90% of licensees earn £30,000 or less in outlets turning over less than £300,000 50% of licensees in outlets turning over in excess of £200,000 p/a earn > £15,000

Source: CGA

Lessees’ attitude to being ‘tied’

134. Throughout our examination of the rental system to public houses we have been struck by the extent to which the valuation system is described as something which should be close to objective, but is in reality much closer to an assessment of what the market will bear, negotiated between the company and the lessee. In our view, the more transparency there is in those negotiations, the better. We are concerned that the beer tie contributes to the lack of clarity about what it is that lessees can expect to pay for their pubs.

135. When asked what would happen if the tie was removed, Giles Thorley of Punch said:

you would see a significant reduction in the amount of inward investment into pubs by the pub companies because we would have no incentive and we would have no connection with the trade of the pub anymore.211

Ted Tuppen of Enterprise told us that if there was no supply tie pubcos would become:

211 Q 294

52

just straightforward property companies and, for a start, one would not see anything like the £9 million of support that we gave to our licensees in the past year.212

It is clear that rents would increase, Giles Thorley of Punch told us:

we could lease the pub for £20,000 income, just straight rent on a free-of-tie basis, or, alternatively, we could lease the pub for £8,000 and we would receive, say, £2,000 for the machine tie and £10,000 from the tie for the beer supply.213

Morgan Stanley said they thought that it was unlikely that if lessees were offered to go free of tie they would take it:

under the terms of their contract, pubcos can put up rent if the tie is removed, and we doubt lessees want a doubling of their fixed rental cost.214

However Enterprise told us that it was not in their best interests to over-rent:

“Over-renting” a pub is completely counter-productive, leading to an increased likelihood of debt and outright business failure. Furthermore, “over-renting” is likely to result in limited future growth prospects, limited assignment prospects, a lack of reinvestment, disillusioned licensees and ultimately the complete breakdown of our business relationship.215

136. Despite the very real prospect of an increase in rent, there is an almost unanimous view from lessees and their representatives that the tie needs to be broken. We were struck by our survey responses to the lack of satisfaction with the tie — only 13% of those responded were happy with their tie. The only pubco which had more satisfied than dissatisfied lessees operated free of tie. In addition 94% of respondees to the FSB poll wanted an end to the tie. One of their members said “I would rather pay more rent and have no tie to products, leaving us free to shop around for the best prices.”216

137. We are also keenly aware of the very real and serious financial pressures under which the pubcos are operating. While at least one pubco does operate without a tie, the tie is integral to most companies’ operations. We are concerned that the simple breaking of the tie in these very challenging economic times could lead to a chaotic situation in which the finances of the pubcos were completely undermined, with unforeseeable consequences for their ability to maintain their businesses and, we believe, the very real risk of widespread pub closures as a direct result. We have no wish to be the cause of an even sharper decline in the number of public houses.

138. The dispute over the tie could be ended easily: every lessee could be offered the choice of being free or being tied. This would enable both sides to prove their competing claims. We believe each and every existing lessee should, in a phased programme, be offered this choice and the same choice should be offered to every new

212 Q 294

213 Q 214

214 Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008

215 Ev 106

216 Ev 151

53

lessee as he or she takes on the lease. To make the choice fair, the process of agreeing revised rents must first be improved as we have previously recommended.

139. Although a voluntary agreement is preferable, we doubt that the pubcos would respond effectively to such an approach. We therefore recommend that the Department considers how best to achieve this end and that it opens an urgent consultation into the principle and phasing of this proposal. The status quo is not an option.

54

5 Dispute resolution 140. The Trade and Industry Committee noted that its inquiry had come about because of “complaints about inequalities in the contractual relationship between pubcos and their tenants.” Many lessees are small business people entering into agreement with big corporations with far greater financial resources than they have available. A lessee is tied into a lease with a pubco who can increase prices and change conditions if and when they please. The lessee’s negotiating position is weak — if they cannot reach agreement, they will have to try to leave the lease which comes with huge cost and family upheaval as often pubs are also their homes. Our predecessor Committee recommended that there was a need for an inexpensive and efficient system of arbitration or alternative dispute resolution to resolve disputes without imposing legal costs on either side.217 This has not happened.

141. The area of particular contention between pubcos and their lessees is rent reviews. In the 24 months to September 2008, out of 2,687 rent reviews completed by Enterprise, 15 were referred to independent determination for settlement, of which nine have now been settled.218 Similarly Marston’s had only two cases go to arbitration.219 Greene King said it had not entered into any arbitration as part of the rent review process.220 Pubcos use the low number of dispute cases as evidence that the model is working and that rents are fair.221

142. Our survey found that 20% of lessees considered that they had had a ‘dispute’ with their pubco — that is one in five respondents. Of those only 18% were satisfied with their pubco’s resolution methods.222 This suggests that the small number of cases pursued to independent arbitration should not be taken as a sign that all is well. It could simply demonstrate that, even though they were dissatisfied, lessees did not consider the dispute resolution system appropriate. Simon Clarke explained:

you have to consider the weight of the parties, particularly with a pub. On the one hand you have a tenant who is probably a one-man band operating his own pub, he does not have a great deal of time, he probably has not got a lot of comparables to work on. On the other hand you have a potentially multi-million pound company that has an open cheque book, a rent review department specialising in purely this sort of thing. The weight is against the tenant at the outset.223

143. In general, if a lessee is in dispute with their pubco there are two methods which can be used to resolve the disagreement: expert determination or arbitration. However both are costly and have their advantages and disadvantages. The BBPA presented the following explanation of the two methods to us:

217 HC (2004–05) 128-I para 204

218 Ev 100

219 Ev 200

220 Ev 205

221 Ev 102

222 Ev 311

223 Q 80

55

Table 12: Dispute Resolution Methods

Arbitration Independent Expert Determination

Cost £24,000 - 30,000 £5,000 - £10,000

Division of Fees In arbitration there is always the risk that the losing party can end up paying everything, which can be as much as a total of £25,000 - £30,000 of fees.

The expert will charge an hourly rate for his or her time, and will bill it 50/50 to the parties. The award will not be released until payment is made in full. The expert has no power to order either party to pay the costs of the other if there is a perception that either party “won”.

RICS RICS-qualified personnel can act as both independent expert or arbitrator – the difference is the set of rules they are working to

Law An arbitrator is bound by the Arbitration Act.

The expert can act as the parties agree they want him or her to, so long as the expert agrees.

Evidence An arbitrator is bound by the Act to use only the evidence presented by the parties.

An expert is not bound by the rules of evidence that bind an arbitrator under the Arbitration Act. The expert can be more flexible about allowing evidence such as the lessee’s own trading accounts, which are usually excluded in arbitrations. The expert can bring his or her own knowledge into play. This makes it possible for an unrepresented lessee, or one who has no evidence to put forward, to get an independent review of their rent without incurring the cost of employing a surveyor to make their case as would occur at arbitration.

Justification An arbitrator will usually give reasons for the amount of the rent award.

An expert will usually just give a figure.

Appeal Arbitrations can be appealed to Court.

If either party thinks there has been a mistake in the award, the expert can be held personally liable for any negligence, but the amount of the award cannot be appealed to the High Court. It is absolutely binding on both the parties.

Source: Ev 190

56

BBPA told us that only 18 rent reviews went to arbitration between 2004 and 2008 (0.3% of rent reviews undertaken during that period). Of these approximately 70% were found in favour of the pubco.224

144. Lessees and their representatives have told us that the cost of these methods was too expensive and deterred them from taking action. David Morgan even implied that the cost was used by pubcos to their advantage:

I have first hand knowledge of BDMs/BRMs stating that if arbitration is sought, the tenant will incur many thousand pounds worth of expenditure and in every instance, the pubco will win and their associated costs will also be added to the costs of the tenant. These scare tactics regrettably often have the effect of frightening a supply tied leaseholder into not seeking third party referral as a result of the threat of an horrendous cost burden.225

Indeed one lessee told us:

My BDM’s response to our refusal to sign [the] rent agreement was a blatant verbal threat to withdraw the rent offer and take us to arbitration where he stated I could expect to have an increased figure imposed on me and payment of that increase backdated.226

However one lessee faced with an increase in rent told us:

We are racing towards arbitration which we can ill afford […]. It is obviously cheaper for us to accept the £1,400 rise and save thousands but it feels wrong when we are placed under such tough operating conditions.227

145. Enterprise did agree that arbitration costs were potentially a problem:

the high cost of arbitration may be prohibitive for some licensees and (we) recognise the need for a low cost, easy access process by which rent review negotiations may be independently resolved.228

BII low cost dispute resolution system

146. Punch, Enterprise and RICS all referred in their evidence to the piloting of a low cost dispute resolution system by BII. Enterprise said:

the solution lies in support, which we give unconditionally, for the BII proposal to produce a £1,000 fixed-cost professional arbitration system. Now, we support this entirely and we are working with them.229

224 Ev 190

225 Ev 246

226 Ev 158

227 Ev 258

228 Ev 107

229 Q 301

57

147. We were surprised that BII had not given any details of this in its written submission nor when its Chief Executive John McNamara gave oral evidence, and asked for more information. The BII told us they had run rent review road shows in 2008, and from these it had become clear that disputes over the rate of rent were a cause of concern for members. The BII undertook to look into creating an Independent Expert Determination service which would have the objectives of being: transparently independent; at a relatively low fixed cost; and binding on both parties. It has since set up a steering committee to determine the feasibility of such a scheme and to consider how it would work in practice. When the work is completed the proposal will go before the BII National Council to decide if the project should continue and how it would be funded and resourced.

148. At present the BII scheme envisages that an independent expert’s fees would be fixed and shared between both parties and it is proposed that the licensee’s share of the fee would be between £1,000 and £2,000 based on a sliding scale of current levels of rent. The BII concluded:

It will benefit the licensee by taking the unknown cost out of the equation. He/she will have the peace of mind that the valuer will be chosen from a BII panel of RICS experts and finally the decision will be binding giving a clear independent outcome.230

149. We agree that some form of low-cost independent procedure for dealing with disputes over the rate of rent is needed and needed urgently. The BII’s proposed dispute resolution system in which fees will be known at the outset, and will be related to rental value is, in principle, welcome. We would be more confident in the prospects for the successful implementation of the BII’s proposal if the Trade and Industry Committee had not recommended precisely such a procedure over four years ago. We are astounded that nothing has yet been done.

Complaints

150. What is also striking is that lessees have few avenues of complaint if they believe that their pubco is acting unfairly. BBPA said in written evidence that it would act as an ‘intermediary to resolve any misunderstandings’ in the Code of Practice but it had ‘received no request to act in this capacity’.231 However in oral evidence Rob Hayward said:

we have never dealt with a case specifically because we are, as has been indicated, a membership organisation of companies and therefore we would expect the individuals to seek advice elsewhere, and I have on occasions advised them so.232

151. The BII also offered to intervene if a pubco breaks a code of practice. BII said:

Whenever complaints are received in relation to alleged breaches of accredited codes, the matter is taken up with the senior official at the named pub company. Since the

230 Ev 195

231 Ev 187

232 Q 180

58

scheme started BII has had to investigate three cases, all of which were resolved to the satisfaction of the lessee/tenant.233

Lessees have little confidence in either organisation. We have received evidence questioning both the positions of the BBPA and the BII and their relationship with the pubcos, from organisations such as Fair Pint234 and Justice for Licensees.235 Fair Pint told us:

The BBPA claims that it “is the leading organisation representing the UK beer and pub sector. Our members account for 98% of beer brewed in the UK and own more than half of Britain’s 58,000 pubs.” In reality it is merely the trade association for pubcos and brewers. In fact, Simon Townsend, Chief Operating Officer for Enterprise Inns, is currently the Chairman of the Communications Group of the BBPA. The BBPA represents the interests of those that own the vast majority of the pubs in the country, but actually run very few. None of the BBPA’s members are individual tenants.236

A lessee said she has written twice to BII asking for an investigation of Enterprise’s codes of practice and never received a reply. She told us:

I feel that the BII cannot and will not involve themselves in areas of dispute with the pubcos and feel that this could be due to the large revenues that the BII receive from the pubcos for the BII training packages. If the BII earn revenue from the pubcos then surely there has to be some conflict of interest.237

Legal remedies

152. The courts are ultimate arbiters in commercial disputes. They will be wary of meddling in business contracts where equality is implied. As Punch stated “It must also be remembered that licensees enter into a tied lease freely and of their own accord”238 and that “licensee naïvety and poor judgement should not be construed as exploitation by the pub companies”.239 Enterprise said: “it must be understood that every individual contract between ETI and a tenant or lessee is initially negotiated and agreed by both parties”.240 Marston’s said “Any tenanted/lease agreement is a commercial agreement that is signed by the operator at the start — from a tenanted perspective they are not forced to enter the agreement.”241

233 Ev 192

234 Ev 223

235 Ev 251

236 Ev 223

237 Ev 265

238 Ev 166

239 Ev 166

240 Ev 99

241 Ev 197

59

153. While a consumer is protected by the unfair contract terms regulations, there is no such protection in business. In many cases this is justified, but it may not be so if one party to a contract is far weaker than another. Considering each party to a commercial contract to be equal is reasonable if both parties have access to the same information and resource but it has become clear from this inquiry that the pubcos have access to a far greater level of both. In such cases the normal legal assumption of equality of bargaining power in commercial contracts may not be appropriate.

154. Our predecessors recognised the imbalance of information and resources between pubcos and their tenants and said:

The pubcos have argued that if tenants do not agree with their rent assessment, they should not have entered into the lease or accepted the rent review. We do not share this view. In the relationship between pubco and tenant, the tenant is in the weaker bargaining position. Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. All tenants should be treated fairly and rents should be reasonable and sustainable.242

155. The report concluded that

At this stage we do not think a legally binding code of practice necessary, but if the industry does not show signs of accepting and complying with an adequate voluntary code then the Government should not hesitate to impose a statutory code on it.

We hope that our successor Committee in the next Parliament will review the situation in the public house industry, in particular whether the code of practice is working.243

Conclusion

156. The BBPA’s Framework Code of Practice and the recommendations of the Trade and Industry Committee have not solved the problems of inequality in bargaining power and inadequate means to resolve disputes identified in 2004: we believe that more is now needed.

157. Our inquiry has inevitably attracted evidence from dissatisfied lessees. We have tried to counter that by being as open as possible to the pubcos, and by commissioning our own survey. We note that in our survey results some pubcos fared better than others. It is clear from our evidence that some lessees act recklessly, or enter into business without due diligence. That is not the pubcos’ failing. Nonetheless, the pubco model should be based on a share of risk and reward. That may be the case in some circumstances, but the two parties to the contract have vastly differing bargaining power. The financial data from our survey suggests that for a great many lessees, the risk remains with them while the lion’s share of the profit goes to the pubco. We are not saying that all, or even any, pubcos abuse all lessees all the time, but it is clear that not only is there potential for abuse, but also that abuse occurs.

242 HC (2004–05) 128-I para 158

243 HC (2004–05) 128-I paras 204–5

60

158. Consumers are protected from unequal bargaining power by the unfair contract terms legislation. The law assumes that both parties to a business contract have equal resources and expertise. This is clearly not the case here — but if a pubco tried to enforce its contract through legal proceedings, courts would be very reluctant to determine whether those contract terms were fair because of the presumption that commercial contracts are made between equals. We recommend that the Department for Business and Enterprise urgently explore ways of ensuring that there are safeguards to prevent inequalities of bargaining power in business contracts being abused.

61

6 Competition issues 159. Many witnesses claimed the pubco model violated competition law principles. The Fair Pint Campaign, CAMRA and SIBA all recommended that the beer tie should be investigated by the Competition Commission. Kossway made similar recommendations about the AWP tie. Tim Farron has also tabled an Early Day Motion calling on the Department for Business, Enterprise and Regulatory Reform to “refer the matter of the supply tie and rent formulation to the Competition Commission with a view to addressing the dominance of the big pubcos in the pub market.”244

The Monopolies and Mergers Commission investigation

160. In 1989 the Monopolies and Mergers Commission (MMC) (now the Competition Commission) issued a report on the retail market for beer following a detailed investigation.245 The Report found that a complex monopoly situation existed by virtue of the fact that over half of all public houses were owned by six national brewers who accounted for three quarters of UK beer production. The MMC concluded that this complex monopoly operated against the public interest in the following ways:

a) the price of a pint of beer in a public house had risen too fast in the previous few years;

b) the high price of lager was not justified by the cost of producing it;

c) the variation in wholesale prices between regions of the country was excessive;

d) consumer choice was restricted because one brewer did not usually allow another brewer’s beer to be sold in the outlets which he owned. The same restriction was also often applied in loan-tied outlets;

e) consumer choice was further restricted because of brewers’ efforts to ensure that their own brands of cider and soft drinks were sold in their outlets;

f) tenants were unable to play a full part in meeting consumer preferences, both because of the tie and because the tenant’s bargaining position was so much weaker than his landlord’s; and

g) independent manufacturers and wholesalers of beer and other drinks were allowed only limited access to the on-licensed market.

We believe that many of these conditions can be found in the market today.

244 EDM 1909 December 2008

245 MMC, The Supply of Beer, CM 651, 1989

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(a) and (b) Price of beer and lager

161. CAMRA have found that the price of beer in pubs has increased faster than brewery beer prices over the last ten years. Between April 1998 and April 2008 the UK producer price index (including excise duty rises) for beer increased by 31.8%, whereas the retail price index for beer on-sales increased by 39.4%.246 CAMRA have also analysed, from surveys they have carried out in the last year, the difference in the price of beer between the on-trade and the off-trade. Their data shows that in August 2008 the off-trade price of a standard lager was as low as 81p a pint. Surveys carried out pre and post the March 2008 Budget found standard lager selling in the on-trade at between 265p (March 2008) and 282p (June 2008). On this basis, the on-trade price of a pint of beer can be estimated to be about 3.3 to 3.5 times more than the off-trade price.

162. This graph from Morgan Stanley demonstrates the divergence in price between the on and off trade since a couple of years before the Beer Orders in 1989:

Fig.6

The price gap widens further

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Source: DataStream

In addition the following chart from Morgan Stanley shows the price difference of beer between managed pubs, leased pubs and supermarkets with recent price increase differences:

246 Ev 121

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Fig. 7

Average Price per Pint of Standard Lager Sep-07 to Apr-08

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Source: Morgan Stanley

163. The evidence relating to the tie’s effect on prices overall is not altogether straightforward. There is some indication that the differential between tied and managed pubs has reduced recently, and managed and free of tie pubs can, of course, charge lower prices and frequently do so, for example Wetherspoon’s much promoted 99p pint. However, it is possible that the large market share held by the pubcos may result in their prices setting a norm which is followed by the rest of the market, subject to occasional discounting. The Good Pub Guide told us “Our impression is that both the higher-than-inflation increases in pub beer prices shown year after year by our annual surveys and the significant regional variations in pub drinks prices owe much to the influence of the biggest pubcos.”247 We believe this needs to be investigated.

(d) and (e) Consumer choice

164. The fact that tied pubs are restricted to the pubco’s list of approved products restricts the lessee’s ability to respond to the market. This is detrimental to the consumer. To give one example, the supply of locally brewed beers may be affected. A report in 2007 found that two thirds of licensees were aware of the demand for local beer but only a third were actually offering it to their customers.248 In addition the Society of Independent Brewers (SIBA)’s figures showed that only 15% of tenancies and 31% of leased pubs stocked a local brewery’s beer, compared to 56% of freehouses. The reasons for this are explored more fully in paragraphs 166-168 below.

(f) Tenants’ bargaining position

165. This has not improved since 1989. As we have seen lessees are still in a much weaker bargaining position than their pubco. This means that they are unable to negotiate

247 Ev 277

248 Beer Report, The Publican, November 2007

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discounts, guest ale provision or lower rents, all of which benefit the consumer through lower prices and wider choice. As one lessee told us “Yes we signed a legally binding contract but I didn't sign up to massive price increases year on year.”249 Fair Pint Campaign gave the following table showing the increase in Enterprise’s prices:

Table 13: Enterprise Price Increases

Brand 2002 price/pint 2009 price/pint % increase

Heineken £1.09 £1.67 53%

Stella Artois £1.15 (5.1% ABV) £1.55 (5.0% ABV) 34%

Hoegarden £1.30 (5.0% ABV) £1.82 (4.8% ABV) 40%

Boddingtons Draughtflow

£0.88 (3.8% ABV) £1.35 (3.5% ABV) 53%

Banks Bitter £0.88 £1.22 38%

Greene King IPA £0.86 £1.25 45%

Source: Ev 233

Fair Pint highlighted that the average rate of inflation per annum across the same period, excluding mortgage interest, was 2.84%, giving a compound rate for the period from 2002– 2009 of 21%. Price increases in the sample of brands shown demonstrated an average increase of 43.8%; constantly twice the rate of inflation. Duty on a pint of beer had increased by 7p from 29p to 36p (24%) in the same period.250

(g) Independent manufacturers and wholesalers access to the market

166. We have received evidence supporting CAMRA’s claim that the pub market is ‘substantially foreclosed’ to small brewers because they are unable to supply the minimum volumes, discounts and logistics demanded by large wholesale and pub owning companies.251 Lovibonds Brewery told us it could only supply one out of 15 of its local pubs because all the others were tied. Jeff Rosenmeier, founder of the brewery, stated:

This type of market suppression for the craft brewer is not limited to Henley-on-Thames, but can be found throughout Britain. There are now 600 or so craft brewers like myself whose growth is stifled in these market conditions.252

167. SIBA set up a Direct Delivery Scheme to help small breweries supply pubcos by establishing a single contact point. Pubcos can use the SIBA website to order from a wide choice of suppliers without the need to contact them individually for orders, billing or payment.253 However SIBA reported that only three pubcos had ‘embraced’ the scheme which accounted for only 26% of tenanted, leased or managed pubs. A lessee told us that

249 Ev 283

250 Ev 233

251 Ev 120

252 Ev 160

253 Ev 254

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Enterprise, which does use the SIBA scheme, had recently put up prices of SIBA products by just over 5%.254 She assessed the consequences as follows:

On speaking to a couple of brewers the difference between what I pay and they receive is approx. £30 per nine gal. This money is not staying within the industry but going straight to the middleman. I did 522 different ales last year (mostly from the SIBA schemes) so this equates to £15,660 lost to both the brewers and ourselves. Most importantly if this amount is split equally then this equates to a 20p price decrease for the end consumer, the customer.

These new prices have effectively priced us out of the market where local ales are concerned. We were planning on having local ale as a regular but to make 45%GP on a 3.7% we would have to charge £2.70. Our nearest real ale pubs are selling local beer at considerably less than this (they are not tied to any of the big pubcos).255

168. Similarly, the tied estates of pubcos are becoming increasingly foreclosed to independent suppliers of non-drink products supplied to public houses such as AWP machines. Pubcos demand that their tied lessees take AWP machines only from their approved panel suppliers. Suppliers are admitted to the panel only if they are prepared to pay a substantial royalty to the pubco. As a result tied lessees have to pay substantially higher prices for AWP machines than non-tied retailers (as discussed in chapter 4) and non-panel AWP machine suppliers are prevented from entering that segment of the market.256

The Office of Fair Trading’s position

169. Competition in UK markets is overseen by the Office of Fair Trading (OFT). The OFT enforces the following legislation to ensure that markets work well for consumers. In response to an invitation to submit evidence to the Committee, the OFT told us :

We have received no evidence or complaints that lead us to alter the position we submitted to the Trade and Industry Committee in 2004 that there is no significant competition problem in relation to the beer and pub market.257

We believe the evidence which we have received to this inquiry demonstrates that there is a case to investigate and we disagree with the OFT on a number of points.

Discounts

170. In justifying its view that intervention was not necessary in 2004 the OFT noted that beer discounts were available and noted, “it is now possible for some tied tenants to earn discounts on the list price of drinks; e.g. up to £50 a barrel of beer”.258 This process has continued and brewery discounts have increased substantially. The problem is that little

254 Ev 283

255 Ev 283

256 Ev 68

257 Ev 277

258 HC (2004–05) 128-II Ev 233

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(or even none) of these increased discounts have been passed through the supply chain to the benefit of the consumer. ALMR have told us that at that time beer discounts were ‘reasonably equitable’ so for example the average discount on a brewer’s barrel of beer (36 gals) was about £120 and this would have been divided — £50 for the pubco, £50 for the tenant and about £20 for distribution costs.259 However since 2004 retail beer prices have gone up and pubcos have been able to negotiate larger discounts from the brewers. As we discussed earlier in the report, pubcos may now receive a discount of between £210 and £250 per barrel but the lessee still only receives the original £50 share. The lessee, and therefore the customer, fails to benefit from the increased discount.

Downward price pressure

171. The OFT also said in 2004 that “big pub companies […] are continuing to lead the way in driving down the wholesale price of beer”.260 However, we believe there is little pressure from pubcos’ to resist increases in beer list prices (upon which the consumer retail price is based) because pubcos discounts actually increase pro rata with brewery list price increases. As a Morgan Stanley report said “It is […] not in the pubcos’ interest to push back too hard on list price increases, because they get a proportion of the price increase as additional discount. Some even argue that pubcos like it when brewers put up prices.”261 Nigel Wakefield said:

The pubcos without exception have forced the discounts to comparatively extreme levels, some three years ago the Coors Area Manager was having to raise the price of one of their beers way above their selling norm so that certain pubcos could achieve their £200 per brewers barrel discount, likewise a colleague who runs a small brewery has to do the same to supply a particular pubco.262

ALMR concluded that pubcos have “forced retail prices up in a difficult market and contributed to the widening gap between the pub and the supermarket where maximum discounts are passed on to customers.”263 This retail price divergence has in turn contributed to the rate of pub closure as consumers choose to drink at home rather than accept the artificially inflated beer prices which tied lessees are forced to charge.

Market Definition

172. In its comments on market definition in 2004, the OFT did not recognise the public house market as a separate market from other on-trade premises, although it gave no evidence to support that view. On the contrary, the OFT noted that: “there is a difference between going out for a drink at a pub and going out for a meal at premises where alcohol may be consumed.”264 Furthermore, the OFT said in 2004 that “the retail on-trade market

259 Ev 84

260 HC (2004–05) 128-II Ev 233

261 Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008

262 Ev 273

263 Ev 84

264 Fourth Special Report of Session 2004–05, Pub Companies: Responses to the Committee’s Second Report of Session 2004–05, HC 434, p2

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has become increasingly differentiated and subject to changing fashion.”265 We are of the view that public houses do form a distinct segment of the on-licence market in England and Wales. Although it may be difficult to distinguish between many food-led pubs and restaurants, in general we believe there is a distinction between pubs and other on-trade outlets and the existence of such a distinction is well recognised by the consumer. For example, the presentation of a pub both externally and internally, the range of services provided in a pub and the prices, are, in the vast majority of cases, readily distinguishable from restaurants, fast food outlets, social clubs etc. Public houses, in both urban and rural locations, also perform an important social function strengthening local community adhesion and the spirit of community as highlighted in the All Party Parliamentary Beer Group inquiry on Community Pubs.266

173. Surprisingly, the OFT’s submission to the 2004 inquiry did not include an analysis of the geographical market — the territory within which competition operates with regard to a particular product or service. In relation to public houses, the geographical market is likely to be narrowly defined. Arguably the geographical market for substitutable pubs is likely to be within a radius of, say, 10–15 miles representing the maximum distance which a consumer is likely to travel to visit a pub for a drink. The All Party Parliamentary Save the Pub Group suggested that a few companies should not be able to dominate all the pubs in a particular region or town.267 The OFT told the Trade and Industry Committee that they looked at data only on a local licensing authority basis.268

Consumer detriment

174. OFT’s submission to the present inquiry states that its “mission is to make markets work well for consumers”.269 We are both surprised and disappointed by the OFT’s apparent reluctance to investigate whether the pub market is working well for the consumer. The failure of the pubcos to pass on the benefit of their discounts to the lessees prevents the lessees from passing on the benefit to the consumer in terms of reduced prices. This has led to an ever increasing disparity between the on-licensed price of beer as compared with the off-licence price of beer. This disparity has played a major role in undermining the viability of pubs, as lessees are forced to increase retail prices, so increasing the trend to home consumption. It is to the overall detriment of the consumer if pubs are forced to close due to uncompetitive practices in the market.

Restrictive covenants

175. Some pubcos sell pubs on the proviso that they can no longer be used as pubs thus restricting a consumer’s choice on where they wish to drink. Ted Tuppen, the Chief Executive of Enterprise Inns, told us:

265 HC (2004–05) 128-II Appendix 2

266 Community Pub Inquiry, All Party Parliamentary Beer Group, October 2008

267 Ev 287

268 HC (2004–05) 128-II Q 615

269 Ev 278

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We tend to put these covenants in if we have an area that is substantially ‘over-pubbed’. I think there is agreement that there probably are too many pubs and the current economic climate is probably making it less possible for the unviable to survive. Were we to have a pub for sale in a village or a suburb where there were already five or six pubs, it may be in the interests of our licensees and indeed all the other licensees in the area for this to be sold not as a pub. This may well mean less money for us. In normal circumstances, we will always be looking to get the best price, but in some instances, and I would think it is probably about 70% of the pubs that we sell, we will seek to put in a restrictive covenant because, genuinely, we think these are pubs that have lived their life.270

We have heard claims that changing social trends and economic factors lie behind the spate of recent pub closures. We reach no conclusion about the validity of these claims, but we acknowledge that pubs, like any other commercial institution, cannot be isolated from such changes. However, the first observation we would make is that it is not for pubcos to decide what degree of competition is appropriate to any geographical market. We have already noted that prospective lessees may be attracted to particular premises rather than to a tied pub. Restrictive covenants reduce their choice. Reducing the number of premises available in a particular area, when a pubco wishes to sell a building, also reduces the competition in the market.

176. We believe it is for the market to decide whether a pub is unviable and not for a pubco to restrict a building’s use. We therefore recommend that the Government makes the use of restrictive covenants to prevent the continued use of premises as a pub illegal.

The Legal position

Article 81(1) EC Treaty and Chapter I Competition Act 1998

177. Article 81(1) EC Treaty prohibits agreements which prevent, restrict or distort competition and give rise to an effect on trade between Member States. Chapter I of the Competition Act 1998 (“the Chapter I Prohibition”) applies a substantially identical prohibition in respect of such agreements where they give rise to effects limited to the UK or a part of the UK.

178. The prohibitions under Article 81(1) and Chapter I are not absolute. Agreements falling within either prohibition may nevertheless be exempted under Article 81(3) EC Treaty or its equivalent under Section 9 Competition Act 1998 where it can be demonstrated that notwithstanding the anti-competitive restrictions, the agreement gives rise to improvements in distribution or technical progress, the restrictions are indispensable to that objective and the consumers receive a fair share of that benefit.

179. Tied pub leases are generally considered to qualify for exemption from the prohibition under EC Regulation 2790/99 (“the Vertical Restraints Exemption”) on the basis that the tied pub lease model offers low cost entry to the business for lessees accepting the tie and

270 Q 262

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that pubcos offer a wide range of brands within the tie so that there is little risk of market foreclosure (i.e. restrictions on manufacturers of beer and other drinks accessing the retail market).

180. Tied pub leases also benefit from the exclusion from the Chapter I Prohibition under the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 (“the 2004 Order”) under which restrictions such as a beer tie contained in a pub lease are excluded from the Chapter I Prohibition altogether.

181. The OFT has taken the view that the exemption under the Vertical Restraints Exemption and the exclusion under the 2004 Order justifies its refusal to investigate the impact of the tie on competition grounds.

182. However, the exemption under the Vertical Restraints Exemption and the exclusion under the 2004 Order may be withdrawn if the competition authority thinks it appropriate to do so. Articles 6 and 7 of the Vertical Restraints Exemption provide as follows:

Article 6

The Commission may withdraw the benefit of this Regulation, pursuant to Article 7(1) of Regulation number 19/65/EEC, where it finds in any particular case that vertical agreements to which this Regulation applies nevertheless have effects which are incompatible with the conditions laid down in Article 81(3) of the Treaty and in particular where access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical restricts implemented by competing supplies or buyers.271

Article 7

Where in any particular case vertical agreements to which the exemption provided for in Article 2 applies have effects compatible with the conditions laid down in Article 81(3) of the Treaty in the territory of a Member State, or in a part thereof, which has all the characteristics of a distinct geographical market, the competent authority of that Member State may withdraw the benefit of application of this Regulation in respect of that territory, under the same conditions as provided in Article 6.272

183. The evidence before the Committee suggests that the benefit of low cost entry offered to retailers through the pubco lease model should not be overstated. There is no evidence demonstrating that a tied lessee receives benefits not available to free of tie tenants or freeholders. Nor are we in a position to say with confidence that rents for tied pubs are invariably lower than rents for equivalent free of tie premises. We have been given examples where free of tie premises cost more to rent than tied ones and examples where they cost less.

184. Furthermore, the evidence to the Committee shows that the wholesale prices offered to tied lessees by their pubcos have increased at a much faster rate than wholesale prices to

271 Emphasis added

272 Emphasis added

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the free trade or the off-licence sector with the result that lessees of tied pubs are at a significant competitive disadvantage as compared to free of tie tenants and freeholders. This could be a major factor in the failure rate of tied public houses in recent years.

Article 82 EC Treaty & Chapter II Competition Act 1998

185. Article 82 EC Treaty prohibits any abuse “by one or more undertakings” of a dominant position giving rise to an effect between EU Member States. Chapter II of the Competition Act 1998 (“Chapter II”) contains a similar prohibition where the dominant position arises only in the UK or a part of the UK. Dominance may arise where one or more undertakings have a market share in excess of 40%.

186. An analysis of the application of Article 82/Chapter II will depend upon the definition of the relevant market. Markets are defined primarily by reference to demand substitution, (i.e. viewed from the perspective of the customer, what products/services are reasonably substitutable). In relation to the on-licence drinks market, it seems to us that the public house market is a discrete segment of the on-licence drinks market as a whole, i.e. the market including pubs, clubs, restaurants, hotels and other on-licence premises.

187. It is difficult to calculate an exact breakdown of the pubco share of the market as we have been presented with different ownership figures. No single pubco has 40% of the pub market, but if the ALMR figures are used the combined market share of all the pubcos is approximately 40%.273 Accordingly, it is arguable that the pubcos collectively may hold a dominant position in the market. The OFT Guidelines on the abuse of a dominant position define collective dominance in the following terms:

“4.23 Article 82 and the Chapter II Prohibition prohibit conduct on the part of one or more undertakings which amounts to the abuse of a dominant position. A dominant position need not be held by a single undertaking. Separate undertakings may be found to hold a dominant position together where certain conditions are met. Their conduct may then be dealt with together under Article 82 and/or the Chapter II Prohibition.

4.24 A dominant position may be held collectively when two or more legally independent undertakings are linked in such a way that they adopt a common policy on the market. The European Court confirmed the principle of collective dominance in the Italian Flat Glass case: “There is nothing, in principle, to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of the fact, together they hold a dominant position vis a vis the other operators on the same market.274

4.25 The links may be structural or they may be such that the undertakings adopt a common policy on the market.275 For example, the nature of the market may be that undertakings might adopt the same pricing policy on the market without ever

273 Ev 82

274 Cases T-68/69 etc Societa Italiano Vetro SpA –v- Commission,[1992] II ECR 1403, [1992] 5 CMLR 302

275 Joined Cases C-395/96 P andC-396/96 P Compagnie Maritime Belge SA & Others [2000] ECR I-1365 paragraph 45

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explicitly agreeing on price (see the competition law guideline Assessment of market power, OFT415).”

The pubcos operate the same business model and apply a substantially identical policy on the market which would seem to be sufficient to give rise to collective dominance.

188. The European Court has defined a dominant position as: “…a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers”.276

189. The evidence before the Committee suggests that Punch, Enterprise and the other pubcos having a tied estate operate without any significant competitive constraint applied by competitors, customers or the consumer. Various analysts have commented on the possibility that a pubco’s financial difficulties might lead to over-renting277 pubs and increasing pressure on lessees. If that is the case, then significant numbers of pubs (and customers) will suffer because of factors beyond the control of the individual business.

190. We believe that the supply ties operated by pubcos may well be anti-competitive and may have a detrimental effect on the public house market. We are disappointed that the OFT has failed to act on this matter in the past and has refused to acknowledge the current problems in the market. Since the OFT is unwilling to initiate an appropriate investigation, we recommend that the Secretary of State uses powers set out in section 159 of the Enterprise Act 2002 to refer supply ties in the public house industry to the Competition Commission for a market investigation. Given its clearly stated position, we do not believe an OFT investigation would be satisfactory.

191. Our provisional view is that the tying of beers, other drinks and ancillary products should be severely limited to ensure that competition in the retail market is restored. However, we note that interventions can have unexpected consequences. The Beer Orders led to the emergence of pubcos, simply replacing one group of powerful players with another. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we are calling for an urgent investigation rather than making a policy recommendation.

276 Case 27/76 United Brands –v- Commission (1978) ECR207 (emphasis added)

277 Charging rent at a higher rate than the business will bear.

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7 Conclusion 192. Not all the problems of the pub industry come from the tied pub model. It is clear there are many pressures on any retail business, and pubs are challenged by changing consumer preferences, changes in the regulatory framework and general economic circumstances. However, as numerous groups and commentators have remarked, pubs are valued as community centres. It is not Government’s job to protect failing industries, but it does have a role in investigating failures and abuses in the market. Its duty to exercise that role becomes more urgent if those failings and abuses have social as well as economic impacts. As we have noted, during our inquiry we receive evidence from lessees of many different pubcos. We were told of pubcos which failed to honour verbal agreements about the status of leases, and pubcos which failed to make agreed repairs. There were recurring stories of rent reviews which lessees could not dispute without excessive costs, and stories of lessees not just working long hours for low pay, but supporting their pub from other earnings. The consistency of these themes suggests that something is seriously amiss. This is confirmed by our survey: over 60% of lessees in tied estates were dissatisfied with their pubco.278 The Trade and Industry Committee recommended that if the industry could not improve voluntarily, there should be a mandatory code of practice. We believe more should be done.

193. This Report contains recommendations which will affect the way in which businesses can treat one another. Some might argue that this can be left to the market. Pubcos which not only benefit themselves but support their lessees are likely to stay in business. If pubcos push too hard and are too greedy they will fail. But on the way bad companies will inflict real damage on their direct customers, the lessees, and on their indirect customers, ordinary drinkers. The potential for such damage may be increased by current economic conditions producing a ready supply of inexperienced would-be lessees eager to use their redundancy money to enter a new career.

194. It may be the industry’s problems can be solved by a framework ensuring fairness and transparency in dealings between landlord and lessee. It may be necessary to ensure that inequalities in bargaining power are recognised, even when business contracts are involved. It may be that the beer tie should be prohibited. The OFT has failed to examine this market properly; the Government should now assume responsibility, to ensure both that competition issues are properly investigated and that the wider legal framework is adequate.

278 Ev 300

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Conclusions and recommendations

Introduction

1. Whatever the effect of the pubco model on competition, which we examine later in this Report, the imbalance of bargaining power and information between pubcos and their lessees has produced a system which is biased against lessees, and needs to be examined in depth. Accordingly this Report examines the industry from first principles rather than being, as we first expected, a simple check on the implementation of the Trade and Industry Committee’s recommendations. (Paragraph 12)

Pub closures

2. It is clear that figures for pub closures do not adequately cover cases where individual lessees go out of business without the pub itself actually closing. We cannot be confident that pubco lessees are less likely to fail than other publicans. (Paragraph 35)

Rent assessment

3. Lessees must appreciate that if a chartered surveyor is involved in their rent negotiation he or she is acting on behalf of a client and that is a legitimate role. However membership of a chartered institution is no longer considered an automatic guarantee of integrity and certainly not of impartiality; RICS members called on to act in arbitration should be aware of the sensitivity of their situation and must be scrupulous in declaring their interests. (Paragraph 41)

Transparency

4. Given the inherent subjectivity of the rental valuation method, it is very important that there is transparency about the assumptions on which it has been calculated. We note that there is disagreement between lessee representatives and pubcos over whether the Trade and Industry Committee’s recommendation that “Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated” has been implemented. The evidence that this recommendation has not been fully implemented is confirmed by our survey results which show that 44% of lessees had not been shown a breakdown of how their rent was calculated. This is unacceptable. (Paragraph 45)

5. We note that, without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. We recommend that there should be industry guidelines on the average costs of running a pub such as those in the ALMR benchmarking survey. These can be used by lessees as comparators against the rental assessments put forward by their pubco. (Paragraph 47)

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Trading history

6. We accept that in many cases pubcos do not have access to their lessees’ books. However, they have access to a substantial amount of information about the business of a particular pub, and are likely to have extensive information if a business is in difficulties. Pubcos entering a commercial relationship with a new lessee should be required to share all their information on a pub’s trading history with them. (Paragraph 54)

Comparables

7. A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses. Our predecessor’s recommendation to create a register of rent reviews would have increased transparency. We note it has been disregarded, and neither the pubcos nor RICS has taken any serious action to make sure the rental system is not unfairly biased against the lessee. (Paragraph 58)

A new valuation method?

8. The rental valuation method for pubs appears to be the product of history and tradition. If it is to be fair, there must be far greater transparency about how rents are calculated to ensure equality between the parties to the negotiations. If this is not improved as a matter of urgency, there are compelling arguments for abandoning the method entirely. (Paragraph 60)

Rent reviews

9. It is difficult to measure the extent to which trade has increased because of improvements to the premises funded by the lessee. Nonetheless, we consider it is manifestly unfair for pubcos to profit from increases in trade brought about by such changes; here, too, transparency on how rent is calculated and access to figures for comparable premises would properly strengthen the lessee’s negotiating position. (Paragraph 70)

10. Our witnesses are divided over the merits of annual RPI rental adjustments. The pubcos claim this prevents lessees having to deal with a large increase in the five yearly rent review; lessees consider it a way of gradually increasing pubcos’ share of the profits, and of reducing pubcos’ share of the risk. The evidence is finely balanced, and we are not the appropriate body to resolve the question. Two things are clear; firstly, pubcos’ greater bargaining power has enabled them in at least some cases to insist that upward only rent reviews are replaced by annual rental adjustments in line with RPI; secondly, if rental is linked to RPI it should be done in a way which enables reductions when appropriate. (Paragraph 75)

The beer tie

11. The effect of the beer tie on basic rent is that both pubco and lessee take a lower income. However, while the decrease in the lessee’s income is absolute, the pubco has £110 from that part of the discount on its barrelage it has not passed on to the lessee.

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The reduction in rent is accompanied by a reduction in the lessee’s profit but an increase in the pubco’s overall revenue. (Paragraph 84)

12. If the interests of the pubcos operating a tied system and their lessees were truly aligned, one would expect that pubcos would want a system in which the combination of rental costs and beer costs enabled their lessees to supply beer at a price which was competitive with other pubs. This does not seem to be the case. (Paragraph 87)

Purchasing power

13. We believe it is seriously misleading for any pubco to promote to potential lessees that a pubco has benefits from ‘purchasing power’ when that benefit is not passed on to lessees. (Paragraph 92)

Enforcing the tie

14. It is entirely legitimate for a company to seek to ensure that the other party to a contract respects its terms. However, we believe that where a measurement device is used to police this, it should be properly calibrated, and subject to external verification. If necessary, the Weights and Measures Act 1985 should be amended to ensure this. Furthermore, given the impossibility of distinguishing between beer dispensed and sold, beer run off and disposed of preparatory to serving, and water used to clean the lines, we believe pubcos should not be allowed to rely on data from Brulines equipment to enforce claims against lessees accused of buying outside the tie. (Paragraph 98)

AWP tie

15. In 2004 the Trade and Industry Committee concluded that “In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50 percent of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed.” That conclusion remains valid. (Paragraph 103)

Insurance

16. Pubcos have a right to require that each of their pubs is fully and properly insured. It may well be that the insurance offered through pubcos is as good as or better than any that lessees could arrange directly. Nonetheless, since lessees are frequently not allowed sight of the policy, it is impossible to establish whether this is the case. Moreover, it is also clear that some insurance policies require the lessees to pay for a benefit to the pubco. We do not see why pubcos should not themselves take out insurance against the risks they face directly. (Paragraph 108)

Benefits of the pubco tied model

17. We conclude that pubcos may offer a lower cost route into the industry and the opportunity for a lessee to create or maintain an asset in the assignment value of the

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lease. However, this benefit is accompanied by uncertainty about the value of the asset which a lessee is purchasing, and the extent to which that value can be maintained. While those who purchase a freehold property may face higher initial outgoings, they obtain a tangible asset. Purchasers of freehold leases have greater commercial freedom. (Paragraph 114)

18. Moreover the attraction of low cost entry should not be overstated: a very significant majority of those who responded to our survey said they were attracted by a particular pub, not a particular business model. Lessees apparently often choose tied pubs simply because they are what are available in their preferred location, or because they are attracted to a particular pub. That would mean that pubcos were, by virtue of their large estates, diminishing competition by forcing those who wish to run pubs into their business model. (Paragraph 115)

Business support

19. The Trade and Industry Committee found that “the performance of business development managers (BDMs) varied across the industry from excellent to dire.” That conclusion remains valid. The evidence we have received suggests that there are still too many BDMs who offer lessees little or no support, and some who bully or intimidate them. Moreover, some of our evidence suggests that this culture is not limited to BDMs but can reach further up a company. (Paragraph 120)

Financial Assistance

20. It is surprising that the link between financial assistance and the extension of the tie was not made clear in oral evidence. Financial assistance which is offset by an increase in rental or an extension of the tie is, in effect, ‘repayable’ and does not confer the benefit claimed by the pubcos. (Paragraph 125)

21. We accept that pubcos are helping their lessees with financial assistance but there are many lessees who appear to be eligible for aid but do not receive it. Pubcos need to make their policies on the administration of financial help clear with a fair and open application process for such assistance. Lessees need to know on what grounds they are turned down. (Paragraph 128)

22. The Trade and Industry Committee found that, on the evidence presented to them, the immediately quantifiable cost of the tie was usually balanced by the benefits available to tenants. From the evidence we have received, we are not so convinced. We are particularly struck by the results of our survey which found that 63% of lessees did not think their pubco added any value. The pubcos offer little support that cannot be found by normal market methods. (Paragraph 129)

A fair share of profits?

23. Increasing a pub’s turnover will benefit the pubco as it increases the sale of tied products. To our surprise it does not seem to benefit the lessee to nearly the same extent. Over 50% of the lessees whose pubs had turnover of more than £500,000 a

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year earned less than £15,000. The pubcos may share the risks with their lessees but they do not share the benefits equitably. (Paragraph 133)

Lessees’ attitude to the tie

24. The dispute over the tie could be ended easily: every lessee could be offered the choice of being free or being tied. This would enable both sides to prove their competing claims. We believe each and every existing lessee should, in a phased programme, be offered this choice and the same choice should be offered to every new lessee as he or she takes on the lease. To make the choice fair, the process of agreeing revised rents must first be improved as we have previously recommended. (Paragraph 138)

25. Although a voluntary agreement is preferable, we doubt that the pubcos would respond effectively to such an approach. We therefore recommend that the Department considers how best to achieve this end and that it opens an urgent consultation into the principle and phasing of this proposal. The status quo is not an option. (Paragraph 139)

Dispute resolution

26. The small number of cases pursued to independent arbitration should not be taken as a sign that all is well. It could simply demonstrate that, even though they were dissatisfied, lessees did not consider the dispute resolution system appropriate. (Paragraph 142)

27. We agree that some form of low-cost independent procedure for dealing with disputes over the rate of rent is needed and needed urgently. The BII’s proposed dispute resolution system in which fees will be known at the outset, and will be related to rental value is, in principle, welcome. We would be more confident in the prospects for the successful implementation of the BII’s proposal if the Trade and Industry Committee had not recommended precisely such a procedure over four years ago. We are astounded that nothing has yet been done. (Paragraph 149)

Legal remedies

28. The BBPA’s Framework Code of Practice and the recommendations of the Trade and Industry Committee have not solved the problems of inequality in bargaining power and inadequate means to resolve disputes identified in 2004: we believe that more is now needed. (Paragraph 156)

29. Our inquiry has inevitably attracted evidence from dissatisfied lessees. We have tried to counter that by being as open as possible to the pubcos, and by commissioning our own survey. We note that in our survey results some pubcos fared better than others. It is clear from our evidence that some lessees act recklessly, or enter into business without due diligence. That is not the pubcos’ failing. Nonetheless, the pubco model should be based on a share of risk and reward. That may be the case in some circumstances, but the two parties to the contract have vastly differing bargaining power. The financial data from our survey suggests that for a great many

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lessees, the risk remains with them while the lion’s share of the profit goes to the pubco. We are not saying that all, or even any, pubcos abuse all lessees all the time, but it is clear that not only is there potential for abuse, but also that abuse occurs. (Paragraph 157)

30. Consumers are protected from unequal bargaining power by the unfair contract terms legislation. The law assumes that both parties to a business contract have equal resources and expertise. This is clearly not the case here — but if a pubco tried to enforce its contract through legal proceedings, courts would be very reluctant to determine whether those contract terms were fair because of the presumption that commercial contracts are made between equals. We recommend that the Department for Business and Enterprise urgently explore ways of ensuring that there are safeguards to prevent inequalities of bargaining power in business contracts being abused. (Paragraph 158)

Competition Issues

31. We believe it is for the market to decide whether a pub is unviable and not for a pubco to restrict a building’s use. We therefore recommend that the Government makes the use of restrictive covenants to prevent the continued use of premises as a pub illegal. (Paragraph 176)

32. We believe that the supply ties operated by pubcos may well be anti-competitive and may have a detrimental effect on the public house market. We are disappointed that the OFT has failed to act on this matter in the past and has refused to acknowledge the current problems in the market. Since the OFT is unwilling to initiate an appropriate investigation, we recommend that the Secretary of State uses powers set out in section 159 of the Enterprise Act 2002 to refer supply ties in the public house industry to the Competition Commission for a market investigation. Given its clearly stated position, we do not believe an OFT investigation would be satisfactory. (Paragraph 190)

33. Our provisional view is that the tying of beers, other drinks and ancillary products should be severely limited to ensure that competition in the retail market is restored. However, we note that interventions can have unexpected consequences. The Beer Orders led to the emergence of pubcos, simply replacing one group of powerful players with another. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we are calling for an urgent investigation rather than making a policy recommendation. (Paragraph 191)

Conclusion

34. This Report contains recommendations which will affect the way in which businesses can treat one another. Some might argue that this can be left to the market. Pubcos which not only benefit themselves but support their lessees are likely to stay in business. If pubcos push too hard and are too greedy they will fail. But on

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the way bad companies will inflict real damage on their direct customers, the lessees, and on their indirect customers, ordinary drinkers. (Paragraph 193)

35. It may be the industry’s problems can be solved by a framework ensuring fairness and transparency in dealings between landlord and lessee. It may be necessary to ensure that inequalities in bargaining power are recognised, even when business contracts are involved. It may be that the beer tie should be prohibited. The OFT has failed to examine this market properly; the Government should now assume responsibility, to ensure both that competition issues are properly investigated and that the wider legal framework is adequate. (Paragraph 194)

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Formal Minutes

Tuesday 21 April 2009

Members present:

Peter Luff, in the Chair

Mr Adrian Bailey Roger Berry Michael Clapham Miss Julie Kirkbride

Anne Moffat Mark Oaten Lembit Öpik Mr Anthony Wright

Draft Report (Pub Companies), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 194 read and agreed to.

Summary agreed to.

Resolved, That the Report be the Seventh Report of the Committee to the House.

Ordered, That the Chairman make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report.

[Adjourned till Tuesday 12 May at 10.15am

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Witnesses

Tuesday 18 November 2009 Page

Mr Brian Jacobs, Fair Pint Campaign, Mr Clive Davenport, Chairman for Trade and Industry, Federation of Small Businesses, and Mr Paul Daly, Publican, Zigfrid and Roadtrip Ev 1

Mr Martin Willis, Chair of the Trade Related Valuation Group, Royal Institution of Chartered Surveyors, Mr David Morgan, Chartered Surveyor and Mr Simon Clarke, Publican and qualified Chartered Surveyor Ev 10

Tuesday 9 December 2009

Mr Rob Hayward, Chief Executive, British Beer and Pub Association, Mr Nick Bish, Chief Executive, Association of Licensed Multiple Retailers and Mr John McNamara, Chief Executive, BII Ev 19

Mr Giles Thorley, Chief Executive and Mr Giles Kendall, Regional Operations Director, Punch Taverns plc, and Mr Ted Tuppen, Chief Executive and Mr Simon Townsend, Chief Operating Officer, Enterprise Inns plc Ev 31

List of written evidence Page

1 National Parliamentary Committee of the Guild of Master Victuallers Ev 46

2 Brian Jacobs Ev 47, 52

3 Kossway Ltd Ev 68

4 Karl Harrison Ev 71, 75, 76

5 Rose and Crown Ev 78

6 Interpub plc Ev 79

7 Association of Licensed Multiple Retailers (ALMR) Ev 81, 89, 90

8 Memorandum submitted anonymously Ev 95

9 Winter Hill Consultancy Ev 97

10 Enterprise Inns plc Ev 98, 104, 111, 117

11 Mark Charman Ev 119

12 Campaign for Real Ale (CAMRA) Ev 120

13 Herefordshire and Worcestershire CAMRA Ev 123

14 Admiral Taverns Ev 124

15 Sarah Ferdinand Ev 128

16 The Duke Public House Ev 128

17 Simon Clarke Ev 134, 137, 139, 143, 145

18 British Association of Pool Table Operators (BAPTO) Ev 146, 147

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19 Federation of Small Businesses Ev 149

20 OSO Pub Company Ev 152

21 Graham Brown Ev 155

22 The Crown and Town Hall Tavern Ev 156

23 The Woolpack Ev 157

24 Borough Arms Ev 158

25 Jeff Rosenmeier Ev 159, 160

26 Punch Taverns plc Ev 161, 167, 177, 179, 183

27 Memorandum submitted anonymously Ev 183

28 The British Beer and Pub Association (BBPA) Ev 184, 189, 190

29 BII Ev 191, 193, 194

30 Business in Sport and Leisure Ev 196

31 Marston’s Pub Company plc Ev 197

32 Memorandum submitted anonymously Ev 203

33 Greene King plc Ev 204

34 South Norfolk Council Ev 210

35 Royal Institute of Chartered Surveyors (RICS) Ev 213, 214

36 Peal O’ Bells Ev 215

37 Fair Pint Campaign Ev 219, 223, 226, 231

38 Stephen Broadhurst Ev 237

39 Federation of Licensed Victuallers Associations Ev 241

40 David Morgan Ev 243, 247, 248

41 The Progressive Pub Company Ltd (PPCL) Ev 248

42 Justice for Licensees Ev 251

43 Society of Independent Brewers Ev 254

44 Camelot Inns Ev 256

45 The Swan Inn Ev 257

46 Paul Daly Ev 259, 260

47 Eddie Cant Ev 261

48 Memorandum submitted anonymously Ev 261

49 Inez Ward Ev 261, 265

50 Anne Hewitt Ev 265

51 Mr and Mrs K Hutton Ev 266

52 JAT Leisure Ev 267

53 Shepherd Neame Ev 267

54 Nigel Wakefield Ev 268, 270, 272, 273

55 Memorandum submitted anonymously Ev 274

56 Memorandum submitted anonymously Ev 275

57 Good Pub Guide Ev 277

58 Office of Fair Trading Ev 277

59 Licensed Trade Charity Ev 279

60 David Law Ev 279

61 Dovedale Towers Ev 281

62 The Royal Oak Ev 282

63 Robert Milroy Ev 282

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64 Gareth Thomas MP, Parliamentary Under-Secretary of State for Trade and Consumer Affairs, BERR Ev 282

65 Lisa Smith Ev 283

66 HMRC Board, London Ev 283

67 Chris Swift Ev 284

68 All Party Parliamentary Save The Pub Group Ev 285

69 Association of British Insurers Ev 289

70 PubCo Licensee Survey by CGA Ev 290

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List of Reports from the Committee during the current Parliament

Session 2008–09

First Report

Energy policy: future challenges HC 32

Second Report∗ Pre-appointment hearing with the Chairman-elect of Ofcom, Dr Colette Bowe

HC 119

Third Report

Work of the Committee in 2007-08 HC 175

Fourth Report

Regional development agencies and the Local Democracy, Economic Development and Construction Bill

HC 89

Fifth Report

The Postal Services Bill HC 172

Sixth Report The Insolvency Service

HC 198

Session 2007–08 First Report The work of the Committee in 2007 HC 233

Second Report Jobs for the Girls: Two Years On HC 291

Third Report Post Office Closure Programme HC 292

Fourth Report Funding the Nuclear Decommissioning Authority HC 394

Fifth Report Waking up to India: Developments in UK-India economic relations

HC 209

Sixth Report After the Network Change Programme: the future of the post office network

HC 577

Seventh Report Keeping the door wide open: Turkey and EU accession HC 367

Eighth Report ∗∗ Scrutiny of Arms Export Controls (2008): UK Strategic Export Controls Annual Report 2006, Quarterly Reports for 2007, licensing policy and review of export control legislation

HC 254

Ninth Report Construction matters HC 127

Tenth Report Post Office finance: matters arising from evidence taken on 10 June 2008

HC 662

Eleventh Report Energy prices, fuel poverty and Ofgem HC 293

Twelfth Report Post Office Card Account: successor arrangements HC 1052

Thirteenth Report Companies House HC 456

Fourteenth Report Departmental Annual Report and Scrutiny of the Department for Business, Enterprise and Regulatory Reform

HC 1116

∗ First Joint Report with Culture, Media and Sport Committee

∗∗ First Joint Report of Committee’s on Arms Export Controls