Lord Hodgson of Astley Abbotts
Main Page: Lord Hodgson of Astley Abbotts (Conservative - Life peer)Small Business, Enterprise and Employment Bill
Lord Hodgson of Astley Abbotts Excerpts
Lord Hodgson of Astley Abbotts (Con)
My Lords, in this group I have tabled Amendment 33L in response to government Amendment 33J, to which my noble friend was kind enough to refer in her opening remarks. It tackles the reintroduction of parallel rent assessments, which were abandoned, or removed from the Bill, at an earlier stage. Before I go any further, I need to remind the House, as I have previously, that I was until January a year ago a non-executive director of one of the companies affected by this Bill. It was one of the integrated pub companies: we operated five breweries and about 2,000 pubs, of which about 500 were managed and about 1,500 were tied in various forms.
That having been said, I regret that this Government, my Government, should have allowed themselves to be carried along on a tide primarily fuelled by emotion and with insufficient attention to the underlying hard economic realities of the pub trade. The trade faces acute pressures as a result of fundamental changes in our society and in our way of life. I fear that the changes we are proposing to endorse today may well increase those acute pressures rather than reduce them. However, I recognise the settled will of the other place and this House about the introduction of a market rent only policy. I also recognise another acute pressure; namely, that faced by my noble friend on the Front Bench in trying to square the circle. I would like to place on record my thanks to her and her long-suffering team of officials for the time and effort that they have taken.
I begin my remarks from a point on which I hope all parties can agree. We want to find a way to keep as many pubs as possible open and the challenge is how to achieve that. The answer must be to agree policies which balance, on the one hand, tenants’ rights and, on the other hand, the need to provide a degree of certainty about the future to the pub owner, the brewer and the pub investor, and to do so while incurring a minimum degree of bureaucracy, paperwork and administrative cost. I recognise the steps that the Government have taken in introducing amendments to the Bill today. In this group, for example, government Amendment 33AV, while far from ideal, at least recognises the need to provide for an aftermarket in pubs. I trust that the Government will resist the blandishments of the noble Lord, Lord Whitty, in a few moments when he speaks to his Amendments 33AW, 33AX and 33AY. I have to warn the Government that there may be unintended consequences even from that change.
CAMRA and others claim that there is a wave of money wanting to pour into the pub trade if and when the tie is removed. As I explained in Committee, that is far from the truth. Even if it were true, this amendment will not reassure individuals or companies wishing to buy pubs from big companies. Big companies own the bulk of the pubs and therefore usually will be the seller. Those individuals seeking to buy will try to avoid taking on a property carrying with it the uncertainties of the Pubs Code and the adjudicator, and the way in which he may operate. When looking to sell a pub, the pubcos may well be left with no option but to look more readily at alternative non-pub uses for their assets.
I am afraid that I am forced to the conclusion that the Bill does not provide the appropriate balance between the parties. I have tabled just three amendments, which would redress that balance and give an appropriate degree of certainty to pub owners and their investors. The first of these, Amendment 33L, is in response to the Government’s proposal in Amendment 33J to reintroduce parallel rent assessments.
Parallel rent assessments were introduced voluntarily by the pubcos as a means of reassuring tenants that, by providing an assessment of what a free-of-tie rent would be, they were being fairly treated. It was not the case that the pubcos got any credit for doing this. These PRAs were not popular with the Royal Institution of Chartered Surveyors, first because of the challenge of finding comparable properties—imagine trying to find a comparable property for a small village pub—and secondly, and no less significantly, the challenge of how to value the back-up provided by the pubcos to the tenant, known in the trade by the rather unattractive name of SCORFA, special commercial or financial advantages, which vary a great deal from company to company and pub to pub.
When the open market rent option was introduced, it was right that the PRAs were abandoned. After all, tenants could now apply for a market rent option as of right. However, for reasons that are quite obscure, other than riding the wave of emotion, the Government are reintroducing parallel rent assessments through Amendment 33J. I hope the Government will accept—I think from her comments in her introductory remarks my noble friend does accept—that to have two separate and different valuation methods to procedures cannot be a good way of providing clarity to tenants, certainty to the pub companies or even a level playing field for the adjudicator. Nor should we forget the administrative costs of having two entirely separate procedures. This trade is insufficiently profitable and its profitability is probably still falling. Let us not establish duplicate procedures which will still further reduce that already inadequate return.
Amendment 33L proposes one procedure. If a tenant asks for a parallel rent assessment—I accept that the Government wish to bring that back—the procedure to be followed should be the same as the first step in the market rent only procedure. At the end of the assessment the tenant can decide whether to stay as he or she is or to proceed with the MRO option. What should not happen in the latter case is to go back to square one and start again with an entirely separate procedure which, in due time, the tenant may or may not wish to accept either.
When my noble friend comes to wind up, could she confirm on the record that the rent assessment trigger for MRO relates only to rent assessments carried out in formal rent reviews and renewals of existing agreements? I am sure this is the case, but concern has been expressed in the industry that the MRO assessment trigger is wider than that. If my noble friend wants to cut down duplicative administrative costs for the pub industry, she will accept my amendment, which does nothing more than require that PRA and MRO evaluation procedures follow the same steps.
Lord Hodgson of Astley Abbotts
I said that CAMRA claims that there is a wave of money. I said that there is not; the briefing that CAMRA sent us claims that there is a wave of money and that if you remove the tie, people will start to put money into pubs.
Lord Berkeley
I am grateful for that clarification. I do not know whether the noble Lord is aware that a dozen or so tenants of Punch and Enterprise Inns have gone public today, listing all the defects that have not been corrected by their owners—including unsafe gas appliances, leaking roofs, unsafe fire exits and so on —with the companies claiming that they have done the work and having put up the rents to some extraordinary degree to cover that when they have not actually done it. It confirms that something is seriously wrong and needs to be put right.
Lord Mendelsohn
My Lords, Amendment 33M makes provision that the Secretary of State may, through secondary legislation, create an opt-out for an MRO in return for a sum of investment. The amendment tries to outline important provisions and considerations and to ask the Government to be clear on what that means. It also asks that they implement safeguards to ensure that the MRO is not watered down. Our belief is that if the investment offer is fair, reasonable and attractive to a tenant, there will be little or no risk of the tenant taking up the MRO at that time. The MRO trigger would be there to ensure that pub companies made reasonable investment offers and were not just bullying or cajoling tenants into signing away rights cheaply.
My reasons for tabling the amendment are twofold. First, we do not fully accept the Government’s argument concerning Clauses 42 and 43 on the Pubs Code. We think that the legislation is insufficient and would be very interested to hear the Minister’s view on this. Secondly, this measure has the capacity to undermine the Commons amendment. We do not feel that it is appropriate to accept the measure without a detailed indication of what it entails and without some markers on the face of the Bill.
There are many horror stories in relation to this, as in relation to the operation of how pub companies deal with the provision of a sale. Indeed, I heard this morning from a tenant about how all their rights were bullied out of them and how they were moved dramatically from a position of reasonable success and security, with the pub company using the provision in a dispute over a sale. Many Members of this House will have heard stories from a variety of sources about issues concerning investment. We are concerned to make sure that these are dealt with adequately, and that the problems that led to this part of the Bill and to the issues that arose in the other place are dealt with properly.
We are also very keen to make sure that the industry, in and of itself, has the capacity to continue to develop and invest, finding a way to work with its tenants productively, sensibly and creatively so as to grow, commercialising the sector to full effect. Therefore, we are looking to the Government to provide a clear view on how they will deal with this. We accept that much of this will be dealt with in secondary legislation, as with other things, but because of the nature of some of these provisions, and the speed at which they have been made, we will be very keen to have some idea of what the Government see the regulations and guidance as including and how they will be framed.
We would be very grateful for some clarification on the following: the definition and amount of investment; what the Government consider to be the maximum deferral period of MRO in return for investment, and their view on whether it should be capped at five years; the stage at which the deferral for an MRO will begin— that is, will it be after the sums are agreed or when they are all fully expended?—the buyout of agreement provisions, whereby a tenant can opt for MRO; the tenant’s option to allow for alternative and blended finance to maintain MRO and how this will operate with investment agreements; and the ability for an investment agreement to trigger the parallel rent assessment. We would also like to have a strong reassurance about how the investment agreement will be a trigger event for the MRO. We would like clarification that an agreement of investment will mean that there is no opt-out of the Landlord and Tenant Act 1954, and an assurance that the investment agreement will recognise the different nature and size of pubs and relevant investment requirements. There is a considerable difference between a large pub in, say, the centre of London and one in a remote village, and it needs to be recognised that a one-size-fits-all model does not work.
There are other considerations, such as who commissions the work, to what standard, who signs it off and is responsible for overruns, the examination of the current condition of properties and other matters. These are not the only relevant factors. We have also received correspondence on problems between pub companies and tenants, and on how these mechanisms have specifically been used. We believe that it is in everyone’s interests to have a working mechanism that allows for investment and makes that investment work. We feel that more clarity now will ensure that problems can be avoided in the future.
I hope that the Minister will be happy to consider these matters in full. Given their sensitive nature, we will be happy to return to them at Third Reading following this debate on the substantive points. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, I have Amendment 33W in this group. The noble Lord, Lord Mendelsohn, has done us all a favour by tabling Amendment 33M, which has the great virtue of ensuring a reference in the Bill to the importance of investment in the sector. There are aspects of his amendment which would be operationally and definitionally problematic, which I will come to in a minute or two, but there is a germ of a good idea and I hope that we may be able to persevere with this over the next few days. By contrast, I find the Government’s position less satisfactory, in that, as I understand it, there is to be no reference to the importance of investment in the sector anywhere in the Bill. It will all be left to the consultation process, with all the attendant uncertainties which all sides of the House have referred to during the debates this afternoon.
The Government have made a practical argument that the pubcos could achieve certainty by offering tenants a new agreement at the same time as the offer of investment. In the explanatory note that the Government circulated last week, there is a suggestion that the Bill does not prevent pub companies from issuing a tenant with a new lease alongside the offer of investment. Sadly, most tenants will not be attracted by this because of the problems of stamp duty. A lessee on a 15-year lease with a rent, say, of £50,000 will pay stamp duty of around £5,000 at the outset. If they are in year two or year three of the lease, and the pub company has to grant them a new agreement in order to make an investment with a five-year payback, they will have to write off the £5,000 they have already paid, pay another £5,000 in stamp duty for the new lease and then pay all the legal costs associated with it, which are estimated at around £1,500. Not surprisingly, this is not a particularly attractive option for the lessee. In essence, the Government’s position now is to force small businesses who want to take advantage of pub company investment to pay additional tax to do so. That is surely contrary to the aim of the Bill, which is to increase access to finance for small companies.
I think all noble Lords agree that investment in pubs is urgently needed if the trade is to prosper, because pubs are having to reinvent themselves to meet new competitive conditions, with a greater emphasis on food, facilities for families and so on. These investments are what bankers called “messy lends”, because they tend to be a mixture of: land works, for example extending the car park; construction—increasing the footprint of the pub; internal fittings, such as enlarged kitchen facilities; and general work such as new signage, new fixtures and fittings, and general decoration. A banker will have some doubt as to the ultimate value of that investment if it is unsuccessful. They are not always therefore very attractive to third-party lenders, but they are attractive to integrated pubcos, because their own estate is an important route to market for their own beer, often accounting for up to 25% or 30% of their production. It needs to be made clear that there is no requirement for a tenant to accept the pub owner’s money. If he or she can find funds elsewhere, on better terms, so be it, although the fact is that an integrated brewer usually is able to offer the best terms.
I referred to the need for pubs to reinvent themselves as a result of changes in society. That brings me to the downside of the amendment of the noble Lord, Lord Mendelsohn, as currently drafted. He referred to the vast range and diversity of investment needs, but I fear that parts of his amendment represent a straitjacket. What is a “rent assessment” in relation to MRO in the introductory section of his amendment? Reinventing yourself as a gastropub in a prosperous London suburb is a vastly different proposition from reinventing yourselves as a value-conscious family-friendly pub in Middlesbrough, but both are important if we are to maintain the pub trade in all its glory and all its diversity.
I argue that the maximum deferral period of five years, as proposed in subsection (2)(b) of Amendment 33M in the name of the noble Lord, Lord Mendelsohn, is not appropriate to appear in the Bill. Secondly, the proposed buyout provisions under subsection (2)(d) are likely to act as a disincentive to investment. Thirdly, for reasons that were clear from my previous amendment, I am anxious to pull MRO and PRA together, whereas the noble Lord has separated them under paragraphs (f) and (g) of his amendment.
My Amendment 33W does not suggest a new clause— as the amendment in the name of the noble Lord, Lord Mendelsohn, would do—but the insertion of two paragraphs in Clause 43, “Pubs Code: market rent option”. My amendment envisages a situation where the Pubs Code would clearly set out what can and cannot be included in such a deferral agreement. Tenants would continue to enjoy all the protections of the Pubs Code and the Pubs Code Adjudicator. No tenant could enter into a deferral agreement without having first taken appropriate professional advice to ensure that he or she is aware of the terms of the agreement and has taken advice on its suitability for their business. The tenant must choose to opt into the deferral agreement; that is, he or she has the right to refuse to enter into any such agreement. The adjudicator should oversee the deferral system to allay concerns from tenants around the process of entering a deferral. A deferral would apply only to significant investments to be defined in the Pubs Code and would not therefore be available for incidental investments for maintenance or repairs which are the responsibility of the owning pub company. The deferral agreement could last for a mutually agreed period of time.
The Pubs Code could set a maximum period of time for a deferral agreement if appropriate. Some flexibility may benefit both tenants and pub companies depending on the scale of the investment, as the noble Lord, Lord Mendelsohn, pointed out, and the length and nature of existing lease arrangements. For the avoidance of doubt, during the deferral agreement the tenant will maintain their right to exercise all other MRO triggers, including significant price increases and material change in circumstances as defined in the Pubs Code.
Whatever approach is followed, it is critical that there is some reference to the importance of investment in the sector in the Bill. Without that certainty, the flow of investment, most of which will inevitably come from the big pubcos and are the subject of the restrictions in this Bill, will reduce. Having heard the remarks of the noble Lord, Lord Mendelsohn, as well as my own, I hope very much that my noble friend will be able to accept the spirit of what is intended and agree to table a suitable amendment to address this issue at Third Reading.
Lord Snape
My Lords, following what the noble Lord, Lord Hodgson, has said, I hope that the Minister will do no such thing as regards his amendment. Amendment 33W seeks to legitimise a loophole in the legislation. The pub-owning businesses are seeking to introduce a provision in the Bill permitting them to defer market rent only option in exchange for significant investment. The fact is that there is nothing now and, as I understand it, nothing proposed in the Bill to restrain pub-owning businesses from undertaking such an exercise. A pubco could simply offer an investment in conjunction with the surrender of the existing lease in exchange for a new lease and a deferred period until the next rent review. I hope that the noble Lord, Lord Hodgson, who has tabled this amendment, agrees with that. I do not believe, and I think that most pub tenants do not believe, that there is any necessity to have this opt-out in the Bill.
As ever, the noble Lord talks about investment being urgently needed in some of these buildings. The reality is that this investment is not taking place. There is a queue of licensees and tenants who are anxious to tell noble Lords on both sides that this investment is not taking place. It would not take place if the Minister were to be unwise enough to accept this amendment, no matter how ably spoken to by the noble Lord, Lord Hodgson. As licensees see it at present, only pubs which accept an increase in rent to cover any investment by the pubco receive any investment. Much of the investment, such as it is, that takes place in pubs takes place in closed pubs in order to tart them up to sell them on the market. I am afraid that pubcos have a pretty bad reputation in these matters.
Baroness Wheatcroft
I am afraid that I do not have the details of the happy ones because they are obviously getting on with running their businesses rather than contacting me, and I hope that they are doing very well.
Lord Hodgson of Astley Abbotts
My noble friend might like to know that I produced three or four examples for the noble Lord in Committee. He just regards them as anecdotal evidence, but the fact is that there are anecdotes on both sides of this argument. There are just as many happy ones—or perhaps more—as unhappy ones.
Baroness Wheatcroft
I thank my noble friend Lord Hodgson and I support him in his amendment because it finds the balance between being overly prescriptive and legislating to give some comfort to pub owners, thus persuading them that it is safe for them to invest. I cannot support the noble Lord, Lord Mendelsohn, in his amendment. It seems to be far too prescriptive for the Bill, as others have said, and somewhat contradictory. The Bill already states that a trigger event for an MRO will be something that was unforeseen. An investment agreement, by its very nature, will have to be something that is negotiated.
Surely there are pub owners and pub landlords who are capable of negotiating an investment agreement that suits both sides. I do not subscribe to the view that all pub owners are out to do the dirty on their tenants or that all tenants are weaklings. Indeed, the Pub Landlord, that character who is so well known to television viewers, is standing up to Nigel Farage in South Thanet, although it has to be said that that particular pub landlord has not been seen there very often.
We need to offer landlords some protection so that, if owners invest in their pubs, they will not immediately be forced into an MRO. The trigger, as cited in the amendment tabled by the noble Lord, Lord Mendelsohn, would have that option. What sensible landlord is going to put money into his pub if the recipient could instantly trigger an MRO? There needs to be some scope for negotiation. My noble friend the Minister has shown that she is open to negotiation and consultation, and the amendment tabled by my noble friend Lord Hodgson would be the best way forward. However, perhaps the Minister could reassure us that she sees the need for investment to be encouraged and that she will find a way of giving pub owners and landlords the protection they need in order to invest in their estate.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lord, Lord Mendelsohn, and my noble friend Lord Hodgson for their amendments and for providing us with an opportunity to debate further the very important question of continued investment by pub-owning companies in tied pubs. That is especially the case because, as my noble friend Lord Hodgson has just said, pubs are having to reinvent themselves in the 21st century. As we have heard, these two amendments approach the issue in rather different ways, and I understand the motivations behind both. I can reassure the noble Lord and my noble friend that the Government absolutely want to see investment in tied pubs. That is key to the success of the industry, both for pub companies and for tenants. We want to see pubs thriving and the new arrangements to work.
I think we all accept that the possibility of pubs exercising the market rent only option will create some uncertainty for pub companies, and it is possible that there might be more uncertainty than they can live with if they are thinking of making a substantial investment in a pub. It is equally clear that there is some nervousness around asking tenants to defer some of their MRO rights in return for investment and that serious consideration needs to be given to how this would work in practice and the safeguards that need to be in place. As I said earlier in our debate, we have been considering how best to address this and strike the right balance. I can reassure my noble friend Lord Hodgson that the Bill as drafted does not prevent pub companies issuing the tenant with a new lease alongside an offer of investment, and no amendment to the Bill is necessary to enable companies to do so.
As my noble friend pointed out, a new agreement may attract costs for tenants, including legal costs and stamp duty.
The situation means that the MRO triggers on rent review or renewal would not be available to the tenant for a period of five years, as that is the maximum interval that the code will currently allow between rent assessments. It would, however, provide the pub company with some certainty. We recognise that there will be occasions where a larger investment—
Lord Hodgson of Astley Abbotts
I am not quite clear whether my noble friend said that there was or was not a problem with stamp duty. My understanding is that there are repeat stamp duty obligations; in other words, you write off the stamp duty of the lease that is running and have to start again every time you have a new agreement, and for five years that is another £5,000, plus whatever you have written off before, plus the legal costs. I am not clear whether she said that was a problem. If this is too difficult and technical, I am happy for her to write to me.
Baroness Neville-Rolfe
My noble friend is right: a new agreement would appear to attract costs for tenants, which would include legal costs and stamp duty.
As I was saying, we recognise that there will be occasions where a larger investment requires a longer return-on-investment period. After careful consideration and discussion with stakeholders, the Government have decided to address this issue, but to do so via secondary legislation, using the powers in Clause 42. I can reassure the noble Lord and my noble friend that the Government are committed to using these powers to set out in the code different rent assessment periods for different amounts of substantial capital investment offered. We will consult on what constitutes substantial capital investment and what the waiver period should be for different amounts. But we are clear that this could extend the rent assessment interval beyond the usual five years where it is appropriate to do so. This would mean that MRO cannot be exercised during the waiver period unless one of the triggers of a change of circumstances beyond the tenant’s control, or a significant price increase, is met.
In our discussions with stakeholders, we have heard varying calls for the length of waiver period that would be required to enable a pub company to see a return on its investment. These calls have varied between the five years suggested by the amendment moved by the noble Lord, Lord Mendelsohn, and 10 years. Clearly, individual circumstances will differ and we need to understand the details through consultation before we set this out in secondary legislation. The code will set out the safeguards that must be met to ensure that the tenant is protected from attempts to abuse a waiver. Again, it is vital that we consult on these to get them right.
I was glad that the noble Lord, Lord Mendelsohn, welcomed the idea of providing for investment. He set out a number of understandable concerns and potential safeguards where I think there is a lot of agreement but where we will need to work out the detail; for example, ensuring that the investment is substantial, that the tenant must take independent advice before agreeing to the deal, and that it is a genuine investment and not running repairs. He also mentioned that the pub company should not be able to require that a waiver agreement involves opting out of the Landlord and Tenant Act. I can reassure him that, using existing powers, we could restrict a pub company from requiring an opt-out of the Landlord and Tenant Act protections as a condition of investment.
My noble friend Lord Hodgson set out two areas of protection in his amendment: “significant investment” and “specified period”. Again, I think we all agree that these are important, and the secondary legislation I am proposing will set them out in detail. To meet the concerns of my noble friend Lord Younger, it will indeed be by affirmative resolution, which will enable us to have a debate.
There are other potential safeguards which will really benefit from consultation. The noble Lord, Lord Mendelsohn, asked whether the tenant can buy out of their agreement at a later date or source the finance from elsewhere. We will want to consider safeguards around ensuring that a pub company delivers the investment it promises, including when the deferral period should start. The adjudicator will have the power to intervene and arbitrate disputes where the landlord has breached the relevant provisions of the code. Remedies under the Arbitration Act are wide-ranging and the adjudicator can order redress which includes the payment of money in appropriate circumstances. I agree with the noble Lord, Lord Mendelsohn, that we need to take account of the fact that different sums of investment are significant for different types of pub—I think that he talked about urban and rural pubs, but it is probably even more complex than that. This is again a matter for secondary legislation and consultation.
“( ) The requirement to offer a market rent only option set out in subsection (1) does not apply to franchise agreements, defined as agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products.”
Lord Hodgson of Astley Abbotts
My Lords, with Amendment 33Y, we come to the issue of franchises—another great issue that has concerned us during discussion of the Bill. I and other noble Lords referred in earlier debates to the need for investment to allow pubs to reinvent themselves. I argue that there is an equally urgent need to allow pubcos to reinvent themselves by trying out and examining new corporate structures more in keeping with modern times, with less of the baggage of suspicion that traditional models carry with them, about which we heard from the noble Lord, Lord Snape, and about which other noble Lords clearly have similar concerns.
Noble Lords will know that I do not believe that changing the pub tie in any event is any more than a marginal answer to the fundamental challenges faced by the pub trade. The real challenges are: cheap beer in the supermarket at £1.13 a pint, compared to three quid in the pub; the increased drinking of wine, which people do not drink very much in the pub; the increasing tide of regulation of drink-driving, smoking and licensing; the rapid change in the structure of our society and the deindustrialisation of large parts of the United Kingdom; and, last but not least—in fact most importantly —the brutal hours required to run a successful pub. The presence or absence of a tie will have little or no effect on any of those.
I accept that the weakness of the tie is that it has two inbuilt conflicts of interest between the owner and the tenant: first, the rental level—the higher the rent, the lower the profit for the tenant—and, secondly, the price for which goods and services are supplied. To get around that conflict, pubcos have been developing the idea of a franchise. After all, that is how Burger King, McDonald’s, PizzaExpress, Starbucks, Costa Coffee and other successful companies have developed on our high streets in recent years. That is a revenue-sharing model. The tenant pays no rent and all goods are supplied on a sale or return basis. The tenants’ only responsibility is for the wages paid to staff of the pub and the council tax. Both parties, owner and tenant, thus have a joint interest, a joint incentive to maximise revenue.
My Amendment 33Y is again about the Pubs Code and the market rent option. I seek to amend the clause so that it is clear beyond peradventure that all the provisions and protections of the Pubs Code apply to those franchises, including the fact that franchised pubs will count as part of the 500 pub level which triggers inclusion in the provisions of the code, which I know that the noble Lord, Lord Whitty, will discuss shortly. This is not a way to get around the code. All the provisions and protections of the code are there, except for one—the market rent option, which is of course because no rent is being paid. It is a revenue-sharing model.
My noble friend on the Front Bench again wishes to leave all this to consultation. That is not satisfactory. The hard edges of how this new world is going to operate are all in the Bill; the soft edges may—I repeat, may—come about as a result of consultation. This consultation will take place after 7 May and while I am 100% confident that the next Government will be a Conservative one, the industry will be thinking, “What if?”. For example, it will be wondering what the outcome of a consultation is likely to be with a Lab-Lib coalition, with Mr Mulholland leading a charge for no changes as a result of the consultation process. That is why there needs to be some reference to this new model in the Bill, otherwise we risk tying the industry back into an operating model which all experience has shown has some fundamental flaws and inbuilt mistrusts.
The Minister has argued that all this can be achieved under the powers of Clause 71, which is not to do with the market rent only option and the Pubs Code’s operation. It is concerned with power to grant exemptions from the Pubs Code. This clause has become known as the Harry Ramsden clause. Harry Ramsden, the well known purveyor of first-class fish and chips, wishes to be certain that if his fish and chip shops supply beer and cider they will be exempt from the code. I understand that the Government are proposing to give that assurance. I know that Mr Harry Ramsden is talking to pubs to see whether he could sell his fish and chips in a pub. That would mean that fish and chips sold inside a pub would come under the code and beers sold inside Harry Ramsden’s fish and chip shops would come outside the code. Where is the sense in that? Further, Starbucks is now beginning to think about obtaining licences to sell beer and wine in its coffee shops, which are of course run on the franchising model. Where is this going to leave the traditional pub and the traditional pub model? The answer is: operating at an ever greater disadvantage.
All these developments emphasise the need for the industry to be freed up to try new ways of meeting the exceptionally competitive nature of our leisure market. The issue today is not whether 5,000 pubs are going to close. In my view, 5,000 pubs are probably doomed under any scenario. They are in the wrong location and have the wrong footprint, construction and reputation. The challenge for us is to prevent these 5,000 becoming 10,000 or even 15,000 pubs, and new corporate models such as franchising are one way to help.
My final words as we come to the end of this long saga are to those who think that the changes in the Bill will somehow herald a return to the golden age of the pub. I say to them: be careful what you wish for. I say the same to my Front Bench and to the noble Lords, Lord Mendelsohn and Lord Stevenson, as well. As we have heard already this afternoon, 25 years ago our predecessors introduced the beer orders. The orders were the result of a belief that big brewers with big chains of pubs were shutting out small breweries, so the answer was to limit the number of pubs that a brewery could own. The small breweries would then have a place in the sun, with the market space to thrive. No doubt to our predecessors, that all seemed extremely logically persuasive. As we know, the result was completely different. On the one hand there emerged the pure pubco, the focus of so much fury today, and on the other the market gap thus created was filled not by small breweries but by large, foreign brewers, so that noble Lords visiting a pub today will find the bar dominated by Stella Artois, Grolsch, Heineken, Foster’s, Castlemaine XXXX, Kronenbourg, Carlsberg and Peroni, with not a single UK brand among them.
At an earlier stage of the Bill, I suggested that there was the possibility of a similarly unpredicted and unwelcome outcome to these proposed changes. A pure pubco—not an integrated brewery, which does not have the same flexibility because it needs the pub to sell its beer—could say to itself: “Parliament wishes us to behave as a property company. So be it. We will behave as a property company. We will increase our short-term profitability by reducing or eliminating our support to our tenants. Where they can pay the rent, fine; where they can’t, we shall begin to look for alternative uses for the premises”. I have never been involved in a pure pubco so this is pure supposition on my part, but the pure pubcos own the overwhelming proportion of the current tied estate so, if this were to be developing trend, it would be a very serious one for the pub trade generally.
Lord Snape (Lab)
My Lords, I fear that I am going to miss the dulcet tones of the noble Lord, Lord Hodgson, on the rest of the Bill. I have sat through this paean of praise for the pubcos at Second Reading, in Committee and so far during the proceedings in your Lordships’ House today. I have some sympathy with the noble Lord’s view about the events of the late 1980s; it is a pity that he was not around in the other place when a Conservative Government were insisting that the power of the brewers at that time should be curbed. He obviously feels that the outcomes of that legislation, such as the beer orders that followed, have led to the situation in which we find ourselves now. Yet the contradiction appears to be that, while it is fair to say that he deplored the effects of the beer orders and what took place—the sell-off of the pubs and the relinquishing of the tie between the brewers and pubs has led to the pubcos that we have today—he has spent every stage of this Bill defending those same pubcos. He cannot really have it both ways; if the beer orders and their aftermath were so bad in the 1980s in creating these organisations, I wonder why he has spent so much time defending them during the passage of this legislation.
Lord Hodgson of Astley Abbotts
My Lords, I know that this is Report, not Committee, but if I may say so to the noble Lord, I have made it perfectly clear that there are between 20,000 and 25,000 tied agreements between pubcos and tenants, and not every one of them behaves like a saint; clearly, mistakes are made. I have explained, if he was not listening to my remarks earlier, that the problem with the tie is that built into it are two inherent conflicts of interest.
Lord Snape
I am grateful for that clarification; perhaps if the noble Lord had made it at Second Reading we might have spent less time bickering. The noble Lord’s Amendment 33Y seeks to put into the Bill some exemption for franchise agreements. The Minister will correct me if I have got this wrong but I think the Government have taken care of those franchise agreements and arrangements within the Bill itself. If they have not, they left themselves enough time, with the consultative procedures that the Minister has so ably outlined, to look at them again over the next few months, when these consultative arrangements are actually taking place.
The problem with accepting the amendment, of course, is that in effect it would pre-empt that consultation and we would be likely to see the pubcos working their way around the legislation in the way about which the noble Lord, Lord Hodgson, warned us. So although I found him as lucid as ever, I think that he convinced one or two of us on this side of the House that his amendment not only was not necessary but, were it to be accepted by the Minister, would lead to an even worse situation than we are in. Surely the noble Lord can see that making exemptions in the Bill, denying the adjudicator and the Pubs Code the opportunity to consider what agreements should be exempt, and to reverse that exemption if it transpires that the exemption is being gamed at a later date to circumvent the legislation, is the proper way forward. I hope that the way in which the Minister indicates the Government’s attitude to this amendment will indicate the way in which they will take this matter forward.
Like the noble Lord, Lord Hodgson, I am coming to the conclusion of my own remarks on the Bill. I would like again to say a few words about investment. It has been a consistent theme of the noble Lord that the Bill and the failure to accept his amendment would have a serious negative effect on investment that the pubcos make in licensed premises generally; I think that that is a fair summing up of his position. However, when one looks at what I repeat is the myth of investment by the pubcos, a different situation is immediately apparent. In 2014, for example, Punch invested £43 million in its core estate but sold pubs to the value of £111 million. It has already announced that it hopes to make £307 million from selling over 1,000 of its non-core estate. Enterprise Inns invested £66 million in pubs that year, then disposed of £73 million-worth of them. This does not sound to me like either a prosperous industry or an industry controlled by those who seek a sensible and profitable way forward for it, regardless of the legislation before your Lordships today.
Baroness Neville-Rolfe
My Lords, I thank my noble friend Lord Hodgson for championing the industry. I agree about the importance of investment. There has been some investment in the industry, and I hope there will be more if we get these important reforms right. I also agree about the importance of franchising as a new potential avenue of prosperity for the sector. I thank the noble Lord, Lord Mendelsohn, for his amendment, which I will come to.
Amendment 33Y seeks to provide that the market rent-only option does not apply to franchise agreements. My noble friend defines them as,
“agreements whereby no rent is paid by the”,
tenant,
“and their share of the profit is unaffected by the price paid for tied products”.
The Government recognise that there are turnover-based pub agreements on the market where the tenant’s interests are arguably more aligned with the pub company because both rely on a fixed proportion of turnover. The tenant does not face the combination of wet and dry rent, as with traditional agreements. The benefits of a franchise are that you are buying a proven business concept that has been tested by the franchiser. That should mean that your risk as a franchisee is reduced. Alongside the turnover share element, this would seem an important part of what constitutes a genuine franchise.
However, pub franchises also retain some characteristics of a traditional tied agreement that mean the tenant is still at risk. For example, the tenant is locked into the agreement for at least five years with no means to change the terms. The pub company remains in a stronger negotiating position, as we understand that the relative turnover share figure is fixed and generally non-negotiable, and a franchisee is unable to shop around for a better deal on some or all of his products and services.
However, after much consideration, I am pleased to confirm to my noble friend that the Government have listened to concerns expressed and agree that genuine franchises should be exempted from the MRO provisions. Given the differences between traditional tied pubs and genuine franchise agreements, we consider this a reasonable exemption, but we are clear that the remaining code protections should still apply.
We will exempt only genuine franchise agreements, and I shall make a few comments about our thoughts here. My noble friend put forward in his amendment two sensible criteria that are fundamental to defining a genuine franchise, but there are likely to be others. Therefore, it would be wise to consult further before we specify exactly what we mean by a pub franchise, and to take this forward in secondary legislation. It is our intention to provide for the exemption using the existing Clause 71.
In relation to Harry Ramsden’s, the code will regulate the alcohol tie in pubs. Harry Ramsden’s fish and chip shop clearly is not a pub, and Clause 71 enables the Government to exempt Harry Ramsden’s from the regime. Similar examples will be considered on a case-by-case basis. We will look at the points made today about Harry Ramsden’s and Starbucks in developing the code.
My noble friend Lord Hodgson was concerned about potential unintended consequences and asked for more to be done in the Bill. This is a difficult one. The best way to reduce the risks of unintended consequences is to allow for flexibility through secondary legislation because it is then possible to tweak arrangements should unintended consequences arise. If we fix these matters in primary legislation, any unintended consequences would be much harder to remedy.
On Amendment 33AZ from the noble Lord, Lord Mendelsohn, I am pleased to reassure him that the regulations we will make under Clause 71 will be subject to affirmative procedure, so we will be able to have a proper debate. However, we believe that subordinate legislation is the right way ahead. I am making it clear in Hansard that that is the Government’s intention, and my Bill team will be working away on franchise and other aspects of the subordinate legislation as soon as the Bill receives Royal Assent.
I hope that my noble friend will feel reassured by my response and will agree to withdraw the amendment.
Lord Hodgson of Astley Abbotts
My Lords, I thought for one wonderful moment that my noble friend was going to agree to put something in the Bill, but it will be secondary legislation again, with all the disadvantages and uncertainties that that implies.
Of course the noble Lord, Lord Mendelsohn, has a family familiarity with franchising, in the sense that his uncle was the moving spirit of the British Franchise Association, which of course would help set the standards that would decide what a pub franchise looks like, because it has a lot of experience in that area—so this will come back to haunt him yet.
My concern about the Minister’s reply is that we find ourselves unable to move the structure of the pub trade forward. We need to find new and better models. There will always be concerns that any new corporate structure we invent carries the risk of it being used for a loophole. That is not the case, because the amendment brings every single aspect of the franchise within the Pubs Code and the Pubs Code Adjudicator’s power except the single issue that you cannot ask for a market rent option because you are not paying any rent.
I accept my noble friend’s assurances that the Government intend to make sure that this is properly dealt with in consultation, but they are making a mistake because there is a danger of slip ’twixt cup and lip. My concern is that the trade finds itself locked into a structure with which neither side is entirely satisfied, and that we may therefore perpetuate enmity, suspicion and difficulty. I had hoped to find a way out of that by getting something in the Bill. I am sorry that the Government will not do that, but I see no point in taking it any further on this occasion. I therefore beg leave to withdraw the amendment.
Lord Whitty
My Lords, the two amendments in this group deal with the issue of the threshold. I will be as brief as I can.
The discussion earlier today and in Committee has shown that there is an awful lot of movement within the pub world: there is buying and selling of pubs between large pubcos, breweries and other companies, and there is a lot of change in the status of pubs between being managed and tenanted and between different forms of tenancy, such as from tenancy to franchise and vice versa.
The definition of the threshold here is rather static in that it relates only to tied pubs. The Minister has made it clear that the definition of tied pubs includes franchised pubs, and I hope that she will repeat that assurance here today. I had also hoped that she would be slightly more favourable to the earlier amendment in the name of the noble Lord, Lord Stoneham, which related to pubs that are tied other than by beer and cider provision, because there are other forms of tie than the purely alcohol tie. Because pubs move from one status to another, and indeed from one company to another, it is surely a lot easier to define the threshold by the total number of pubs. Otherwise, there could be some gaming to avoid the threshold, or indeed changes in the structure of the industry that alter the way in which the code and the MRO option would apply.
The Government have said that if we did that we would run the risk of completely inappropriate pub owners falling within the area of the Bill. First, as of now, it makes a difference of one company, so it is not a comprehensive reassessment; it is just an easier way that will stand the test of time for longer. In any case, as was referred to in the debate on the previous amendment, if any company is caught inappropriately by this provision, either because of the threshold or for any other reason, the Government have the power under Clause 71 to exempt that company or companies.
It would therefore be a lot easier were the Government to accept the rationale of what I am saying. It would make the operation of the code a lot easier and clearer. It would not make a lot of immediate difference, but it would, as I say, stand the test of time, given the volatility of the patterns of ownership with the buying, selling and changing of status within this sector. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, it will not surprise the noble Lord, Lord Whitty, that I urge the Government not to accept the amendment. The issue of the change in the MRO and its introduction is about tenants: that is to say, self-employed business men and women and the imbalance of bargaining power between the individual tenant and the brewery, in particular because of the issue of the rent charged and the charge for products and services supplied. That is the heart of the problem.
Managed pubs—the other big category—are run by people who are employed by the brewery, who run it like a branch office. The noble Lord, Lord Snape, referred earlier to how Wetherspoon runs its pubs. It has managers in every pub who are employees. They are paid a salary and a bonus, with all the other aspects that go with corporate existence. To include those in a Pubs Code would be wrong, first because there is no rent to pay and no question of any aspect of the Pubs Code applying to pubs like that. These are completely different vehicles and corporate structures, and the application of the Pubs Code can have focus and effect only where you are dealing with independent businessmen, whether they are tied, franchised, or whatever.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord, Lord Whitty, for his amendment, and for his engagement on these provisions in advance of Report. As the noble Lord explained, these amendments would change the definition of a pub-owning business for the purposes of the Pubs Code to one with 500 or more pubs of any kind rather than 500 or more tied pubs.
The noble Lord asked about franchises. They will indeed be included for the purposes of the 500, as I think my noble friend Lord Hodgson helpfully explained when we were discussing it earlier. The definition focuses on the alcohol tie, because that is where we have evidence of problems, as colourfully explained in four Business Select Committee reports, all of which focused on the tie.
I understand the noble Lord’s view that companies with more than 500 pubs of any kind are companies of sufficient size that they can cope with complying with the code. However, the amendments would lead to some striking anomalies. A pub-owning company with 499 pubs, all of which are tied, would not be covered by the code, but a pub-owning company with 500 managed or free-of-tie pubs and just one tied pub would be covered for that one tied pub.