Pubs Code etc. Regulations 2016

Lord Lexden Excerpts

Tuesday 12th July 2016 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills and Department for Culture, Media and Sport (Baroness Neville-Rolfe) (Con)]

My Lords, I shall speak to the Pubs Code etc. Regulations 2016 and the Pubs Code (Fees, Costs and Financial Penalties) Regulations 2016. These orders form part of the implementation of the Small Business, Enterprise and Employment Act 2015. They will come into force on the day after they are made.

Pubs continue to play an important part in the life of this country. They are the hub of local communities in both rural and urban areas, and for many there are few pleasures in life that can compare to a pint, some other drink or, increasingly, a delicious meal with friends in a British pub.

It may be helpful for me to remind your Lordships why we are introducing a statutory pubs code. Tied tenants have for many years argued that their relationship with pub-owning businesses can be unfair. For example, the lack of transparency in reaching decisions on rent can put tenants at a significant disadvantage in challenging increases or negotiating a better rent. Examples are also cited of pub companies failing to meet deadlines or to comply with the contractual processes for the termination of tenancies. After more than 10 years of BIS Select Committee inquiries, Part 4 of the Small Business, Enterprise and Employment Act 2015, which I had the pleasure to take through the House, was brought in to address these concerns. During the passage of the Bill, as some will remember, it became clear in November 2014 that Parliament wished to add the market rent only option to the Bill. That is the option to occupy the pub premises free of tie at market rent. The Government accepted that intent in January 2015. At that stage there was no settled policy on the details of how the MRO process would work. These have ended up accounting for more than half the regulations now before your Lordships—a weighty bundle.

Unfortunately, the tight timetable set down by Parliament contributed to some technical drafting errors in the SIs as originally laid. These have now been corrected and the opportunity has also been taken to add some clarifications to the regulations and to improve the mechanism for assessing what constitutes a significant increase in price for the purposes of triggering the right to request a market rate only option. The Government are very keen to ensure that the code now comes into force as soon as possible. Clearly we regret that it was not possible to meet the May deadline for making the regulations and I am afraid that it will not be possible under the Act for them to have retrospective effect.

The SBEE Act requires us to ensure that the Pubs Code is consistent with the principle that tied tenants of the largest pub-owning businesses are no worse off than free-of-tie tenants and that there is fair and lawful dealing between the largest pub-owning businesses and their tied tenants. At the same time, we have sought to ensure that this takes place without placing undue burdens on businesses. I believe that after many discussions, these regulations now successfully achieve the right balance.

Perhaps I may look first at the processes for the market rent only option and the functions conferred on the Pubs Code Adjudicator to deal with disputes about it. Noble Lords will be aware that this has been an area where, as the Secondary Legislation Scrutiny Committee recognised, the Government have had to reach decisions in the light of often widely varying views expressed through the consultation process. We have sought to balance protections for tenants and obligations on pub-owning businesses. Let me give three examples of how I believe that we have achieved this.

First, the draft regulations provide that the right to an MRO option at rent assessment is not dependent on a proposed rent increase from the pub company to the tenant. This reflects constructive feedback both from your Lordships and from the industry itself that the earlier proposal would have had the unintended consequence of preventing significant numbers of tied tenants from receiving an MRO offer. Secondly, we have also listened carefully to both tenants and pub-owning businesses in finalising the drafting of the significant increase in price provisions. We have, for example, guarded against MRO being triggered simply by a tenant changing their product selection. This has been ensured by stipulating that products must be compared only where they are like-for-like products sold in the same units and based on the same amount sold. Thirdly, we have delivered our commitment in the final March package last year for an investment exception, which at that stage was called the investment waiver. This is important because it is vital for the future of pubs and their tenants that pub owners want to invest in them. In doing so we have taken account of the concerns that were raised during the passage of the SBEE Act that this could become an MRO loophole. Therefore the MRO exception is limited to a maximum of seven years and a minimum investment of twice the pub’s annual rent.

The code addresses many other important aspects of the relationship between tied tenants and pub-owning businesses which I would like to draw to the attention of noble Lords. These include the requirement for tenants to receive a parallel tied rent offer to consider alongside the MRO offer and protections for tied tenants whose pub is sold to a non-code pub-owning business. Transparency is essential for tenants and pub owners. Both parties must be fully aware of what is involved and what they are committing to. But transparency must be backed by the enforcement of fair dealing. A tenant who believes that the pub-owning business has breached the code therefore has the right to refer that alleged breach to the independent Pubs Code Adjudicator, who is appointed to enforce code obligations and empowered to award redress. Of course, we have already ensured in the primary legislation that the pub company receives sufficient notice—21 days—to put things right before a tenant may go ahead with the referral; and we are deterring frivolous or vexatious referrals by requiring a £200 fee for each case.

I turn now to the Pubs Code (Fees, Costs and Financial Penalties) Regulations 2016 which are modelled on those for the Groceries Code Adjudicator, which noble Lords will remember. The fees and costs provisions largely mirror the arbitration or mediation arrangements in the existing industry voluntary code. Financial penalties are not an aspect of that voluntary code and may be imposed by the adjudicator after an investigation. This is distinct from the arbitration arrangements where the only financial awards are for redress and costs. The regulations specify a maximum penalty of 1% of a pub-owning business’s annual UK turnover in respect of investigations.

The adjudicator has complete discretion as to whether he imposes a financial penalty and in what amount, up to the maximum stipulated. The nature and effect of the breaches will inform the exercise of that discretion. Accordingly, I expect the maximum to be applied only in extreme cases for very serious breaches of the code. The adjudicator must consult on the criteria that he intends to adopt in deciding the amount of any penalty he may choose to impose.

I make no bones about the fact that the code is 52 pages long and covers a lot of issues. As anyone who has followed its birth and early years must know, tied pub relationships are multifaceted and not always straightforward. The Pubs Code before you, despite its length, is proportionate and balanced in its approach and will lead to greater prosperity for those who work in our great British pubs industry. I commend these draft orders to the Committee.

[Lord Lexden (Con)]

My Lords, I want to draw attention to some concerns expressed about the Pubs Code etc. Regulations 2016 by the Joint Committee on Statutory Instruments, of which I am a member. The concerns are set out in full in the fourth report of the current Session and I shall touch on the most important of them.

As my noble friend said, the regulations would alter the obligations on pub-owning businesses towards the tenants of their tied pubs. Under Section 43 of the Small Business, Enterprise and Employment Act 2015, the regulations must include provision for a tenant to be offered a market rent-only option. Section 43(6)(c) requires the regulations to provide that option to be offered where there is a significant increase in the price at which a product or service subject to the tie is supplied to the tied pub tenant and where that increase was not reasonably foreseeable when the tenancy was granted.

Regulation 24 among those before us today requires that the market rent-only option be offered where there is a significant increase of that kind irrespective of whether the increase was reasonably foreseeable. Moreover, Regulations 3 to 6 provide that the test of whether an increase in price is significant is to be determined by reference not to the amount by which the particular product or service has increased in price but to the level of increase in price of a category of products or services.

The Joint Committee on Statutory Instruments concluded—the salient paragraphs in the report are 4.9 to 4.17—that the regulations do not comply with the requirements of Section 43 of the 2015 Act in two respects: they do not include the condition of reasonable foreseeability and the test of significant increase is inconsistent with what Section 43 requires. The department has not provided a satisfactory explanation of either of these two divergences from Section 43 and, therefore, the Joint Committee on Statutory Instruments considers that if the regulations are made there is a doubt whether Regulations 3 to 6 and 8 are intra vires. I would be grateful for my noble friend’s comments.

[Lord Mendelsohn (Lab)]

My Lords, getting up feels almost like it does at the bell before last orders—I confess that I am insufficiently capable of such a witticism and have to acknowledge my noble friend Lord Beecham for that observation. We welcome the introduction of the Pubs Code etc. Regulations and the Pubs Code (Fees, Costs and Financial Penalties) Regulations.

This has been a very long and drawn-out process, and in fact as I was listening to the Minister I realised that I could mouth half the words of the introduction to her speech because we have been at this for some time. However, I am grateful for all the work that has been done by officials in making sure that we get to this particular place. It has not happened within the timetable that everyone wanted, but it is more important to get the code right than to serve an arbitrary timetable. I will turn to the issues around the timetable in due course.