The Pubs Code and going free of tie

The “beer tie” is a centuries-old concept where large pub companies lease their pubs to tenants. As part of the pub tenancy agreement the tenant is restricted to buying its beer and products from the landlord, generally at inflated prices. In England and Wales, there are six large pub-owning businesses (landlords) and thousands of tied tenants.

When a tenant goes free of tie, they continue to rent the pub from the landlord but under a new, renegotiated ‘market rent only’ (MRO) lease. MRO tenants are free to buy their beer from wherever they choose.

How do I go free of tie?

To go free of tie, you must serve an MRO Notice on your landlord. It must contain specific information and be served within strict time limits. There are four specific events that give you the right to do this. They are:

• Your lease is up for renewal.
• You have received a rent review notice. This is called a “rent assessment” under the Pubs Code.
• There has been a significant increase in the price of a tied product or service.
• An occurrence has had a significant impact on your trade. This is called a “trigger event”.

What is the Pubs Code?

The Pubs Code etc. Regulations 2016 were introduced in July 2016 and govern the relationship between large pub owning companies (landlords) and their tied tenants. The Pubs Code is in place to ensure that dealings between landlords and tenants are fair and lawful, and that tenants are no worse off than if they were free of tie.

The Pubs Code Adjudicator (PCA) is the independent regulator responsible for enforcing the statutory Pubs Code. The PCA has the power to resolve disputes between pub landlords and tenants which arise in the context of the Pubs Code

What can I gain by going free of tie?

• The potential for increased profits. One of our recent clients says he stands to make an extra £2,500 per week profit after going free of tie.
• Freedom of choice, which allows you to offer greater choice to your consumer
• More ‘spare’ money to spend on the pub itself, such as refurbishments.

You may not benefit from going free of tie if the remaining term of your lease is relatively short. This is because, your landlord is only obliged to offer you an MRO lease term that is as long as your existing tied lease term. This adds more risk into the equation because when you reach the end of your lease term, your landlord might seek to oppose the subsequent renewal in an attempt to get the pub back for their own use.

What do I need to know before I start the process of going free of tie?

Before you decide to request to go free of tie, it is important to know that the process can be lengthy and the legal fees can add up as a result. To take your case all the way to a full arbitration before the PCA could cost in excess of £100K. The time and money involved, as well as the fact you are challenging a powerful organisation, means that it can be a stressful process and should not be entered into lightly. That said, not all requests to go free of tie end up before the PCA. Some requests are resolved by agreement directly with the landlord and this is a shorter and more cost effective process.

Although all tenants can request to go free of tie, we usually recommend that tenants who are considering going free of tie have a high annual turnover (more than or equal to £1 million per annum). You should also be confident that you stand to make more money by going free of tie.

In terms of your costs’ liability if you take your referral all the way through arbitration the usual rules on costs would generally apply i.e. that the unsuccessful party would bear the successful party’s legal costs in addition to their own. You would bear your legal costs upfront and then seek a recovery from the landlord if you are successful. If you are unsuccessful the maximum you could be ordered to pay in respect of the landlord’s costs is £2,000, provided your referral is not found to have insufficient grounds or your conduct does not unreasonably increase costs. You would, however, have to bear your own legal costs.

What are the advantages of being a tied tenant?

Being tied does still have some advantages and taking steps to challenge the arrangement is not recommended for all tenants. Rent is generally lower than market rates and tenants have the support of the landlord. This includes access to the landlord’s economies of scale on insurance, fixtures, fittings, televisions, glassware and even wifi. The tied model also means that tenants are better protected during a slump.

As the beer tie lowers the barriers to entry to the pub industry (by operating as an effective franchise system), large pub owning companies argue that their model is shoring up Britain’s pubs by bringing more people into the industry and therefore keeping more premises open.

What are the disadvantages of being a tied tenant?

The beer that tenants buy from their landlords usually costs more than it would on the open market and this can lead to pub tenants charging their customers inflated prices. In addition to this, the agreement with the landlord can mean that the tenant cannot choose the products they stock in response to the preferences of their clients.

The Campaign for Real Ale (CAMRA) has said that pub tenants are often paid poorly, with six in ten of them earning less than £10,000 a year, lower than the national minimum wage. Generally speaking, pub tenants tied into restrictive arrangements also tend to have less money to refurbish their premises, which can lead to building neglect.

Arguably a tie is anti-competitive, restricts profit and choice, and discourages entrepreneurship.

Why choose Clarke Willmott?

Our team has direct, first-hand experience of taking a referral to the PCA right through from start to finish. In one of our recent cases, the tenant of The Woodman in Highgate, North London successfully challenged onerous terms set out in a stocking requirement proposed by his landlord. The Deputy Pubs Code Adjudicator described the referral as ‘trail blazing’ law.

Contact a Pubs Code solicitor today

Our specialist solicitors can help you determine whether you could benefit from challenging your tie and support you throughout the case. Please call for a free initial consultation on 0800 652 8025 or get in touch online