The Pubs Code adjudicator has published an open letter to tied pub tenants following independent research into the market rent only (MRO) process.

Fiona Dickie
Fiona Dickie, the Pubs Code adjudicator

The key findings were:

  • Tenants who had the help of a competent advisor through the process overwhelmingly had a much more positive experience than those without
  • The MRO process has positively affected the respondents’ ability to negotiate their tied offer, giving lower tied rent than before, lower tied rent than offered, improved tied terms, and other tied benefits
  • 71% of survey respondents considered the MRO rent offer from their pub-owning business (POB) to be unreasonable
  • All interviewees who went through the process had favourable results — only one in 11 respondents was dissatisfied
  • Under terms and conditions, common issues were: dilapidation costs; high upfront rental deposits; and stocking requirements

In her letter, Ms Dickie said: “I have seen some large disparities between the rent offers pub companies make for MRO
tenancies, and the market rents when independently assessed.

“The research findings show the independent assessor process is working well for tenants. But this should be a last resort because it involves time, and cost, as the tenant pays half the assessor’s fees. Where initial rent offers are too high, it can make negotiations harder and put tenants off.

“In my consultation, to help ensure rent offers are realistic, I propose requiring pub companies provide supporting evidence to justify any rent they offer, including detailed profits valuations and trading forecasts.”

She added: “Concerns from tenants in the research included high upfront costs of taking the MRO option, such
as deposits and the cost of terminal dilapidations where the MRO proposal was for a new tenancy. In my consultation I propose to prohibit pub companies from routinely charging for dilapidations as part of the MRO process.

“I also propose requiring pub companies to offer a minimum of 12 months to build up any additional deposit and rent in advance, so tenants would not have to find cash upfront for these things.

“Stocking requirements were also an issue of concern for some tenants surveyed, which I already knew from arbitrations. You may be aware that I investigated Star in relation to non-compliant stocking requirements and found a number of code breaches.”

Negative expectations

Ms Dickie wrote: “Many tenants in the research had negative expectations of the MRO process and feared a negative impact on their relationship with their pub company. While in many cases no such impact was ultimately felt, it would be a breach of the Pubs Code for a pub company to subject you to detriment for exercising your legal right to use the MRO process.

“In my consultation I emphasise that pub companies should be making accurate notes of any conversations with you about the MRO. I am also proposing that they record any decisions on whether to oppose renewal and take a pub into management. I want to give you confidence that any breach of the Pubs Code can be identified.”

She concluded: “As well as my proposals for guidance to make the process more accessible for tenants, my team will use the survey results to inform how and where we talk about the code.

“For example, the results show that the MRO has been used by more lessees than tenants and more so by experienced operators, particularly those in London and the South East. My office is also continuing its work to produce simplified information materials and case studies.

“I want you to feel confident to use the MRO process if it is right for your business, and I am committed to ensuring you will be treated fairly if you do.”

‘Balance, security, and investment’

A spokesperson for the British Beer & Pub Association said: “We support these proposed changes to the Pubs Code, which recognise the value of the leased and tenanted model and the strong relationship between pub-owning companies and their tenants.

“In particular, the streamlining of the market rent only process is welcome for tenants and pub-owning businesses alike, and will facilitate negotiation and agreement.

“During the pandemic, leased and tenanted pubs received £285 million in reduced or cancelled rent and further additional support worth on average £27,000 per pub from pub-owning businesses.

“The partnership between tenant and pub-owning businesses provides balance, security and investment — and has secured community pubs for generations to come. Looking ahead to the launch of the next statutory review in 2022, we will again reiterate this message to ensure the Ccode continues to support the relationship between tenants and pub-owning companies.”

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