Considered in Grand Committee
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.
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.
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.
One of the most important features of this is that tied tenants have had a particularly difficult time with the pub-owning businesses and the relationship has been fractured for quite some time. This was made considerably worse by the adoption of some rather reckless business models by the pub-owning companies and that has led to the establishment of provisions covering the Pubs Code Adjudicator, so this was done within the context of a worsening situation. As the Minister has said, the construction of the code itself, which comes from the legislation, tries to strike a balance. I want to say at the beginning that while I have a few questions about the statutory instrument, fundamentally our concerns turn on where the balance is struck in relation to the code. The reason for that is the desire not to place undue burdens on businesses while not suggesting that the concerns of tenants are not legitimate.
There are ways in which many businesses are transformed in their method of operation, their businesses processes and even their innovations by regulatory changes. In fact it could even be argued that in many industries, regulatory change has been a much better indicator of productivity than other forms of business reinvention. In this, striking a balance suggests that a business is static, but as I will come on to later, it is not. As it is established at this moment in time, it is important that the balance is properly struck.
I understand where the Government got to in designing the code and that as far as tenants are concerned, fine-tuning the code is now considered to be more effective with the experience of its operation. So the Government have given a commitment that there will be a review two years after commencement, and I would be grateful if the Minister could give us some idea of what the initial consideration is of what this will cover and how and who conducts it, as well as what reports will be made to and how engagement will take place with Parliament. In addition, I hope that the Minister can confirm that the interpretation issues are now ready to be considered by the Pubs Code Adjudicator and his office. Perhaps she can give some indication of the scope and direction of where they can go and how much they can do in the matter of interpretation as well as whether she and her officials will continue to engage in these issues. If the code proves to be an impediment to how they are interpreted, is there a case for an early amendment to it? The Government have the option to bring forward amendments, so it would be useful to know in what circumstances they might be introduced—and certainly if doing so would address our more general considerations about the problems of companies gaming the system. Although I feel that this is less of a concern, it would still be useful to have some idea about it.
We would also be interested to hear the Minister’s observations about the concerns expressed by the Joint Committee, but as I say, they are less relevant. However, if they call into question the veracity of the code, they will be materially important. Indeed, we also have some concerns about the formula for a significant increase in price, but as that has gone through consultation, no one is feeling particularly happy. It seems rather ill-judged for us to suggest that that presents a problem.
On the issue of the size of the penalties, the Minister made a case saying that penalties for the most egregious examples would attract the highest amount likely to be imposed. Perhaps I may suggest that when she is suggesting that, it is important that we have some indication that because this is down to the discretion of the adjudicator, they could also impose the highest-possible penalty for something less important and egregious. It is only in those circumstances that the necessary message can be sent to companies to encourage them to change their ways and to make the potential impact of a material impairment of their financial results possible. You have to be willing to use a bit more stick rather than offer some sort of carrot. I have had a look at LTIP arrangements of the particular companies concerned and I do not think that unless the penalty is materially significant, it will even affect them. Many of these could continue to be conducted, so if the penalty was imposed only on its level of seriousness—there is a variety of ways in which that might be measured—that certainly would not have the impact that penalties probably should.
Could the Minister be very clear on the timings from now and from implementation? This instrument is certainly somewhat unusual in that it does not have the usual delay, but it is very important that we get this moving as quickly as possible. We have always been concerned about the interregnum and what might happen, and it is very important that we ensure that the statutory instrument is enforceable on approval and that we get the strongest indication when that will be.
I will just return to the original point about the construction of the code striking a balance. I have looked at the interim results of two of the largest pub-owning companies over the last period, and it is very clear that the companies have decided to transform their businesses and been quite successful at it. Not only have they done that in relation to their overhanging debt—all have been able to deleverage their positions—but they have looked at different ways of operating their business and servicing their tenants, and all can report significant EBITDA improvements. The total number is slightly lower as a result of disposals, but it is certainly much improved, and they both have growing commercial letting operations. They now have commercial properties and report on the average rental that they are able to accrue on their estates: for Enterprise Inns the figure is £59,000, and for Punch Taverns it is £72,000.
Both companies devote some paragraphs in their most recent interim results to looking at regulatory changes. Both are able to stress that the changes they have made to their models, service contracts, pricing and to other aspects of their business are now highly advanced. Enterprise Inns says:
“We are confident that our strategic plan provides us with sufficient flexibility to accommodate this legislation and represents the appropriate response to its likely impact”.
“While the take-up of the MRO option will only become clear over time … our current expectations are that the majority of the estate will continue to operate under, and enjoy the benefits of the tied-drinks model”.
Their strategic response has made them ready. The industry has not just changed its models and operations but spent its time preparing for these sorts of changes.
That makes the case for two things: first, for a very speedy implementation, because there is not much time; and secondly, for the Government to keep a keen eye on this. Although a balance has been struck at this stage with what were quite rigid models, over the last period, the pub companies have responded not just to the regulatory changes but to the increased competition that they face from a variety of different forms of leisure activity on the high street and to the continuing problem for them of alcohol pricing in supermarkets. They have made sensible and decent responses which could, in their own words, assist them with reducing the potential impact of the MRO by providing much better options for tenants. In those circumstances, will the Government keep a keen eye on the code and make sure that the balance is not just enshrined today but considered over the coming two years on the basis of an ever-strengthening model of pub ownership?
I thank noble Lords for their contributions to this surprisingly brief debate—the briefest ever, I think, on the subject of pubs. I thank the noble Lord, Lord Beecham, for the joke that he passed to his colleague about the bell for last orders. I just hope that this is not my last order in the business brief, given the momentous events of the last few days. I will be very glad to put pubs to bed in this stage of regulation.
I very much concur with the wish of the noble Lord, Lord Mendelsohn, to see speedy implementation, which is why we are planning to introduce the regulations the day after they are made if noble Lords are happy here; there are debates in the Commons tomorrow and on Monday. Subject to parliamentary approval, we will be making the regulations ahead of the Summer Recess and in a minute I will talk about our plans for the adjudicator.
In passing, I thank the noble Lord, Lord Mendelsohn, for always looking at this from an economic, industry point of view. I actually rather miss my noble friend Lord Hodgson, who usually engages in debate and ensures that we are thinking about the economic side. It is very important that pubs flourish. They are changing and obviously they will have to face a post-Brexit situation. The consumer climate is very important to them. So it is good news for pubs that we now have the certainty of a new Prime Minister, rather than uncertainty dragging on for several weeks.
The noble Lord asked about the review provisions. We will, as I have said already, keep a close eye on the operation of the code to make sure that it is delivering its objectives. There is, as he suggested, a statutory review of the code, which has to take place by March 2019 and every three years thereafter. That is rather more frequent than some of the regulations that we discuss in this House and we will be keeping an eye on the code to ensure it continues to deliver fairness and the other objectives that I set out in my opening remarks. Obviously, the department and, I am sure, the Minister of the day would be involved in any such review.
Turning to the Pubs Code Adjudicator and his role in interpretation, I saw him last week to make sure that plans were in place and that he was getting ahead. I was glad to see that he was because obviously he needs to be ready for day one. He is planning to consult and publish guidance in line with his statutory duties as outlined in Section 61(1) of the SBEE Act in relation to the conduct of investigations and any resulting financial penalties. He will do that by 2 November this year and over time he will consider whether other guidance or interpretive support may be required. Obviously, he intends to work with stakeholders to help determine this.
In relation to the penalties, as I said in my opening remarks, there is flexibility for the adjudicator. It is a high maximum penalty but it is entirely at his discretion. He will consult on his criteria so that stakeholders can inform his thinking.
It was an honour to hear from my noble friend Lord Lexden and I never cease to marvel at the skill and detail that the JCSI lends to this kind of thing—it keeps us honest. If you get one of the reports through the post, you know that it is really well worth a read, including this one. I will try to answer my noble friend’s concerns and if for any reason he is not happy I hope we can discuss the matter further. The reference in the SBEE Act as to whether the increase was reasonably foreseeable does not limit the power the Government have to define the MRO trigger. This was recognised in the JCSI report and parliamentary counsel confirmed this for us. Following consultation in 2015 and 2016, the Government have ensured that the regulations provide for increases that were not reasonably foreseeable, and other significant price increases.
My noble friend’s second point was about the significant increase in the price of a single product category. The regulation provides that the test for the SIIP trigger is an increase in at least one product or service. It is the Government’s view that the test of whether or not an increase is significant should be assessed through a comparison of price changes across a range of relevant products, not just the one.
I believe that the Pubs Code is bringing fairness and transparency to an industry that has been troubled by poor relationships between too many tied tenants and their pub-owning businesses for too many years. It brings statutory rights, protections and responsibilities where the voluntary approach has sadly failed to make sufficient headway. Above all, it brings hope and confidence to a sector very much in need of it.
I thank the noble Lord, Lord Mendelsohn, for his appreciation of the staff who have been involved in the arduous work on this important reform of pub law. Assuming that Parliament approves our orders, we will be drinking to the pub order next week. I commend these draft orders to the Committee.