I am delighted that the noble Lord, Lord Berkeley, said that. I am about to come to the definition of “unfair” in about one second. I am talking about the importance of the definition of “significant” as important and notable. The price of beer might rise sharply because of: the cost of raw materials, such as hops; governmental action on alcohol taxation following medical advice; or increased delivery costs following price rises or road tax changes. It is surely not right to potentially penalise the pub owners alone as a result of such events, which have equal impact on all parties.
By contrast, coming to the point made by the noble Lord, Lord Berkeley, the Oxford English Dictionary definition of “unfair” is: not equitable; “unjust”; not according to the rules; partial. In my view, this precisely matches the concept behind the Pubs Code. It is intended to deal with situations that are inequitable—that is to say unfair—between the two parties: the pub owner and the tenant. I hope that the Government will think again about this wording before Report.
I turn to Amendment 80, which concerns the other events that could trigger the requirement to offer an MRO option. This formed part of my noble friend’s introductory remarks. Clause 42(6)(c) requires an MRO offer on the sale of a pub. This would be quite unfair to pub-owning companies. Pubs, whether singly or in blocks, can be sold for perfectly legitimate reasons. So long as the tenant’s position is protected, as it would be, the identity of the owner really makes no difference to the tenant. If this paragraph were to remain in the Bill it would freeze up the market for pubs and so discourage investment.
The amendment also seeks to remove another trigger point at Clause 42(6)(d): that, if a pubco goes into administration, an MRO offer must follow to the tenants. I think that my noble friend addressed this point in her opening remarks. The same objections apply to this: provided that the tenant’s position is protected, he has no interest in the affairs of the pub owner. If this paragraph were to remain, it would have serious consequences for the industry. First, pubcos would find it much harder to borrow. From a bank or lender’s point of view, the fact that, on administration, the relationship of the pub owner could change with every one of its tied pubs would make lending significantly more risky and, therefore, less attractive, thereby reducing the flow of investment to the sector. Secondly, if administration was to occur, the position of the creditors would be significantly worsened as value could be destroyed by the uncertainties that would result from an MRO option. I understand that the Government are proposing to withdraw those paragraphs. I would like my noble friend to give that commitment.
Amendment 81 is also concerned with a trigger point: Clause 42(6)(e), which appears to form part of the proposed new clause at subsection (6)(d) and subsection (9). This also covers the emergence of trigger events. In the proposed new clause, the definition of a trigger event is drafted very widely and is likely to lead to a good deal of uncertainty in its application and interpretation. That is surely not to the advantage of any party in these circumstances.
We have the well established procedure that has been used to determine appeals against rateable value; that is, whether there is deterioration in the circumstances of a property. Paragraph 2(7) of Schedule 6 to the Local Government Act 1988 lays out the matters to be taken into account. They include,
“matters affecting the physical state or physical enjoyment of the hereditament … the mode or category of occupation of the hereditament … matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there, and … the use or occupation of other premises situated in the locality”.
This definition sets out the criteria for when a change happens to a business and a rating reduction can be allowed. It is a well used and well understood definition that could, with advantage, be used to define when an MRO option could be triggered. I hope my noble friend will reflect further on this before Report.
I come now to Amendment 82 and the points made by the noble Lord, Lord Snape. This is an important amendment and I do not think it has been addressed in new Clause 42. The amendment inserts into the Pubs Code:
“The Pubs Code shall offer an exemption from the Market Rent Only Option for a mutually agreed period in return for a significant investment by a large pub-owning business in that tenant’s pub”.
This would mean that if a pub-owning business spends a significant sum improving a pub, the Pubs Code would permit an agreement with the tenant for a period during which there would be an exemption from the MRO option.
Those who successfully proposed the amendment to Part 4 of the Bill in the House of Commons see the tie as universally malign—the point that the noble Lord, Lord Snape, and I discussed a few minutes ago—an arrangement without merit and having no benefit. But this is not true. I was challenged by the noble Lord, Lord Snape, at Second Reading to produce evidence to support the continuation of the tie in any form, and this I will now do, with a couple of examples.
If I may, I will take the Committee to the Black Bull in Mansfield. I should make it clear that the tenant, Janice Shaw, has given permission for me to use it as an example. When Janice Shaw took the pub on, it was trading at about £7,000 a week as a result of a lack of catering facilities, which resulted in strict food service times and a rather poor food offering. The brewery invested £100,000 in the pub. It addressed kitchen standards and capacity, doubling the size of the kitchen by extending it into the car park. In addition, the pub was redecorated, with new signage and fixtures and fittings. The result is that the turnover is up to £10,000 week—an increase of £3,000 a week or £150,000 a year. The brewery has increased the rent by £5,200, from £32,800 to £38,000, and is making, as it wished me to remind the Committee, £6,000 more from increased sales of beer. So from Janice Shaw’s point of view, she has £150,000 of extra revenue while the landlord has £11,200 of extra profit. It is doubtful whether a bank would have funded this. It is a messy lend, being part construction work, part purchase of fixtures and fittings, and part redecoration. Of course, a bank would not have had the same vision and confidence as to the likely success post-investment.
My second example is the Crown Hotel in Southwell, Nottinghamshire. Anna Guise is the current tenant. She took on the Crown in 2005. Although pretty well run, the site had become tired, resulting in the consumer often becoming confused; little food was being sold; the reliance on the town centre drinking circuit was evident; and there was a need to change to a more balanced offer in order to appeal to wider consumer groups. Anna Guise tried to invest in the site but could not afford the necessary capital and the pub remained in decline. To support the operation, the brewery reduced the rent and Anna’s father supported her with regular cash injections.
The brewery invested £84,000 in November 2013 without requesting any rental uplift. The cap ex addressed both internal and external standards, modernising throughout. It developed the back bar to include coffee, wine and a more rounded offer. A new menu was introduced and food was served all day. The evening drinking remained but the message to the consumer was that the feel of the building had been improved and fresh signage was introduced. Post investment,
decline has been reversed and there is now 39% growth. That has enabled her to plan for a brighter future for her pub.
The basic point is that integrated pubcos that wish to sell will not invest £100,000, or even £84,000, if there is no guarantee that they will be able to sell their beer and if, after the money has been accepted and an investment has transformed the pub, the tenant will be able to say that they want to change the basis of the contract. The amendment would permit—not require—a situation in which if significant investment has taken place, of the sort that I have just described, the two sides could agree a period during which the MRO option would not be available. Without this, pubco investment will be significantly reduced, and I hope that my noble friend can give some reassurance on that point.
Amendments 84, 85 and 87 are drafting amendments to Clause 42(8). Subsection (8) is concerned with the 90-day assessment period during which an independent assessor reaches a judgment on the terms of the no-tie agreement. It is important to be clear what happens during that 90-day interregnum. It must be made clear that the tenant must comply with the existing contract until the new MRO contract comes into effect.
Finally—no doubt much to the relief of the Committee—Amendment 89 is paralleled in large measure by Amendment 83A in the name of my noble friend Lord Borwick, concerning the rather unattractively named SCORFA—special commercial or financial advantages. I will leave my noble friend to address that and how it will fit into the MRO world post the break of the tie.
I recognise that I have thrown a lot at my noble friend in the last few minutes, although I hope that her officials were already aware of my direction of travel. It is important that all parties to the debate get clarity on the Government’s position. I am talking not about clarity on the broad principle—we all understand the MRO option—but rather on the more granular aspects of how the policy is intended to operate and what the consequences are likely to be.