|Don’t Say We Didn’t Warn You!|
Oh, what a tangled web we weave, well you know the rest ! An all too familiar story has been presented to us in recent months by a number of tied pub tenant clients scattered around the country all attempting to exercise their Market Rent Only (MRO) rights under the Pubs Code relying on the rent review as the ‘trigger event’. The first story came to us from a client in London, a second identical case in the Midlands, a third scenario in the South West and the list keeps on growing. The culprits you ask? Stonegate Group (previously Ei Group) and Punch Taverns thus far… although we are more than a little concerned that the other Pub Owning Businesses (POBs) will follow suit if they wise up to the following strategy success rate in frustrating tenants’ rights to MRO.
There are only few things certain in life; death, taxes and regulated Pub Companies doing their utmost to frustrate tenants from going free of tie under the MRO provisions of the Pubs Code. There is far greater room for manoeuvring at lease renewal, especially for POBs with managed estates that can be used as a threat to “take back for our own use as a managed house”. That is a newsletter for another day. What we are focusing on here is POBs ability to muddy the waters at lease renewal or rent review with a tenant who has set his mind on achieving free of tie (MRO) status.
What you our dear reader must bear in mind is that the Pubs Code, specifically Regulation 50 sets out;
“Tied pub tenant not to suffer detriment
50. A pub-owning business must not subject a tied pub tenant to any detriment on the ground that the tenant exercises, or attempts to exercise, any right under these Regulations.”
The regulated POB must not be seen to cause the tenant to suffer any detriment as a result of the tenant’s intentions to go free of tie (MRO) through exercising their rights. To do so would provide ammunition to the tied pub tenant in lodging a referral with the Pubs Code Adjudicator (PCA), thus running the risk a hefty fine and a published slap on the wrist. It could be far worse for the POB if the PCA did indeed find a golden thread, discovering an estate wide strategy employed to actively frustrate the tenant in the achievement of going free of tie (MRO).
How do they do it you ask? Well, it is not as straight forward as the POBs would have liked. They have to confuse matters, make it seem as if it were the tenants fault, rather than through any shamelessly bold and open moves of their own. Let us show you how…
The tenant has an upcoming, or slightly over due, rent review yet to be resolved. The POB, through the Business Development Manager (BDM), sets up the initial discussions in in preparation of the tied ‘Rent Assessment Proposal’, otherwise known as the RAP. Through these discussions, the tenant declares their interest in MRO, the BDM will then relays this to whoever they report to and mentions;
“The RAP will be served soon”.
It is key to understand at this point, the issuance of the tied RAP is an essential ‘trigger event’ at rent review. The tenant must rely upon this point of time reference to make their request for MRO. The tenant only has 21 days following receipt of a tied RAP to trigger and request MRO.
After a few further discussions, to confirm whether the tenants MRO intentions are genuine and a further delay in serving the RAP, the BDM will verbally suggest but of course surprise surprise, NOTHING confirmed in writing or email;
“Seeing as you are certain on going free of tie, how about we discuss a new free of tie agreement on a longer term, rather than just for the remainder of your current agreement? It will save us both the money and due process. The MRO process under the Pubs Code is long and drawn out, we don’t want to put you through all that. So, what rent would you be willing to pay free of tie? I can then go away, take things further up the line and draw up our proposal and come back to you. How does that sound?”
The tenant, is not surprisingly sceptical at this point, but cannot see the pitfalls as they are anything but obvious. The POB has the tenant exactly where they want them, utterly distracted by the noise of it all. The tenant, if not properly advised, decides to sound out the POBs free of tie agreement as above and engage in further discussions. After all, what is the harm, they are not committing to anything yet?
In the background, the tied RAP has now been prepared and served but along side the ongoing new free of tie lease proposals. The clock now begins to tick. The tenant continues discussions unaware of what is to come and before they know it, they have missed the 21 day essential window to request MRO following receipt of the tied RAP.
The POB now have it confirmed that the tenant has lost all leverage. Discussions on the free of tie agreement turn sour, there are disagreements over certain lease terms and the level of rent to be paid. Unfortunately for the tenant, the ability to have these terms arbitrated or the level of rent determined through the protections of the MRO process has passed them by, the POB now makes a ‘take it or leave it’ offer for the free of tie agreement.
The tenant realises that the discussions are not going anywhere, so they revert their attention to MRO. Oh Dear! The penny finally drops.
“Ah, terribly sorry. But you missed your opportunity to request MRO. You are out of time… we did tell you in writing to seek external advice. It is such a shame we could not have come to an agreement… let’s see what we can do on the tied rent, cut a deal to soften the blow”.
Job done… the POB is in a win – win position, either the tenant takes the unfavourable free of tie lease with, no doubt, an extortionately high level of rent which makes no difference to the POB as it is not a genuine transfer of profit to the tenant. Alternatively, the tenant remains tied until the next trigger event arises, often years away.
The above has been drawn from very real examples with, as we said earlier, a consistency of tactics and timing case to case which is scary.