The long awaited Pub Code Regulations 2016 came into effect in July 2016, aiming to improve the relationship between tenants and their pub-owning landlords. The Regulations currently only affect pub companies who have more than 500 pubs in their portfolio, but it’s anticipated that this may be revised in future years to capture smaller pub-owning businesses.
The regulations intended to give more choice to affected tenants from larger pub companies in relation to the terms of their lease. More specifically, the aim was to give tenants the ability to challenge and request the release of any beer product or service tie that may be a term of their lease.
Affected tenants have a number of trigger points enabling them to request a market rent only (MRO) throughout the term of the lease, including rent reviews or lease renewal. The Regulations set out a number of procedures with strict time limits that tenants must adhere to when requesting an MRO lease. Upon the tenant making an application to their Landlord, the Landlord must reply with their suggested terms for the MRO lease, including the removal of the tie. There will be a corresponding increase in the amount of rent payable under the terms of the lease which will then most likely become subject to the usual commercial open market rent review.
The guiding principles of the legislation are that pub companies need to be fair and lawful in dealing with their tied tenants, and that tied tenants should be no worse off than they were when their lease was subject to any tie. It’s open for the landlord to vary or request a surrender of the existing lease and granting a new MRO compliant lease. The terms can be substantially different given that a lot of pub tenant’s leases tend to be older and granted some time ago. Comparing the old lease with the new MRO lease means an inevitable change in terms.
Careful consideration by the tenant needs to be made, not only to establish and obtain a valuation of the property, but also to review the revised terms for the MRO lease. If the tenant wishes to challenge the open market rent or some/all of the terms in the MRO lease, then they can make an application to the pub code adjudicator. It is then a commercial matter for the tenant whether or not they wish to release their tie to become a freehouse, as there are no advantages or disadvantages of having a tied lease. It is suggested that a tenant should carry out an appraisal of the likely costs and consequences prior to exercising the MRO option.
Whilst the pub code regulations only came into force in July last year, we have found a general increase in the number of tenants wishing to take advantage of applying to their pub landlord to request an MRO lease, becoming free of their beer tie. The terms offered by some of the pub-owning companies to date involve significant changes to the terms of tenants’ existing leases. They therefore have ongoing consequences that need to be carefully taken into consideration.
Our experience in dealing with the pub code regulations means we can steer you through this process or offer assistance on when you can challenge your landlord and apply for an MRO lease. If you wish to understand more, please contact Julian Pyrke, Head of Food Drink & Hospitality at Gregg Latchams, who will be happy to assist and guide you through this process.