It seems like only yesterday that the holy grail for pub tenants was legislation allowing them to take a free of tie lease, rather than have to buy drinks for what many of them regard as ‘extortionate’ prices from their pub company landlord. The introduction of the Market Rent Only (MRO) option in 2016 seemed to offer that.

Unfortunately, five months later, the consensus among fellow professionals is that the MRO legislation has some significant deficiencies. Rather than rebalancing the playing field, many tenants believe that the complexity of the legislation and the costs involved in taking a free-of-tie lease has tilted it further in favour of pub companies. Few tenants are able to meet the financial costs estimated by the pub companies and the leases which have been offered vary considerably from those they currently hold.

It is not the first time the pub sector has experienced such a situation. Low-key Government involvement in the 1970s and 1980s was followed by the Beer Orders. The latter were intended to combat lack of competition by restricting the number of tied pubs the UK’s six large breweries could own. Instead, the orders led to the creation of two huge tenanted pub companies which did not have breweries but completely monopolised the market. The initial benefits for tenants of being able to achieve a premium sale price for their tied leases became a burden instead when the economic downturn of 2008 took hold and the leases lost value.

Fast forward to 2016 and the introduction of MRO. The reaction of pub companies, which in the eyes of many tenants appear to have taken measures to ‘avoid’ offering the MRO wherever possible, has been criticised. But while their stance may not be in the spirit of the legislation, it is within the letter of the law. Pub company directors would be irresponsible if they didn’t try to mitigate the negative effects on their businesses.

The Pub Code Adjudicator has also faced criticism. The adjudicator is a highly regarded independent expert who has resolved disputes between landlords and tenants on behalf of the RICS for over a decade and we should allow him to get on with his job, enforcing the current legislation and pressing for improvements. However, a speedy and helpful response from the PCA office interpreting the legislation must be forthcoming. To date, this has largely not been the case.

Adapting the legislation in a few simple ways, outlined below, would make it more workable and achieve a situation in which tied tenants are no worse off than free-of-tie tenants.

How to make MRO work:

• Review time constraints. Give two months for the tenant to seek professional advice and make the MRO request. Get rid of all other timescales.
• Address documentation. Other than at lease renewal, a Deed of Variation fulfils all legal requirements and many leases already have an option for the landlord to release the tie. At lease renewal, the Landlord & Tenant Act 1954 states that the new lease should be on terms similar to the previous one. Remove the reference to the tie and ‘job done’.
• Bring back the Pubs Independent Rent Review Scheme (PIRRS). Most tenants are happy with the tied system in general, and just want better distribution of the profits of the business. There needs to be a low-cost solution compared with the costly arbitration process.

Let’s not wait another 30 years to get it right.

Further information

Contact Savills Licensed Leisure team