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Morning Briefing for pub, restaurant and food wervice operators

Fri 15th Apr 2016 - Friday Opinion
Subjects: How the Statutory Code of Practice will work, perceptions of beer and wine, and the view from the wrong end of the telescope
Authors: Kate Nicholls, Glynn Davis, and Paul Chase

How the Statutory Code of Practice will work by Kate Nicholls

The government has published the conclusions of its consultation on the new Statutory Code of Practice, which will cover the tied tenants of pub companies owning more than 500 pubs. The key points of the consultation are set out below:
The new code will be introduced on 26 May 2016 and will be effective immediately – any rent review that takes place from 27 May will be governed by the new provisions and will give tenants the right to have detailed tied rent assessments, request a market rent only (MRO) alternative and take a case to the adjudicator for any behaviour or rent event after that date.
The government has also confirmed that all the code provisions, aside from MRO, will carry over should a tied pub be sold to a landlord not covered by the statutory code until the lease ends or the first rent review, whichever is sooner.
The government has also confirmed that where a lease includes reference to IFC 6, compliance with the voluntary code can continue, unless it undermines the Pubs Code. The provisions of IFC 6 that are therefore referenced within agreements remain valid. While most of IFC 6 is referenced in the new code, this could provide a right for tenants to refer tied rents to the Pubs Independent Rent Review Scheme or Pubs Independent Conciliation and Arbitration Service.
MRO triggers
Tied tenants will have a right to request an alternative MRO free-of-tie rent assessment at rent review, renewal (contracted in agreements only) or if there is a significant increase in price or substantial change in circumstances (see below for details). The original proposal an MRO option would only be available at rent review where the rent increases has been abandoned, tenants will have a right to request an MRO assessment irrespective of whether the rent increases, decreases or stays the same.
An MRO request can also be triggered outside the rent review process where there is a significant increase in price. This is assessed by reference to the relevant ONS Price Index and for beer, it must be more than 3% above the index, for other alcoholic drinks it is 6% above (both are inclusive of duty) and for other tied products and services, a price increase of more than 20% above the relevant ONS Price Index. The price comparison period is over 12 months on a like-for-like cost basis and referring to prices actually paid by the tenant.
MRO may also be triggered if there is an event, which has a significant impact on trade. The requirement for this to be an event that only affects that particular pub has been removed, but the change has to be one of long-term change to local economic, environmental or employment factors or as a direct consequence of changes in the tie imposed by a pub-owning business eg removal of a particular tied product. The tenant will have to provide a written analysis of the forecast impact on trade for the next 12 months.
MRO procedure
The right to request an MRO assessment will mean that tenants can consider a free-of-tie rent proposal alongside the tied rent assessment and can opt for one or the other at any point during the process. The timescales for the procedure are fixed, but most of them have been relaxed and crucially there will be no deadline for the conclusion of the rent assessment process to allow for negotiation. Under the government’s previous proposals, the negotiation had to be concluded within 70 days. Rent will be able to be recovered where a new tied rent is agreed after the rent renewal date.
The pub-owning business must provide the tenant with an alternative MRO rent proposal within 21 days of receipt of the request and both parties will have 56 days to negotiate and 28 days to appoint an independent assessor if they are unable to agree.
There is a general principle of mutual disclosure of evidence, particularly that which will be provided to the independent assessor for them to agree the rent. This will include evidence from both parties of three years trading history and trading forecasts...for an MRO assessment. Previous requirements for comparables with other tied and free-of-tie pubs, for special commercial or financial advantage to be quantified have been rejected.
Upon reaching agreement on MRO rent, the expectation is that a new agreement will be reached – although this is not an absolute requirement – and that this will be on normal commercial terms. However, the government will specify in legislation and in the code that the tenant may not be offered deleterious terms and crucially, the MRO agreement may not be a lesser length than the remaining unexpired portion of the tied lease and the tenant cannot be offered a lesser security of tenure than under their old agreement.
The fee for taking a case to the adjudicator is £200 and there is a cap on costs, which the tenant may be expected to bear, of £2,000. The maximum penalty for a breach of the code will be 1% of UK turnover. The parties are expected to share the costs of an independent assessor should they choose to jointly appoint one to arbitrate on free-of-tie rent.
The tenant may waive their right to MRO in return for a significant investment. This can only be applied to a sitting tenant, not where a tenant is going into an empty pub. The minimum qualifying investment will be 200% of the pub's dry rent and the maximum length of the exemption is seven years. The pubco will be required to demonstrate a clear link between the investment and an anticipated increase in trade and profit of the pub. Landlord and tenant contractual obligations are excluded from the calculation of a qualifying investment. There must also be at least one scheduled rent review during the investment period, although MRO will not be allowed at that time.
Information requirements
There are new statutory information requirements imposed that a pubco must meet before entering a new agreement, negotiating a renewal or entering into rent review. These largely mirror the requirements of the current voluntary Industry Code but there are new provisions on maintenance, repair or improvement works, handling of rent deposits, Transfer of Undertakings (Protection of Employment) (TUPE) obligations for incoming lessees. The pubco must also inform the tenant if the freehold or long leasehold of the pub they occupy is being actively sold – this will not require the pubco to inform the tenant if the pub is being advertised, placed on the market or an agent employed. A pubco cannot enter into a substantive negotiation until the information is provided but this will not prevent administrative preliminary work or checks being undertaken.
In addition, there will be an obligation on pub companies to ensure tenants produce a sustainable business plan after considering independent professional advice. The pubs code will not specify the detail of that advice or when it is to be taken, but there is an expectation it will include business, accountancy, legal and property. The business plan must cover either the entire duration of the tenancy or up to the next rent assessment, whichever is the shortest. Pub companies must also ensure that tenants complete appropriate pre-entry. Lesser requirements will apply to tenants taking on TAW or short-term agreement or those with relevant tied pub experience.
A pubco must ensure the assignee has been advised to seek independent professional advice and undertake training before it consents to an assignment. It will be a breach of the code if the pubco agrees to an assignment without being satisfied that advice has been taken and training undergone. The code will encourage assignees to meet the same business plan requirements, but this will not be a legal obligation.
TAW, franchise and short-term agreements
Genuine franchises are to be exempt from most of the code’s requirements, but there will be minimum information and pre-entry training obligations. The code will specify a genuine franchise and there is a cumulative set of requirements to be met. TAWs and short-term agreements under 12 months will also be exempt, but the 12-month length relates to cumulative agreements with the same parties. The information requirements here will relate to rent, utility bill payments and responsibilities, TUPE, deposits, repairs, ties, fees and penalties.
Kate Nicholls is chief executive of the Association of Licensed Multiple Retailers

Perceptions of beer and wine by Glynn Davis

Beer has long been seen as a low-end drink that has more recently sought to gain greater respect. Ideally it would like to enjoy some of the reverence that is lauded upon wine. In contrast, wine has historically been seen as the high-end drink, but it has in recent years looked to rid itself of its impenetrable reputation and enjoy some of the mainstream acceptance enjoyed by beer. 

While beer is undoubtedly journeying down this path as the rise of craft helps place beer on an altogether more exalted platform. This also involves newly built temples dedicated to selling craft beer as a high-end product. Although wine is not going through quite such a revolution there are still some very interesting things happening – not least with wine bars. Spending a few hours in the new wine-focused establishment Noble Rot recently in London’s Lamb’s Conduit Street was to enjoy wine as much more approachable and less stuck-up.
For starters, it has adopted the very welcome trend of using a modest single page of A4 to list that day’s wines by the glass. These are also available in 75ml measures along with the more standard 125ml and 175ml (thankfully no sign of the ghastly Frankenstein-sized 250ml here), which encourages trialling. This is one of the simplest ways of getting people to switch from going down the blinkered route of automatically ordering their usual of Pinot Grigio or Rioja.
That’s not to say such wines won’t be on the list but where they do feature they will be from lesser-known producers – probably as exclusive deals. What Noble Rot and the new generation of wine bars are focusing on is introducing people to interesting unknown wines that will be exceedingly good value.
But what really distinguishes Noble Rot and its ilk is not so much about what’s in the glass but how what is in the glass is delivered. The pretentiousness of wine and wine bars is being stripped away. Take a look at Noble Rot magazine (published by the two young owners of the Noble Rot wine bar) and you’ll find it is far removed from traditional wine writing and it is this philosophy that is being imbued in their wine bar.
Humble Grape is also ploughing the same furrow. This wine bar and shop in Battersea features 30 wines by the glass and carafe and it puts the emphasis on wines from small, sustainable, independent vineyards that have been sourced directly from the producer, which certainly helps with competitive pricing. The combination of wine bar and takeaway shop taps into the trend of retail and on-trade blurring together and is another component in delivering a more free-and-easy atmosphere that fits with the philosophy of these new wine bar operators. It also makes exceedingly good business sense to sweat the physical assets in this way.
The success of the Battersea outlet has led founder James Dawson to expand to a second unit – with a City of London bar and shop to open in May. At 3,600 square feet this will be a sizeable outlet and brings a new era to wine bars in the City. The area has had a long history of such venues, with a small number of family-owned chains enjoying 200 years of success.
But then things changed in the late-1980s when customers began to demand food with their alcohol and women became a more prominent part of the mix and with them came a new set of requirements. The incumbents Davy’s, El Vino’s, Corney & Barrow and Balls Brothers (RIP) found it hard to react and faced a lot of pain. They have (very slowly) made adjustments and acclimatised to the “modern” era but with newcomers like Humble Grape now moving in then there will now be new benchmarks set.
Such activities are far from being just a London thing. Bellita in Bristol is setting the standard for the next generation of bars in the south west and up north the trailblazing friends of Ham in Yorkshire has recently opened a second branch in Ilkley following the success of its first outlet in Leeds that opened in 2012. Okay, it’s not actually a wine bar. It’s a wondrous mix of wine bar, craft beer bar, and restaurant/cafe with food biased towards cheese and charcuterie. It cannot really be pigeonholed as a wine bar, beer bar, cafe or restaurant. The reality is it’s all of these things.
This lack of definition will no doubt find respect from the two guys at Noble Rot. Their next generation of wine-focused outlet doesn’t need to be constrained by the rigid rules of old. The objective is to break out of the straightjacket and in doing so they are delivering a great service to wine and the consumer.
Glynn Davis is a leading commentator on retail trends

The view from the wrong end of the telescope by Paul Chase

There is no doubt the closure of the steel works at Port Talbot would be a human as well as an economic catastrophe – particularly in South Wales, which is already very deprived. And so government ministers are scrambling to find a buyer and to “save jobs”. If Tata Steel closes we could see 40,000 jobs lost, including those in the supply chain. This has been a big political story and will feature in the headlines for many weeks to come.
And yet on 1 April we saw the introduction of the new National Living Wage (NLW) for over-25s, or the new National Minimum Wage for over-25s as some prefer to call it. The independent Office for Budget Responsibility’s estimate is the introduction of this measure will cost 60,000 jobs by 2020 when it is fully implemented and set at 60% of the median wage – so 50% more job losses than the closure of Tata.
So why aren’t politicians and commentators protesting this loss of jobs? Well, firstly because the job losses will be spread over five years and the government hopes no one will notice; and they will affect part-time, poorly educated and low-skilled workers most. According to research by the Social Market Foundation, nearly 50% of those who will lose their jobs will be part-time workers; 40% of those affected are educated only to GCSE standard; and those working in social care, hospitality and pubs are particularly at risk.
By the time the NLW is implemented in 2020 some 18% of workers will have their pay determined by government. What is wrong with that? Well, several things. The National Minimum Wage was originally introduced to put a floor under wages and prevent exploitative pay. Its regular reviews were carefully calibrated by the Low Pay Commission to minimise the impact raising it would have on jobs. But by setting the NLW at 60% of the median wage government has locked in NLW increases regardless of the state of the jobs market. And don’t imagine for a moment that government will reduce the NLW if the median wage were to fall – that would fall into the “politically too difficult” category.
The NLW also introduces the idea that wages should be set to cover a workers cost of living, rather than what a day’s work is worth to a business. This is utterly iniquitous not least because employers have absolutely no control over the cost of living. But government does. If government wants to relieve the plight of low paid workers then there are a number of structural things they could do that wouldn’t involve meddling in the labour market at a cost of tens of thousands of jobs; but they’re looking at the problem from the wrong end of the telescope. Legislating to reduce the cost of living is a much more effective way of helping low paid workers than legislating to raise the cost of labour.
Let’s take as an example the average consumption of an adult in the bottom income quintile who smokes, drives a car and drinks alcohol. According to the Office for National Statistics this average low income consumer spends £1,746 a year on tobacco taxes – 15.4% of disposable income (DI); £933 a year on motoring taxes (8.3% of DI); £278 a year on alcohol taxes (2.5% of DI); £1,165 on VAT (10.3% of DI). In all, 36.5% of the disposable income of low-income workers is spent on VAT and sin taxes. Halve sin taxes and reduce VAT to 15% and you could put £35 a week into the pockets of low-earners – and this would stimulate consumption and job creation. Of course, public health meddlers would have a fit if government were to reduce sin taxes – particularly on tobacco or alcohol; and government would have to wean itself off vanity projects and get its finances in order, so don’t expect any change in this direction soon.
It is much easier for government to put this burden on employers than to put its own house in order. It is also easier for government to take a moralistic view of the consumption patterns of the poor than to admit that its own taxes impoverish them. The size of the wage packet is less important than the size of the state supported by indirect taxes taken out of that wage packet by government. The figures I’ve just quoted illustrate how indirect taxes are regressive and how they impact most on the living standards of those in the lowest quintile. By contrast, sin taxes and VAT gobble up only 15% of the wages of those in the highest quintile. The cost of sin is only going to rise with the introduction of the sugar levy – another measure that will disproportionately affect the poor. Someone needs to turn the telescope round.
Paul Chase is a director of CPL Training and a leading commentator on health and alcohol policy

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