Partnership Pubs

We all want to have vibrant pubs playing a key role in their community. There are a range of models of pub ownership to suit communities across Britain. A pub sector with a diverse range of ownership and entry models can mean a thriving market for all.

This video shows the story of three sets of licensees who realised their dream of running their own pub by partnering with a pub company.

Just over a third of Britain’s 50,000 pubs operate a lease or tenancy agreement. With a supply agreement their tenancy or lease obliges them to purchase beer and possibly a range of other goods and services from their pub operator, in return for lower rents and entry costs.

In addition to this, each year pub companies invest over £200m into their pub estates. This includes hundreds of pubs benefiting from external redecorations, new kitchens, improved gardens and toilet facilities – every single year. Without this investment many pubs would not be viable businesses.

The rest of the market is comprised of managed pubs (where the licensee manages the property as an employee of a pub company or brewer) and freehouses (where the licensee is solely responsible for maintenance and capital investment in the pub). There is space in the market for all of the different ownership models to thrive.

Licensees need to weigh up their options, but a Partnership model can benefit both sides by balancing the opportunities and trade-offs.

Opportunities

  • Low cost of entry
  • Investment
  • Business support
  • Refurbishment & maintenance
  • WIFI & TV deals
  • Training

Trade-offs

  • Requirement for the purchase of beer goods and services from the pub operator

The Pubs Code came into force on the 21st July 2016 and applies to all businesses owning 500 or more tied pubs in England and Wales – currently this is Admiral Taverns, Ei Group, Greene King, Marston’s, Punch Taverns, and Star Pubs & Bars.

The principle of the Pubs Code is to oversee a fair and lawful relationship between tenants and pub owning companies. This is a principle the BBPA and its members supported throughout the drafting of the legislation and we continue to support that today. In the formation of the Code, Parliament and Government were clear that the leased and tenanted model had a vital role to play in the UK pub market.

What has changed?

As would be expected when such a major piece of regulation comes into force, changes have taken place within the tenanted and leased pub market. We have gathered evidence from the six companies subject to the Code, which suggests that:

  • Both the average length of tenure and the number of enquiries regarding new tenancies have increased.
  • New tenancy options are being introduced into the market, giving prospective tenants a wider range of choice on how they operate to suit their financial position and operating experience.
  • The increased transparency in the market as a result of the Code has meant that recruitment of licensees is more tightly controlled and more efficient. For example, tenants cannot be recruited without an adequate business plan.
  • The number of younger applicants taking on a lease has increased since the introduction of the Code.
  • Internal procedures within pub owning companies have been refined (and continue to be refined) which have resulted in better services for licensees and better recruitment processes.
  • The advent of the Market Rent Only (MRO – explained below) model has seen licensees gain a broader understanding of the risks and rewards of relative pub models, e.g. the lower risk partnership model versus the higher risk and upfront cost of the MRO agreement, which is very similar to a lease to run a shop.

In March 2018, the Pubs Code Adjudicator carried out an extensive survey of pub tenants which found that:

  • 72% of tenants are aware of the Pubs Code.
  • 63% of tenants were aware of the right to request Market Rent Only agreement at certain trigger points.
  • 69% of tenants said they felt they had all of the information required about their pub owning company Business Development Manager.
  • 64% of newer pub tenants surveyed stated that they would definitely want to remain as a tenant for at least five years.

The PCA has issued a similar survey for 2019 and we await the results. This remains an iterative process, thanks in part due to the lack of a transitional period and no time for bedding-in of the system, but it is one that we will continue to work on constructively with all stakeholders. The industry will continue to adapt and change to fit the new landscape and we will be responding to the Government’s review of the operation of the Code.

The Market Rent Only option

The Code also brought into force the Market Rent Only (MRO) option for tenants. In short, this element of the Code enables tenants to change their existing supply deal with their pub owning company to one where they can buy beer and other drinks from a third party. This option is available at certain trigger points during the lease, and would result in the tenant moving to a deal in which they are paying a market rent for the pub, but receiving none of the benefits associated with the support offered under a pub company lease or tenancy. It is important to note though that the success or failure of the Code should not be judged solely on how many MRO deals come into being as a result of it as this is only one element of the Code, not least because taking on a commercial lease may not suit the financial resources or operational expertise of the tenant or lessee.

Since the Code came into operation, 766 valid MRO notices have been submitted to pub owning companies. Of these, 377 have resulted in new or revised partnership deals (while 289 remain in negotiation). This would appear to confirm the strengths and continuing popularity of the tied model amongst tenants.

Furthermore, despite the very short time to prepare for the Code and put systems in place, and notwithstanding some inevitable teething issues, there have been very few disputes referred for arbitration by the adjudicator, other than those about MRO applications. Of the total number of 312 valid cases referred to the PCA for arbitration between July 2016 and March 2019, only 36 have been on non-MRO related disputes. This suggests that the Code itself is working and companies are operating within the letter and spirit of it.

This short animation gives you a summary of how the partnership model works.