Will pub companies use the Landlord and Tenant Act 1954 to circumvent the ability for tenants to take up the Market Rent Option?

The new Pubs Code Regulations 2016, expected to be effective in May 2016, shall provide certain pub tenants the right to take up a “Market Rent Option” (MRO) and go free of tie. This would bring an end to a tenant’s obligation to buy certain products from their landlord and allow them to operate more independently.

However, it seems that certain pub companies are already looking at ways of frustrating the tenant’s ability to do this, including using the Landlord and Tenant Act 1954. Can they do this?

Many pub tenants operate on a “tied” basis with their landlord. This means that not only does the landlord let the premises to the tenant but the tenant is required to buy certain products, such as beer and other alcohol, from its landlord. In addition, the landlord maintains a certain degree of control over the premises to ensure the pub is operated in a certain manner. This has benefits for the tenant, including paying a lower rent for the premises. However, disadvantages include restricting the tenant’s ability to operate its business as it wishes and paying a disproportionately higher premium for the tied products to compensate for the lower rent; a rent that when calculated on the open market may not suggest a fair and justifiable saving.

The new Pubs Code should give tenants the right to choose to take the MRO so that they will become more akin to normal tenants of other properties such as shops, offices or warehouses. In those cases, the landlord accepts the rent, from the tenant and insures the building but otherwise does not interfere with the tenant’s business. The hope is that the MRO will help to stem the flow of pub closures experienced over the last decade.

The legislation will initially apply to pub owning companies which own more than 500 pubs and will therefore only affect the major pub companies to begin with.

The MRO means a tied tenant could source and acquire products from any other supplier and better control its business. The tenant will be able to take up this option on certain “trigger points”; primarily either on a rent review, if the proposed rent increase is higher than inflationary rises, if the pub company significantly increases the prices of the tied products or on the lease renewal. The Pubs Code will provide certain provisions for dispute resolution should the landlord and tenant not be able to agree the appropriate new rent and other terms.

However, it already appears that certain pub companies are going to try to persuade their tenants not to elect to take up the MRO by threatening them with the landlord’s ability to “take back” the lease and operate it themselves.

Under the Landlord and Tenant Act 1954, tenants have certain rights to remain in occupation of their premises and request the grant of a new lease from their landlord. This is to protect the tenant’s business and the goodwill it has built up in the area that it operates. However, the Act does allow the landlord to object to such renewals in certain circumstances, including where the landlord intends to occupy the premises itself (“Ground G”).

For the landlord to be able to use Ground G, it must have owned the property for at least five years. This is likely to be the case when involving a major pub company and a tied tenant. The landlord must also have an actual intention to occupy the premises for the purpose of its business. It would need to demonstrate a “firm and settled” intention, for example providing evidence of internal board minutes of its intention to occupy, contracts for works required to the premises and its financial ability to do so.

Presumably, in an individual case, it may be fairly easy for a major pub company to show that it is able to take over a pub for its own use. However, the landlord must demonstrate that it has a reasonable prospect of achieving its firm and settled intention. If all of that pub company’s tenants exercised the MRO, one might wonder how easy it would be for a pub company to show that it had a firm and settled intention to take over occupation of all of those pubs immediately upon their next renewals and show the requisite intention in each case. However that is not much comfort for each individual tenant who may be under pressure from their pub company not to consider the MRO.

Clearly, the pub companies are going to use this as a negotiating point with their tenants to persuade them not to take up the MRO, or, if they have done so on a rent review, to revert to a tied lease on the renewal of the lease.