The Small Business, Enterprise and Employment Bill is making its way through Parliament. The bill proposes, among other things, to end the so-called 'beer tie' in pub leases, which imposes an exclusive purchasing obligation on many pub tenants and lessees in the United Kingdom, requiring them to purchase beer – and frequently other drinks – solely through the (brewing or non-brewing) landlord pub company.

A knotty problem

The inclusion of supply ties in pub leases has been scrutinised and criticised for many years, particularly as a result of the growth of pub-owning companies. To date, however, the EU and UK competition authorities have not found beer tie arrangements to infringe competition law rules, provided that:

  • the UK market for the distribution of beer in premises for the sale and consumption of drinks is not 'foreclosed' – that is, the pub companies (whether brewing or non-brewing) buy their drinks from a number of sources, rather than predominantly from one source; and
  • the agreements in question are not of a scale that would significantly contribute to the foreclosure of retail outlets to suppliers.

Even if the arrangements in question were considered to restrict competition in the UK beer distribution market, they are likely to merit an exemption from the competition law prohibition on anti-competitive agreements, since they can often be regarded as leading to an improvement in the distribution of beer/drinks and providing countervailing benefits for tied lessees.

In 2009 the then UK competition authority – the Office of Fair Trading (OFT) – concluded in its examination of a super-complaint by the Campaign for Real Ale (CAMRA) that the UK pub sector was competitive overall and it found no evidence of competition issues that had a significant adverse impact on consumers. The OFT found that consumers benefitted from considerable competition and choice between pubs, which prevented the beer tie from being used to inflate pub beer prices beyond competitive levels, and that the beer tie had not prevented tied pubs from offering a wide choice of beers to consumers. Contrary to a slightly earlier report by the House of Commons Business and Enterprise Committee in the same year, the OFT did not consider that the issues raised in the super-complaint merited further action in the form of either a market investigation reference under the Enterprise Act 2002 or a competition law investigation under the Competition Act 1998. The OFT upheld its decision a year later following from an appeal by CAMRA against the original decision.

Time to undo the tie?

The government's concerns regarding pub-owning companies and their relationship with their (tied) tenants, however, have remained. These concerns eventually led to the government's current proposals to establish:

  • the Pubs Code, a statutory code to govern the relationship between pub-owning companies and their tied tenants; and
  • the Pubs Code Adjudicator, an independent adjudicator for the UK pub sector to monitor compliance with the Pubs Code and adjudicate disputes, similar to the way in which the Groceries Code Adjudicator oversees the relationship between supermarkets and their suppliers.

Despite significant lobbying by many tenant groups, the government initially decided not to provide tenants with an automatic right to choose a 'free-of-tie' agreement. The government found, on balance, that such a right was likely to lead to a high degree of uncertainty in the industry and have a negative effect on investment, which in turn was likely to lead to various pub-owning companies abandoning the tied market, higher levels of pub closures and job losses.

However, when reviewing the bill, the House of Commons took a different view and included a so-called 'market-rent-only' option in the proposed Pubs Code, which will give tenants or leaseholders of pubs owned by large pub-owning companies – that is, those that are the landlord of more than 500 pubs and one or more tenanted or leased pub – the right to be offered tenancies or leases:

  • based on an independently assessed market rent; and
  • free of any obligation to buy from the landlord, or a person nominated by the landlord, some or all of the alcohol or any other goods or services to be sold at the premises.

An exception may be made for breweries qualifying as large pub-owning companies, which may be permitted to continue to require that specified brands produced by them are sold within their tenanted or leased pubs, provided that their tenants and leaseholders are free to purchase such products from any supplier.

Large pub-owning landlords must offer their tied tenants the market-rent-only option:

  • on renewal of the tenancy contract, lease or other agreement, at a rent review or five years from the previous rent review;
  • when it imposes or gives notice of (whichever is the earlier) a significant increase in the price at which it supplies products, goods or services;
  • when it implements or gives notice of a transfer of title or when it goes into administration; or
  • on an event outside the tenant's control which significantly effects the tenant's ability to trade, but which was unforeseen at the time of the previous rent review.

It will be up to the tenant or leaseholder to decide whether to exercise the market-rent-only option.

In order to ensure a level playing field, the Pubs Code will include a provision prohibiting large pub-owning companies from acting or discriminating against any of their tenants which choose the market-rent-only option.

The Pubs Code Adjudicator will deal with any disputes, complaints and queries as to whether there has been a significant increase in prices of goods or services.

The bill is presently under consideration by the House of Lords, but the government is reported to be unlikely to try to overturn the amendment. The bill is envisaged to become law in 2015.

Comment

As expected, the proposed market-rent-only option is strongly opposed by pub companies with large portfolios of tied tenants (eg, Enterprise Inns and Punch Taverns), but welcomed by tenant groups and CAMRA. The large pub-owning companies claim that a market-rent-only option would lead to "widespread pub closures, significant job losses and reduced investment in the sector", whereas CAMRA considers that the option should signal "the end of pubco licensees being forced out of business through high rents and tied product prices". Time will tell as to which is right.

What does appear to be happening is that the beer tie is starting to come undone – ultimately as a result of political interference, rather than on the basis of any competition law arguments.

Joosje Hamilton

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.