One of the last meaningful acts of the previous Parliament before it downed tools and entered General Election mode proper was The Small Business, Enterprise and Employment Act (SBEEA 2015) which received Royal Assent on 26 March 2015.

The SBEEA 2015 contains a broad range of provisions with the following property-related changes being of interest to those who operate hospitality or other businesses from home and those who are in the pub sector:

  • Changes made to the Landlord and Tenant Act 1954 (LTA 1954) to exclude residential properties used as business premises from the security of tenure provisions of the LTA 1954. 
  • The establishment of a framework of regulations for pub companies (Pubs Code), which will allow tenants the option of paying a market rent for pub premises, and may have other effects on the terms of pub leases.

Changes to the Landlord and Tenant Act 1954: premises used for home business purposes

The SBEEA 2015 amends the LTA 1954 to address leases which permit tenants to use their premises for "home business" purposes. 

The Government’s intention was to seek to encourage business to flourish by allowing landlords to permit tenants to use their homes as business premises without running the risk of the tenants acquiring security of tenure under the LTA 1954. 

A landlord is of course often keen to retain control over his tenant’s ability to renew or seek compensation for termination on expiry of a lease and so wishes to avoid the tenant becoming protected by the LTA 1954.   

Excluding home business use from benefiting under section 23 of the LTA 1954

Section 23 of the LTA 1954 sets out which tenancies have security of tenure under it. Section 23(4) already provides that a tenancy does not attract security of tenure where business use is in breach of the tenancy, unless the landlord has agreed to or allowed that breach.

Section 35 of the SBEEA 2015 now amends section 23 of the LTA 1954. Going forward, even if the landlord has agreed to the breach (or acquiesced in it), the tenant still does not obtain security of tenure under the LTA 1954 where the business use is solely for the purposes of a "home business". 

This begs the crucial question as to what will qualify as a “home business” so as to give the landlord the control he wants on expiry of a lease.

Home business uses which avoid security of tenure

The new Section 43ZA of the LTA 1954 defines a "home business" rather unhelpfully as "a business of a kind which might reasonably be carried on at home". This seems certain to lead to argument, but section 43ZA envisages regulations to clarify the meaning of this term and we will need to await the detail on this.  

Section 43ZA(5) does clarify matters to an extent by providing that a business involving the supply of alcohol for consumption on licensed premises which form all or part of the property cannot be a home business. So a landlord in those circumstances cannot avoid security of tenure in this way.

It is also worth noting that Section 43ZA applies where there is a lease of a house or part of a house, let as a separate dwelling to an individual (or individuals). The term "house" is not defined and this may mean that a residential lease of a flat in a block might not be caught by the new provision. The lease must also provide that the let premises are to be occupied as a home, but permit the tenant to carry on a home business (or allow the landlord to consent to such a use). The tenancy must not permit any other sort of business, or it will fall outside section 43ZA of the LTA 1954 and security of tenure could result.

The new section 43ZA(8) of the LTA 1954 provides that a house (or part of a house) that is let for mixed residential and business use is "capable" of being let as a dwelling. The aim of this seems to be that premises let on terms that expressly envisage a mixed residential and business use (such as a live/work unit) can still be caught by section 43ZA. It will therefore be a question of fact if the premises are actually let as a dwelling.

Establishing the Pubs Code

Part 4 of the SBEEA 2015 contains provisions dealing with the regulation of businesses that own public houses.

Section 42 of the SBEEA 2015 provides that the Secretary of State must make regulations about practices and procedures to be followed by pub-owning businesses in their dealings with their tied pub tenants. These regulations are to be known as the "Pubs Code".

The Pubs Code will have an impact on the landlord and tenant (or licensor and licensee) relationship in respect of public houses, including disputes. The SBEEA 2015 established the role of Pubs Code Adjudicator (Adjudicator), who will have a range of powers, including authority to arbitrate disputes between pub-owning business and their tied pub tenants.

Another major element of the introduction of the Pubs Code is to regulate the rent payable under leases and licences of tied public houses. There have been concerns over the potentially unfair nature of the rent that can be owed under tied pub leases for many years. The introduction of the Pubs Code is aimed at alleviating them, along with other problems in the tied pub sector. The government has referred to tenants (and licensees) under such arrangements being allowed to request a rent review, if they have not had one for five years and it seems that this may be covered in the Pubs Code itself.

The SBEEA 2015 includes two specific provisions relating to the Pubs Code that may be of interest to those in the sector:

  • Market rent for tied tenants
  • Inconsistent or restrictive terms of pub tenancies

Market rent for tied tenants

Section 43 of the SBEEA 2015 provides that the Pubs Code must require large pub-owning businesses to offer their tied pub tenants (which includes licensees with a licence to occupy a pub on a tied basis) the option of occupying the tied pub on market rent terms. 

A tied pub is one where the tenant must buy some or all of the alcohol sold on the premises from one of the following:

  • The landlord
  • A person in a group undertaking with the landlord
  • A person nominated by the landlord
  • A person nominated by a person in a group undertaking with the landlord

This arrangement is often referred to as a "tie" or "beer tie" (even though it might not apply to just beer). Many leases or licences to occupy tied pubs are subject to a rent that requires a certain amount of alcohol to be purchased on the tie. This sort of rent is referred to as "barrelage". It is quite easy for rents with a barrelage element to prove very expensive for the tenants. The Pubs Code may help to alleviate some of the hardship caused to tenants on tied leases, although it remains to be seen exactly how the market rent option will operate in practice.

The Pubs Code will specify the circumstances in which the market rent option is to be offered. The Pubs Code will also set out the detail of exactly what is required for a market rent option lease or licence.

Sections 42 and 43 of the SBEEA 2015 came into force on 26 May 2015, while further provisions will come into force on a day to be appointed.

Inconsistent or restrictive terms of pub tenancies

Section 47 of the SBEEA 2015 states that the Secretary of State may make regulations dealing with the terms of tenancies (or other agreements) made between pub-owning businesses and tied pub tenants. Section 47 envisages that these regulations will cover:

  • What happens where a tied pub tenancy or other agreement is inconsistent with the Pubs Code.
  • What happens where a lease or other agreement contains a term that seeks to penalise the tenant should it require the pub business to comply with a provision of the Pubs Code.
  • What happens where a rent review (or assessment of money payable in lieu of rent) is upwards only, or can only be triggered by the pub business.

It therefore seems likely that these regulations will, in some way, restrict upwards only rent reviews in tied pub tenancies. 

Section 47(4) of the SBEEA 2015 states that provisions in agreements for tied pubs will be void if they purport to prevent a tenant from referring a dispute to the Adjudicator for arbitration or to penalise the tenant for making a referral.

Section 47 will come into force on a day to be appointed.

It’s expected that the government will publish a new draft Pubs Code for consultation with a view to it coming into force in May 2016. The Pubs Code adjudicator is anticipated to be in office prior to this. 

It remains to be seen whether the Pubs Code will address the perceived inequalities between pub-owning businesses and their tied pub tenants. Self-regulation seems not to have been successful and if these measures can go some way to helping local pubs survive in their communities then they will have achieved their aim.