The PCA has become aware from arbitration disputes and listening to tenant concerns that there can be barriers and disincentives to accessing the Market Rent Only (MRO) option to go free of tie. While arbitration referrals to the PCA on disputes about MRO terms have reduced significantly over recent years, the PCA is doing more to improve access to MRO. Following consultation, the PCA has exercised her powers to issue statutory guidance.
The full detail of the guidance is published on the PCA’s website. In summary, it addresses the following issues:
MRO rent information
A lack of information supporting the proposed MRO rent can hinder the tenant’s understanding of how the rent has been calculated. This can in turn impact their ability to effectively compare the MRO rent to the tied offer and negotiate. This guidance means tenants should receive information to help them (and on referral, the independent assessor) understand how the pub company has calculated the proposed MRO rent. The guidance sets out in full the minimum information to be provided. It includes information such as non-confidential comparable evidence the pub company has used, a detailed profits valuation, barrelage assumptions and more.
The pub company should also be clear whether tenant improvements are disregarded, and if so which. There is no requirement for tenant improvements to be disregarded from MRO rent, although the pub company can offer to, or the tenant can seek to negotiate. A tenant needs to be clear on the position the pub company is taking, so they can make a meaningful comparison with the tied rent offer where their improvements may have been disregarded.
Pub companies may require the tenant to pay large sums of money upfront to go free of tie, such as for deposits, rent in advance, and where MRO is through a new tenancy, terminal dilapidations.
This guidance means that a relevant factor in considering if proposed MRO terms and conditions are unreasonable, will be the extent to which the pub company has considered any gradual build-up to an increased deposit or less frequent rental payments. The PCA expects that some build-up period would be usual and (unless properly justified) a decision to offer no such period at all may lead to a finding that a term or condition is unreasonable.
This guidance also means in most cases it will be unreasonable for a pub company to require the tenant to complete terminal dilapidations or compliance issues as a condition of entering the MRO tenancy. Although this means a schedule of dilapidations should be avoided, if the pub company chooses to serve one, this should not cause the tenant to incur charges simply for asking for, or taking, the MRO option.
Records of decision-making
Concerns have been raised by tenants and their representatives about the perceived consequences of asking for MRO. These worries centre on tenancy renewal where the pub company can give notice under the Landlord and Tenant Act that it intends to take the pub back.
It is a breach of the Code for the pub company to subject a tenant to detriment for using or attempting to use their Pubs Code rights, including to break the tie. An allegation that this has happened could be the subject of arbitration or investigation. This guidance makes it clear that the pub company would be expected to have a record of its reasons for decisions, such as if it chooses to take the pub back for its own use as a managed operation.
Why this guidance is important
A tied tenant’s right to the MRO option is a valuable one – it allows them to break the tie at certain points in their tenancy. This is typically at rent review or renewal of their agreement, or more exceptionally, where there is a significant increase in price or trigger event having an impact on trade.
Even if the tenant does not intend to go free of tie, they can request MRO to compare a free of tie deal to their tied offer at rent review. It means a tenant can check they are no worse off than if they were free of tie, and many have used the MRO offer to strengthen their hand in negotiations and get a better tied deal.
The PCA must take this guidance into account in carrying out their functions. This includes in investigating Code breaches and taking enforcement action as a result. The PCA (and any appointed arbitrator) must also take it into account when arbitrating Code disputes.
The guidance will come into effect from 1 May 2023, including in relation to cases where a MRO notice is served on or after that date.