The ties that bind
Huge corporate profits, impoverished landlords and a toothless regulator. Robin Eveleigh investigates the battle for the soul of the Great British pub
Tuesday 21 May 2019
This article is from
Maine, New England
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We like our beer with a side shot of history. We enjoy stooping beneath wood-wormed beams, in thrall to tales of cellar ghosts or of blood spilled across scabbed wooden bar tops. At historic coaching inn Ye Olde Mitre in North London’s Barnet, rumour has it that highwayman Dick Turpin would call in for a flagon or two before his reign of terror was cut short at the end of a hangman’s rope.
Today, landlord Gary Murphy’s focus is on an altogether different kind of highway robbery, one he says is perpetrated by the pub company giants who own thousands of Britain’s boozers. And he’s gearing up for a David and Goliath battle which has at its heart a tradition as old as his pub itself.
Of the 39,000 or so pubs in the UK, about a third – 12,000 – are run as ‘tied’ tenancies by Britain’s six biggest pub companies: Star Pubs & Bars (part of Heineken), Punch Taverns (co-owned since 2017 by Heineken and a private equity real estate investor), Admiral, Ei Group, Greene King and Marstons.
Under this 400-year-old model, tenant landlords theoretically pay the pubco lower-than-market-rate rent (known as the ‘dry rent’). In return, they commit to buying beer and other supplies (‘wet rent’) from the pubco. The catch is, wet rent beer costs a sight more than the wholesale prices paid by free-of-tie, or ‘freehouse’ pubs. CAMRA found tied tenants paid as much as 77% more for mass-market yellow fizz like Fosters. Beer writer Roger Protz blogged recently about Ei paying £39 for a 9-gallon cask of ale, and charging its pub tenant £120.
"Companies provide a lot of help to tenants with investment, advice and training, which helps the business to thrive."
Even so, some argue the pros of a tied tenancy – training, marketing, property maintenance – compensate for inflated beer costs. Ei, for example, invested £19m in refits across 322 tied pubs in the year to September 2018. Heineken spent £44m on pubs in its Star group. And pubcos say tied tenants benefit in other ways, through ‘special commercial or financial advantages’ (SCORFA, in pubco parlance) such as satellite TV deals or cheap buildings insurance.
Brigid Simmonds, Chief Executive of the British Beer & Pub Association (BBPA), points out that leasing and tenancy offer a ‘low cost’ entry to running a pub.
“Companies provide a lot of help to tenants with investment, advice and training, which helps the business to thrive,” she comments. “It would be much more difficult to obtain similar support for a small business from a bank.”
This chimes with the experience of Sarah Allchorne and her chef husband, Dane, who became first-time pub operators five years ago when they took over the defunct Bull in Sissinghurst, Kent, transforming it into The Milkhouse with a renovation project largely funded by owners Ei (formerly Enterprise Inns - the UK’s biggest pubco).
Sarah explains: “We knew the kind of property and location we were after and the reality is, it’s very difficult to find quality free-of-tie properties.
“Ei put in the investment to bring the place up to spec, and from the outset we’ve had the support of an amazing regional manager. They took care of health and safety, cellar training and dispense systems, fire regulations - the lot.
“As someone new coming into the business, all those pillars are put in place for you.”
But anti-tie campaigners have complained for years that the system is exploitative, that the once-attractive rents have skyrocketed – alongside the cost of beer – and that some of the biggest pubcos of today have little in common with the pub-owning, family brewer operations of yesteryear. Punch and Ei, for example, have no brewing facilities, and are accused of being little more than property developers. Moreover, critics say ties are skewed against successful tenants with booming beer sales, as the pub company scoops up the lion’s share of profits. CAMRA has claimed that with tied tenants’ margins squeezed by both wet and dry rent prices, 80% of them earn less than £15k a year, with 57% on under £10k. At the other end of the chain, we see an opposite trend: At Marston’s, profits per venue are up 77% since 2009, according to its 2018 annual report.
CAMRA has been poking this bear for over a decade, and CEO Tom Stainer said: “A healthy pub sector that delivers for consumers is dependent on ensuring that pub tenants are able to secure a fair deal from their landlords. Too many great pubs have been lost because of sky high rents and inflated wholesale prices.”
In response to these complaints, new legislation – the Pubs Code – was introduced in July 2016.
This fresh code of practice, governing the relationship between businesses with 500 or more tied pubs in England and Wales and their tenants, has at its heart two core principles: fair and lawful dealing by pub-owning businesses in relation to their tied tenants, and that tied pub tenants should be no worse off than if they were free of tie.
In addition, it was meant to provide a transparent legal framework for tied tenants to negotiate their way out of tie, plus a Pubs Code Adjudicator (PCA) to arbitrate disputes.
Except, some tenants complain, it isn’t working.
Bedding-in time aside, critics say the Code is riddled with loopholes which pubcos exploit to pressurise tenants into remaining tied. Tenants asking to break their tie in favour of a ‘Market Rent Only’ (MRO) lease – enabling them to buy beer on the open market from a wide range of suppliers – find themselves entangled in lengthy negotiations and accruing crippling legal fees.
Labour MP Rachel Reeves, chair of the Business, Energy and Industrial Strategy (BEIS) Committee, has warned that big pub companies are “gaming the system and bullying tenants into accepting poor terms,” and spoke of “resistance from certain pub-owning businesses at every step” in relation to MRO requests.
One telling statistic set, buried in Ei Group’s 2018 annual report, speaks volumes: of the 310 MRO offers it issued since the Pubs Code’s incarnation, just 27 concluded in a mutually-agreed, free-of-tie deal. Almost a third, 91, remained unconcluded, and over half of those were referred to the PCA for arbitration. Greene King, meanwhile, says the Pubs Code’s impact ‘remains insignificant’. Out of nearly 1000 venues in England and Wales in its ‘Pub Partners’ operation, only four tenants have MRO agreements in place.
Gary Murphy, despite his best efforts, is not one of them.
He took on the Mitre a decade ago, leaving behind his civil service background in the process. In that time, he’s had three tied tenancy landlords, with Greene King taking over from Spirit Pub Company in 2015. He’s rightly proud that in these tough times, with 14 pubs closing every week, he’s not only managed to preserve the Mitre as a wet-led venue, but take beer sales from around 72,000 pints a year to over 200,000.
His eye for detail, downright tenacity, and willingness to plough through mounds of documentation, mean he managed to cap his own legal expenses for renegotiating his tenancy with Greene King to £20k. Yet even after all the outlay, he still ended up staying tied, albeit with some extra purchasing freedom.
“I spoke to another tied tenant the other day who’s already £60,000 in,” he says. “And he’s not finished yet.”
One issue with tied tenancies he identifies is the failure of pubcos to keep up with the kinds of rapidly changing trends we’re all familiar with in the craft beer sector, which leaves tenants – and their customers – wanting.
He was saddled with Greene King when it bought Spirit four years ago. Frustrated with its limited beer list, he managed to negotiate during a 2017 rent review a decent selection of free-of-tie products, which preserved his foothold in the evolving market and proved a key factor in the pub’s survival.
“In the year before the rent review,” he explains, “I had to pay them £13.5k for permission to buy some beers from somewhere else. At every twist and turn, they’ll screw you for money.”
"At every twist and turn, they’ll screw you for money"
Gary estimates his previous tied deal was costing him the equivalent of three times the market rent. Even now, he says, he’s paying around double.
Says Gary: “Some aspects of the tie aren’t an issue. It really doesn’t matter where I get my Fosters from as long as the price is right, but I do want the freedom to go and choose craft beers as well.
“I tried to go down the MRO route, and Greene King did everything in its power to muddy the process. They wanted an entirely new lease, so with legal fees, deposit, three months’ rent, onerous maintenance terms and various other costs, it was going to cost me £130k to transfer to MRO.
“There’s no way the average tenant can find that kind of money. It’s ridiculous. Most just give up.”
Alun Williams, an Ei tenant running The Three Golden Cups near Bridgend in South Wales, has been waiting for a PCA decision on his MRO request since September 2017. He’s racked up £11k in legal bills countering Ei’s original demand of £70k in advance rent and deposits for an MRO lease.
And Jeanne Mason, who puts in 90 hours a week as tenant at the Red Lion in Litton, Derbyshire, has been grappling with Ei for two years. The terms of her MRO request were settled by the PCA in June last year, but she then had to pay for an independent assessor to fix the cost of rent. (She says Ei had asked for £67k per year - £20k more than the assessor’s appraisal.)
It didn’t end there.
Once an MRO request has been resolved, pubcos – interpreting Pubs Code legislation in a way Gary claims is unlawful – can trigger yet another arbitration to negotiate the value of backdated rent for the time spent arguing the terms of the MRO. If your head is spinning just reading that, imagine paying a lawyer thousands of pounds to unravel it for you. At the time of going to press, Jeanne’s backdated rent negotiation was still up in the air.
“These are quite shocking tactics,” says Gary. “And the PCA has done absolutely nothing about them. They were meant to provide a quick and easy arbitration system, and it’s not turned out that way at all.”
Delays of this kind are not uncommon. By its own admission, a fifth of all cases accepted by the PCA for arbitration have been waiting longer than six months, and a PCA spokesperson admitted ‘frustration’ that so many requests had been referred for adjudication, instead of being resolved between pubco and tenant. “In 2019 we want to see arbitration becoming the exception rather than the rule,” it said.
Refusing to comment directly on individual cases, the spokesperson added: “But we have also been encouraged by indications that a good number of tied pub tenants are making full use of their Code rights by using the process to request an MRO option to strengthen their hand when negotiating a new, improved tied deal.”
Ei said in a statement that the group works closely with publicans to ‘support their success’, regardless of tenancy model.
“The Pubs Code is designed to offer publicans greater choice and transparency and we have worked hard to ensure our publicans are aware of all the options available to them and have the information they need to request and consider an MRO proposal,” a spokesperson told us.
“Our free-of-tie estate has grown to over 400 pubs over the last three years, demonstrating our willingness to negotiate free-of-tie terms on a mutually agreed basis.”
Greene King was eager to point out the benefits of remaining in a tied tenancy, stating: “From the outset we have committed fully to embracing the Pubs Code, including working fairly and openly within the current legislation. As part of that, we have always been fully transparent on the option our licensees have to move to a free-of-tie agreement if they wish.
“However, remaining on a tied agreement is often more attractive and beneficial, with shared risk and access to capital investment, business consultancy, training and access to lots of other support. As such the number of MRO agreements taken up should not be used as the sole measure of success of the code.”
The BEIS is expected to announce a review of the Pubs Code and the effectiveness of the PCA imminently.
Unconvinced that this particular tiger is likely to gain a set of teeth any time soon, Gary Murphy is readying to take his complaint to the High Court, to demand legal clarification on elements of the Pubs Code which he says are being abused. In February, he received a written concession from the PCA that it has misinterpreted key aspects of the legislation, but the implications of this climb-down remain a source of disagreement.
His is a battle being fought not only for fellow publicans, but for breweries, too. The Society of Independent Brewers (SIBA) – which markets members’ beer to pubco estates through its ‘Beerflex’ ordering system – says only 13% of their output goes to tied or controlled pubs.
“The continued lack of access represents a fundamental market failure,” it says. “Local craft beer drives footfall into pubs, yet too many operators are still failing to provide enough access, and remain focused on high volume ‘big beer’ brands.”
John Cussons of Lincolnshire’s Ferry Ales is one of several brewers we spoke to expressing concern at the way ties restrict choice and stifle growth.
“There’s a great tied pub near us. They love our beer but, buying through Beerflex – with a huge mark-up slapped on by the pubco – we’re just not competitive for them.” he says. “We get about £65, the pub is paying over £100. It means they have our beer maybe once a month. If I could sell direct, they’d buy every week.”
Gary already has a £12k High Court war chest, funded by a crowdjustice campaign, but his battle could come at great personal loss. He faces paying out ten times that in costs if he loses. And ultimately, it is you, the drinker, who stands to gain from his victory, with more purchasing freedom translating to more choice at the pumps.
“Publicans have been trodden on for decades to make corporate businesses these massive profits,” he says. “I’m taking a huge risk. If I lose, I lose. I’ll have to deal with that if and when the time comes. But I can’t let them get away with it, it feels quite improper.”
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