Market Rent Option (MRO) 

PUB CODE, PUB ADJUDICATOR and MRO NOW LIVE!

Parliament has decided to redefine the relationship between the tenants and lessees of large pub owning companies such as Punch, Enterprise, Admiral, Greene King, Star (Heineken) and Marston’s. The changes will only affect companies who own more than 500 pubs at the moment, but the proposed regulations do allow for this figure to be reviewed if necessary at a future date.

Simply put, the Market Rent Only (MRO) option allows, when a tenant/lessee requests, the granting of a free-of-tie rent and an ending of all product and service ties (with the exception of buildings’ insurance) and the landlord’s direct involvement in the trading operations of a tenanted or leased pub.

The proposed MRO means a tenant or lessee can request this option either at rent review time or at lease renewal, however, the MOR option is not retrospective. If a lease renewal or rent review falls earlier than the ratification of the pubs code, then it is highly likely a pub would not be eligible to take up the MRO option. until the next review or renewal. A tenant or lessee of a landlord who owns less than 500 pubs will not be able to request a MRO at this juncture, however, there is nothing to stop smaller companies adopting this business model, especially if demand for their traditionally tied premises diminishes.

Rent review or renewal of a lease is a “trigger point” but there may be other trigger points where an MRO option could be initiated. To be a trigger, an event would need to be:

  • beyond the control of the tied pub tenant, that was not reasonably foreseeable
  • has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub
  • is of a description specified in the pubs code, (yet to be agreed)

No doubt all will become clearer as time goes on but in the meantime Simon Clarke, renowned campaigner for tenants’ rights and a leading light of the Fair Pint campaign has produced these FAQs on the whole MRO issue.

Do all Pub Co’s and brewers have to offer MRO?

No. Only Pub Cos and brewers with 500+ tied pubs in their total ownership will have to offer the MRO option. This includes Enterprise Inns, Punch Taverns, Admiral Taverns, Greene King, Heineken and Marston’s.

Is MRO mandatory?

MRO can be taken up at the election of the tenant.

If my Pub Co plans to invest in my site, will I still be able to trigger the MRO option?

There may be circumstances where the MRO option could be deferred, yet to be considered in the consultation process. There is a possibility that in exchange for a significant investment, the MRO option could be deferred but not negated. The Pub Co may make an offer, but the tenant is not bound to accept.

Will the MRO affect the value of my lease?

If the MRO works effectively this should make the leases worth more money than they do at present, but going free of tie does not mean that your business will automatically increase, business is finite and your business as it stands is it’s market share at that moment of time, if you work to promote your business without being tied, your lease should become a good asset, provided that your rent is fair.

Is the MRO option automatically a good thing?

If discounting is revised in your favour to such an extent that the taking up of MRO is not of substantial financial advantage, then you might wish to stay with your current level of relationship with your Pub Co. Certainly there is a large level of unknowns until the system has ‘found its feet’ and there have been some sample test cases which would underscore the procedures linked with MRO option.

My tenancy/lease agreement expires later this year. Will I be covered by the new legislation?

No. Until the pubs code is finalised – envisaged at the earliest as May 2016 – the legislation does not apply.

Is there any way I can benefit from the legislation before it comes into force?

Not directly. At rent review and lease renewal, there will be an opportunity to contend that the open market rental value may be affected by the expectancy of up-and-coming legislation. Whilst you may not be able to take the MRO option, you may be able to argue that the tied rent should reflect its availability in the future. Indirectly, this may have a knock-on effect on tied rents with pub owning businesses that are not covered by the legislation.

Can I opt in and then opt out of MRO option?

If you take up the MRO option then a Deed of Variation or even a new lease will be granted (you will have to pay for the ‘reasonable’ legal costs associated). The Bill does not restrain the parties from discussing and potentially agreeing alternative terms, be they tied or otherwise, in the future. However it could well be to the Pub Co’s and tenants advantage if the enormous discounts that the Pub Co’s enjoy as multiple operators, to be able to offer a higher discount than that offered to a single operator by suppliers.

How is the new rent calculated?

It is envisaged that the calculation of MRO rent would be much the same as the calculation of tied rent – the primary difference being the level of gross profit that can be achieved under the particular circumstances. There may be other issues to consider – for example any benefits that are provided by the Pub Co or brewer that may be withdrawn after the MRO option is taken. The additional discount obtained will only affect wet sales, this will enable Pub Co tenants to be more competitive, but may only make a difference of possibly 2-5% net profitability.

Does the new rent replace the wet rent, or Pub Co wholesale contribution?

The extent of the current Pub Co wet rent, or wholesale contribution, has no bearing on the profits test valuation. It is very probable that the new MRO rent will be less than the combination of tied rent and wet rent previously demanded by the Pub Co or brewer.

Will my rent go down?

Unlikely if the current tied rent has been correctly set at a proper market level. If, however, you have not had your market rent reviewed for, say, five years and it has been index linked for those five years, then it is possible that you could be due a reduction in your supply-tied rent. Only at that point of revision of the supply-tied market rent, should MRO option be considered.

What if my lease has an upwards-only rent review clause.

Most modern leases have this provision. Upwards and downwards revision of your current rent is only available through the IFC or COP, neither of which will apply to MRO – Option. The new MRO rent is likely to be subject to inflationary increases and upward-only rent reviews unless you have had the upwards-only rent review clause removed by Deed of Variation.

Will the Pub Co still be able to fine me for so called breaches of Trading Agreements

You no longer need Brulines, you are purchasing direct from a supplier, buying out does not apply, cash with order will only apply if you default with any supplier, you have the same rights as a genuine freehouse, a Pub Co Representative can no longer decide arbitrarily that you have breached a trading agreement and fine you accordingly. The only breach is a breach of the new lease agreement, which you must comply with.

Would I get the same discounts as the Pub Cos?

Highly unlikely as the level of standard discounting would never be made available to the individual free trading tenant. You would, however, be entitled to acquire at the free-of-tie, open market price and take advantage of any special offers or discounts that brewers and wholesalers may be offering. We consider this free-of-tie price will be substantially less than the tied price most tenants are paying. It will substantially aid your cash flow, dealing direct with individual suppliers you can negotiate your terms of credit, normally one month.

Will I always get substantial free trade discounts?

If you deal with the major brewery companies, there is a strong likelihood that you will get substantial discounting although, as outlined above, not the same size of discount that has been negotiated by the Pub Cos. Being free-of-tie, you can deal with whom you like which includes local and regional brewery companies and a variety of wholesalers. Whilst it is unlikely that the little local ‘craft brewer’, can offer you any discounts of substance off their free-of-tie wholesale prices, these prices are in some cases almost half the price being charged under the tied regime. There are a large number of regional brewery companies whose level of general discounting is surprisingly low – they may find they need to compete to maintain the same level of free trade business.

Will I have one ordering point and one beer delivery drop as I have with my present Pub Co?

If you choose to deal with only one large brewery company or one specific wholesale outlet, then you will be certain of having one order point and generally, one weekly delivery, assuming you are tied on all products . However, if you choose to have several different suppliers, all of them will have their own separate order points and all of them will arrange for their individual weekly deliveries and the collection of empty barrels. If you have a free house every brewer is chasing your business, some may offer greater discounts for being your sole supplier, but you may find that dealing with a wholesale drinks supplier more flexible and profitable, they also often have several deliveries a week in some cases.

Is there a standard free trade price list?

No. You will have to negotiate the best price that you can achieve if you deal direct with brewery companies. If you choose to have your deliveries from a specific wholesaler, then there will be one price list and no negotiation (with the exception of volume-related discounting) concerning the established price list. They are worth playing off against each other for discounts and credit terms.

Can I join a buying consortium?

It is quite possible that as the take-up of MRO option increases and using relevant social media, you will probably find that there is a buying consortium in your immediate area which will, of course, greatly help the strength of bargaining power and level of ultimate discounts.There are many buying groups, we have several at Use Number One.

Will my new suppliers automatically take the cost of my beer supply by direct debit on the day of delivery?

Although you can set up a direct debit relationship with your new suppliers, you will generally find that you have 30 days’ credit for the payment of supplies.

What will happen to flow monitoring equipment?

Under the terms of many tied agreements, the Pub Co or brewer has the right to install flow monitoring equipment to monitor dispense of draught products. There seems to be little point in continuing to maintain and service this equipment once a tenant has chosen the MRO option and as such, it is envisaged that Pub Co’s and brewers will consider removing the equipment.

How is me taking up MRO likely to affect my relationship with my Pub Co?

The relationship should become one of strictly landlord and tenant, more like any normal commercial lease or tenancy. You will be bound by similar terms for repair and maintenance for example, but the all-tied terms will be severed (with the exception of insurance). You will not be bound to acquire products from the Pub Co. The Pub Co will probably sever any commercial or financial benefits it offers under its tied terms, although the point many have made is that these supposed benefits do not outweigh the over-inflated tied prices. You will need to carefully consider how much value you place upon the products and services offered to you by your Pub Co and whether the advantages countervail the disadvantages before opting for the MRO option.

Where do I stand on the protection of Pub Co codes of practice and the industry framework code?

Neither will apply if you elect for an MRO option. The activities of many Pub Co’s that have brought about the need for codes of practice etc. should be substantially reduced, since the majority of problems were based to a greater or lesser degree on the supply tie and the trading conditions imposed by the Pub Co leases.

Will I lose my SCORFA benefits?

Benefits currently offered by the Pub Co or brewer are generally discretionary and, to that end, they may choose to continue them or withdraw them. The Pub Co’s have maintained that these benefits have a significant value in which case their removal would have the effect of lowering the resultant rent.

Will I still have to pay the Pub Co Insurance or can I take out separate buildings insurance?

This depends on the wording in the lease, if you can save serious money through taking out your own Buildings Cover, it is worth doing, but ensure that the Insurance Company notifies the Pub Co of any default on the premium within two weeks and maintains that cover until another premium is paid.

What will happen to my regional manager or business development manager?

The Pub Co or brewer may offer to maintain a BDM relationship as the new MRO rent would be assessed on the basis of a pub’s profitability. A pragmatic and pro-active Pub Co or brewer would seek to work with their MRO tenants in an attempt to increase the pubs’ potential profitability and thereby increase the prospect of a higher rent in the future, in conjunction with increased tenants’earnings.

Is this the death knell of the supply-tie?

Certainly not. The MRO option would appear to be very attractive indeed for wet-led properties, with the balance of attractiveness decreasing as the scale of non wet product sales increases. If, however, the Pub Co’s offer an exciting and financially viable package that supports their supply-tie continuing, then there would be no need to exercise the MRO option.

If I do not think my landlord is being fair in calculating MRO option, who can I turn to?

You should seek genuinely independent professional advice from a specialist Chartered Surveyor who cannot be inferred as having any form of professional conflict of interest, i.e. s/he or his/her firm had, or still does, accept work / instructions from your Pub Co or brewer landlord or other Pub Co’s/brewers.

If all else fails – then what?

It is proposed that the pubs code will have ultimate third party referral to an Adjudicator. The identity, scope and power of this individual is not yet known. (Please Note:- Certain Pub Co’s will try and maintain the status quo and will fight tooth and nail to change the legislation or find a loophole, this has already started, we will do our best to provide a totally unbiased report on any changes when they should happen.

For further advice contact the Pub Advisory Service.

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