Have pub tenants really won the battle? Time will tell...
Managing Director - Pubs & Restaurants Neil Morgan mulls over the potential impact of the MRO Code on the licensed sector.
12,000 pubs – 24% of the total in the UK – will be affected by the implementation of MRO, all under the ownership of the “Big Six” PubCos.
The recent Government response to the Consultation on MRO provides some useful clarity and hopefully will now enable all parties to work towards the implementation of the Code on the 26th May – subject, of course, to the closing of recently spotted loopholes.
It’s an oft-used phrase, but we really are going to have to “watch this space” as to how this pans out. It is probably fair to say that at this point, no one in the industry has any idea how the whole thing is going to work out and what effect the Code will have on the licensed sector.
Early indications are that there is no immediate benefit for tenants than they were under the tied agreement. It is suggested that Landlords will be offering discounts in order to make it more attractive for tenants to remain tied, and so there is no longer an obvious choice to be made as to how to proceed. In simple terms, pub tenants may have won a battle here to have the choice, but the fact is the benefits are difficult to quantify and it is too early for them to start celebrating.
We’ve had some confirmation that there will be parallel rent assessments with tenants having no obligation to accept the outcome of a tied rent assessment until they have the result of the MRO process and vice versa. We’ve also heard, in some detail, discussions on the alternative options for an MRO (“Trigger Events”), including where there is a significant increase in price for tied products and services and where there is a significant impact on trade and where the price increase paid by the tenant exceeds the relevant ONS Price Index which for beer is 3%, with higher percentages for other products.
Whilst trigger events leading to an impact on trade are set out in detail and focus on local rather than national issues, the tenant is nonetheless under a duty to mitigate substantially. Positively for tenants, the impact is forecasted rather than retrospective, therefore avoiding potential delays in the process. Negatively, this does however carry with it the difficulty in proving the forecasted impact, potentially leading to disputes.
In addition, there is a welcome exemption to the MRO where a significant qualifying investment has been made into a pub. This enables a maximum deferral of the MRO for a period of seven years, which could be considered too short for major investments.
The market has to proceed with caution. If a tied tenant assigns a lease during the term of an MRO waiver, a prospective buyer for the lease must be made aware. This additional layer of complexity will undoubtedly effect pub lease values.. From a market perspective, the Government’s announcement on MRO and its proposed implementation in May gives buyers and sellers the opportunity to look at the options available. Deals can now be done without any uncertainty of “what if” which has caused stagnation in the tied lease market for the last year.
Overall, the lack of a transitional period seems ill thought through and may lead to some short term issues on recently agreed rents.
May 26th, assuming all the loopholes are put through Parliament before then, could be seen to be a watershed Day Zero for the sector. Or it could be a damp squib. Watch this space...
