Official Report 655KB pdf
We now come to agenda item 3, which is the Tied Pubs (Scotland) Bill. I welcome Neil Bibby MSP, who is the member in charge of the bill; Nick Hawthorne, who is the senior assistant clerk for the non-Government bills unit; and Neil Ross, solicitor. They all join us by live link. I invite Neil Bibby to make a short opening statement, then we will move to questions, the first of which will be from the deputy convener.
Thank you, convener. Good morning, committee members. For transparency, I refer the committee to my entry in the register of members’ interests and the in-kind support that I have received from the Scottish Licensed Trade Association, the Campaign for Real Ale, GMB Scotland and Tennent Caledonian wholesalers.
I am grateful for the opportunity to discuss the bill. Now is a critical moment for Scotland’s pubs: it is the worst time for them since the second world war. Some may never open their doors again after the coronavirus crisis. We need to do everything that we can to protect and save the pubs that we all cherish and that contribute so much to our communities.
I have never claimed that the bill would help with all the problems of all pubs, but it is vital that it proceeds in order to help the approximately 750 pubs in the tied sector, which has well-documented, deep-rooted problems. Tied pubs, unlike free-of-tie pubs, face costly and unusual restrictions, which can deny tenants the flexibility that they need to sustain and grow their businesses. As you have heard, pub-owning companies often take far more than is fair from pub profits. The opportunities for Scottish products to reach the tied sector are limited, and the mark-up on tied products can be excessive and unsustainable. By rebalancing the relationship between tied tenants and pub company landlords, we can help tenants to make their businesses work and keep a fairer share of the profits that pubs make in the Scottish economy.
11:00The big pub-owning businesses say that the bill is a
“solution to a problem that doesn’t exist.”
They are entitled to disagree with the bill, but it is arrogant and irresponsible to deny that problems exist in the sector in the face of the evidence, so let us talk about the problems and the evidence.
As the Federation of Small Businesses and CAMRA explained in their written evidence, self-regulation has failed. Prior to the introduction of the England and Wales pubs code, there had been six voluntary codes in 10 years and four parliamentary select committee inquiries, culminating in a 2011 report, which said of statutory regulation:
“we see no other alternative for an industry which has for too long failed to put its own house in order.”
The Economy, Energy and Fair Work Committee has access to the findings of the consultation that I conducted on the bill, in which 93 per cent of the 275 individual responses supported legislative action. Most responses to the committee’s call for evidence support legislative action. Ninety-three per cent of the nearly 100 tenants taking part in the committee’s survey said that legislation is necessary. Do not let the pubcos tell you that there is no problem here.
The committee will also be aware of the 2014 CAMRA-commissioned study, which found that 65 per cent of tenants had an annual income of less than £15,000 and that 74 per cent believed that they were worse off as a result of their tie. How can that be fair or sustainable?
Tennent Caledonian has supplied evidence showing that, over a two-year period, while revenues grew by more than 5 per cent for free-of-tie pubs, revenues for tied pubs fell by 8 per cent, according to the CGA trading index. Times are tough but they are tougher if you are tied. Tennent Caledonian also cites a CGA study showing that the tied model extracts more than £30 million of profit from the Scottish economy. In written evidence, it said that English beers are stocked on the tied estate in Scotland at twice the level that they are in free-of-tie pubs, to the detriment of local products.
The committee heard evidence from Jamie Delap of the Society of Independent Brewers, who said that Beerflex provides only a “relatively small” element of access to the tied market. You heard evidence from Greg Mulholland of the British Pub Confederation that
“the reality of what they”—
pubcos—
“term ‘investment’ is that it is just a form of loan”.—[Official Report, Economy, Energy and Fair Work Committee, 18 August 2020; c 8.]
The investment myth has been busted. Tenants pay it back over and over again. You also heard Chris Wright of the Pubs Advisory Service say that investment by pubcos is often at high and uncompetitive rates. You heard that tenants on one side of the border have the protection of a statutory adjudicator, whereas tenants of the same pubcos here in Scotland do not. I have never made it a party-political issue, and I have no desire to do so, but it is a matter of fact that Scottish MPs of all parties, including the SNP, voted for the adjudicator in England and Wales.
However, there is something that the committee did not hear about, which is what the pubcos really think of the statutory code in England and Wales. In written evidence to the Business, Energy and Industrial Strategy Committee, they say that awareness of the statutory code is up, tenure has increased, the number of young applicants taking on a tenancy has increased and pubcos now provide better support for licensees and better recruitment processes.
The evidence is clear. If pubcos are good, responsible landlords, what do they have to fear from the bill? If a tied agreement is working well for a tenant, there is no reason to seek redress through a pubs code. However, if tied deals are not working, we need to rebalance the pubcos’ relationships with their tenants to ensure that they do. That boils down to three regulatory principles, on which I propose a code should be based: the principle of fair and lawful dealing, the principle that tied pubs should be no worse off than free-of-tie equivalents, and the principle that tied deals should offer a fair share of risk and reward.
The committee is asked to decide whether to recommend the general principles of the bill to Parliament. I believe that those principles are sound and represent a proportionate response to the deep-seated issues detailed in the evidence that the committee has received. I look forward to answering your questions.
Thank you, Mr Bibby. We now move to questions from the deputy convener.
Good morning, Neil. The committee heard some evidence that turnover of tied tenants can be high in the market. Do you have any data that illustrates the scale of that issue and how that compares to turnover in free-of-tie or freehold premises, to give us a sense of the turnover issues in the different sectors?
Only pub companies would really know about that and be able to provide full data. The issue is churn, and the industry does not want to talk about the fact that we have so many business failures in tied pubs. As Greg Mulholland said, the number 1 reason for pubs closing is that publicans cannot make an income. Things are particularly tough in the tied sector.
I am aware from evidence that the Pubs Advisory Service has sent to me that at least one pub company has an average tenure of around nine months. We can see the churn in our communities with the “To let” signs on pubs. You can also see the churn on websites such as www.findmypub.com, which shows about 60 pubs up for lease. As I said earlier, pubcos have said that tenure has increased as a result of the introduction of the code in England and Wales.
Is the failure rate something that we could address through the provisions that you propose in the bill? If so, how do we address—[Inaudible.]
Yes. As I said earlier, the main reason that pubs are failing is that publicans are failing to make an income. There is an issue in the tied sector, in that we have profitable pubs where publicans are not getting a fair share of the profits. If we have a fair share of risk and reward, publicans can have that security and the balance that will allow them to sustain and grow their businesses. Also, the market-rent-only option would give publicans greater flexibility to sustain and grow their businesses to make them more viable.
Thanks, convener. I am happy to let colleagues come in with their questions for Neil.
Thank you. Maurice Golden has the next questions.
The Scottish Government study found that no one part of the pub sector in Scotland suffers significant detriment. Furthermore, a voluntary code was introduced in 2016. The evidence that the committee has received from tied pub tenants suggests that awareness of the code is low. If promoted and communicated more effectively, could a voluntary code help to address the issue that you intend to legislate on?
The problem with the Scottish Government study that you refer to is that it heard from only 25 pubs, and only 10 of those were fully tied. The CAMRA study that looked at the issue spoke to 200 Scottish tied pubs. The committee has heard from nearly 100 tied pubs in the tenants’ survey. I have also heard from well over 100 tied pubs. Therefore, there is an issue with the scale of the Scottish Government study. The evidence from other sources far outweighs that study.
On the voluntary code, to go back to what I said earlier, self-regulation has failed. Tenants have told me that and they have told you that. Ninety-three per cent of tenants who completed the tenants’ survey said that; 93 per cent of people who responded to my consultation said that. There have also been four House of Commons select committee reports on the issue that concluded that self-regulation had failed. The pubcos were given 10 years and six different versions of a voluntary code, and time after time they failed to put their house in order. The voluntary code is exactly that. It covers only about 72 per cent of pubs in Scotland, and it does not deal with the fundamental problem of fair share of risk and reward, and tenants do not have confidence in it. There is a real issue that we need to address by having an independent adjudicator and a code.
You have been making comparisons between Scotland and England and Wales, but those markets are significantly different. Therefore, is the same legislation equally applicable in Scotland, given the different market in England and Wales?
Although Scotland has a smaller number of tied outlets than England and Wales—nobody is disputing that—it is still part of a UK tied pub sector, and the sector is operated in the same way. The numbers are different, but the principle remains that although tenants in England and Wales have statutory protection and access to an independent adjudicator and code, hundreds of tenants in Scotland who have the same pubco for their landlord do not. We need to redress that imbalance and ensure that tenants in Scotland have the same rights. It is a matter of principle. There are at least 750 tied pubs in Scotland, and they need that statutory protection.
We move on to questions from Rhoda Grant.
I have a follow-up to Maurice Golden’s question. Has enough time passed to assess the impact of the changes to the voluntary code?
As I said to Maurice Golden, there has been ample time for the pubcos to get their house in order. I referred to the fact that, in England and Wales, there were six different versions of the voluntary code in 10 years. When I carried out a consultation on the bill in 2017, there was significant support for statutory regulation. Three years on from then, the committee has taken evidence and there is still significant support for statutory regulation. That time has passed, but tenants still have no confidence in the code and the pubcos have not got their house in order. There has been ample time for the situation to be addressed through the voluntary code, but it is not going to be addressed through the voluntary code, because it does not deal with the fundamental issues that tenants are concerned about.
The Minister for Business, Fair Work and Skills told the committee that he is sceptical about the need for the bill because of what the Scottish Government’s study showed, and the evidence that we have received is polarised. What is the compelling evidence for your bill?
There is a body of evidence. We have the four House of Commons select committee reports and we have the CAMRA study. There are other studies, including a CGA study that was commissioned by Tennent Caledonian, which I would be happy to provide to the committee. We have the responses to my consultation and to the committee.
You mentioned that views were polarised; the bill is not uncontroversial. There are different opinions on each side of the debate. On one side, we have the Scottish Licensed Trade Association, the Campaign for Real Ale, the Federation of Small Businesses and hundreds of tenants in Scotland and many others, including the Society of Independent Brewers. On the other side, we have the big multinational pubcos. There are polarised views on the subject. I believe that we should support what the coalition in Scotland is saying, but I also think that, if we accept that there are polarised views, that in itself is acceptance that there is a problem. That has always been clear to me, but I think that it is becoming more and more evident in the committee’s work that we have a problem and that we have polarised views.
I am not asking the committee to sit as judge and jury on all the issues and problems. However, given that there are deep-rooted, well-documented problems, we need to establish an independent adjudicator to look at the issues and resolve them. If we do not do that, we will be back here over and over again. We need to bring in the legislation now to establish an adjudicator to deal with the problems, to improve the tied pub sector and to improve the relationship between pub tenants and landlords. That is why the bill is vital.
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I also put this question to the Minister for Business, Fair Work and Skills. How would your bill support the economy? We are in a bad place because of Covid-19, and the pub sector is in a bad place. Would your bill help the pub sector? More important, would it help the economy in general?
I believe that it will, and the evidence from a range of sources suggests that that is the case. One of those sources is the submission from Tennent Caledonian, which points to £31 million of profit extraction from the Scottish economy. It believes that £23 million is being extracted from pubs and that £8 million is being extracted from brewers. That is an issue not just for pubs but for Scottish brewers. If more of that money was retained by Scottish pubs and in the Scottish economy, it would be good for Scottish pubs and good for Scottish brewers.
There is also the potential benefit of investment in the real economy. For example, many pubcos have big contracts with big procurement companies, but if we give local businesses such as pubs more flexibility to invest in their businesses, it is far more likely that that money will be invested in the real economy and local businesses.
The Scottish Parliament, the Scottish Government and councils talk a great deal about community wealth building. The bill would be an example of how we can retain more of the profits that pubs make in local communities.
I want to follow up on Willie Coffey’s questions. At the time of the English legislation, the Institute of Economic Affairs produced a report that said that the removal of the beer tie would make little difference to the health of the industry. It said:
“The blame attached to the beer tie has been greatly overstated. There is little evidence that pubs owned by PubCos have been closing permanently at a faster rate than those in the rest of the sector.”
Other evidence suggests that, since 2010, the closure rate in the free trade is three times that in the tied pub sector. Do you have any explanation for why freehold pubs are closing at three times the rate of tied pubs?
Pubs have been closing at a significant level since 2010, and there is a range of reasons for that. There are pressures on the industry and on pubs across the board. I hear what you say about the IEA’s report; there are conflicting views on that. That report did not persuade the select committees before they proceeded with legislation, and it did not deal with the issue of churn. We see significant churn in the tied pub sector, where businesses are failing. The pubs might still be there, but there is significant churn and business failure in the tied pub model, and we need to rebalance that situation. Although many of those pubs are profitable, publicans cannot make a living from them.
But we also have a situation in which freehold pubs are for sale and will change ownership, so there is churn in the freehold market as well as in the tied pub sector.
Yes, there will be churn, but the turnover that we see in the tied sector is significant. For example, there is a former tied pub in Renfrewshire that I know of that had four different tenants in two years, and I do not think that that is necessarily uncommon. I am not aware of a free-trade pub that has had that level of turnover in my area, for example. There are significant issues with churn, and that is more the case in the tied pub sector.
The next questions come from Colin Beattie.
The committee has heard concerns about the market-rent-only right that is included in the bill—in particular, it has heard that the legal context in Scotland is different for tenants, because the Landlord and Tenant Act 1954 does not apply. Did you consider that when drafting the MRO provisions in the bill?
Yes, we did consider that issue. It is important that we have a market-rent-only option for tied tenants in Scotland, that we ensure that they are no worse off than free-of-tie tenants and that we give them the flexibility to grow their own businesses. The MRO provisions are extremely important, and tenants should have that right automatically.
The Landlord and Tenant Act 1954 does not apply in Scotland, but that does not take away the need for the bill. It is just that there is a different landscape for the code and the adjudicator to work in. I believe that those who have raised concerns about the bill are mainly the pubcos. Some might say that it is uncharacteristic for them to be concerned about a possible impact on tenants.
It is important that we have an MRO option, and we have considered the point about the 1954 act. The Scottish licensed trade is as supportive of new legislation for Scotland as the trade was in England and Wales, and people are aware of the differences in commercial tenancy law.
Let us hold the thought about MRO. In your opening statement, you touched on the income levels of some tied tenants in Scotland. According to CAMRA, more than 60 per cent of tied tenants take home less than £15,000. Why would anyone work for less than £15,000? That aside, if the MRO provision comes into force, tenants will presumably pay whatever the market rent is, which might be more than they are paying now, but they would have the freedom to operate in the way that they wanted to. On that level of income, how could they support running a pub?
The Scottish Beer & Pub Association says that the average take-home pay for a tied tenant in Scotland was £38,000. It also says that 96 per cent of respondents earned more than £18,200 a year. That is not big money for running a pub, given the unsociable hours and hard work and the fact that, frequently, it is a husband-and-wife team running it. How can they support that independent business?
That is a really good question. You make a very valid point. The amount of money that tied tenants have in income means that they are struggling to make ends meet; they are on the brink. As you said, the CAMRA study said that 65 per cent of tenants earn less than £15,000 a year. At the same time, the pubs are making significant profits. It was highlighted to the committee in the evidence session two weeks ago that Enterprise Inns, which is typical of the UK operation, takes around 80 per cent of the pub’s profits, with the remaining 20 per cent going to the tenant. That is not uncommon, based on the experiences that pub tenants have discussed with me in Scotland. It is a real issue.
At the same time, Star Pubs & Bars is owned by Heineken, which reported a profit of €832 million earlier this year. There is a huge disparity between the position of tied tenants on the ground in Scotland and the big profits that the multinational pubcos and brewers—the second biggest brewer in the world, in Heineken’s case—are making.
You mentioned the figure of £38,000, which was cited by the Scottish Beer & Pub Association. The Scottish Licensed Trade Association said that it does not recognise that figure. I do not recognise that figure. I have spoken to many tenants in Scotland who say that their income is not much more than the figure in the CAMRA study. Times are tough. Of the £38,000 figure, tenants have said things such as, “That’s nonsense” and “No chance.” I cannot repeat some of the things that tenants have said about the £38,000 income claim. They feel that the figure is not accurate and that it misleads the committee on the level of income for tied tenants in Scotland.
Those figures are important. Do you have any data that shows that tied tenants struggle, compared with other subsectors of the pub market?
I refer to the studies that I have mentioned before, including the CAMRA study, which said that more than 60 per cent of tied tenants earned less than £15,000. The same study said that 74 per cent felt that they were worse off because of the tie and that 96 per cent felt that the reduced rent did not fully take into account the higher prices that were paid for tied products. That reinforces other things that the FSB has said, such as that 76 per cent of tenants believe that pubcos take too much of the profits. Therefore, there is a range of sources for the view that the tied sector is hit hard in that way.
The committee also heard from Paul Waterson, who talked about the mark-up on beer. If a keg of beer costs a tied tenant £35 to £40 extra and they sell 1,000 kegs a year, the tenant is £35,000 to £40,000 worse off because of the tie. I mentioned earlier the study that Tennent Caledonian commissioned, and I would be happy to provide that to the committee, if that would be helpful.
That would be useful, because even if all the issues that you are talking about as regards income constraints were to go away, somebody who is taking home less than £15,000 a year could triple their income and still not be bankable, and they would struggle to get loans to develop their business. Their income would need to go up by five, six or seven times for them to be able to afford the sort of renovations and so on that they would need to do in their pub, because pubs wear out—people use them and they need to be refurbished from time to time. My concern is that we are working on the basis that these people are going to be able to get loans, but from where?
I am not going to prescribe to tied publicans what they should do with their businesses. The bill is about the principle of allowing them a fairer share of risk and reward and giving them extra leverage to demand a fairer deal from their pubco. It is also about giving them the flexibility, if they wish, to move to an MRO lease. If publicans do not think that that would make them better off and be in their interests, they do not need to exercise that right. However, tenants consistently say to me that they could be £20,000 a year better off if they were free of tie. That is a significant amount of money to invest in their business and in the bricks and mortar.
Tom Stainer from the Campaign for Real Ale made the important point that, if pubs in Scotland retained more profits, that would not simply be invested in bricks and mortar; they could invest in taking on staff, in marketing or in other ways of creating jobs. As I mentioned earlier, they could also decide to invest in a way that used more local businesses. Generally speaking, tenants would be better off if they were able to exercise their right to an MRO option. By passing the bill, we would also give tenants the leverage to get a fairer deal from the pub company, if the pub company wanted to ensure that it could keep them tied.
I have one last question. What you are saying is laudable. Nobody should be on that level of income, given the hard work that is needed to run a pub. However, I wonder how much leverage somebody who is on that sort of net income actually has when it comes to taking over their business and running it independently. It is quite a cliff to climb.
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The bill is about giving tenants the chance to take that opportunity. Tenants in England and Wales have leverage because they have access to the MRO option. There are trigger points in that, which has resulted in a backlog of cases that is now being worked through. However, there is no leverage for tied tenants in Scotland. At the very least, we should ensure that tenants in Scotland have the same leverage as tenants in England and Wales and can exercise a market-rent-only option and get a fairer deal from their pubco.
At the end of the day, the bill might not result in all tied pubs moving to a market-rent-only arrangement; it might result in renegotiated deals. A lot of the changes that have happened in England and Wales have involved the renegotiation of deals between pub landlords and pubcos so that the MRO option has not been exercised. That would be a positive thing. I am happy to provide the committee with the number of renegotiated deals in England and Wales, but off the top of my head I think that there have been about 400 or 500. It is important to consider that approach as well. In England and Wales, landlords do not have to exercise the right to an MRO arrangement, because they have the leverage to demand a fairer deal from their pub company.
I would like to ask about the support that pub companies have given their tenants in the pub trade during the pandemic. What do you make of that?
That is a good question and an important one. Generally speaking, the pubcos have not treated tenants fairly during the crisis. This is a really tough time for tenants and publicans. Many are working long hours just to break even and many are not making any money at all.
The biggest bone of contention during the coronavirus crisis has been that pubcos have charged rent on locked-down pubs. There has been no income for tenants during that period, which has been crippling, and many have gone into debt. I think that the committee has had testimony from a tied publican about the thousands of pounds of debt that they have gone into. For the pubcos, the crisis has not been at the same level. They have had a cash-flow interruption but, as I mentioned, Heineken’s profits in the first part of the year were €832 million.
Some pubcos acted to cancel rent early in the process—I think that Admiral Taverns did that—but others that have given evidence have not been as supportive of their tenants. Campaigners had to introduce a wall of shame in order to shame some of the pub companies into giving rent cancellations or deferrals. The pubcos’ response to the crisis has been inadequate, and that view comes directly from the tenants. At the end of the day, the rent that tenants are meant to be paying is rent based on turnover. Their turnover has been zero, but that has not been properly accommodated.
I believe that there is a section in the voluntary code that mentions tenants being compensated for a loss of income as a result of issues that are outwith their control. There is no better example of that than the coronavirus, but tenants do not believe that they have been properly compensated in that regard.
Two weeks ago, we heard from Edith Monfries about the support that has been provided, particularly by her company, which is Hawthorn Leisure. Do you accept that most companies have helped their tenants to keep their businesses open? We were told that, because beer goes off, most of it had to be taken away and replaced. Would that have happened if the pubs were not tied?
It is quite right that the support that you mentioned, which has been outlined by pub companies, has been provided; pub companies should be supporting their tied tenants. It is in their interest to keep their tenants viable, so they should be doing that. The fact is that there is a different picture with different pub companies—some might be better than others. We should have a statutory code and statutory regulation to ensure that all pub companies treat their tenants properly.
On the issue of beer credits and beer being destroyed, I have spoken to a number of tied tenants who are still waiting for the cash for beer credits. Therefore, even though that area has been flagged up as one in which pub companies might have supported their tenants, the experience of tenants on the ground does not necessarily reflect that.
Can you confirm that your policy memorandum acknowledges that there could be pub closures as a direct consequence of the bill being passed?
What I said about pub closures in the policy memorandum has been taken out of context. I said that the bill is about sustaining and protecting pubs, investing in them and allowing them to grow. The reference in the policy memorandum was based on what the pub companies had threatened if legislation were to go through; they said that they would close pubs. It is not my view that pubs would close. I believe that the bill has the potential to sustain and grow numbers in the pub industry.
One of the aims of the bill is to improve the process for tenants who wish to seek an MRO arrangement in Scotland, yet it removes the various trigger points. What consideration have you given to the impact that that change could have?
In drafting the bill, we carefully considered the removal of the trigger points. There are trigger points in the English and Welsh system. Those were introduced to avoid a rush of tenants applying for MRO arrangements, but they also resulted in a big backlog of cases. I understand that that backlog is being worked through. The trigger points involve extra red tape as part of the MRO process.
The bill makes the system simpler and more straightforward: there is less red tape, it allows tenants more leverage in demanding a fairer deal and it shifts the balance between risk and reward, which tenants and campaigners have been calling for. I have been at pains to say that the English and Welsh legislation was a starting point; I wanted to make improvements on it, and I believe that the removal of the trigger points represents a significant improvement on the legislation in England and Wales.
Those who support the bill suggest that it could create investment in Scotland’s pubs, and those who oppose it say that it could have quite the opposite effect. Do you have any evidence of data that supports the view that free-of-tie pub tenants are more able to make or attract investment?
If tied tenants were free of tie, they would have more resources and more opportunities to invest in their business. I said earlier that tenants I have spoken to have said that they would be around £20,000 a year better off. In his written submission, Joe Ghaly, who is a leaseholder in Aberdeen, said that he would be £35,000 to £40,000 better off, because the mark-up on beer that he currently has to pay makes him that amount worse off. In addition, as I said earlier, 76 per cent of tenants who responded to a survey that was carried out by the Federation of Small Businesses said that they would invest in their business.
Greg Mulholland made an important point to the committee two weeks ago when he said that it was a “complete myth” that pubcos would no longer invest in their pubs if the tenants were free of tie. The pubcos would still have an interest. The pubs in question would still be their assets and it would still be in pubcos’ interest to invest in their businesses.
I recently saw an online article that discussed the investment levels of pubcos in England and Wales, where there is a statutory code and an adjudicator, and it talked about £500 million to £600 million of investment being made by pubcos there. When Lawson Mountstevens spoke to the committee two weeks ago, he mentioned a figure of about £190 million.
Pubcos will still have the opportunity to invest. There is nothing in the bill that prevents pubcos from investing in pubs. Equally, as a tenant said to me at the weekend, there is nothing in lease agreements to say that tenants have a right to investment from the pubcos.
I come back to the point that the bill is about having a fairer share of risk and reward, giving tenants more leverage and providing them with the flexibility to take decisions that would sustain or grow their businesses and allow them to keep more of their profits in the pub.
I want to ask about a couple of areas. My first question relates to what the Scottish Courts and Tribunals Service said in its submission. According to it, the Sheriff Appeal Court deals only with appeals from the sheriff court. The bill would involve a new process that would require an investment by the Scottish Courts and Tribunals Service. Why was that additional cost not reflected in the financial memorandum?
I would like to bring in Nick Hawthorne to talk about that.
The simple answer is that we were unaware that there would be such an additional cost. Neil Bibby wanted to include an appeals provision, and the drafter of the bill drafted it in that way, with appeals being made to that court.
Since then, we have engaged with the Scottish Courts and Tribunals Service. It would be for Neil Bibby to say, but if the bill required amendment, the service has suggested that an alternative would be to amend it to change which court an appeal would be heard by. That would avoid any additional cost. That would be a matter for Mr Bibby, but it is certainly an option. That is why that cost is not reflected in the financial memorandum.
Neil, would you consider amending your bill to avoid that additional cost?
I am aware of that issue. I will be happy to look at it at stage 2 and to liaise with the Scottish Courts and Tribunals Service if necessary, and I am sure that Nick Hawthorne and the non-Government bills unit will do the same.
I want to move on to the issue of guest beers. The Kilderkin, where you launched your bill, is owned by Star Pubs & Bars. It has a good range of guest beers. How can you argue that the tied model limits choice of local beers when the pub where you launched the bill has a good range of guest beers?
There is a good range of beers at that pub, but there are many pubs that do not have a good range of beer. It is important that the guest beer right is included in the bill. It is important to provide an opportunity for access to the tied market. The Society of Independent Brewers has told us about the problems that there have been with access to the market—it says that independent brewers have relatively little access to it.
The guest beer right is about giving publicans the opportunity to stock more beers and to stock the beers that they want to stock. It will also allow consumers the opportunity to demand more choice at the bar.
There is an economic element to the beer tie. I understand that one tenant in the committee’s focus group said that they wanted to support the local economy and local products, but that they could not because of the tie. In some markets, customers are demanding local products that cannot be provided because of the tie, as that makes them unaffordable to stock. I am sure that the pub companies will show you lengthy lists of all the beers in the world that they can buy, but the prices at which pubs sell them on makes them unaffordable to stock. There was an example in the committee’s focus group of a publican who could buy a keg of beer from Norfolk for £77, but a Scottish beer that they wanted to introduce would have cost them £135. That discourages pubs and local businesses from being able to stock more beers and the beers that customers want.
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I agree that we need to get more craft beers into bars and support the Scottish craft beer industry, but is there not a concern that the proposed guest beer right might not achieve its aim of improving market access for smaller local brewers—[Interruption.] Excuse me. Rather, it might allow tied pubs to offer an alternative mass-produced lager at a more competitive price than under the existing tie. What consideration did you give to that risk?
We need to get the code right. The bill is about ensuring that there will be a code and, as part of that code, I want there to be a guest beer right. In considering that right, I think that it should be down to the publican to decide what beer they want to select under the guest beer agreement. In some pubs that might be a mass-produced lager such as Tennent’s lager, and in other pubs it might be a beer from the Stewart Brewing company in Midlothian, Kelburn Brewing Company in Barrhead or one of the many other breweries across Scotland.
My thinking is that we should give publicans the flexibility and give consumers the choice. That should be looked at in the code, but we want to establish a guest beer right in the first instance. The MRO option, if exercised, would give publicans the opportunity to stock however many different beers they wanted to and their consumers demanded them to.
If the bill is about supporting the Scottish craft beer industry, surely we should be encouraging publicans to take up the Society of Independent Brewers’ Beerflex option. Maybe we should say to publicans that if they want to stock a guest beer, they should buy from the local brewery on their doorstep, because they would be supporting the local industry.
The aim of the bill is to support pubs and the brewing industry in Scotland. It should be for publicans to make decisions on what beers they want to have in their pubs, based on what their consumers demand. It is about giving pubs the flexibility and the right to stock the beers that they want to stock. There is a great demand out there for Scottish beer and produce, which is currently underrepresented and to which access is being restricted. As the committee has heard from the Society of Independent Brewers and others that represent the many fine brewing companies that we have in Scotland, that needs to change and something needs to be done. This is an example of a situation where voluntary codes and voluntary regulation are not working. For example, the committee heard that, under Beerflex, only 1,000 barrels a year are sold. Many pubs sell that amount on their own; that is a tiny proportion of the beer that goes into the tied sector.
I accept that, but the bill would not guarantee Scottish craft brewers more access to the market; as you have said, it would just give publicans an option. They could move over to another mass-produced lager rather than taking a local craft beer.
It would present more of an opportunity than they currently have for Scottish brewers to access the tied sector. My view is that what the beer is should be down to the publicans and consumer choice. I would like to see more Scottish craft beer in Scottish pubs, and I think that the bill affords that opportunity. I repeat that, if the MRO option is exercised, there is a lot of opportunity for pubs to stock the beers that they want.
You are right: if the guest beer right was exercised, that would make publicans better off, too, and they would potentially be able to cross-subsidise other ties. However, judging from the submissions from the pub companies, I think that they oppose the bill and many of the provisions in it. I think that their opposition to a guest beer right for just one beer in a pub shows how unreasonable they are. They are not even willing to allow that level of access. That is regrettable, and it is another reason why we need to do something.
Thank you for that. I apologise for my land-line phone ringing in the middle of those questions.
I have a few questions for you, Mr Bibby. First, can you clarify that, in Scotland, tied arrangements are purely private contracts and they are not subject to any existing regulation—obviously, outwith standard contract law, health and safety and all the rest of it? There are no specific statutory provisions that govern the arrangement between a tied tenant and a pubco, and your bill would be the first piece of legislation to introduce such provisions.
Yes.
Returning to the market-rent-only option, I note that the landlords argue that it would disincentivise investment on the basis that, when they made any investment, they would not be sighted on whether the tenant might choose to exercise that right at some point in the future.
I did not get the chance to ask them this because we did not have a great deal of time, but I spoke to them privately subsequently and I asked them whether there is really a difference there. My understanding is that, if a tenant exercised a market-rent option and the landlord had made an investment of, let us say, £100,000 in new kitchen equipment, any rent assessment that was made for the purpose of the market-rent-only option would take account of the investment that had been made in the asset, and it would attract a higher rental.
In other words, landlords would not be disincentivised from making investments, because the market-rent-only option would reflect the fact that they had made them, although the pubcos tell me that that is not strictly true because part of the return that they get is not in the dry rent but in the wet rent.
Given the way that you have framed the bill, would the rent assessor, where a market-rent-option was being exercised, adequately take account of the investment that had been made by the pubco, such that it need not worry about the option being exercised?
Broadly, yes. If a company has invested in a property, the value of the property and the asset will increase, so I would say yes.
When it comes to making a market-rent-only assessment, does the bill make adequate provision for assessing the wet rent as part of the payback? I want to be clear about whether, in your view, if a tenant exercises a market-rent-only option, the rent that is then set will be an adequate return for the investment that the landlord has made.
Either the MRO will be agreed or there will be an independent rent assessment. I am happy to consider the matter further and write to the committee or, if necessary, deal with it at stage 2. There are a lot of issues here. The bill will establish an adjudicator, whose view will count.
Yes. I just want to be confident that the mechanism that has been chosen will set a fair rent in light of the investment that has been made by the landlord. On the flipside, the Scottish Licensed Trade Association has brought to our attention in supplementary evidence that, because of the on-going wet rent, tenants often pay back more than the investment. However, I will welcome it if you can bring some clarity on the matter, given the uncertainty. Part of the problem that we have in considering the bill is that, in some cases, we are having to grapple with two diametrically conflicting opinions and sets of evidence.
I will move on. Gordon MacDonald asked you a question about pubs closing. As I recall, evidence that was given to the committee showed that there is a difference between pubs closing—in other words, the doors being shuttered and the pub being closed—and businesses failing. A pub tenant’s business might fail and they will leave, but the pub is still there, and it will either be sold or be offered on a managed tenancy or to a new tied tenant. In other words, the pub will not close, but businesses might fail.
Will you comment on the trends in the closure of pubs—where the pub is completely closed and it will never come back—and business failures, which do not necessarily lead to the closure of pubs? Do you have any data on those two types of closure or interruption?
I do not. Figures are available on overall numbers of pub closures, which, sadly, show a decline in the number of pubs over a 20-year period. That is regrettable. I do not have information on churn and business failures, but I think that the pubcos would be able to provide figures and information on churn.
As I said earlier, the Pubs Advisory Service has highlighted in supplementary evidence that average tenure in one pubco is about nine months. If you look online, you will see that there are about 60 tied pubs for lease in Scotland, which is a fair proportion of the 750. I think that we can see the model.
I have tried to progress the bill as quickly as possible, but a member’s bill can take time, particularly when you are dealing with complex legislation and trying to learn lessons and rules as you go along. When I did the consultation in 2017, I spoke to tied tenants, and one of the saddest things about the length of time that the bill’s development has taken is that at least half a dozen of those tenants’ pubs are now for let online. Far more tenants will have been brought to the brink and their businesses will have failed, and unfortunately the bill is too late for them.
Over the past few years, I have received a number of emails from tied publicans who have got in touch with me to say, “We’re really struggling to make ends meet—can you tell me when the bill is going to be introduced?” Unfortunately, it has been too late for them. They have had to hand the keys back because their business has failed. However, I still believe that the bill is important to protect current and prospective tenants. That is a critical point.
Okay. You mentioned 60 businesses being up for rent. Are they all tied arrangements?
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Yes—I had a look online the other day, and it seems that there are around 60 tied pubs for rent in Scotland. Obviously, it is a really difficult time for pubs, but the churn rate is consistently high, regardless of the coronavirus.
A criticism of the bill that has been made to us relates to the fact that the number of tied pubs in Scotland is relatively small compared with the number in England and Wales. It could be argued that the arrangements that have been put in place for England and Wales are proportionate because the proportion of tied pubs there is high, but the proportion of tied pubs in Scotland is far more modest in comparison. Are you satisfied that the bill is a proportionate response to the problems that you perceive in the tied sector in Scotland?
Absolutely. I do not think that it is a numbers game, but there are still a significant number of tied pubs in Scotland. There are statutory protections for tied pub tenants in England and Wales, and there are a considerable number of tenants in Scotland who do not have those statutory protections. We need to ensure that those rights are in place.
It has been said that only a very small number of cases would go to a pubs code adjudicator because of the smaller number of tied pubs in Scotland, but I think that the exploitation of one tied tenant is one case of injustice and unfairness too many. We have a Scottish Housing Regulator, which I think dealt with nine cases last year. Despite the fact that that is a low number, I do not think that anyone is suggesting that we should not have the Scottish Housing Regulator. Several other statutory and regulatory bodies in Scotland deal with small numbers of organisations and small numbers of complaints.
As a matter of principle, it is important that we have the same statutory protection in Scotland so that tied tenants here are afforded the same rights that are afforded to tied tenants south of the border.
The Scottish Housing Regulator might have dealt with only nine complaints last year, but it has a wide range of other statutory duties as well. Putting that to one side, however, I take the point that you are trying to make—
That was just one example.
Sure.
One of the concerns about the bill is that, ultimately, the cost of implementing the provisions would be borne by the pub industry. Its argument is that, because there are so few tied pubs in Scotland, that would impose on it a relatively high cost per pub.
Are you confident that an adjudicator could be put in place without it being accompanied by a large bureaucracy? In other words, could we have a part-time, light-touch arrangement that would be cost effective? When we have adjudicators, regulators and all the rest of it, it is important that they do not lead to empire building, that they are structured in such a way that their operations are proportionate, that they are nimble and that they do not come at great cost. That is particularly so when the cost is to be borne by the private sector, unlike the situation with other regulators such as the Scottish Housing Regulator, the cost of which is born by the public purse.
Are you satisfied that a flexible, nimble and cost-effective arrangement could be put in place? The pubcos are not.
I hear what the pubcos say about the costs being radically underestimated but, on the other hand, they also say that there are too few tied pubs in Scotland and that there would be too few complaints. They cannot have it both ways; they cannot simultaneously say that the costs are underestimated and that the number of tied pubs is too small to justify the bill.
I would envisage the adjudicator being part time, and I would envisage a structure that is not bureaucratic. I return to what I said about the MRO provisions. In England and Wales, there has been a big backlog of cases, which is to do with the MRO trigger point. I have tried to improve on the experience there by doing away with MRO trigger points in the bill. That should simplify the process and make it more streamlined. If it works well and we give tenants more leverage to get a fairer deal out of their pub companies, that should also lead to less bureaucracy.
As I have said in response to other points that have been made about the cost, I do not want what is proposed to be overly bureaucratic or to cost a significant amount of money, and I do not think that it will. There will be a small contribution for pubcos to make. The worst offenders will find that the more complaints there are about them, the more they will pay—in that regard, the polluter will pay.
As I mentioned, the pub companies can well afford a small amount to fund an adjudicator. I gave the example of one of the companies that owns pubs and its profits. It can well withstand a small charge to set up an adjudicator.
My final question is about the coronavirus pandemic. The committee dealt with the Protection of Workers (Retail and Age-restricted Goods and Services) (Scotland) Bill. In scrutinising that bill at stage 1, we were very conscious that the coronavirus pandemic had brought into sharp relief the contribution that retail workers make. However, we cannot legislate for the possibility of such temporary emergencies—that would be for emergency legislation.
The legislation that we pass has to endure and be able to resolve issues that will endure beyond the pandemic. The pandemic might change some of those fundamentals in ways that we do not quite understand yet, but we cannot legislate for that. Although we are conscious of the impact of the pandemic, it is important that we do not legislate in response to it, as it is in essence temporary.
One way of asking my question would be to ask this: do you envisage that, if your bill is enacted, the number of tied pubs in Scotland might increase because the option will be more attractive to tenants?
Possibly, yes. There is a wider issue with the pub sector more generally. However, as I said, I want there to be a fairer sharing of risk and reward and the ability for publicans to get a fairer share of the profits that pubs make. I want to see pubs grow.
You mentioned the coronavirus pandemic. The bill was published before the pandemic, but there are still deep-rooted issues in the tied pub sector—they were there before the coronavirus, and they are still there. We can look at the issue that you raise.
There is legislation in England and Wales. We have an opportunity to make Scotland the best place in which to be a tied tenant, and an opportunity to have the best tied pub sector. We are coming to legislation after England and Wales, but we have an opportunity to have better legislation and to improve the tied pub sector here in Scotland.
As there are no further questions from committee members, I ask Neil Bibby to briefly sum up his position before we move into private session.
If you do not mind, convener, I will ask Nick Hawthorne whether he has any further points to make. Is that in order?
Yes, certainly. Do you have any points to sweep up on, so to speak?
I have nothing specific. I have a few notes of things that Neil Bibby said, and one or two things on data and statistics given members’ questions, on which we could usefully write to the committee. We will speak to Neil and refer back to the committee as appropriate.
Thank you again, convener, for the opportunity to discuss the bill today. I reiterate the need to support publicans at this time, and our much-loved small businesses in Scotland. I believe in the bill. I believe that it represents the right thing to do and that doing nothing would be the wrong thing.
The bill seeks to introduce statutory rights for tenants that already exist in England and Wales. The legislation there was passed on a cross-party basis, and I see no reason why my bill, which seeks to give rights to tenants in Scotland, should not also be passed. I am happy to work across parties and with all committee members to get that done.
I hope that the committee will support the general principles of the bill, which are fair, reasonable and sound. If the committee believes that the bill should be considered further, the Parliament will have the opportunity to do that at stage 2. I repeat that I am happy to work with the committee to develop the bill, and I will be happy to expand on my evidence and answer any further questions that members have.
I thank Neil Bibby and also Nick Hawthorne and Neil Ross, who appeared with him virtually.
12:10 Meeting continued in private until 12:56.