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Are Tied Pubs another Post Office Scandal? – Reflections of a Reluctant Landlady

Introduction

I have heard a few pub landlords recently say that the tied pub model is another Post Office scandal waiting to be uncovered.  Do I think this is true? Continue reading to find out.


What is a Tied Pub?

In my hospitality business, we had three tied pubs.  A tied pub is leased from a pub company (Pubco) by a landlord who must buy a many of their products, particularly beer, directly from the Pubco at set prices.


The Pitfalls

When I took on my first pub, I admit I was quite naive and unaware of the extent of problems with tied pub leases. I was sold that although the pub was tied, the rent was cheaper to balance it out.  Once we had been trading for a while, I learnt first hand the pitfalls of this model – and they were pretty spectacular. 


A barrel of Fosters beer, for example, could be purchased from a local wholesaler for 50-60% less than I had to pay when I placed my weekly order from the Pubco.  The beer tie was very lucrative for the Pubcos, and they would send ‘cellar spies’ round to check that landlords weren’t buying any beer out of tie. 


When we were trading well, the rent negotiations became increasingly aggressive. I remember one time a Regional Manager from the pubco agreed with me that the rent was too high, and he would go away and discuss it with his manager.  The result – they suggested my rent went up from £81,000 to £95,000!

And other products – we were tied for other services such as having to use their contractors for the refurbishments, insurance and which accountants we could use in the first year. We had no power of negotiation for these services which were often pricey.


One of the Pubcos we were with decided to turn a neighbouring pub they owned into a managed house – where they were selling lines of beer cheaper than the cost I had to purchase mine from them. So, they made us compete unfairly with them, as well as pay high rent and extortionate beer prices.


I wasn’t the only one facing these landlord struggles.  I met many other people facing the same issues. In fact, many of them were working long hours, not taking home the National Living wage and were facing huge financial difficulties.


Why the Pub Code?

After numerous accounts of tenants struggles due to restrictive practices by some Pubcos led to a public outcry, in 2016 the Pub Code was brought in to redress the power imbalance between giant pub companies (those with 500+ tied pubs) and their tenants.


At the heart of the Pub Code are two pivotal concepts: fair and maintainable trade (FMT) and the market rent only (MRO) option. FMT refers to the level of trade an average competent operator can expect to achieve at a particular pub which serves as a benchmark for negotiations between the Pubco and the tenant.


On the other hand, the MRO option allows tenants to request a rent assessment that isn't tied to the obligation of purchasing products from the Pubco under certain circumstances. This means a tenant can choose to pay only the market rent for the property, freeing them from the tied arrangement, should it prove unsustainable.


The Battle of the 'Little' People

We were among the first pubs to request an MRO option under the new Pub Code due to a trigger event, i.e. an event beyond the control of the tied pub tenant that was not reasonably foreseeable.


When we took on our third venue, we worked hard to turn around the terrible reputation it had for being a dingy, drug-filled boozer.  After a great refurbishment (which, to be fair, the Pubco helped to achieve and it was a complete transformation), we opened the venue as a seven-day carvery, with an eye-catching dessert fridge and small play area.  It was an instant success, the locals supported it and we were delighted with the trading figures.


However, our delight was short-lived, as a few months later Greene King began construction on a massive purpose-built carvery, with large indoor and outdoor play areas at a cost of over £1,100,000 just a mile or two away.  It did everything we were doing only bigger and in many ways better.  We could not compete. Our takings crumbled and the carvery became nonviable overnight.


We took advice and put in an MRO request due to this trigger event.  It sat on the Pub Code Adjudicators desk for a couple of years, during in which time we propped up the venue with the profits from our other pubs.  We were really struggling and desperate for a response.  Eventually it arrived, we had won!  The Adjudicator agreed that we should be able to put in an MRO request (this was only the first hurdle, as it was only the first step in rent negotiations). 


We were ecstatic, but again, not for long.  The Pubco decided to appeal the decision in the high court.  They argued that we should have foreseen a rival business could operate in the area – even though this was no SME and we hadn’t seen any planning applications. They were focused on not losing this test case as it could pave the way for others to make the same arguments.


The long drawn out process was taking its toll – we were financially struggling, stressed, and faced with a massive legal bill not only for ourselves, but the prospect of paying towards their legal costs if we lost, and they were using top barristers. In fact, one firm of solicitors suggest that it could cost over £100,000 to complete the arbitration process.


Eventually, we negotiated a better tariff for our tied beer prices.  It was a compromise of sorts, but it kept us afloat.


What Would the Pubco Say?

What about the benefits of the tied pub model? Pubcos often argue that the tied model has significant benefits that are sometimes overlooked in broader discussions. They point out that this model allows individuals to run a pub with a lower initial investment compared to freehold purchases. Moreover, Pubcos assert that the tied model provides ongoing support that goes beyond just the financial aspect. This includes access to training and business advice.


Furthermore, in response to the criticism about high prices and restrictive practices, some Pubcos highlight that the prices set for products often include these support services and investments in the pub.


I agree that there is help in entering the trade through the model – but these benefits are quickly swallowed up with the landlord’s inability to make a profit when paying extortionate beer prices. 


Another Post Office Scandal?

Are tied pubs another Post Office scandal? I am horrified by the way that the Post Office saga unfolds, and the effect it still has on the poor people caught up with it.  I wouldn’t want to say what I went through was the same as the poor folk caught up with the Post Office scandal, but there are some parallels.


The ‘little people’ caught up in the toxic leases of tied pubs suffer huge financial losses and stress. They can lose everything, and Facebook groups are full of stories about landlords who have left the trade (and their homes) penniless or still battling to leave – not easy when you have a long lease. 


I think that tied pubs are in the same David v Goliath league as the Post Office scandal, but in a lower division. At least the Government has required a three yearly review of the process of the Pub Code.  The last one was fairly favourable towards the Pub Code; however, there appears to be a disconnect between the report and the word on the street. I believe the process has to be much simpler to understand and less expensive to really make a difference.


The hospitality sector is on its knees – according to a report by the University of Cambridge, hospitality, alongside real estate sectors, have the highest rates of common mental health problems.  COVID-19 knocked the sector hard with total shut downs, strange curfew and alcohol rules, not to mention the Scotch Egg debate (follow this link to see a breakdown on how COVID affected pubs).


On top of that, pubs are facing spiraling costs, changing drinking habits, alongside cheap beer sold through supermarkets and it is all taking its toll. Hundreds of pubs close every year.  A toxic lease on top?  A sector-wide disaster brewing I fear.


And me?

We eventually sold our pub lease back to the Pubco – who approached us a year later because the profits they were making on us had reduced too much for their liking. In time my other two tied pubs became free of tie, after difficult negotiations at rent review of course. I would never contemplate a tied lease again!


Read more of my reflections at www.catalystcoaches.org/hospitality/blogs.



A landlord looking down in despair propped up against his bar.  There are pub customers in the background.

 


 

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