Rural Pubs

Part of the debate – in Westminster Hall at 11:00 am on 7th December 2005.

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Photo of Michael Wills Michael Wills Labour, North Swindon 11:00 am, 7th December 2005

Rural areas face problems with employment, housing, transport and health, but sustaining their communities can present them with particular challenges. Although my constituency is largely urban, it does have rural areas that suffer from all those problems, and I have constituents who want to see further progress made in tackling them.

This Government have done more than any previous Government to invest in sustainable rural development with a range of measures, including help for rural transport, rural post offices and rate relief. I secured this debate to ask the Government to continue that important work with further support for the institution that so often represents the beating heart of rural communities—the rural pub.

As the supermarkets tighten their grip on our shopping habits and as patterns of work and settlement keep changing, increasingly the village pub provides the main, and sometimes the only, focus for social activity in rural areas. Without such a focal point, the sense of community evaporates from rural areas, and that sense of community is essential for regeneration. Yet the rural pub is under threat. Some estimates suggest that six are closing every week. There are many reasons for that: drink driving regulations inhibit many people from driving out into the country for an evening at the pub as they might have done 30 or 40 years ago; the extremely competitive prices charged by supermarkets for beer are encouraging some to drink at home instead of going out to the pub; and the changing composition of villages means that more and more people are commuting in and out of them. All those things challenge the viability of many rural pubs.

Those problems are well known and a lot of good work has gone on to tackle them. The Campaign for Real Ale, for example, has been indefatigable in championing the cause of choice, and small breweries, to make all pubs more attractive to the discerning and committed consumer.

There are good examples of what can be achieved. Some pubs have been making themselves sustainable by diversifying into other areas, including prescription deliveries, DVD rentals, and even delicatessen and broadband facilities. There have been inspiring examples of villagers giving their pub a new sustainable financial basis by buying it as a co-operative.

When, as the Minister with responsibility for small business six years ago, I set up the Small Business Service, I wrote into its remit that it should encourage mutual enterprise as an instrument of regeneration. I believed then, and still do, that such co-operation and mutuality can be an invaluable instrument of community regeneration. It is encouraging to see rural communities putting that into practice by supporting their local pubs in that way, but more needs to be done. I hope that the Minister can reassure me that his officials and those in the Department for Trade and Industry will work with the Small Business Service to ensure everything possible is being done to provide support for villages that might want to form co-operatives to run their local pub.

The Minister will be aware of the role of the Pub is the Hub initiative, originated by Business in the Community, in spreading best practice. Again, I would welcome his reassurance that he and his officials, and those in the DTI, will work with Pub is the Hub to ensure that it receives the funding and other support to enable it to develop its work so all rural pubs can benefit from it. I should be grateful if the Minister could write to me by the end of March about the action that is under way in those areas, so I can reassure my constituents about the good work being done by the Government.

I would welcome reassurance from the Minister about how the fairness, equitability and sustainability of the commercial environment in which rural pubs operate can be ensured. He will know that in recent years ownership of pubs has become increasingly concentrated. The top six so-called pubcos control almost 40 per cent. of UK pubs. He will also know that a year ago the Select Committee on Trade and Industry conducted a thorough investigation of their relationships with their tenants. I do not intend to rehearse all those arguments today, but I have some concerns that I shall raise with the Minister. Before I do so, however, I stress that I have no quarrel with the Select Committee's balanced conclusions about the trade-off between the so-called dry rent and the wet rent charged by the pubcos—the profit they make from contractually exclusively supplying beer to their tenants.

I recognise that some pubcos have moved some way towards addressing concerns about their relationship with tenants. The largest have codes of conduct that stress that tenants should take professional advice before entering into any contract, and their websites offer clear and helpful accounts of different business models available to potential tenants.

However, there are still grounds for concern. Pubcos start from a strong position, first because there remains a strong demand for tenancies, not necessarily because a tenancy offers a viable living but because many people still dream of the rural idyll of running their own business in a pretty village. There are other attractions. The chief executive of Punch Taverns plc said earlier this year that taking on a lease with accommodation

"can appear a very attractive deal when house prices are so expensive".

Such a lease can also seem attractive because the entry costs into the business in that way are lower than taking on a free house.

However, such attractions must not be an excuse for abuse of a dominant position in a contractual relationship, and there is certainly a price to pay for the low cost of entry. For example, I have seen detailed figures prepared by a successful and experienced publican in the Swindon area, who is now a contented tenant of a local brewery, but was previously an unhappy tenant of a pubco. Those figures suggest, among other things, that the percentage of gross profit taken by rent will be less than 10 per cent for a free house but more than 20 per cent. for the lessee of a pubco.

The Trade and Industry Committee rehearsed the main complaints against alleged exploitation by pubcos a year ago, and some of the questions it raised have still not been properly answered. The Select Committee said that pubcos should insist

"as a condition of acceptance that tenants obtained all necessary professional advice. This should be one element of an industrywide code of practice."

The new code of practice is now out for consultation by the British Beer and Pub Association and goes a long way towards meeting that objective. That is important because Morgan Stanley, for example, found that 40 per cent. of prospective tenants took no legal advice before signing lease agreements, 42 per cent. said they were encouraged by the pubco to do so and 63 per cent. were not asked by the pubco whether they had done so.

Obtaining such advice should ensure that tenants understand better what they are getting into, but that does not guarantee that pubcos will alter objectionable clauses. There are often two or three potential tenants pursuing the same lease, which puts them in a difficult position. It is a seller's market and the pubcos hold most of the cards. Some of the clauses that they put in their contracts are worrying. One, from a contract issued by one of the largest pubcos, states:

"the tenant agrees to pay trading accounts and statements . . . on the dates specified by the Landlord".

That is followed in the same agreement, which ties the tenant to buying beer only from the pubco landlord, by the statement that

"the landlord shall on the signing of this lease and from time to time thereafter supply the tenant with a pricelist of beers".

In other words, there is no contractual fetter on the landlords to prevent them from raising prices as often as they want and as high as they want, and demanding payment as frequently as they want. Those clauses are not subject to any test of reasonableness or tied to any increase in the pubcos' charges from the brewery. In this case, the pubco seems able to charge whatever it wants, whenever it wants.

The pubcos frequently claim that their business model depends on their tenants prospering, and the argument is advanced that it would not be in their interest to bleed tenants dry. However, there is a difference between the extreme position of bleeding them dry and simply exploiting them by charging unreasonably high prices for the tied beer, secure in the knowledge that their tenants will often work extremely long hours to make the business pay, and swallow any disproportionate increases in costs.

It is hard to avoid the conclusion that such clauses leave pubcos in a position where they can use their dominant economic position to exploit their tenants. That does not mean that the tenants will necessarily go bankrupt. They may survive by working hours, and at a standard of living, that no pubco director would accept, but survival can be consistent with exploitation and nothing in the new code of practice issued by the British Beer and Pub Association will prevent that, as far as I can see.

The so-called wet rent, which is derived from the profit made on the exclusive supply of beer to tenants, is justified by the claim that it is partly offset against the rent charged for the premises so that such rent is competitive. However, I am also concerned about the so-called dry rent. The Trade and Industry Committee report stated:

"The industry could and should establish clear guidelines for the rent valuation process" with

"new national guidance for rent calculation . . . The profit assessment method of calculating rent should be carried out in accordance with national accounting standards".

However, the British Beer and Pub Association code of practice states that

"company codes of practice should, as far as reasonably practicable and possible, provide for the making available to the lessee of information relating to how the rent will be determined initially", which is not quite what the Select Committee recommended. It suggests that the fixing of rent and rent reviews will remain contentious, and, in the absence of the national standards suggested by the Select Committee, that there will still be scope for pubcos to exploit their tenants. Apart from anything else, the more vague and opaque the process, the more disputes over unjustifiably high rents and rent increases can be resolved only through litigation. How many tenants can afford to litigate against huge powerful pubcos?

Apart from the operation of the charges for tied beer and rent, I am also worried about the appropriate disclosure of information to tenants and potential tenants, which, again, was called for by the Select Committee. There are disturbing signs that the pubcos are not fully signed up to that. The Select Committee said that

"pubcos should advise their tenants of the average discount they receive" from brewers, and

"how this compares to the free market discounts available, and how much of this discount pubcos are passing onto their tenants".

Enterprise, which is one of the largest pubcos, said in response that that was

"entirely irrelevant to the tenant's decision-making process".

I am baffled by that response. It hardly suggests that pubcos view their tenants as partners. Of course such information helps tenants understand the business model of their competitors and, indeed, the strength or weakness of their position in relation to their landlords. As such, it seems to be highly relevant to tenants' decision-making processes. Of course, contracts with suppliers are subject to commercial confidentiality, but why could tenants not be bound by such clauses? It is not unreasonable to expect partners to share commercially important information.

At best, tenants will not be able to invest in improving their facilities for the community that they serve if they are squeezed too hard. At worst, they will go out of business. That could be a personal disaster for the tenant and could damage the rural community that they serve, but the pubco faces less risk. For them, there will always be the option of liquidating the asset and turning the pub into, for example, housing. That distorted balance of power must be worrying for rural communities that depend on their pub.

I recognise that the worries that I have expressed today may prove groundless. Pubcos may use the latitude in their contracts to behave fairly towards their tenants over the tied supply of beer, rent and other matters. They may consider that it is in their own interests to do so—but there is often no contractual imperative for them to do so.

There are many reasons why it is hard for tenants to fight their contractual corner. The pub can remain a hub of village life only if it is a sustainable business, but sustainability is damaged by unfair exploitative relationships between pubco and tenant. The survival of the rural pub is too important to village life for the Government to abandon this issue. I hope that the Minister agrees that it is important for pubcos to be aware that public scrutiny of their relationship with their tenants will not disappear with their response to the Trade and Industry Committee report a year ago. I would be grateful if he could confirm that his Department and the DTI will continue to monitor the situation, and, if the problems identified by the Select Committee, some of which I touched on today, persist, that they will take any action necessary, including introducing a statutory code of conduct, if appropriate.