The Tied Pubs (Scotland) Act 2021 ("the Act") became law on 5 May 2021, but due to a series of (ultimately unsuccessful) legal challenges, the Scottish Pubs Code ("the Code") envisaged by the Act has not yet come into force.
The Code is contained in the Scottish Pubs Code Regulations 2024 ("the Regulations") which were made on Tuesday 25 June 2024, and which say that they will come into force on 7 October 2024 . However, the Scottish Government laid a set of draft amending regulations before the Scottish Parliament on 7 June 2024 ("the amending regulations") to delay the Code coming into force until 31 March 2025. The policy memorandum accompanying the amending regulations states that the reason for the delay is to enable the Scottish Government to undertake a short, targeted consultation to consider concerns raised by the tied pubs sector on the Code.
This insight summarises the key provisions made by the Regulations in the following areas:
Information and advice to prospective tied-pub tenants
Regulations 9 to 11 set out the information and advice that a pub-owning business must give to a prospective tied pub tenant before entering into a tied pub lease. The Code will place obligations on pub-owning businesses including obligations to:
- advise certain prospective tenants to complete appropriate pre-entry training and give them information about providers of such training;
- provide information to certain prospective tenants before entering into a lease, including a draft lease, rent assessment statement, a copy of any dilapidation report from the previous tenancy and other specified information; and
- advise certain prospective tenants to prepare a business plan, and signpost independent providers of business plan advice.
Rent assessment and review
The Code provides that owners must provide a tenant with a rent assessment statement at least 6 months before the date the rent is to change either due to a rent review under a lease or where a rent review occurs under the Code. The rent assessment must set out:
- the proposed rent as valued at the valuation date (a date selected at least 6 months from notice of the rent assessment)
- the methods, assumptions and disregards used to calculate the rent,
- a profit and loss forecast for a 12 month period beginning on the valuation date,
- the volume of alcohol purchased for the pub from the owners (or any person acting on behalf of the owner) in the last 3 years, and
- any other information relied upon.
Market rent only ("MRO") lease
The introduction of MRO leases is perhaps one of the biggest changes. An MRO lease will be a lease setting rent payable either at an amount agreed between the landlord and tenant or the market rent where there is no agreement. An MRO lease will not include any term which is a product or service tie in relation to the pub and will bring an end to the tied-pub elements of the lease.
The Code provides that "market rent" means the estimated rent which it would be reasonable to pay if the pub was occupied under a tenancy assuming that:
- the hypothetical tenancy is not subject to a product/service tie,
- the pub will continue to be a pub, and
- the hypothetical tenancy is entered into on the date that the estimate of the rent is being carried out, in an arm's length transaction, after proper marketing, and between parties who are all acting knowledgeably, prudently and willingly.
There are four key phases in the MRO lease process.
Firstly, there is the process for a tenant to request an MRO lease. A tenant may request an MRO lease in writing and can also cancel the request at any time before the conclusion of the assessment period discussed below. A landlord must offer a tenant an MRO lease unless limited exemptions apply. If an MRO is refused on the basis of one of those exemptions, the owner must inform the tenant.
Secondly, there is the offer and negotiation period for an MRO lease where no exemptions apply. Where a tenant validly requests an MRO lease the owner must offer the tenant an MRO lease in writing within 4 weeks of receiving the request. The MRO lease must provide for a new rent and include a draft deed of variation (or a draft lease in certain circumstances). There must then be a negotiation period of no more than 8 weeks from the date the offer of an MRO lease is received by the tenant during which both parties are to use their best endeavours to agree terms and enter into an MRO lease as soon as possible. The period may be extended by up to 4 weeks by agreement.
Thirdly, there is a period for assessment where an MRO lease cannot be agreed. A rent assessor is to be appointed by the owner with the consent of the tenant within a period of 3 weeks beginning on the day after the negotiation period ends or, where agreement cannot be reached, the matter must be referred by one of the parties to the Code Adjudicator within 2 weeks from that deadline. The rent assessor must report within 4 weeks of appointment, the landlord must then provide a proposed MRO lease in consistent terms within 4 weeks of that date and the tenant has a further 2 weeks to accept or reject the proposed MRO lease.
Fourthly, there is a dispute mechanism. If at the end of the negotiation and rent assessment periods the terms of an MRO lease have not been agreed, this may be referred to the Code Adjudicator as a dispute.
Guest beer arrangements
The Code also provides that an owner must offer to enter into a guest beer agreement with the tenant at the tenant's request. A guest beer agreement allows the tenant to sell to the pub’s customers (at a price decided by the tenant) at least one beer chosen by the tenant, and to change the chosen beer as frequently as the tenant wishes. The agreement must not:
- vary the existing lease except to the extent necessary to include the guest beer agreement or to provide for a service equipment charge,
- penalise the tenant in any way,
- contain restrictions on how a guest beer may be purchased, stored or sold, or
- restrict the tenant from purchasing a guest beer from a person of the tenant's choosing.
A guest beer agreement must not relate to a brand of beer of which either:
- more than 5,000 hectolitres was produced in the production year immediately preceding the production year in which the request occurs, or
- the brand of beer has not been in production for a full production year immediately preceding the production year in which the request date occurs and the producer reasonably estimates that more than 5,000 hectolitres will be produced in the production year in which the request occurs.
The owner must send the tenant an offer to enter into a guest beer agreement in writing within 4 weeks from the day the tenant's request was received. The offer must include information on any service equipment charge for facilitating the guest beer arrangement.
Overall
Owners and tenants involved in the tied-pub industry will need to be alive to the key proposed changes which are set to come into force from 31 March 2025 if approved by the Scottish Parliament.
