The Law of Unintended Consequences
Essential reading should you consider a Pub Co Tied Lease.
MORGAN & CLARKE NEWSLETTER NO. 26
Email: firstname.lastname@example.org Phone: 01285 719292
(Also at: London, Cardiff, Matlock, Braunton, Lewes)
The Law of Unintended Consequences has always been something that is easily overlooked, not least because far-reaching legislation is introduced with an effective or operational date far-distant from the public announcement of the new regulations. This was particularly noted in our recently reported unintended consequences of the Energy Act 2011 which, you may remember, has its implementation date on 1st April 2018. Plenty of time to consider that, but also plenty of time to forget. This month we have two pieces of legislation that have quietly nestled onto the statute book which, yet again, will not be implemented until either early or late 2014. Full detail is set out below of the Taking Control of Goods Regulations 2013, which will be implemented on 6th April 2014 and the European Union Food Information for Consumers Regulations which come into force on 14th December 2014.
We are more legally focused this month. The final piece of legislation, which also has far-reaching consequences, is the Damages-Based Agreements’ Regulations 2013 which became operable on 1st April 2013. The direct effect of these three pieces of legislation on our specialist world of licensed and leisure property is enormous and will affect the industry profoundly.
1. Taking Control of Goods Regulations 2013
As earlier stated, this piece of legislation will come into force on 6th April 2014 and is, effectively, the long-awaited second step of the Tribunals, Courts and Enforcement Act 2007 which was all very well except it has now taken six years to confirm the detail of the mechanism of Commercial Rent Arrears Recovery (see CRAR). So you have a better understanding of what looks like a dusty piece of law, we can flag up that the Pubcos – some of whom have not yet caught on to these regulations – have every right to be deeply concerned over the effect of their clipped wings. There will be a huge effect on the way landlords can seize tenants’ goods for the failure to pay rent. This is known as Distress.
The regulations concerning Distress as they now stand, allow a Pubco to take action against non-payment of rent by instructing a Bailiff or Debt Collector to attend the pub and either collect the rent (not very likely), or seize goods and chattels which are held by them until the outstanding rent is paid. This can either be by the straightforward physical removal of the inventory, or the taking of what is known as ‘walking possession’ by listing the inventory items and leaving them in-situ, the ownership then having been transferred.
Going way back – would you believe to 1689? – under that legislation the Pubco was also entitled to sell the inventory to recover the rent arrears without even having to notify the licensee of an intention to exercise this action and without having to obtain a court order unless the tenant was insolvent. The scene was set for the sudden appearance of the Bailiff (or more likely a Debt Collector), with absolutely no warning. So, why the panic amongst the Pubcos? Here’s why!
a) The Taking Control of Goods Regulations 2013, now set down a number of rules which need to be met before the Pubco can exercise CRAR. The CRAR, in order to operate, has to have a written tenancy or lease agreement which includes Tenancies at Will but excludes Tenancies on Sufferance, so a licence agreement will not be sufficient.
b) You cannot ‘contract out’ of CRAR by changing a new lease agreement, hopefully to circumvent the CRAR regulations. An unlikely alternative is that any new lease could contain the agreement that the Pubco will not enforce CRAR – which is hardly likely.
c) CRAR will only apply to purely commercially-used premises where no part of the property is used for residential purposes. This item is probably the ‘killer’ clause, as how many pubs are completely lock-up premises as against businesses with distinct and separate residential accommodation? Not very many!
d) The second ‘killer’ clause is the obligation for the Pubco to notify the lessee at least seven clear days before using CRAR. The regulations require that the amount of the ‘debt’ must be stated in the Notice, which might include other debts being treated as rent arrears (for example – Brulines’ fines) and also must specifically stipulate the clear amount of the rent owing.
e) The lessee can challenge the sum quoted with a set-off for “permitted deductions”.
f) The grouping up of other monies owed under the previously allowed heading of ‘Rent’ is not acceptable because now CRAR can only be used for the arrears of principal rent, associated VAT and interest. Nothing else. For example, CRAR will now not allow the Pubco to recover any service charges or any other items such as overdue insurance, contributions to repairing funds, unpaid inventory purchase sums, etc. Rent and rent alone is the focus of CRAR.
g) The enforcement agent must then give the lessee at least another seven clear days’ notice of the date, time and place of sale after having seized goods. If this notice is not given, the seized goods are then classified as being abandoned and must be returned to the lessee.
So what are the unintended consequences? After 14th April 2014, the Pubco is unable to ambush the lessee in arrears by simply sending in the Bailiffs or Debt Collector. There is a possibility, as recognised by Government, that in a practical sense, the giving of notice might allow the lessee the time to either dispose of or remove the inventory from the premises which, although not legal under the terms of the majority of leases, might still be seen as an act of desperation. It is also possible that the new CRAR regulations might mean larger rent deposits and tougher leases. However, the question still remains over how the Pubcos will cope with the legality of only being able to enforce CRAR on purely commercially-used premises where no part of the property is used for residential purposes.
2. Death of the Specials Board and the Menu Blackboard
Since the evolution of a blackboard and a piece of chalk, pubs have always utilised this medium, either for the announcement of daily specials or, in some cases, the permanent and only display of their full menu. Well, from December 2014, all of this, sadly, is set to change.
The legislation is European-based and totally binding on the UK Government. The regulations are contained in the European Union Food Information for Consumers Regulations (EUFIC), operable from 13th December 2014 and are specifically designed to inform and protect consumers with a focus on fourteen named major allergens and intolerance-causing substances. This legislation requires publicans, restaurateurs, hoteliers and even café owners to provide allergen details on fresh and freshly prepared food, i.e. non pre-packed food. Not alluded-to details, but full details.
The legislation requires that the allergen information should be easily visible and clearly legible for every dish offered. Whilst it was hoped that the simple notification on a chalk blackboard or specials’ board stating “dishes may contain allergens and refer to our menu” would be OK, this will definitely not be sufficient for a specials’ board or a menu that is only set out on a blackboard. It is quite likely that specials will, individually, have to carry the details of the dish contents. Also a further scary factor is that there is an expectation that all staff taking food orders will be able to respond in detail to allergen and nutrition enquiries and be clearly able to give customers more information. Some hope!
This European legislation also carries a maximum fine of, currently, £5,000 for non-observance. The elephant-in-the-room is, of course, as to whether anyone will actually enforce this legislation and it is hoped that you won’t have any customers who have a severe allergenic attack or, in worst case scenario, have a serious illness or subsequently die as a direct result.
Will public liability insurance, which is mandatory for all On-licensed premises, now have to change so that it encompasses specific compliance with the EUFIC and will On-licensed premises’ lessees be caught up in the catch-all (which is contained in every single lease) that they have to be compliant with all statutory and civic regulations? Don’t blame the British Government for the further expansion of the nanny state Europe-wide. All of this comes from Brussels.
3. Success-Related Fees.
New legislation was introduced on 1st April 2013 in the shape of the Damages-Based Agreements Regulations 2013 which allows an agreement between a lawyer and a client in which the client agrees to pay the lawyer a percentage of sums recovered in a claim. This Agreement regulation would generally require the payment in the event that sums are recovered, either by settling the claim or after the trial. Damage Based Agreements (DBAs) were not lawful for contentious work until 1st April 2013.
How does this benefit the litigant? You don’t have to pay any legal fees, except expenses such as Expert’s fees, but not including any Barrister’s fees, until the sums with which you have to pay them are recovered. The fee is always a simple, pre-agreed, percentage of the sums recovered. There is, however, a sting in the tail for the giving of Expert Evidence and a recent case concerning David Morgan has highlighted the problem.
An Expert Witness cannot enter into a DBA himself as this would interfere with his independence from the party who has engaged his services. If the Expert is unaware of the case funding arrangements between the Client and the Solicitor, there is no problem. However, if those funding arrangements under a DBA have been confirmed to the Expert, then an attack on his independence under cross-examination could easily arise, with the specific intent of eating away at his impartiality and his duty to the Court rather than the Client.
Just such a situation arose recently where David Morgan had to stand down from an Independent Expert referral because of the openness of the Client reliance on a damage-based agreement with his legal team.
To ensure that this unfortunate situation does not re-occur, David’s Expert Statement of Truth now includes an extra final sentence as follows:-
“I have no knowledge of the basis on which [the party] on whose behalf I have been instructed has agreed or is liable to make any payment to the solicitor and/or counsel for acting on his behalf in this claim”
Whilst the existence of the DBA will, we are sure, be of interest to a number of lessees thinking of taking on Pubcos, we know that other Chartered Surveyors who act as Independent Experts and subscribe to this monthly newsletter, will want to “cover the bases” for this important factor in their continuing independence.
4. Wage Growth.
We have for ages been at loggerheads with Pubco and Brewer rent assessments that seem to constantly under-estimate wages in the calculation of rent. This is not an isolated moan and groan, but consistent throughout almost every single rent review we touch. Statistical analysis is all very well, but it is often up to eighteen months out of date and, as we keep on reminding the world, a rent review is the process of looking forward for the next three or five years until the next rent review and ensuring that the rent settled is actually genuinely affordable for those years, rather than looking backwards.
It was interesting to pick up on the latest research in 2013 from the ALMR, which confirmed that wage growth in the On-licensed trade has outstripped inflation for each of the last three months on record. The figures reflect the fact that key staff are still expensive and if you want to run a quality operation you have to pay for staff that you need rather than the theory of the minimum wage levels that you think you can get away with. The ALMR 2013 Benchmarking Report, which in itself is out of date by its very nature, indicates that the average payroll now accounts for 25.4% of revenue which is an increase on 2012. The latest three months’ figures, of course, reinforce that very finding.
5. Average Rents On New Leases Fall – Yet Again.
The RICS Pub Benchmarking Survey has revealed that, for the second quarter in 2013, new leases in England and Wales dropped slightly to an average rent of £24,368. This, of course, is statistical evidence that concerns lease renewals throughout 2012 as almost always the lease rental is settled and agreed after the renewal date.
The telling point is that the four Pubcos (Enterprise, Punch, Marston’s and Stars Pubs & Bars) who have contributed to the RICS survey, confirm that the rent costs represented an average of about 8.2% of turnover on an average pub turnover of £293,698.
From our experience at Arbitration and tracking the very few PIRRS’ referrals, the Pubcos are still trying to promote the majority of their lease rent reviews at levels in excess of 10%. As one lessee client said to us recently “pot calling kettle calling pot!”
6. And Finally
“I tried not drinking once. I heard myself talking all night and then, worse than that, next day I had total recall. It was terrifying.” (Patsy Stone – Absolutely Fabulous.)
“I have a profound respect for old age. Especially when it’s bottled.” (W.C. Fields).
Best wishes from the Team at M & C
Phone: 01285 719292