MPs call for Competition Commission to investigate pub companies

May 13, 2009 at 4:58 pm Leave a comment

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The Business and Enterprise Select Committee has published a unanimous report into so-called “pubcos,” companies that own chains of public houses.

The committee called on the Government to act urgently and to refer the issues raised with the Competition Commission.

They also called on the Department for Business, Enterprise and Regulatory Reform to investigate the inequalities of bargaining power between pubcos and lessees.

Recommendations include improving the transparency of rent assessment and banning the practice of pubcos selling buildings they no longer require with restrictive covenants preventing their use as a pub.

Peter Luff MP, chair of the committee, said:

“Pubcos do provide services and support to their tenants.

“There are good Business Development Managers out there. However, as our report says ‘there is a worrying pattern in the evidence presented to us of lack of support for lessees, of verbal agreements no honoured and, on occasion, of downright bullying.’

“It is not clear that the benefits of the tie outweigh its disadvantages. Our report challenges pubcos to demonstrate the benefits of the tie, by offering their lessees the opportunity to run their pubs on a free of tie basis. This can only work if there is a transparent system for negotiating rents.

“But even if the industry took up our challenge, the problems about the imbalance of bargaining power remain. We believe that the Department for Business, Enterprise and Regulatory Reform should examine this issue.”

The committee reported that 64 per cent of lessees did not think their pubco added any value and while a fifth had had a dispute with their pubco, few (18 per cent) were satisfied with the outcome.

The MPs were “astonished to learn” that 67 per cent of the lessees surveyed earned less than £15,000 pa and over 50 per cent of the lessees who had turnover of more than £500,000 pa earned less than £15,000 – a 3 per cent rate of return.

The lessees may share the risks with their pubco but they do not appear to share the benefits.

The report contains recommendations which will affect the way in which businesses can treat one another.

“Some might argue that this can be left to the market,”  it said.

“Pubcos which not only benefit themselves but support their lessees are likely to stay in business.

“If pubcos push too hard and are too greedy they will fail. But on the way bad companies will inflict real damage on their direct customers, the lessees, and on their indirect customers, ordinary drinkers.

“The potential for such damage may be increased by current economic conditions producing a ready supply of inexperienced would-be lessees eager to use their redundancy money to enter a new career.

“It may be the industry’s problems can be solved by a framework ensuring fairness and transparency in dealings between landlord and lessee.

“It may be necessary to ensure that inequalities in bargaining power are recognised, even when business contracts are involved. It may be that the beer tie should be prohibited.

“The OFT has failed to examine this market properly; the Government should now assume responsibility, to ensure both that competition issues are properly investigated and that the wider legal framework is adequate.”

Click here to read the full report.

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