Friday, January 17, 2014

Letter to the Office of Fair Trading from Fair Pint Campaign

The Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
LondonEC4Y 8JX

10th January 2014

Dear Sirs


1. Fair Pint Campaign is the voice of tied tenants and tenants calling for an end to the exploitation of publicans through the tie. We are working to protect the UK pub industry and to ensure a fair deal for both publicans and consumers. We wholly endorse the Government proposals in respect of a statutory code.

2. We have recently had the opportunity of reviewing the OFT submission to BIS in response to the public consultation, dated 14th June 2013, and consider there are some fundamental flaws in your understanding of how the tied pub sector currently operates and indeed the proposals that have been tabled to rectify the behaviour of some pub owning companies and the rent setting process.

3. OFT powers

4. The OFT submission makes references to the CAMRA super complaint of 2009 and your subsequent findings of 2010. It is no secret we consider the OFT findings were wrong as too much weight was placed on hearsay evidence produced and submitted by the pub companies and their mouth piece the BBPA. The OFT did identify back in 2010, as outlined at para 9 of the submission to BIS, that “…any strategy by a pub company which compromises the competitive position of its tenants would not be sustainable, as this would be expected to result in sales and margin losses for the tenant and, in turn, for the pub company.” The evidence of the following 4 years proven this to be exactly the strategy adopted by many pub companies and the effects are exactly as the OFT expected.

5. Regardless of the latter, the OFT findings were almost 4 years ago and in our view much more evidence is now available and there have been some significant changes, not least the revocation of the Land Agreement Exclusion Order of 2011.

6. The OFT powers of investigation are now stronger than in 2009/10. The revocation of the Land Agreements Exclusion brings all commercial property transactions within the ambit of Chapter I of the Competition Act. The OFT draft guidance identifies as most likely to be anti competitive an agreement which restricts the commercial freedom of a trading partner such as a distributor or supplier, for example, beer ties on a pub, as a types of land agreement likely to fall within the prohibition.

7. Clearly, in 2009/10 the OFT would not have considered this amendment to the Competition Act 1998. The revocation of Land Agreement Exclusion Order enables the OFT to now consider beer tie agreements in the context of leases. We consider that a tied agreement will be regarded as having an appreciable effect on competition as the pubcos and brewers, operating tied agreements, are competitors operating a network of similar agreements and their aggregate share is more than 5% of the relevant market.

8. We appreciate there are four exemptions from the prohibition but we consider these do not all apply in the instance of tied agreements. The OFT may not have considered product prices and rent levels payable to landlords, and the rent assessment process justify intervention however in the light of the revocation there appears to be clear justification for intervention now.

OFT policy concerns regarding a principle that ‘a tied tenant should be no worse off than a free of tie tenant’ and the Government proposed method of ‘balancing risk and reward’ between pub companies and tenants

9. In relation to the tied tenant being no worse off then the OFT position before was that they could not interfere in commercial agreements yet now the OFT seek to interfere on behalf of the pubcos. The OFT concerns raised seem duplicitous at best and therefore lacking in objectivity. We would however take this opportunity to highlight what appear to be quite fundamental misunderstandings and flaws in the three concerns listed in the OFT public consultation response submission.

10. The OFT set out in section 15, the three observations in response to a principle that ‘a tied tenant should be no worse off than a free of tie tenant’ and the Government proposed method of ‘balancing risk and reward’ between pub companies and tenants.

11. Observation 1

12. The OFT state quite clearly that in their opinion, in 2010, they believed the equilibrium intended by the ‘no worse off’ principle was achieved. It follows that the OFT conclusion reached, “…that the rental adjustment envisaged in consultation may not be necessary to achieve the Government’s aim of ensuring a similar position as between the level of overall rent paid by the tied and free of tie tenants.” suggests that the effect of such a method of balancing risk and reward poses no immediate threat of significant rent adjustments and therefore, if the OFT are correct, the implementation of such a method of balancing risk and reward would NOT result in a noticeable threat to the pub companies rental income stream. In the light of the above we fail to see how this OFT ‘observation’ could be construed as a ‘concern’.

13. Observation 2

14. The OFT state that they consider “… where a market is considered to be competitive, interventions involving price regulation should be contemplated only in exceptional circumstances…” this is a baffling statement as no one is suggesting price regulation and indeed the Government proposal makes no mention of it. IN addition, the commercial negotiation is agreed on the understanding that high product prices will be balanced by a lower rent and benefits. This is not expressed in the contract as it was understood that European and domestic competition law required it.

15. Observation 3

16. This OFT observation seems totally contradictory to the OFT statements in the first observation. In the first observation the OFT state that “…that the rental adjustment envisaged in consultation may not be necessary to achieve the Government’s aim of ensuring a similar position as between the level of overall rent paid by the tied and free of tie tenants.” (“including wet and dry rents and any relevant benefits provided by the pub company to the tenant” – from OFT footnote 5). If the OFT statement in the first observation 1 is correct then how can the statement in the third observation, that “…such an approach has the potential to result in significant rental adjustments.”, hold true ?

17. Either the ‘no worse off principle’ and Government proposals will result in significant rent adjustments or they will not – it can not be both.

18. The final part of the third observation demonstrates a clear lack of understanding of the contractual relationship between landlord and tenant and the pub companies income streams. Proposed changes to rent calculations may mean that pub companies decide that running a tied outlet is no longer its most profitable option, the legislation placed on Rachmann no doubt led him to a similar conclusion. The pub company may like to adopt an alternative business model but running their pubs as managed houses is only an acceptable option if the potential level of sales is considerably higher than the national average, and, if they chose to operate a free of tie leased estate of pubs, this would lose the pub company the additional income stream they derive from the discounts achieved from their bulk buying power, which they do not achieve at the tenants expense. Even if the tenant is no worse off than if they were free of tie, the most profitable approach for a pubco is to maintain a tied leased estate enabling them to profit from the discounts achieved from bulk purchasing but restraining them from the Cartel like behaviour many consider they currently demonstrate.

19. In this third observation, the OFT demonstrate another clear misunderstanding of the pub environment. A pub company can not simply close a pub. There is a contractual relationship between pub company and tenant under which the tenant is protected from eviction under the provisions of the Landlord and Tenant Act 1954. In order to ‘close’ a pub the pub company must first obtain vacant possession. The most efficient business model that the pub companies can adopt is one that strips the vast majority of a pubs profits out of the business leaving the operator (the tenant) with a derisory earning and trapped in an abusive relationship. The most efficient business model for the production of clothes, for example, might be sweat shops but we in the UK seek to restrain and discourage such behaviour. The whole purpose of the Government proposals for intervention is to restrain the efficiency of a business model that relies on manipulation and abusive relationships and encourage a business model that allows all, including consumers, a fair share of the resulting benefits, something that is not in existence presently.

OFT policy concerns regarding a mandatory Market Rent Only (free of tie) option

20. The OFT observations in regard to the mandatory Market Rent Only (free of tie) option are also misrepresentative of the circumstances that prevail.

21. Observation 1

22. The OFT state that in recent work they “…found that large non brewing pub companies already source beer/drinks from a wide variety of suppliers and that there is already a great deal of fragmentation at the brewing level of the supply chain.” There are estimated to be around 1,000 brewers now in the UK. Most pubco tenants have access to a selection of micro brewers beers but these are a fraction of the brewers that exist. The 30 small family brewers have an effective monopoly on access to the tied pubs, however, there is one route to the tied pub market for micro brewers through the pubcos and Small Independent Brewers Association (SIBA) scheme. This scheme forces micro brewers to increase their prices if they want access, effectively, in some cases, almost doubling the price they would otherwise sell to free of tie operators. As a consequence of the latter, micro brewers beers are priced even higher than the small family brewers prices, on the large pub companies price lists, effectively deterring tenants from purchase as the necessary uplift in price to the consumer becomes unattractive. This undermines the tenants willingness to supply the micro brewers products but enables the pubcos and larger brewers the opportunity to control and in some cases eliminate competition in respect of a substantial part of the products (beer) in question under a veil compliance with the request to offer a wide variety of suppliers products.

23. Observation 2

The OFT state that the pubcos may lose some economies of scale if the market rent only option were taken by their tenants. The OFT seem to be under some impression (presumably from information provided by the pubcos and/or BBPA) that these economies of scale find their way to tenants and in turn are passed on to the consumer. This simply does not happen. Any tenant can get better beer prices by simply ringing the brewer. Any financial benefit on other essential services or products that might attract a discount due to central purchasing or bulk ordering, e.g. insurance, utilities etc, are just as easily price matched by a free of tie sole trader as the financial benefit achieved by the pubco central purchasing is rarely passed on. Indeed we are aware that in practically all instances it is cheaper for a free of tie trader to acquire any product or service than to acquire the same product or service as a tied tenant. If products and services were genuinely cheaper through the pub company, due to the benefits of central purchasing, then a tenant would choose to acquire them from the pub company not be forced to acquire them by mandatory lease provisions. The pubco’s make a profit from these services and seek to force the tenant to acquire them. We remain shocked that the OFT have not failed to recognise this and instead still seem content to take the word of the pub companies and their representatives.

24. Pub companies acquire beer at considerable discount, below the price to a sole free of tie operator, yet in many cases the price to their tenants is approaching double the free of tie open market price. If central purchasing, of say building insurance, led to cheaper insurance and it were contractually shared with the tenant, then it would be quantified and included in any rent assessment as a SCORFA. A tenant considering the market rent only option would have to evaluate whether a free of tie agreement may mean the loss of such a SCORFA, in this example insurance discount, and whether this warranted taking the option. That is the point of a MRO option – it is a choice allowing a tenant to evaluate their circumstances and ensure their agreement is compliant with the original intention of the parties and competition law requirements.

25. The OFT conclusion that loss of pubco central purchasing would lead to higher prices to tied tenants, which may in turn be passed on to consumers, is precisely why the MRO option needs to be in conjunction with, NOT instead of, the principle that a ‘tied tenant should be no worse off than if they were free of tie’. MRO and ‘no worse off’ principle working together deter pub companies inappropriately increasing prices of other products and services.

26. Observation 3

27. No one is asking for removal of the supply tie, tenants are asking for the supply tie agreements to be operated fairly or risk having this part of the agreement severed from the agreement, apply to the same remedies to unfairness as those applied to anti competitive restrictive contract provisions under the Competition Act 1998. To this end tenant organisations have collectively agreed to the BISCOM compromise of a Market Rent Only (free of tie) option. If the supply tie in an agreement is operated fairly it will prevail if not it runs the risk of being nullified. A tenant choosing to take the option and go free of tie, should not be significantly altering the nature of the contract that had been agreed, all other terms and conditions would remain in tact.

The supply tie is simply a provision within a wider agreement capable of being severed from the document if it is shown to be operated unfairly. Indeed all tied agreements contain provisions to accommodate the eventuality of supply tie removal should it occur.

28. The agreement the tenant understood they were signing up to, as sold to them by the pub companies, was that, as a tied tenant/tenant, the higher price paid for tied products would be offset by a lower ‘countervailing’ rent and benefits (SCORFA’s). Free of tie rent was supposed to equal the tied rent plus profit on tied products and SCORFA. If the nature of the contract is significantly altered as a result of a tenant taking the Market Rent Only (free of tie) option it is only because the original balance, and the original understanding of the pubco offer, has not been honoured and maintained – hence the Government objective to rebalance risk and reward.

29. As the OFT acknowledged, at the beginning of their submission, that their comments were in relation to competition and consumer aspects or implications of Government policies. The proposed intervention is not on competition grounds but on the grounds of fairness and the relationship between landlord and tenant in the pub sector.

30. Leaving aside the issues of fairness, which the Government is seeking to address through its statutory code proposals, the OFT have made comment on the Government proposals in respect to the implications on competition and we would like to concentrate on these comments on a purely competition basis.

31. Our following competition related statements have no impact on the Governments efforts currently in operation to seek to deliver fairness and circumstances where a tied tenant is no worse off than if they were free of tie. We acknowledge these are two different issues and should be treated accordingly.

32. We would like to draw the OFT’s attention to the original European Commission block exemption which was based on the concept that higher product prices would be offset by countervailing benefits, one of which of course was a lower rent. Since the OFT’s response to CAMRA’s super complaint in 2009/10 legislation has been amended with the revocation of the Land Agreement Exclusion Order in 2011.

33. Following the revocation of the Land Exclusion Agreement Order we now have circumstances where land agreements (including tied leases) are not exempt from the Competition Act 1998 and businesses need to review their property transactions to consider whether they may infringe on the Act.

34. A supply tie provision is anti competitive as :
it has as its object or effect the prevention, restriction or distortion of competition :
its effect on competition and trade within the UK is ‘appreciable’ : and
it does not qualify for exemption on the basis that its benefits outweigh its anti competitive effect.

35. Supply tie provisions are agreements which restrict the commercial freedom of a trading partner, for example, a distributor or supplier and are therefore likely to be prohibited restrictions (OFT definition).

36. An agreement is exempt from the prohibition if ALL of the following apply :
the agreement contributes to improving production or distribution, or to promoting technical or economic progress
it allows customers a fair share of the resulting benefits
it does not impose restrictions beyond those indispensable to achieving those objectives: and
it does not afford the parties the possibility of eliminating competition of a substantial part of the products in question

37. Supply tie provisions should not be exempt from the prohibition as they do not offer all fourconditions of prohibition, indeed they appear to offer none, and the aggregate market share of the competing parties operating supply tied agreements, ‘a network of similar agreements’, is well over 5% of the relevant market.

38. The effect of the revocation of the Land Agreements Exclusion Order in 2011 means that where before a supply tie provision was exempt from OFT powers under the Competition Act 1998 they now are not.

39. For the above reasons we believe the OFT need to consider their duties and should review the impact of the changes to the Competition Act 1998 in relation to the CAMRA super complaint and competition circumstances that have changed and now prevail.

40. In respect of the submission to BIS responding to the public consultation, we consider the OFT may benefit from a meeting with Fair Pint Campaign which would perhaps clarify what appear to be clear misunderstandings of the both the Government proposals, circumstances of tied tenants and tenants and legislation seeking to offer protection in tied commercial agreements. The OFT need to consider evidence from pubcos in the light of evidence from tenants.

Yours faithfully


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