EI Group Plc v John Clarke

Hearing date: 17 June 2020

The claimant seeks leave under s.69(3) of the Arbitration Act 1996 to appeal from the award of Professor Graham Chase dated 4 September 2019 in a statutory arbitration commenced by the defendants as tenants under Part 4 of the Small Business, Enterprise and Employment Act 2015 (“the 2015 Act”) and the Pubs Code etc. Regulations 2016 (“the Pubs Code”).

The defendants are tenants of the Pottery Hotel, Bournemouth, under a tied lease dated 13 January 2012. The claimant is a “pub-owning business” (or “POB”) as defined by s.69(2) of the 2015 Act (being a landlord of 500 or more tied pubs whose tenants are obliged to purchase alcohol from the landlord or the landlord's nominee). The defendants are a “tied pub tenant” (or “TPT”) for the purposes of the 2015 Act.

Part 4 of the 2015 Act and the Pubs Code give TPTs an option in certain circumstances to take a market rental only (“MRO”) tenancy in place of their tied tenancy. The process for giving effect to the MRO option is laid down by s.43 of the 2015 Act and various provisions of the Pubs Code.

Section 41 of the 2015 Act establishes the office of a Pubs Code Adjudicator.

Section 42 of the 2015 Act provides for the Secretary of State to make the Pubs Code as regulations. By s.42(3), the Secretary of State must seek to ensure that the Pubs Code is consistent with: (a) the principle of fair and lawful dealing by pub-owning businesses in relation to their tied pub tenants; and (b) the principle that tied pub tenants should not be worse off than they would be if they were not subject to any product or service tie.

Section 43 of the 2015 Act provides for the MRO option. Section 43(1) provides that the Pubs Code must require POBs to offer their TPTs an MRO option in specified circumstances. Section 43(2) defines a “market rent-only option” as an option for the TPT to occupy the tied pub under a tenancy or licence which is MRO-compliant.

Section 43(4) and (5) provide as follows:

“(4) A tenancy or licence is MRO-compliant if—

(a) taken together with any other contractual agreement entered into by the tied pub tenant with the pub-owning business in connection with the tenancy or licence it—

(i) contains such terms and conditions as may be required by virtue of subsection (5)(a),

(ii) does not contain any product or service tie other than one in respect of insurance in connection with the tied pub, and

(iii) does not contain any unreasonable terms or conditions, and

(b) it is not a tenancy at will.

(5) The Pubs Code may specify descriptions of terms and conditions—

(a) which are required to be contained in a tenancy or licence for it to be MRO-compliant;

(b) which are to be regarded as reasonable or unreasonable for the purposes of subsection (4).”

Section 44 provides that the Pubs Code may make provision about the procedure to be followed in connection with the offer of the MRO option and may confer functions on the Adjudicator in connection with that procedure.

Section 45 provides that the Secretary of State may by regulations confer functions on the Adjudicator in connection with the resolution of disputes relating to the offer of an MRO option, including as to whether a proposed tenancy or licence is MRO-compliant. This includes provisions for referring disputes to arbitration.

The Pubs Code provides inter alia for the procedure for MRO-compliant offers and includes the following, so far as relevant:

(a) Where the TPT serves the appropriate notice, reg. 29 requires the POB on receipt of a valid MRO notice to send the tenant a “full response” including a proposed tenancy which is MRO compliant.

(b) Reg. 31 provides that the terms of a proposed tenancy should be regarded as unreasonable including (under sub-paragraph (2)(c)) where they “are terms which are not common terms in agreements between landlords and pub tenants who are not subject to product or service ties”.

(c) Reg. 58 sets out rules for the arbitration of disputes over the terms of any proposed MRO-compliant lease provided by the landlord. The regulations allow the Adjudicator to appoint an appropriate person as arbitrator.

The defendant served an MRO notice on the claimants on 1 November 2016. On 22 November 2016, the claimants sent their “full response”, including a proposed MRO-compliant tenancy. On 8 December 2016, the defendant referred the matter to the Adjudicator claiming that the claimant had failed to provide a compliant MRO lease and offer. The defendants identified certain specific clauses in the draft lease which they contended were unreasonable.

The dispute has led to two separate arbitration awards. The first, dated 2 August 2018, was given by the Deputy Pubs Code Adjudicator, Ms Fiona Dickie (“the preliminary award”). The second is the award of 4 September 2019 from which the claimants now seek leave to appeal.

The preliminary award of Ms Dickie addressed a number of points of principle in the hope that the parties would then be able to resolve their differences. Ms Dickie summarised her award on page 1 as follows:

“a) Does a compliant MRO proposal have to be offered in the form of a new lease, a deed of variation (“DOV”), or is either vehicle permissible in law?

Either is permissible.

b) If either form is acceptable, in law what considerations apply to the choice of vehicle?

It must be reasonable.

c) Do the terms of any FOT [ sc. free of tie] tenancy offered have to be the same or substantially the same as the terms of the existing lease, subject only to such variations as are necessary to render the tenancy MRO compliant?

No.

d) Is it permissible (or required) to offer wholly new terms, subject only to the requirements of section 43 of the Act?

It may be permissible but only if reasonable. It is not required.

e) Can a term be unreasonable for the purpose of section 43(4)(a)(iii) of the Act if it is not deemed unreasonable by virtue of regulation 31 of the Code?

Yes.

f) How is the test of reasonableness in section 43(4)(a)(iii) to be interpreted?

In accordance with the core Code principles and as set out below.

The remaining issues will be the subject of a further award if the referral is not settled by agreement between the parties.”

In order to understand the argument on this application it is also necessary to set out [73] to [78] of the preliminary award:

“[73] The Claimants' position is that the starting point for the MRO lease is the existing lease terms. However, there is no support in the legislation for this assertion. A tenancy which contains product or service ties and an MRO tenancy are treated as different creatures by the Act and the Code. The definition of an MRO-compliant tenancy (in section 43(4) and (5)) makes no reference to the terms of the existing tied tenancy.

[74] By comparison, when renewing a tenancy under section 32 to 35 of the 1954 [Landlord and Tenant] Act (arguably the closest example on the statute books of a statutory jurisdiction to determine the terms of the commercial tenancy) “reasonable” terms [are determined] by reference to the existing lease as a starting point. It is for the party seeking a departure from those terms to justify why it is fair and reasonable, having regard to the purpose of the Act. The legislature would have been aware of the criteria used in the 1954 Act when enacting Part 4 of the Act and the Code and I consider it is significant that it in doing so it did not choose to take the same path.

[75] Moreover, there are instances in the Code where reference is made back to the tied tenancy, e.g. in relation to provisions for security of tenure (regulation 31(3)(b)) and the duration of the new term (regulation 30(2)). The absence of any reference to the terms of the tied tenancy in both section 43(4) and (5) is significant.

[76] I therefore make it clear to the Claimants: the existing lease is not the necessary starting point in this statutory procedure. A DOV is not the default option. The tie and tie free lease are fundamentally different relationships. That does not mean however that it will always be reasonable to change terms in the existing lease which are also common in FOT leases.

[77] Furthermore, in my view that does not mean that the existing lease terms and conditions cannot be relevant to the question of whether the new terms and conditions are MRO-compliant. In order not to be unreasonable, the landlord in offering terms of the MRO option may need to have regard to the existing contractual relationship between the parties. The existing lease terms will be in the mind of the TPT, who is entering into negotiations for a new lease. The landlord will have their own commercial considerations in mind. From their respective positions, parties motivated to reach an agreement rather than a stalemate will negotiate from these starting positions to one that is acceptable for both. Therefore, both will have to take into account the position of the other if they intend to reach a deal. This is what a landlord would do if it wanted to tempt a preferred tenant into a new contractual relationship. That is the position in which the TPT tenant should be in the MRO procedure.

[78] There may be other reasons why the existing terms are relevant, but I cannot set out an exhaustive list. For example, where a landlord offered (perhaps fairly recently) very favourable deposit terms on the tied lease, which suggests the...