PRESS RELEASE : Stonegate offers to change non-compliant rent review terms in MRO agreements [February 2023]

The press release issued by the Pubs Code Adjudicator on 27 February 2023.

Around 70 MRO lessees have received an offer from Stonegate to remove the upward only open market rent review from their agreement when combined with an RPI linked rent review.

The Issue

The Pubs Code prevents pub companies from offering tied lessees Market Rent Only (MRO) terms that are not common in free of tie agreements. The terms must also be reasonable.

Where required in a free of tie lease, an upwards only open market rent review will typically take place every five years, or a Retail Price Index (RPI) rent review will typically increase the rent annually.

In response to PCA correspondence, Stonegate has acknowledged that it is not, and never has been, common to find these two rent review terms together in the same free of tie lease. Ei Group (before its acquisition by Stonegate) stopped offering MRO agreements with these terms in combination in 2019 as a result of expert evidence obtained in an arbitration. But since the first MRO agreements were completed in 2017, a number of them across different pub companies have entered the market containing both types of rent review.

Stonegate has written to its lessees on those agreements to confirm it will not be enforcing the upwards only open market rent review and offering to remove it from their agreement. It has also offered a financial contribution towards legal costs for any who take up the offer. It has confirmed to the PCA that no upwards only open market rent reviews have yet taken place where agreements also have annual RPI increase terms.

This action follows PCA correspondence to all pub companies last year about the use of rent reviews linked to the RPI in their MRO agreements, including where combined with other rent review terms. The PCA wished to understand the extent to which such terms had been in use, particularly in light of the sharp rise in interest rates and inflation. It was concerned to ensure that only common terms in free of tie agreements were included in those agreements. The PCA has made clear to the regulated pub companies that they should not rely on terms which they know or ought to know are non-compliant as evidence of terms which are common in the free of tie market.

Stonegate is the first pub company to acknowledge to the PCA that there had been previous non-compliance that was still affecting existing MRO tenants and lessees. The PCA considers that Stonegate’s action provides certainty to MRO lessees with RPI rent review terms and welcomes the steps it is taking to put this right. Stonegate will inform the PCA when its intended actions are complete.