2020/NO.56 - Let’s start with what the Code requires and then how things can get out of hand in “interpretation”. The Regulation 30 in the Code governs “Terms and conditions required in proposed MRO tenancy”. Short and sweet and says not very much. This is followed by the much lengthier Regulation 31 detailing unreasonable terms. This leaves the gate wide open to POB “interpretation” of what should be required as the obligation s of a so called “Full response” tracking R 30. Two of the many pillars of the EI Group “Full Response” is the requirement for the provision of a full credit check and a start from scratch business plan. All very well you may say and necessary if this were a totally unknown new applicant with no record of a commercial relationship with the EI Group. BUT an MRO application is always from a known EI Group tenant, some with over 30 years standing in their relationship with EI. Quite correctly the tenants think the requirement is an insult, without justification and irrelevant to the FOT rent calculation process.
So imagine our surprise (no names, no pub identity) to have the following confirmed last week by EI in an ongoing MRO application when we questioned such need….”As outlined in our acknowledgement email; these checks do not affect your client’s statutory right to an MRO tenancy, but would assist in enabling us to prepare an appropriate FOT rent proposal based on their covenant strength as publicans”.
When we picked ourselves up off the floor, we began to wonder what was behind this strange confirmation. But consider the rent review provisions first. (a) the rent is based on vacant possession and to ignore the tenant in occupation (b) the assumption is as to the ‘hypothetical willing tenant’. The overriding assumption is to totally set aside the current tenant and especially their ongoing goodwill. Credit checks and a new business plan have NOTHING WHATSOEVER to do with an FOT rent calculation. But could it be, and this is very far-fetched indeed, linked to the level of deposit they require. If that is the case is it intended to make the MRO process even more financially difficult? There is no effect on the guarantor requirements so that is a blind alley.
But on the other hand, some might say, if there was the vague general possibility of a sale of the freehold interest to anyone other than the tenant, then covenant strength is all important if not essential to getting the best possible yields strength for the investment sale. Perish the thought indeed but why profoundly insult your long-standing tenant by making the request in the first place? The whole situation is further complicated by the now (reluctantly by EI) acceptance that the mode of delivery for an MRO application can be by Deed of Variation (DOV). The route of DOV which we are successfully securing for our many clients, preserves the current lease content except for the tie agreements and obligations being removed. Definitely no need for a new business plan nor credit checks as the ongoing status quo is preserved.
Back to the beginning. The “interpretation” in our considered view is just that. A view of the Code to suit the POB not the tenant. Remember the that if it has not been spelt out loud and clear as a Code Regulation that a challenge is fully justified. With the PCA now getting ever firmer on unreasonable terms we are even more solid in our resolution that an application for MRO does not need the provision of either credit checks or a new business plan. Doubtless if we are wrong on the detail EI will take the time and care to set the record straight. Wait and see!