1999/474/EC: Commission Decision of 16 June 1999 relating to a proceeding pursuant to Article 81 of the EC Treaty (Case IV/35.992/F3 - Scottish and Newcastle) (notified under document number C(1999) 1474) (Only the English text is authentic)
Date: 1999-06-16
Institutions: European Commission
Subjects: beverage industry, business lease, exclusive purchasing agreement, restriction on competition, retail trade, wholesale trade

L 186/28

EN

Official Journal of the European Communities

19.7.1999

COMMISSION DECISION

of 16 June 1999

relating to a proceeding pursuant to Article 81 of the EC Treaty

(Case IV/35.992/F3 (cid:151) Scottish and Newcastle)

(notified under document number C(1999) 1474)

(Only the English text is authentic)

(1999/474/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

Having regard to Council Regulation No 17 of 6 February
1962, First Regulation implementing Articles 85 and 86 of the
Treaty (1), as last amended by the Act of Accession of Austria,
Finland and Sweden, and in particular Articles 4, 6 and 8
thereof,

Having regard to the application for negative clearance and the
notification for exemption submitted on 25 April 1996 by
Scottish and Newcastle plc pursuant to Articles 2 and 4 of
Regulation No 17,

Having published a
summary of
notification pursuant to Article 19(3) of Regulation No 17 (2),

application and

the

After consultation with the Advisory Committee for Restrictive
Practices and Dominant Positions,

Whereas:

I. THE FACTS

A. INTRODUCTION

(1)

at

of

the

(cid:145)OFT(cid:146))

started,

request of

the Office

Fair Trading
In February 1995,
(hereinafter:
the
Commission, an enquiry into the UK brewers’ wholesale
pricing policy. This enquiry, which also covered Scottish
and Newcastle plc (hereinafter:
(cid:145)S&N(cid:146)), resulted in the
internal OFT report on their (cid:145)enquiry into brewers’
wholesale pricing policy(cid:146) (hereinafter: the (cid:145)OFT report(cid:146))
being adopted in May 1995; a press release on the
report was issued by the OFT on 16 May 1995.

(1) OJ 13, 21.2.1962, p. 204/62.
(2) OJ C 8, 13.1.1998, p. 4.

(2) On 25 April 1996 S&N notified eight standard forms of
leases (hereinafter: (cid:145)the leases(cid:146)), the subject of each of the
leases being a fully fitted-out, on-licensed (3) public
house in the United Kingdom with a tie for beer as
described below. The eight standard forms can be put
into three groups: the (cid:145)English leases(cid:146) consisting of the
S&N standard England and Wales November 1993 lease
((cid:145)E&W November lease(cid:146)), the S&N Standard England and
Wales 1993 lease, as amended by a letter of variation,
and the Matthew Brown lease;
the (cid:145)Scottish leases(cid:146)
consisting of the S&N standard Scottish November 1993
lease, the Scottish E-type lease and the Scottish S-type
lease, as amended by letter of variation; and finally, the
(cid:145)short-term leases(cid:146) which include a temporary lease and
a tenancy-at-will agreement. S&N requested negative
clearance or confirmation that the leases could benefit
from the application of Commission Regulation (EEC)
No 1984/83 of 22 June 1983 on the application of
Article 85(3) of the Treaty to categories of exclusive
purchasing agreements (4) (hereinafter:
(cid:145)the Regulation(cid:146)),
as last amended by Regulation (EC) No 1582/97 (5), or
individual exemption pursuant to Article 81(3) of the
EC Treaty to take effect as from the date on which the
agreements were entered into.

(3) The

in

information

been
the
supplemented by way of a verification pursuant
to
Article 14(2) of Regulation No 17 at the premises of
S&N, and by several requests for information.

notification

has

(4) Following the publication in the Official Journal of the
European Communities of the notice pursuant to Article
19(3) of Regulation No 17 (hereinafter: (cid:145)the notice(cid:146)), in
which the Commission announced its intention to grant
a retroactive exemption pursuant to Article 81(3), the
Commission received observations from interested third
parties. 21 observations by current and former tenants
were provided on a model designed by the Scottish
two
Licensed Trade Consultants ((cid:145)the SLTC model(cid:146));

(3) On-licensed premises are those which are licensed to sell alcoholic
beverages for consumption on and off the premises as opposed to
off-licensed premises such as supermarkets which are licensed for
off-premises consumption only.

(4) OJ L 173, 30.6.1983, p. 5.
(5) OJ L 214, 6.8.1997, p. 27.

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Official Journal of the European Communities

L 186/29

tenants enclosing the work of an accountant, who also
the
submitted observations on his own account;
Bavarian Lager Company; three trade associations and
an
Retailers
Organisation.

employee

Finnish

Petrol

the

of

(5) The information in these observations will be dealt with
in the remainder of the Decision. 26 of the interested
third parties requested the Commission to register their
submission also as a formal complaint against S&N.
Some of the complainants withdrew their complaint,
but the 15 remaining complainants were informed in
November 1998, pursuant to Article 6 of Commission
Regulation No 99/63 of 25 July 1963 on the hearings
provided for in Article 19(1) and (2) of Regulation
No 17 (6) of the Commission’s intention to reject their
complaint. 11 of them presented further comments on
this letter. Those comments have been integrated to this
Decision.

B. THE PARTIES

(6) The S&N group comprises three business divisions:
brewing, pub retailing, and leisure. S&N’s brewing
business is based principally in the UK and Ireland,
where it brews and distributes its own brands and brews
and/or distributes a number of other brands under
licence.

(7)

In August 1995, S&N acquired the brewing and
distribution business of Courage Limited. The combined
UK brewing businesses trade under the name Scottish
in Ireland S&N trades principally
Courage, while
through Beamish and Crawford plc, acquired by S&N as
part of the Courage acquisition. These brewing activities
represent around 28 or 29 % of the UK beer market in
volume production terms.

(8) Following undertakings given to the Secretary of State
under the UK Fair Trading Act 1973 after the Courage
acquisition, S&N was not allowed to tie or manage
more than 2 624 on-licensed premises. On 16 November
1998 the UK competition authorities released S&N from
its undertaking, allowing it to tie 2 739 public houses.
This number represents approximately 1,9 % of the total
number of on-licensed premises in the UK and these

outlets account for 4,4 % of total beer throughput in the
UK on-trade market. Currently, 432 pubs are leased to
tenants under the notified agreements, and those pubs
bought in 152 000 barrels of beer from S&N in the
year ended 3 May 1998, accounting for 0,6 % of the UK
on-trade beer market.

(9) S&N’s worldwide turnover for the year ended 30 April
1997 was GBP 3 349 million. In that year, S&N’s retail
division’s turnover was GBP 779 million.

(10)

In March 1998, S&N acquired 310 on-licensed premises
from Inntrepreneur Pub Company Limited (IPCL). These
outlets are included within S&N’s 2 739 permitted tied
or managed outlets. In order to allow headroom, within
the permitted maximum,
for the acquisition of these
outlets, S&N released the tenants of 184 outlets from
the purchasing obligations in their leases, and disposed
of a further 126 outlets.

(a) all

(11) Details of the actual number of barrels (7) sold by S&N
to and the relevant market shares on the UK on-trade
beer market of
including those on
temporary tenancy agreements, (b) managed houses, (c)
pubs with a loan tie to S&N, (d) total of S&N’s sales to
property tied pubs, managed houses and loan ties, (e)
S&N’s total sales to the on-trade and (f) the total UK on-
trade market are given in Table 1 below:

tied pubs,

Table 1

S&N’s position in the UK on-trade beer sector

(a)

(b)

(c)

(d)

(e)

(f)

(1 000 barrels)

1990/91

421

471

1 070

1 962

2 677 31 863

1997/98

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

1990/91

1,32

1,48

3,36

6,16

8,40

100

1997/98

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

[(cid:133)]

(%)

(12) The average length of S&N’s loan tie agreements has,
since 1990, been about 10 years. The average duration

(6) OJ 127, 20.8.1963, p. 2268/63.

(7) One barrel equals 1,63659 hl; 1 hl equals 0,611026 barrels.

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Official Journal of the European Communities

19.7.1999

of S&N’s
loan tie agreements before repayment of
renegotiation is between 2,5 and 3,5 years. S&N have
no records of
the prior arrangements of accounts
entering a new loan agreement with the company.
S&N’s outstanding-loan book has
increased from a
figure of some GBP 72,9 million in 1990 to GBP 217,6
million in 1998.

a must

restrictions

contractual

include other brewers,

(13) The Commission has some limited information on the
barrelage/percentage of beer sold by S&N to other
operators on the (cid:145)wholesale(cid:146)
level of the UK on-trade
beer market, subject to some form of restriction such as
a minimum purchasing obligation,
stock
obligation or a (limited) non-compete clause. These
other operators
independent
wholesalers or non-brewing pub companies. There are
agreements with
no
independent wholesalers. However, there are restrictions
in agreements with pub
representing
approximately 1,1 % of the UK on-trade beer market. In
respect of other brewers,
restrictions accounted for
the UK on-trade beer market. The
around 1,2 % of
information in the Commission’s possession tends to
indicate that the volume accounted for by (cid:145)restrictive(cid:146)
agreements
(minimum purchasing obligations with
penalties) is decreasing compared to the early 1990s, as
more
tended to promote
discounts as an incentive, foreseeing discounts linked to
certain volume or distribution targets.

recent agreements have

companies

in

(14) The other party to the actual agreements, that are based
on the notified standard leases, are individuals or their
companies who, in general, have an interest in only one
on-licensed premise.

C. THE MARKET

The 1989 MMC report and the subsequent Beer
Orders

at

tie

the

relaxing

traditional

(16) The 1989 MMC report on the supply of beer led to a
number of recommendations being made which were
aimed
(exclusive
purchasing obligation and non-competition obligation)
between brewers
the MMC’s
recommendations were implemented, mainly by the
Supply of Beer (Tied Estate) Order 1989 and the Supply
of Beer (Loan Ties, Licensed Premises and Wholesale
Prices) Order 1989 (hereinafter:
(cid:145)the Orders(cid:146)). The Tied
Estate Order imposed the following changes on the
(cid:145)national brewers(cid:146), which means brewers having an
estate of more than 2 000 on-licensed premises:

and pubs. Most of

(cid:151) their tenants/lessees would be free of tie for non-

beer drinks and low-alcohol beers,

(cid:151) their tenants/lessees would have the right to buy
one cask-conditioned ale (a beer with fermentation
in the cask) (8) from a source other than the brewer/
landlord (hereinafter: (cid:145)the guest beer clause(cid:146)),

(cid:151) they were only allowed to tie a certain number of
pubs. This forced them to sell or free of tie about
11 000 of the then estimated 60 000 UK pubs. S&N
is allowed to tie a maximum of 2 739 pubs.

Demand factors

In addition,

(17) Beer can be sold through the on-trade, namely pubs,
hotels and restaurants, or through the off-trade, such as
supermarkets and off-licences.
imports
brought into the UK by private individuals on which
duty has been paid, mainly from Calais, are estimated to
account for almost 5 % of total beer consumption in the
UK in 1996. Volume sales of all beer in the UK fell by
9,5 % between 1989 and 1995 (in 1996 total volume
increased marginally compared to 1995) and volume
sales of beer in the on-trade fell by 17,3 % in the same
period. The proportion of sales volume accounted for
by the on-trade has thus fallen (from 79,3 % in 1989 to
around 69 % in 1996) but, with the exception of
the
highest
Ireland,
Community.

proportion

remains

the

in

(15) Since 1985,

(cid:145)MMC(cid:146))

the date of

the result of

introduction of

the leases,
significant changes have occurred in the structure and
conduct of the UK on-trade beer market. These are for
the most part
the Beer Orders made
following the Monopolies and Mergers Commission’s
report on the supply of beer,
(hereinafter:
in both overall demand and
together with a fall
in consumer
particularly on-trade beer
demand towards pubs offering a wider choice of drinks
and food, the withdrawal of several companies from
brewing and the redefinition of relationships between
brewers and pub retail chains on the one hand and
tenants on the other.

shifts

sales,

(18) Falling beer sales volume in the on-trade has been offset

by:

(a) a rise, in real terms, in on-trade beer prices of 21 %
between 1989 and 1996, only
a negligible
proportion of which was accounted for by tax
increases;

(8) The UK Government extended the scope by also allowing for one

bottle-conditioned beer from 1 April 1998.

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Official Journal of the European Communities

L 186/31

(b) a rise in the proportion of non-beer sales in pubs to
37 % of total revenues in 1996, largely as a result of
the increase in catering sales.

Ireland,

total consumption. This

(19) Consumption of draught beer accounted in 1996 for
is also, with the
63 % of
exception of
in the
Community. In contrast, the figure for Belgium, which
the third largest draught consumption in the
has
Community, was 39 %. UK pubs also offer a bigger
choice of draught beers
in the
Community, with an average of 6,5 brands per pub.

than elsewhere

the highest

figure

Supply factors

Brewing

the

since 1989 is

increasing
(20) The main change
concentration of
the brewing market. The increased
concentration has been caused by companies leaving the
brewing market and selling their brewing operations to
existing competitors.
the remaining four
In 1996,
national brewers, Scottish & Newcastle, Bass, Carlsberg
Tetley Brewing and Whitbread, controlled 78 % of the
UK beer market in terms of supply. The Herfindahl-
(cid:145)HHI(cid:146)), used to help
Hirschmann index (hereinafter:
describe market concentration,
increased for the UK
beer market, on the basis of the market shares of the
national brewers, from 1 350 in 1991 to 1 678 (9) in
1996. With an HHI between 1 000 and 1 800,
the
market is described as (cid:145)moderately concentrated(cid:146). Some
regional brewers (10) left the market between 1989 and
1996, reducing the number of regional brewers from 11
to 8. The SLTC model notes that S&N has 38 % of the
market in Scotland and Bass 42 %.

Wholesaling

(21) The result of the Orders was the sale of some of the
national brewers’ tied estates. This was expected to lead
to an increase in the free trade and to a greater role

(9) The Commission does not have precise information on the market
shares of the other UK brewers. Nevertheless, it does not estimate
that the HHI for all brewers would reach the 1 800 mark as from
which a market is considered to be (cid:145)highly concentrated(cid:146).

(10) Defined in the MMC Report as brewers which (cid:145)have a business
which is mainly, but not necessarily wholly, concentrated in a
single region of the UK(cid:146). The number of regionals in 1996 is
defined taking the number of owned pubs and production volume
for the smallest regional in the MMC Report as a benchmark.

independent wholesalers. However,

for
in 1995/96
independent wholesalers still only accounted for some
6 % of distribution, compared to 5 % in 1985. The
national brewers still dominate the wholesale sector,
with a share of distribution similar to their share of
production.

(22) The pubs that were sold by the national brewers were
purchased mainly by retail pub chains or by regional
brewers. In general, pub chains either have their own
wholesaling operations or are supplied direct by the
brewers. Similarly, regional brewers do not require the
independent wholesalers. This, combined
services of
with the general decline in sales of beer and the
increased efficiency of national brewer-wholesalers, has
resulted in marginal
independent
wholesale sector.

growth in the

Retailing

(23)

In the UK, the retail sale of beer and other alcoholic
drinks for consumption on the premises requires a
licence. Three distinct
law)
justices’
classes of licences are currently in operation (11):

(local courts of

(cid:151) full on-licences: where

a person can buy an
alcoholic drink without being a resident or having a
meal. There are approximately 83 100 full on-
licences in issue, of which around 57 000 are pubs.
The remainder include hotels and wine bars,

(cid:151) restricted on-licences: where it

is a condition on
buying a drink that the customer is either a resident
or having a meal. This covers some 32 300 private
hotels and restaurants,

(cid:151) clubs: a person has to be a member before buying a
drink. This covers some 31 500 outlets, mainly
jointly owned by their members.

(24) By forcing changes in the ownership of pubs,

the
Orders have also had an effect on the proportion of
beer sold through the different retail channels: (a) the
tied estate of the brewers, (b) the managed estate of the
independent pub
tied estate of
brewers,

the

(c)

(11) The licensing system is slightly different in Scotland.

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Official Journal of the European Communities

19.7.1999

companies, (d) the managed estate of independent pub
companies, (e) loan-tied premises and (f) untied or free
premises. This can be seen from the following overview
on beer sales (volume). The 1985 data come from the
MMC report and can be considered as representative for
the years 1985 to 1989; the 1997 data are from the
Brewers and Licensed Retailers Association (hereinafter:
(cid:145)BLRA(cid:146)), including estimates for non-members.

Table 2

UK on-trade beer consumption

(a)

(b)

(c)

(d)

(e)

(f)

(%)

1985

1997

30,8

24,2

0,0

0,0

22,0

23,0

10,0

17,2

11,4

8,3

18,1

35,0

the brewers

in 1997 includes

(25) The 10 % figure for the sales going through the tied
estates of
the tied
purchases of the lessees and the cask-conditioned beer
that
the national brewers
landlord-
purchase, with a
brewer (12). The figure does not include the purchases
by the national brewers’ tenants and lessees of a guest
beer from another supplier.

the tenants and lessees of

from their

discount,

the end of

the start of

survey undertaken in 1996),
it appears that the usual
period of a loan is five or 10 years, and the average
actual length is almost four years. 31 brewers had some
37 000 loans outstanding at
the survey
period (almost 35 000 at the start) with over the year
almost 8 000 new loans entered into and over 5 000
repaid. The value of
loans repaid during the period
exceeded the value of the new loans made (to existing
or new customers); some 2 % of the outstanding capital
was written off as bad debts. The average value of a
loan is around GBP 30 000. There appear to be two
types of loans, relatively small ones (a value of almost
GBP 5 000 at
the period, but only an
average value of less than GBP 2 000 at the end of the
survey period) which are often made available to small
free-trade pubs and they appear to be very volatile. On
the other hand, there are much larger loans to large
volume outlets such as clubs (average value around
GBP 60 000) and these are usually non-exclusive.
However, the purchasing obligations are usually for a
specific quantity of beer. No estimate was made by the
BLRA as to the volume split for small/big loans, the
number of non-exclusive loans,
the total on-trade
volume-percentage accounted for by such non-exclusive
the
loans, or the percentage of
relevant premises accounted for by the quantity of beer
stipulated in such loan ties. No information was given
as to the proportion of loans which the publican pays
back with money loaned to him by another brewer (in
exchange for the loan tie). Beer volumes sold through
loan ties have reduced in the last couple of years and,
for
loan
repayments has exceeded the value of new loans.

the years 1994 to 1996,

throughput of

the scale of

total

(26) The 18,1 % figure for tied premises’ volume in 1997
does include the total volume that a loan-tied pub
operator buys from the supplier with whom he has a
loan tie. This volume may exceed the tied quantities laid
down in the loan agreement. It is, however, not known
what part of the 18,1 % represents purchases in excess
of
the loan-tie quantity. The 18,1 % figure does not
include the (cid:145)free(cid:146) purchases of a loan-tie pub operator
with other suppliers.

(27) While Table 2 gives an idea of the throughput in the
on-trade by describing the ownership situation of the
premises, it can also be noted that if one refers to the
category of on-licensed premises, 70 % of beer is sold
through the estimated 57 000 pubs, 20 % through clubs
and 10 % through restaurants, hotels, wine bars, and so
forth with full or restricted on-licences (1995 data).

(28) The Orders also reduced the restrictive scope of loan
ties, by allowing their termination at any moment in
time by the tenant on three months’ notice. The Orders
also introduced the guest-beer right for publicans with
Judging by
from the national brewers.
trade loans
information supplied by the BLRA (following a specific

Competition between brewers

(with or without

(29) At the wholesale level, the major brewers have some
guaranteed sales through their tied and managed estates.
The brewers have to compete to supply the remainder
of the market, through individual agreements with free
and supply
houses
agreements with pub chains and other brewers (with or
without (cid:145)ties(cid:146) such as minimum purchasing obligations,
non-compete
The
competition parameters are mainly on price and brand
strength, although the brewers also try to gain sales by
offering other benefits such as promotional support.

and must-stock

obligations.)

loan ties)

Market entry at brewing level

(12) This is also sometimes called a guest beer, although the legal
definition of a guest beer refers to the purchase of a cask-
conditioned beer from another supplier (see recital 16).

(30) The main hindrances to entry at this level are the need
to secure outlets for supplies and to have access to a
to secure
distribution system. A new entrant has

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Official Journal of the European Communities

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supplies to free houses, pub chains, or to the brewer’s
estates as part of their portfolio of beers or (in the case
of a national brewer) as a guest beer. Possession by
competitors of well-known brands may hinder entry, or
expansion of existing brewers. This may be more
in lagers, which are normally marketed
important
nationally, and where economies of scale in advertising
may make small-scale entry less viable. The difficulties
involved in small-scale entry may be increasing as the
advertising expenditure for the national lager brands has
increased substantially over the last couple of years,
even on a brand basis.

(31) The need to secure outlets has been reduced since the
implementation of the Orders, owing to the reduction
of the proportion of the market subject to ties and to
the emergence of pub chains (in so far as they are not
tied (cid:151) see recital 22). It is easier for a new entrant to
enter supply agreements with a chain rather than with
individual pubs. Whereas it is relatively easy to set-up a
distribution system limited to the
the
and/or
the
wholesale
wholesalers, it is more difficult to reach the individual
retail outlets.

supply of
brewers

depots

other

of

(32) Most

foreign producers of beer (mostly lager) have
chosen to enter the UK market by entering in exclusive
licensing agreements with existing national brewers
whereby the beer is brewed in the UK and sold as part
of
the national brewer’s portfolio of brands. These
foreign lagers have often been marketed as premium
brands and supported by substantial advertising budgets.
S&N has concluded such licensing agreements with, inter
alia, Foster’s, Beck’s, Kronenbourg and Holsten.

Market entry at retail level

applied strictly throughout the UK, but where they are,
locality being
in entry within that
they can result
difficult. Also, in some areas of the UK, licences are now
being refused mainly on public order grounds. However,
a particular pub company has succeeded in opening
over 100 pubs on greenfield sites in recent years.

Changes in arrangements between pub tenants and
their landlords

(35) Historically, pubs were let by means of

(cid:145)traditional(cid:146)
short-term pub tenancies. Brewers retained responsibility
for the fabric of the building and its fixtures and fittings
and tenants were responsible for selling beer supplied
by the landlord plus other drink and food. Following
the MMC report, pub tenants in England and Wales
tenure (13) by being
were provided with security of
brought within the Landlord and Tenant Act 1954.
However, well before the MMC’s recommendation, the
long full repair and maintenance leases, which
first
provided some security of
tenure and the ability to
assign the lease, were offered.

D. THE AGREEMENTS

(36) The leases are contracts between S&N and the lessee,
whereby S&N makes available a licensed public house
together with the non-moveable fixtures and fittings to
a lessee for the purpose of carrying on the business of
the public house and under which the lessee pays a rent
to S&N and agrees to purchase the beers detailed in the
lease from S&N or its nominee and no other source.

(37) There are eight types of lease which can be put into

three groups:

(33) Pubs compete only with others in their locality. Broadly
speaking, each area has a local price for a certain type
the total pub (cid:145)offer(cid:146)
of package, which comprises
(facilities, ambience) and not just the price of beer.

(cid:151) the (cid:145)English leases(cid:146): the S&N standard England and
Wales November 1993 lease ((cid:145)E&W November
is for an initial fixed term usually of three
lease(cid:146))

(34) Entry barriers in the retail market are relatively low. The
only one of any significance is the presence of licensing
laws, which can prevent new pubs from being opened
unless there is a need for them. These laws are not

(13) Except for a limited number of specified reasons, i.e. where the
owner of the pub wants to use the outlet for his own purposes as
a managed house, in which case the lessee receives compensation
fixed by law, the parties can negotiate a new agreement. In the
absence of a new agreement,
the UK courts will renew the
agreement on similar terms to the existing agreement with the
exception of the rent and the duration which cannot exceed 14
years.

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Official Journal of the European Communities

19.7.1999

years automatically renewable for additional terms
each of three years (a small number have an initial
term of between four and nine years, renewable on
three-year terms). Under the lease the tenant is not
obliged to repair the main structural parts of the
premises, certain parts integral to the structure such
as electrical and heating systems, but must repair
other areas and fixtures and fittings, and redecorate
the premises internally. The S&N standard England
and Wales April 1993 lease, as amended by a letter
of variation, is a lease in which the term and repair
obligations are the same as the November lease, but
the
entire premises.
Finally, the Matthew Brown lease, as amended by a
letter of variation, is a lease which was in use by
Matthew Brown plc prior to its acquisition by S&N
in 1985. This lease may be terminated by S&N
giving 12 months’ notice or by the tenant giving
three months’ notice. Under the lease the tenant is
obliged to repair and decorate only the interior of
the premises and the fixtures and fittings,

tenant must decorate

the

(cid:151) the (cid:145)Scottish leases(cid:146):

the lease,

the tenant

is,
continues

the S&N standard Scottish
November 1993 lease is for a fixed initial
term,
usually five years (a small number are for between
six and nine years), and continues indefinitely until
terminated by either S&N or the tenant giving six
months’ notice. Under
is
responsible for repairing everything apart from the
the premises, and for
main structural parts of
redecorating the premises
internally. The S&N
Scottish E-type lease, as amended by a letter of
in contrast, for a period of 10 years
variation,
and
unless
terminated either by S&N or the tenant giving six
months’ notice. The tenant’s repair and redecoration
obligations are similar to those obligations in the
Scottish lease, save that the tenant must redecorate
externally. Finally, the S&N Scottish S-type lease, as
amended by a letter of variation, is identical to the
E-type lease and is usually for a period of 10 years
but sometimes for 20 years. The principal difference
between this lease and the other two Scottish leases
is
is granted ownership of all
goodwill relating to the premises. On rent reviews
such goodwill is disregarded and on assignment may
be sold to the assignee,

the tenant

indefinitely

thereafter

that

(cid:151) the (cid:145)short term leases(cid:146): the temporary lease is for use
in England in circumstances where the UK Landlord
and Tenant Act 1954 has been excluded by Court
Order. The lease is for a period of one year and can
be terminated by either party giving 28 days’ notice.
The tenant’s repair and redecoration obligations are
the same as in the E&W November lease. The
tenancy-at-will agreement is also for use in England
for a longer-term lease are
where negotiations
pending.
to occupy the
premises but can be terminated at any time. Under
this agreement, the tenant must keep the interior of
the premises in good order and must repair the
trade fixtures and fittings. The leases are contracts

the tenant

It permits

between S&N and the lessee, whereby S&N makes
available a licensed public house together with
fixtures and fittings to a lessee, for the purpose of
carrying on the business of the public house. Under
the leases, the lessee pays a rent to S&N and agrees
to purchase the beers specified in the lease from
S&N or its nominee and from no other source.

The beer tie

(38) The lessee agrees to buy all specified beers from S&N or
its nominee with the exception of beer containing less
than 1,2 % alcohol and one brand of cask-conditioned
beer. Specified beers are the beers of the type set out in
the schedules of the lease which contain the terms of
trading. These include: light, pale ale (including Scotch
Ale) or bitter (also known as 70 shilling, heavy or
special ale); export or premium ale (also known as
80 shilling ale); mild ale (also known as 60 shilling ale
or light ale); brown ale; strong ale (including barley
wine);
fruit beers; wheat beers; stouts; sweet stout;
porter; lager; export or premium lager (also known as
(or
malt lager or malt liquor); strong lager;
premium low carbohydrate
low
beer or
carbohydrate (or (cid:145)lite(cid:146)) beer or lager; and low alcohol
beer or lager. These types are represented by the brands
or denominations of beer listed in S&N’s current price
list.

(cid:145)diat pils(cid:146)
lager);

(39) The lessee may sell any type of beer other than the
specified types if it is packaged in bottles, cans or other
small containers or if it is in draught form and the sale
of
is
necessary to satisfy a sufficient demand from the lessee’s
customers.

form is customary or

in draught

that beer

It

(40) A few lessees have commented on this issue.

the (cid:145)specified(cid:146)

is
type definitions cover
remarked that
substantially all beer types sold in the UK. This is not
the 12
disputed. One complainant has argued that
specified types are too generic and thus not
(cid:145)clearly
distinguishable by composition, appearance or taste(cid:146), the
relevant criteria indicated in the Regulation to define
(cid:145)different types of beer(cid:146) (14). The complainant referred to
(a beer
the difference between (cid:145)cask-conditioned beer(cid:146)

(14) Article 7(2).

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with fermentation in the cask) and (cid:145)keg beer(cid:146)
(no
fermentation in the cask) types and the absence of any
reference to this difference in the specification of the 12
types. The Commission recognises
that discerning
drinkers can taste the difference between the cask
conditioned and the kegged version of the same brand.
However, the Commission does not consider that this
necessarily implies that the specification of the types
should take account of this difference. The definition of
beer types is a matter for experts to decide (15). As the
the 12 types was originally agreed
specification of
between the respective federations of brewers and
licensed victuallers in the United Kingdom, experts with
regard to beer, the Commission accepts this definition
as an appropriate, workable way of defining beer types
in the UK.

Rent

(41) For all

leases except the tenancy-at-will

lease, rent is
paid monthly or quarterly in advance and the lessee
repays the premiums paid by the landlord for insuring
the premises against
for
example, fire and including two year’s open market rent
of the premises and expert’s fees. (For the tenancy-at-
will leases the payment of rent is weekly.) Each year the
rent payable under the Scottish leases increases by the
General Index of Retail Prices.

the loss or damage by,

(42) Numerous lessees have indicated in their submissions
that they consider that the insurance that they have to
repay S&N is above the market rate for similar coverage
and that they are not entitled to see the contract.

(43) S&N insures all its licensed premises, both managed and
the group,
in an entire risk portfolio of
tenanted,
namely buildings, motor, public liability and so forth.
S&N uses its purchasing power to obtain the best
possible price in which the premium is closely related
to the claims history of the estate; in other words, the
insurer’s margin is minimised. This results in the policy
and the total premium being commercially sensitive and
not being disclosed to lessees.

(15) See also paragraph 51 of

the Commission notice concerning
Commission Regulations (EEC) No 1983/83 and (EEC) No 1984/
83 of 22 June 1983 on the application of Article 81(3) of the
Treaty to categories of exclusive distribution and exclusive
purchasing
the
(hereinafter:
arrangements
Regulation(cid:146)) (OJ C 101, 13.4.1984, p. 2).

notice

(cid:145)the

to

(44) A system whereby tenants

individually insure the
landlord’s interest would result in higher costs to the
tenants. The lease contains a statement of the risks that
the landlord is entitled to insure and recharge to the
tenant. There is nothing to prevent
from
seeking a quotation for the insurance of the premises,
or advice on the validity of the recharge, on that basis.
There was no evidence submitted that suggested that the
amount charged by S&N was overinflated.

the tenant

(45) The normal rent review period is every three years. The
reviewed rent is the higher of the existing rent or the
market rental value of
the relevant
increase date. The market rental value is defined as
either what the parties agree is the then fair market rent
or the sum as determined by an arbitrator.

the premises at

(46) Submissions, based on the SLTC model, claim that the
costs of arbitration influenced the decision as
to
whether or not
set by S&N.
However, there was no evidence submitted to show that
S&N’s rent proposals do not stand up at arbitration (cid:151)
as would be the case if rents generally were higher than
the level the arbitrator would set.

to dispute the rents

(47) S&N have indicated to tenants, in a letter sent in early
July 1998,
Institution of Chartered
Surveyors will appoint experts on a fixed-fee basis for
fast-track resolution of rent reviews.

the Royal

that

(48) Numerous submissions, based on the SLTC model, have
indicated what the parties consider to be the negative
effects of
in
such an (cid:145)upward only rent
particular when turnover in the individual pub goes
down owing to local circumstances or an overall
recession in the country.

review(cid:146),

(49) The OFT report (see recital 50) has looked into this
issue and the OFT discussed this practice with the
the Environment which in 1995
Department of
conducted a major review of UK commercial property
leases.
review
It appeared that upward only rent
(hereinafter:
is a widespread practice for all
sorts of commercial property and thus not special for
pub leases. UORR can be said to encourage property
the more predictable flow of
investment because of
income.
in the absence of
UORR, the level of rent at the time of entry into the
lease could be higher to compensate for the increased
uncertainties for income flow.

is also estimated that,

(cid:145)UORR(cid:146))

It

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Discounts and countervailing benefits

the calculation of the rent increase. Where the tenant is
not currently purchasing a guest ale from another
supplier,
the S&N supplied cask ale with the largest
volume is excluded from the calculation.

(50)

In the United Kingdom, individuals who are not tied for
their beer purchases to another company (individual
free-house operators) can obtain discounts for their beer
purchases which are not available to the tied operators.
The Commission has therefore assessed (i) the net price
differential for beer purchases from S&N between the
price paid by individual free-house operators and S&N’s
tied lessees; and (ii)
the value of benefits which are
granted by S&N to its lessees and which are either not
readily available to the individual free-house operators
or in excess to S&N’s contractual obligations towards its
lessees
The
starting point for this assessment was the report of the
Office of Fair Trading (hereinafter:
(cid:145)OFT(cid:146)) on their
enquiry into brewers’ wholesale pricing policy of May
1995 ((cid:145)the OFT report(cid:146)), which was supplemented by
further investigations by the Commission.

(cid:145)countervailing

(hereinafter:

benefits(cid:146)).

(51) For

the purposes of

the calculation of

the price
differential, the average discounts granted by S&N to
individual free-house operators were calculated on the
basis of actual invoices in each year for either the best
selling lager or ale for a sample of 400 individual free
trade accounts. The average discount
figure resulting
from this exercise was then increased by a factor based
on historical volume for the sample outlets.

(52) The average price paid by the tied tenants takes account
introduced in November 1993
of a discount scheme,
and called (cid:145)the Deed of Variation(cid:146), which 80 % of S&N
lessees have joined. Under the Deed, the rent payable by
the lessee is increased (compared to those lessees not
under the scheme) by a fixed amount,
in return for
which the lessee is entitled to a basic discount per barrel
on purchases of specified beers. The amount of
the
increase in rent is calculated at the outset as 90 % of the
discount payable on an agreed barrelage, based on
previous trading levels.

(53)

In a submission by a trade association, it is contended
the Deed operates as a minimum purchasing
that
penalty agreement. Given the lessee’s rent increases by
90 % of the discount, in this case at least GBP 25 per
barrel, i.e. GBP 22,50, the actual discount is GBP 2,50.
Should the leaseholder purchase a guest beer, the lessee
would forfeit GBP 22,50 of the recoverable extra rent
paid in advance. This is the penalty for purchasing other
products.

(54)

It should be noted that S&N lessees had a choice, they
were fully entitled to retain their existing terms and
20 % did. Second, in calculating the additional rent it is
only on tied products. Guest beers are excluded from

(55) The Deed of Variation varies the terms of the lease and,
therefore, has no independent existence. It does not, in
itself, impose any purchasing obligation on the tenant.
The lease and the Deed of Variation therefore form a
single new agreement and, as such, the agreement must
be considered as a whole in relation to both any
exclusive purchasing obligations or
countervailing
benefits.

(56) The Deed of Variation creates a contractual obligation
to pay discount in return for a higher fixed fee. The
market rent for a lease where discount is payable must
be higher than that where no discount
is payable.
the higher the rent, and the higher the
Inevitably,
discount, the more the tenant (rather than the landlord)
is exposed to the risk/reward of over/underperformance.

(57) Most interested third parties have indicated that they are
aware of higher discounts being granted by S&N to
individual free traders than those indicated in Table 3 at
recital 77 and some of them have supplied copies of
offers made by S&N to such clients. It is not disputed
that in individual cases higher discounts are granted as
Table 3 is based on averages for all S&N’s individual
free-house operator-clients. It also follows from recital
51 that the relevant figure in Table 3 is the result of the
average discount to the free trade (excluding loan-tie
customers) minus the discounts granted to S&N lessees.

(58) An important countervailing benefit is the so-called rent
subsidy, the benefit resulting from a comparison with
the rent paid for a tied outlet and property equivalent
costs to be paid by a (cid:145)free of tie(cid:146) pub operator.

(59) There are a number of methodologies for calculating the
rent subsidy. The OFT report has identified three main
methods of comparison. The first is to take an (cid:145)average
the property and the
pub(cid:146), estimating the value of
divisible balance and comparing the resulting mortgage
payments with the rent a brewer would take. The
second is to look at
the brewers’ returns on capital
employed from their pub estate and compare these to
some estimate of a normal return. The third is by
calculating the difference between the
ratio rent/
turnover for the tied estate with an estimated ratio rent/
turnover for (cid:145)free of tie outlets(cid:146). This third method has
been used in the OFT report as the OFT had the most
data available to use this method. The Commission has

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followed this methodology because it allowed the
Commission to build on the work of the OFT which
leads to an obvious economy in procedure.

(60)

In practice, the rent subsidy is calculated by subtracting
the actual rental income from the tied estate from 15 %
of the turnover of the estate (the assumed rent for a free
of tie-outlet being 15 % of turnover). To arrive at the
rent subsidy in GBP/barrel, the overall rent subsidy is
divided by the total number of barrels (tied and untied)
supplied by S&N to the estate.

(61) The total rental

income is defined as the sum of the
lease rent, the Deed of Variation rent and S&N’s share
of machine income.

actual

and past

examining

(62) The total retail turnover of the estate is an estimate for
which the starting point was an estimate of the total
annual turnover of each individual house in February
1995 made by the responsible first line manager (16).
The turnover of each individual house resulting from
the sale of alcoholic and non-alcoholic drinks was
estimated by
volume
purchases from S&N. The figures for the past relate to
the year ended October 1993, as up to then almost all
tenants were required to make all purchases of beer,
cider and minerals from S&N (17). Wines and spirit
volumes were
also estimated by checking actual
purchases from some tenants pre-October 1993 and
current conversion rates (that is, the number of cases
per 100 beer-barrels sold) from a comparable sample of
S&N’s managed houses, i.e. S&N Retail (North) Ltd. The
estimate volume purchases per outlet were then used to
calculate
recent prices.
Machine turnover was calculated by reference to the
actual number and types of machines in each house,
together with knowledge of
revenue
generated by such machines (backed-up by estimates of
specialised consultants and actual revenues for a large
number of houses which had been subject to machine
sharing terms prior to October 1993). Tobacco and
sundry sales were estimated at 6 % of wet
turnover.
Turnover for food and rooms was set at only 3 % of
total turnover. For 1994/95 onwards, the proportion of
turnover relating to food sales has grown considerably.

turnover, based on more

typical

the

(16) The accountant commented that S&N has no factual knowledge of
its tenants. S&N informed the Commission that is has considerable
factual knowledge of the turnover of its tenants (based on S&N’s
sales
to tenants and tenants’ price lists which are publicly
displayed in accordance with UK legislation).

(17) In October 1993, S&N became a (cid:145)national brewer(cid:146) so that its
tenants were entitled, pursuant to the Beer Orders, to the special
rights described in recital 28.

at

by

has

S&N,

looked

supplied

conservative

data
taken

Having
the
view in
a
Commission
considering that this percentage has increased from 3 %
in 1994/95 to 6 % in 1997/98. The Commission chose
at random 20 pubs in the estate to check the reliability
of the estimate of total retail turnover against S&N’s
internal files for each of them.

(63) The turnover for the year 1997/98 so arrived at was
converted to a turnover per beer barrel
(from all
suppliers). This figure for 1997/98 was then used to
calculate the estimated turnover per barrel
the
previous years by indexing the figure to the rise in
average S&N list price per barrel. This figure was
reduced by 2 % per annum in proceeding years,
to
reflect the growth in non-drinks turnover, principally
food.

for

(64) The methodology for the calculation of the rent subsidy
has been criticised. Numerous lessees, based on the
SLTC model, have stated that it is widely known that
the fair and arbitrary rent for an average public house is
between 6 and 8 % of turnover in contrast to the 15 %
of turnover for free-of-tie public houses used in the
notice.

(65) First, the Commission notes that the letter on which the
claim made by the lessees is based does not mention
whether the 6 to 8 % refers to a free or a tied public
house. Second, if the letter referred to 6 to 8 % as the
free-of-tie rent, it is not clear why a newcomer to the
industry would choose an S&N tenancy if, as the sample
of S&N tied houses
selected by the Commission
suggests, the rent/turnover ratio is 11,36 %.

(66) Two tenants, on the basis of the work of an accountant
who also submitted his work independently, consider
that, in practice, rents are determined on the basis of
the divisible balance (cid:151) namely the net
50 % of
profit (18).
the assumption
It
that rent is properly based on a percentage of turnover
is false, and that the assumption that free-of-tie rent is
based on 15 % of turnover is therefore also false. They
consider that the total rent imposed by S&N, namely the

is therefore alleged that

(18) The accountant, on behalf of a complainant, provided a guide
showing how he would construct a pub lease rent. However, the
accountant provided no evidence that his model reflects the
workings of the open market.

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lease rent and the cost of discounts denied (wet rent)
result in the lessees’ being disadvantaged financially. The
tenants and the accountant have gone further
in
asserting that the rent subsidy cannot exceed the price
differential
(but without stating why). They offer no
evidence that it does not do so in the open market,
where prospective tenants make their own judgments of
risk and reward.

(review) negotiations

(67) The Commission does not dispute the fact that actual
rent
take place between the
company and the (prospective) lessee on the basis of a
shadow profit and loss account taking into account the
performance achievable by a competent
the
market sector in which the site trades; the product sales
mix; the tied product procurement terms; the size and
condition of the property, and the complexity of the
operation (such as the number of bars).

lessee;

(68) The contractual rent negotiated by the parties is not
automatically determined on the basis of 50 % of the
divisible balance. Resulting from open competition on
the market the parties negotiate a rent typically between
40 and 60 % of the divisible balance.

(69) However, the purpose of the current assessment is not
to describe how individual rents are negotiated but to
make a comparative analysis of the average rental levels
the market and another. The
between one part of
advantage of using the rent/turnover-ratio for
this
analysis as compared to a conceivable methodology
based on the differences in the average rent/divisible
balance is that the comparison for the first methodology
is based on fewer estimates of variable parameters. No
estimates need to be made for the (cid:145)cost(cid:146) structure of the
pubs in working with rent/turnover.

(70) With regard to the result of the different methods,

it
would not be unusual to find that the average free-of-tie
rent as a percentage of turnover for a particular estate is
15 % and that the average divisible balance is 50 %.

(71) For

the most

important

remaining variable in the
Commission’s methodology, namely that 15 % rent/
turnover
the
the ratio for
Commission relies on the following facts:

the free-of-tie rent,

is

sale period been longer S&N believe that they would
have been able to achieve a higher rent,

in their expert opinion,

(cid:151) Gerald Eve and Christie & Co., Surveyors, Valuers
and Agents, have indicated to S&N that most of the
free-of-tie reviews should see a free of tie rent of
between 13 and 17 %. In addition they have also
informed S&N that
the
average rents in the sector are generally around the
50 % of the average competent operator net profit
with the remaining 50 % attributable to the tenant.
In cases where the 50 % attributable to the tenant
produces an inadequate living for the tenant this
could be a lower percentage. Conversely, on outlets
where the discount level and profits are higher, rent
in excess of 50 % are not uncommon and they
would consider that 60 % would be the upper end
of the scale,

(cid:151) these findings confirm the facts presented to the
OFT that free houses pay 2 to 3 percentage points
more of their turnover in rent than the tied tenants
of brewers and that in the free trade rent equivalents
amounted to between 14 and 15 % of turnover. This
enabled the OFT in their
to base their
methodology for the calculation of the (cid:145)rent subsidy(cid:146)
on the difference paid in actual rent by the tied
lessees with an estimate of between 14 and 15 % of
turnover.

report

(72) The Commission therefore considers that,

the
reasons set out above, the rent/turnover methodology is
appropriate for assessing the rent
subsidy to tied
tenants.

for all

(73) Numerous tenants, based on the SLTC model, noted that
the Landlord and Tenant Act 1954 does not apply in
Scotland. It is argued that the tenant therefore does not
have security of tenure and hence there is an imbalance
between the parties when rent negotiations take place.

(74) Tenants in Scotland enjoy security of tenure according
to the contractual terms of their leases. In the case of
S&N lessees,
they have security of
tenure until the end of the lease. At rent reviews, during
the term of
the tenant enjoys the same
the lease,
security of tenure as a tenant in England.

this means that

(cid:151) S&N has informed the Commission in a letter of 22
April 1998 that they released free-of-tie in 1998
some 184 pubs within six weeks in order to comply
with the Beer Orders. The average rent
increase
achieved through these negotiations was, compared
to the previous tied rent, some 18 % greater, i.e. the
rent/turnover ratio is approximately 14,6 %. Had the

(75) At a rent negotiation when a lease renewal

is being
discussed, it is the case that the tenant does not have
security of tenure: the renewal of the lease and hence
the pub
the continued occupancy of
depend on the outcome of a negotiation on rent. No
evidence has been submitted by the tenants to suggest
that rent levels, on average, in Scotland are affected by
the alleged imbalance of negotiating power between the
parties.

the tenant of

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(76) A submission by the Licensed and Gaming Association
contended that S&N could use a decision to exempt the
leases to tie in relation to the provision of auxiliary
equipment and coin-operated equipment. Under
the
leases (except for the E- and S-type leases where no
consent is required), S&N require prior written consent
if
the tenant wishes to bring onto the premises or
operate from the premises any amusement machine. For
so long as S&N remains the landlord, under the Scottish
lease,
the E&W November lease and the temporary
lease, S&N cannot make it a condition of such consent
that it share in the profits for any such amusement

machine. Under the other leases, S&N can make it a
condition of such consent that it shares in the profits or
can alternatively require a rent review. Under those
leases where S&N can make it a condition that it share
in the profits, S&N will usually do so.

(77) The result of this assessment of the price differential and
the countervailing benefits are shown in the following
table.

Table 3

Price differential and countervailing benefits

Year end 30 April

1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

Price differential

Rent subsidy

Conclusion (circa)

1

31

30

8

35

27

13

37

24

21

31

10

13

18

5

18

24

6

25

25

0

27

27

0

(GBP/barrel)

(78) There are other possible countervailing benefits that are
not included in Table 3. It was not necessary to include
the countervailing benefits described below as
the
rent
the price
differential.

than compensated

subsidy more

(79) S&N spends significant sums on capital maintenance
and repairs of fixtures and fittings. To the extent that
lease
this expenditure falls outside the contractual
obligations
a
as
countervailable benefit. Tenants and former tenants have
stated that
individual cases they have not
in their
benefited from such expenditure.

counted

S&N,

can

be

of

it

(80)

loans

training

sources.

Secondly,

some unquantified
In addition, S&N also provides
benefits. First, S&N provides
to tied tenants.
Though not subsidised, they are a benefit to lessees to
the extent that they cannot gain access to finance from
other
provided.
Observations based on the SLTC model have noted that
there are other providers of
training. Thirdly, S&N
provides certain technical and marketing assistance
benefits only to S&N tenants. Such assistance includes
advice on the storage and dispensing of products as well
as assistance in connection with licensing applications
and appeals and the provision of promotional materials
and periodic promotional discounts.

is

(81) Tenants also benefit from the S&N group’s purchasing
power in relation to the insurance of
the premises.
Finally, S&N have also, in certain circumstances, agreed
to a surrender of the lease.

II. LEGAL ASSESSMENT

A. ARTICLE 81(1)

1. The relevant market

The relevant product market

(82) The relevant product market includes, in principle, all
goods or services which are perceived by the consumer,
on the grounds of their characteristics, price or intended
purpose, as being reasonably interchangeable with each
other (19). As the Court of
Justice has stated in the

(19) Case 27/76, United Brands, [1978] ECR 207, paragraph 12.

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Official Journal of the European Communities

19.7.1999

the nature of

Delimitis judgment (20), (cid:145)the relevant market is primarily
the economic
defined on the basis of
activity in question, in this case the sale of beer. Beer is
sold through both retail channels and premises for the
sale and consumption of drinks. From the consumer’s
point of view, the latter sector, comprising in particular
public houses (21) and restaurants, may be distinguished
from the retail sector on the grounds that the sale of
beer in public houses does not solely consist of the
purchase of a product but
is also linked with the
provision of services, and that beer consumption in
public houses is not essentially dependent on economic
considerations. The specific nature of the public-house
trade is borne out by the fact
the breweries
organise specific distribution systems for this sector
which require special installations; and that the prices
charged in the sector are generally higher than retail
prices(cid:146)

that

as all

these outlets,

clubs are also included(cid:146). This

In view of the specific licensing system in the UK, it has
the three distinct
to be specified which sections of
classes of on-licences (recital 23)
form the relevant
In
product market of (cid:145)public houses and restaurants(cid:146).
this respect, reference is made to paragraph 43 of the
notice to the Regulation where it is stated that
(cid:145)the
concept of (cid:147)premises for the sale and consumption of
this
drinks(cid:148) covers any licensed premises used for
purpose. Private
is
understandable,
including the
restricted on-licences, have the common feature that the
drinks are purchased for consumption on the premises
and that there is an important service element provided
for. The Commission recognises that the price of beer in
clubs, being in December 1994 some 82 to 83 % of that
prevailing in pubs,
than that charged in
lower
pubs (22). However, this reflects to a large extent the fact
that these clubs operate on a non-profit basis. It remains
the case that, in view of the service element, the price in
clubs
in
specific distribution
supermarkets. Furthermore,
system for the whole on-trade,
including clubs, is the
same: the special installations for draught dispense, the
brewers’ beer list prices, and the operation of loan ties.

the price of beer

in excess of

still

the

is

is

for

is that

in premises

follows that

the reference market

for the
It
distribution of beer
the sale and
consumption of drinks (the whole on-trade market). As
was stated in the Delimitis judgment (23), that finding is
not affected by the fact that there is a certain overlap
between the on- and off-trade, namely inasmuch as
retail sales allow new competitors to make their brands
known and to use their reputation in order to gain
access to the market constituted by premises for the sale
and consumption of drinks.

(83)

(84)

(20) Case C-234/89, Stergios Delimitis v. Henninger Br(cid:228)u, [1991] ECR I-

935, at paragraph 16.

(21) The German (procedural language) version of the judgment uses
In the French version, being the

the term (cid:145)Schankwirtschaften(cid:146)
working language within the Court, the term (cid:145)cafØs(cid:146) is used.

(22) Extracts from Stats MR’s survey of retail prices, submitted by a

national brewer to the OFT.
(23) See footnote 20; at paragraph 17.

The relevant geographic market

(85) The objective competitive conditions of supply and
demand for the supply of beer to the on-trade vary
considerably in the different parts of the Community.
As the Court of
Justice has noted in the Delimitis
judgment at paragraph 18, most beer-supply agreements
are still entered into at a national level. This is especially
land
so for the United Kingdom, given the lack of
borders.
in applying the Community
competition rules to the agreement, account is to be
taken of the UK market for beer distribution in premises
for the sale and consumption of drinks.

follows that,

It

(86) The UK market is also distinct from beer markets in
other Member States in view of the Orders (recital 16),
the high consumption of draught beer (recital 19), the
presence of pub-management companies (recital 22), the
pub-licensing regulations (recitals 23 and 34) and the
variety in types of ale offered (recital 38).

2. Agreement between undertakings

(87) S&N and the lessees are undertakings within the

meaning of Article 81(1).

(88) The individual

leases,

in similar form to the standard
leases described above, between S&N and each of its
lessees are agreements within the meaning of Article
81(1).

3. Restrictive effect on competition of the principal

restrictions

3.1. Description and nature of

the principle

restrictions

(89) A beer supply agreement such as the leases is generally
qualified by referring to the
exclusive purchasing
obligation which is generally backed by a non-
competition obligation (24). These clauses are formulated
in the lease as follows (recitals 38 to 39):

(cid:151) the tenant shall purchase from S&N or its nominee
and from no other person or firm such specified
beers (with the exception of the guest-beer clause) as
he shall require for sale in the premises; in practice,

(24) See footnote 20; at paragraph 10.

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the brewer is free to add, replace or delete the actual
brands of a specified type in the company’s price list
(exclusive purchasing obligation),

(94)

Justice held that

the effects of a beer

In the case of Brasserie De Haecht v. Wilkin (26), the Court
supply
of
agreement had to be assessed in the economic and legal
context
in which they occur and where they might
combine with others to have a cumulative effect on
competition. It also follows from that judgment that the
cumulative
agreements
constitutes one factor among others in ascertaining
whether
or
distorted (27).

competition

prevented,

restricted

similar

several

effect

of

is

for

(cid:151) the tenant shall not sell or expose for sale in the
premises or bring on to the premises
the
purpose of sale therein (a) any beer which is of the
same type as a specified beer but which is not
supplied by S&N or its nominees; or (b) any other
beer unless either (i) it is packaged in bottles, cans
or other small containers; or (ii)
it is in draught
form and the sale of that beer in draught form is
customary or is necessary to satisfy a sufficient
(non-
lessee’s
demand from the
competition obligation).

circumstances

(90)

the

from the explicit non-
It can be noted that, apart
competition obligation with regard to specified types of
beers,
so
formulated that
it already includes implicitly a non-
competition obligation by reference to the general
wording (cid:145)such specified beers(cid:146).

exclusive purchasing obligation is

(91) Because of

the exclusive purchasing obligation,

the
lessees are precluded from accepting offers of contract
goods from other suppliers. Competition for the lessees
between the brewer and other beer wholesalers who
offer the same brands is precluded (restriction of inter-
brand competition).

(92) The explicit and implicit non-competition obligation for
specified types of beer, that is to say, the prohibition on
the lessees’ purchase of other brands of specified types
from other producers of beer
inter-brand
competition. The contractual provisions on the purchase
of non-specified types impose certain administrative
constraints on the lessees but do not in effect restrict
their ability to offer such non-specified types on their
premises. These clauses therefore lack a restrictive effect
on competition.

restricts

3.2. Restrictive effect

(93) Having identified the nature of

the restriction of
the
competition brought about by the network of
brewer’s leases, the restrictive effects on retailers and
suppliers
be
demonstrated (25).

relevant market

need

the

to

in

(25) See also paragraph 13 of

the Delimitis

such
(exclusive beer supply) agreements do not have the object of
restricting competition within the meaning of Article 81(1), it is
nevertheless necessary to ascertain whether they have the effect of
preventing, restricting or distorting competition(cid:146).

judgement:

(cid:145)If

3.2.1. Cumulative effect of several similar networks

foreclosure of

the UK on-trade market,

(95) The purpose of this assessment is to measure the degree
thereby
of
measuring the hindrance of the opportunities for other
producers of beer, national or foreign, to reach the on-
from the
trade market
cumulative effect of all brewers’ networks.
In other
words, the assessment relates to the opportunities open
to such other brewers to reach the final consumer in
competitive conditions (28) defined independently by the
brewer in question.

independently,

resulting

(96) Furthermore, as S&N notified the leases in order to
obtain an exemption to take effect as from the date on
which the agreements were entered into, this assessment
must go back to 1985, the year of introduction of the
leases.

(97) The foreclosure resulting from the brewers’ networks
has different forms. First, there is the vertical integration
by UK brewers down to the retail
level. This vertical
integration takes the form of managed houses and
property tied houses. Secondly,
the network includes
also (cid:145)vertical agreements(cid:146) on either of two levels: either
directly, with retail outlets via loan ties, or on the
wholesale level, via (cid:145)tying(cid:146) supply agreements, namely
agreements containing exclusive purchasing obligations,
minimum
must-stock
obligations and so forth with (cid:145)traditional(cid:146) wholesalers,
non-brewing pub companies or other brewers in their
wholesale function.

obligations,

purchasing

(26) Case 23/67, ECR 1967, p. 407
(27) See footnote 19; at paragraph 14.
(28) With regard to competition policy, the main parameters are what
is called the (cid:145)above the line(cid:146) parameters: overall positioning of the
brand (including pricing), general marketing policy (advertising
concept, national advertising, promotions) as opposed to (cid:145)below
the line(cid:146) which is more (cid:145)point of sale(cid:146)-related marketing.

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of

tied

houses

foreclosed another 22 % of

(98) From Table 2 (recital 24) it can be seen that sales of the
brewers
property
and managed
represented in 1985 about 55 % of sales in the on-trade.
Loan ties
the on-trade
market in that year. As there have been only limited
changes in the situation on the UK on-trade beer market
prior to the Orders, the 1990 data are considered as
representative for at least the years 1985 to 1989. In
1990, the Orders were still not fully implemented so
that, although the situation was starting to change
compared to the previous years, it can be estimated that
still around 70 % of consumption of beer in the UK on-
trade occurred in tied outlets.

(99) For the year 1997, the last year for which this kind of
data is available, brewers’ property tied and managed
houses account for 27,2 % of volume throughput. Loan
ties account for 18,1 %. An unidentifiable part of the
volume for loan ties is not supplied subject to a legal
binding commitment of the retailer to buy the volume
of the tying brewer (recital 26) (29), but it is most likely
that the binding commitment will at least cover 10 % of
on-trade volume throughput. Therefore the conclusion
must be that the UK brewers tie themselves directly to a
maximum extent of 45,3 % (but most
least
likely at
the UK on-trade
37 %). This volume throughput of
offers no direct opportunities for independent access by
other brewers direct to the retail level.

(103)

(100)

It has been argued that since the Orders made it
possible to terminate a loan tie on three months’ notice,
such ties should no longer be regarded as hindering any
opportunities for access.

(104)

(101) The Commission accepts that independent access to the
loan-tied outlets in question is not always excluded, as
there are an unidentified number of non-exclusive loan-
tie agreements (30). However, for the volume covered by
loan ties,
the possibility for other brewers to reach
directly the final consumer in competitive conditions
defined independently by the brewer in question is
limited.

four years indicates that

duration of
the contractual
relationship is not a temporary one. Furthermore, the
brewer that wants to enter independently into loan-tied
premises needs to offer the individual pub operator the
finance to pay back the first loan (by way of, most
likely, a new loan tie). Competition between such
brewers is thus not restricted to the quality and (direct)
price of the beer, but requires the other brewer to also
offer loan ties. In addition, it needs to be remarked that
such an independent entry in loan-tied premises would
only make sense for a brewer that offers all or most
types of beer typically offered by a pub retailer to the
public, because otherwise the total finance cost of the
loan would need to be recouped by the sale of one
brand (or a limited number of brands).

It is not disputed that the tied volume might still offer
indirect access for other brewers in so far as the
(property or loan) tying brewer/wholesaler is prepared
to supply to its tied outlets beer from other brewers.
However,
the assessment on foreclosure focuses on
opportunities for independent access for other brewers,
from (cid:145)horizontal(cid:146)
which clearly
Such
cooperation
inter-brand
cooperation may
competition between the brewers in question and the
tying brewer will only allow another brewer’s beer in
his outlets when this is in the tying brewer’s interest.

competitors.
of

actual
the

does not

between

result

limit

level

In addition to the direct (managed and leased houses
and loan ties)
ties by UK brewers of retail outlets,
reference has to be made to the 19,7 % (in 1997) going
through non-brewing pub companies’ property tied and
It is estimated that around 13 % is
managed houses.
accounted for by (cid:145)tying(cid:146) beer-supply agreements between
pub companies and brewers. This percentage includes
the volume
Inntrepreneur Pub
Company Limited, Spring Estates Limited and Allied
Domecq Retailing all of which had to buy in 1996 (31)
all their beer requirements from one national brewer.
the four national
Also included are the estimates of
brewers of
to contractual
their
restriction to other pub companies.

throughput of

supplies

subject

the

(102) The Commission also recognises that the Orders make it
the average

easier to terminate a loan tie. However,

(29) The intrinsic link between the loan tie and the actual volume
purchased cannot be denied, the best evidence for this link is the
inability of the brewers to dissociate the two in their internal
accounts.

(30) This access could be excluded in practice by way of multiple non-

exclusive loans.

(105)

It can thus be concluded that a maximum of around
58 % (but most likely at least 50 %) of the UK on-trade
volume was
in 1997 by tying
restrictions of brewers. Therefore, the bundle of tying
since 1985, had
agreements of UK brewers has,

still accounted for

(31) The exclusive supply agreement for the Inntrepreneur and Spring
estates ended on 28 March 1998; that for the Allied Domecq
estate on 12 December 1997.

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considerable effect on the opportunities for gaining
independent access to the UK on-trade beer market.

beer that a retail outlet would need to offer as new
competitors (and especially foreign competitors) will
tend to offer individual brands rather than the whole
range of types of beer common in the UK.

3.2.2. Other factors

(106) The Court of

Justice also held that, as was

last
confirmed in the above mentioned Delimitis judgment,
the network of exclusive purchasing
the effect of
agreements is only one factor, among others, pertaining
to the economic and legal context
in which an
agreement must be appraised. The other factors to be
taken into account are, in the first instance, those also
relating to opportunities for access and, secondly, the
conditions under which competitive forces operate on
the relevant market.

3.2.2.1. Opportunities for access

(107) Paragraph 21 of the Delimitis judgment referred to the
(cid:145)real concrete possibilities for a new competitor
to
penetrate the bundle of contracts by acquiring a
brewery already established on the market together with
its network of sales outlets, or to circumvent the bundle
of contracts by opening new public houses. For that
purpose it is necessary to have regard to the legal rules
and agreements on the acquisition of companies and the
establishment of outlets, and to the minimum number
of outlets necessary for the economic operation of a
distribution system. The presence of beer wholesalers
not tied to producers who are active on the market is
also a factor capable of facilitating a new producer’s
access to that market since he can make use of those
wholesalers’ sales networks to distribute his own beer(cid:146).

(108)

It is not easy to open a substantial number of new pubs
within a couple of years, in view of the licensing laws
(see recital 34). Moreover, although there is an active
trade in UK pubs and substantial numbers of pubs have
been sold off in single deals, it has to be remarked that
the investment that would need to be borne by a new
competitor to acquire a network of sales outlets, or to
open new public houses is a considerable one (32) and
would, in fact, involve a change in focus from being a
brewer
to also being a UK retailer. This would,
links with
furthermore, require additional horizontal
other UK brewers to provide all the different types of

(109) Direct takeovers of UK brewers (and their tied estate) by
foreign brewers has occurred a few times in recent
years, but in most cases the foreign brewer has since
divested itself of its interest again (the Dutch brewer
Grolsch in Ruddles, and the Australian brewer Foster’s
in Courage).

(110)

the

relatively

In addition,
role played by
(cid:145)traditional(cid:146) wholesalers in the distribution of beer in the
UK (recital 21), makes it difficult for a foreign brewer,
or for a new brewer, to enter the market independently.

small

(111) Therefore,

in most cases,

foreign breweries license a
major UK brewer to brew and distribute their products
within the UK, thereby having access to their public
houses and distribution facilities to free houses. In such
circumstances, the UK brewer has a strong influence on
the positioning and the marketing (advertising) of the
foreign brewer’s brand.

(112) The Commission accepts that the increased importance
of
retail sales volume in outlets operated by non-
brewing pub companies offers, at least theoretically, an
increased possibility for other brewers to have an access
to the UK on-trade beer consumer. It is indeed a lot
easier for a newcomer on the market to conclude an
agreement with a pub company, even if the newcomer
only has one brand, and thereby gaining access to all
the pubs in that network as compared to concluding
agreements with individual outlets. However,
for the
reasons stated above in recital 99, the concrete opening
of
the market cannot be estimated
accurately. In addition, a brewer wishing to supply a
its own distribution facilities
pub company without
would need to organise the distribution (see also recitals
23 and 32).

that segment of

3.2.2.2. Competitive forces on the market (33)

(113) The UK brewing industry has been going through a
process of concentration (recital 20). Second, the overall
demand for beer as well as the on-trade market are

(32) The average sales price of a private freehold UK pub is around

GBP 200 000. (Source: Fleurets).

(33) See also paragraph 22 of the Delimitis judgment. See footnote 20.

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Official Journal of the European Communities

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(114)

(115)

likely to continue to decline or remain, at best, static
the increasing advertising
(recital 17). Furthermore,
expenditure needed to support a single brand (a sunk
cost), gives a further incentive to foreign brewers to
enter via licensing agreements. Finally, the possibilities
of building on a reputation in the off-trade beer market
to gain independent access to the on-trade market is
more limited in the UK than in most other European
countries in view of the fact that the off-trade represents
only 30 % of total beer sales (recital 17).

3.3. Conclusion on first Delimitis test

It can thus be concluded that an examination of all
tying agreements including, but not limited to, beer-
supply agreements entered into, and the other factors
relevant to the economic and legal context of the UK
on-trade market,
tying
agreements had in 1985, and still have today, on the
basis of
the
cumulative effect of considerably hindering access to
that market, for new national and foreign competitors.

recent available information,

the brewers’

the most

shows

that

3.4. Significant contribution

into

entered

It is now necessary to assess, as the Court clarified in
(cid:145)the extent to
paragraph 24 of the Delimitis judgment,
which the agreements entered into by the brewery in
question contribute to the cumulative effect produced in
that respect by the totality of
the similar contracts
found on that market. Under the Community rules of
competition, responsibility for such an effect of closing
off the market must be attributed to the breweries that
make an appreciable contribution thereto. Beer-supply
agreements
breweries whose
contribution to the cumulative effect is insignificant do
not therefore fall under the prohibition under Article
85(1)(cid:146). Therefore,
the
contribution made by the brewery in question, in this
case S&N, the brewer’s total tied network, including but
not limited to the exclusive purchasing obligation and
the inherent non-competition obligation in the leases,
must be assessed. In other words, it is the network that,
according to the Delimitis judgment,
(cid:145)must make a
significant contribution to the sealing-off effect brought
about by the totality of the brewers’ tying agreements in
their economic and legal context(cid:146) (34).

in assessing the

extent of

by

(116)

In so doing, consideration will be given to the effect of
the finding of a
the network of S&N as a whole;

restrictive effect
equally to each of its constituents (35).

for the network would then apply

3.4.1. The beer de-minimis notice (36)

(117) S&N is clearly not a (cid:145)small brewer(cid:146) as defined by the
notice as it produces more than 200 000 hl, its market
share is more than 1 % of the UK on-trade market and
one of the standard leases is in some cases longer than
the maximum of 15 years indicated in the notice.

3.4.2. Individual assessment

In paragraphs 25 and 26 of

(118) The Court has ruled in the Delimitis judgment (37) that
(cid:145)the extent of the contribution made by the individual
agreement depends on the position of the contracting
parties in the relevant market and on the duration of
the agreement(cid:146).
the
judgment, the Court has clarified that (cid:145)that position is
not determined solely by the market share held by the
brewery and any group to which it may belong, but
also by the number of outlets tied to it or to its group,
in relation to the total number of premises for the sale
found in the relevant
and consumption of drinks
market(cid:146). As to the duration, the Court held that (cid:145)if the
duration is manifestly excessive in relation to the
average duration of beer supply agreements generally
the individual
entered into on the relevant market,
contract falls under the prohibition under Article 85(1).
A brewery with a relatively small market share which
ties its sales outlets for many years may make as
significant a contribution to a sealing-off of the market
as a brewery in a relatively strong market position
which regularly releases sales outlets at shorter intervals(cid:146).

(119)

the Court of First
In the German ice-cream cases,
Instance, in assessing the significant contribution of the
companies in question, referred to (cid:145)the strong position
occupied by the [company concerned] in the relevant
market, and, in particular, its market share(cid:146) (38). The CFI
has thus based itself primarily on the broader concept
of the overall market share.

(35) The Court of First Instance pointed out in Cases T-7 & 9/93,
[1995] ECR II-1539 and II-1611,
Langnese-Iglo and Sch(cid:246)ller,
paragraphs 129 and 95 respectively (hereinafter: (cid:145)the German ice-
cream cases(cid:146)) that (cid:145)where there is a network of similar agreements
concluded by the same producer, the assessment of the effects of
that network on competition applies
the individual
agreements making up the network(cid:146).

to all

(36) Paragraph 40 of

the notice to the Regulation (OJ C 121,

13.5.1992, p. 2). See footnote 15.

(37) Last

sentence of paragraph 1 of

the operative part of

the

judgment.

(34) Penultimate sentence of paragraph 1 of the operative part of the

(38) See footnote 33; at paragraph 87 for Sch(cid:246)ller and paragraph 112

judgment.

for Langnese-Iglo.

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(120) An assessment of

the contribution by the brewer
therefore needs to take into account his position on the
relevant market, and in particular his contribution by
way of
to the foreclosure and,
secondly, the duration of his restrictive agreements, and
in particular his standard agreements.

tying arrangements

(121) The assessment of the contribution of the brewer takes
into account the managed estate of the brewer, although
this latter part in itself does not fall under Article 81(1)
concern an agreement between
as
it does not
In considering the notified
independent operators.
is
the brewer’s network),
agreements (as part of
particularly important that due account is given to the
foreclosure resulting from the managed estate of a
national brewer as the total number of property ties is
limited by the Orders. However, within that number the
brewer is free to choose whether he wants to operate
the house by way of a tenancy/lease agreement or by
way of a managed house. The brewer has thus the
possibility of offering at any moment a lease agreement
for a currently managed house, and, after the end of a
lease the brewer may turn the leased house into a
managed house.

it

(122) The other segments of the (cid:145)tied network(cid:146) of S&N are
S&N’s loan ties and the amounts of beer for which its
(cid:145)wholesale partners(cid:146) are under an obligation to buy
(exclusivity, minimum purchasing, must-stock, non-
compete and so forth). As indicated at recital 13, the
Commission has some limited data for this (cid:145)channel(cid:146).
Furthermore,
in assessing any brewer’s role on the
market, consideration can also be given to his overall
market share of the UK on-trade market, and its share
on the related UK beer production market.

(123) The 892 pubs (of which 421 were operated by way of
tenancies/leases) owned by S&N in 1990/91 and the
2 600 (432 leased) owned in 1997/98 account for 0,57
and 1,9 % respectively of
the total number of on-
licensed premises. Moreover, they account, as indicated
in Table 1 (recital 9), for around 2,8 and 4,12 % of the
on-trade volume in 1990/91 and 1997/98 respectively
(the property tied part accounting for 1,32 and 0,89 %
respectively). The S&N tied sales
for which the
Commission has
the data, namely the above and
including the loan tie sales, account for 6,16 (39) and
loan and
9,44 % respectively. The (cid:145)tied(cid:146) part (property,
managed) thus accounts for around a quarter of S&N’s
total sales on the on-trade market share of around 28 %.

(39) The Commission has no detailed information on S&N’s tied
network previous to 1990, i.e. for the period 1985 to 1990. It is,
therefore, possible that in that period, S&N’s tied network might
not have been a significant contributor
to the foreclosure.
However, it will be assumed, possibly to the disadvantage of the
company, that the leases fall within the scope of Article 81(1) for
the whole period.

To this should be added the (cid:145)wholesale partner ties(cid:146) as
described in recital 122.

(124) With regard to the duration of the segments of S&N’s
tied network, it has to be understood that all the houses
that S&N owns are, in principle, always (cid:145)locked in(cid:146) to
the company. This is not only the case for the managed
house, but also the leased houses will after the end of
to another
lease, be re-let
one (short or long-term)
operator on a tied basis. The longest of
the leases
extends in some cases for 20 years. S&N’s loan ties last
on average 2,5 to 3,5 years.

(125)

notified

agreements

It is therefore concluded that S&N’s tied sales, of which
the
contribute
a
part,
the UK on-trade
significantly to the foreclosure of
market. The exclusive purchasing obligation and the
non-competition obligation in the leases therefore have
a restrictive effect on competition.

are

4. Restrictive
restrictions

effect

on

competition

of

other

4.1. Description

(126) The leases contain the following clauses by which it has
been argued by some of the respondents to the notice
that they have a restrictive effect on competition:

(cid:151) to put and keep the interior of the public house and

fixtures and fittings in good repair,

(cid:151) to use the premises only as a fully licensed public

house,

(cid:151) restrictions on assignments,

(cid:151) to sell

trade fixtures and fittings,

furniture and
effects and stock on the termination of the lease to
S&N or to the new lessee,

(cid:151) not

to place amusement machines without

the

consent of S&N,

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as

to

clause(cid:146)):

collectively

referred
the obligation to

(cid:151) clauses relating to advertising in some of the leases
(cid:145)the
(hereinafter:
advertising
display
advertisements supplied by S&N (in the England and
Wales 1993 leases, and in the Scottish lease); and
permission to only advertise goods supplied by third
parties in proportion to the share of those goods in
the total turnover of the premises (in all the English
leases).

that

possesses

information

Commission
the
no
advertising clause has been strictly applied. On the
contrary, S&N has confirmed in a letter of 2 October
1998 that it has not in the past, does not at present,
and will not in the future use the leases to exclude or
unduly impede advertising for the products of other
tenants occupying premises
undertakings.
under
frequently display
advertising material provided by other suppliers. S&N
has not attempted to prevent tenants from displaying
such material, or refused permission to display such
material. In these circumstances the advertising clause is
not considered to be an appreciable restriction of
competition.

In practice,
Scottish lease

very

the

4.2. Evaluation

5. Effect on trade between Member States

the object or

(127) The first four of the above clauses cannot be considered
to have
restricting
competition in a particular market. The clause with
regard to the amusement machines is not restrictive in
view of the influence of amusement machines on the
character of the premises (40).

effect of

the

(128) Whether or not

to

all

the advertising clause falls foul of
is only relevant for the market for the
Article 81(1)
other
beer. With regard
distribution of
neighbouring markets for the supply of goods to on-
licensed premises in the UK, such as, for example non-
beer drinks, crisps and amusement machines, the clause
is not restrictive. The leases,
in the absence of an
exclusive purchasing obligation and a non-competition
obligation for the supply of such products, do not
restrict competition on such markets,
if such were
considered to exist,
to an appreciable extent by the
mere imposition of an advertising clause.

(129) With regard to the supply of beer, the obligation to
display advertisements supplied by S&N does not restrict
in any way the advertising of beer supplied by other
undertakings and is thus no restriction of competition.
The clause in the English leases has the object of
supplied by other
limiting the advertising of beer
undertakings to a certain extent. The only beer that the
S&N lessee is entitled, pursuant to the lease, to buy
from other undertakings is the guest beer and beer of
non-specified types. In particular the brands of beer of
on-specified types may not be well known to the UK
consumer and therefore would require specific on-the-
spot advertising. The letter of the clause would make
advertising for these new products impossible, as the
clause requires the advertising to be proportionate to
is
the turnover of these goods, which, by definition,
the
virtually zero as the goods are new. However,

than would

(130) Where, for the reasons described above, the effect of the
exclusive purchasing and non-competition obligations in
the leases in question is to eliminate the freedom of the
lessees to stock and offer for sale to the consumer
specified beers of competing suppliers, those suppliers
are impeded, irrespective of their geographical location
in gaining access to the
and the origin of the goods,
premises concerned unless
they have concluded a
specific agreement with S&N. This restriction has the
effect that the level of trade in beer may be at a lower
case. The
otherwise
level
opportunities
establish
foreign
independently in the UK on-trade beer
themselves
(cid:145)restrictive(cid:146)
affected;
are
market
agreements,
beer-supply
the
agreements, are likely to protect a substantial part of the
from direct competition from competing
UK market
Indeed, as
goods originating in other Member States.
was noted in recital 32, most foreign producers have
chosen to enter the UK market by entering licensing
agreements with existing brewers,
to
gain access to their on-trade network (41). Accordingly,
the leases affect trade between Member States.

in particular
including

be
suppliers

including S&N,

exclusive

the

the

for

to

6. Appreciability

(131) The

exclusive

purchasing

non-competition
obligations only fall within the scope of Article 81(1),
however, if they affect competition and trade between
Member States to an appreciable extent.

and

(40) See also paragraph 53 of

the notice to the Regulation: see

(41) Commission Decision 90/186/EEC (cid:151) Moosehead/Whitbread

footnote 15.

(OJ L 100, 20.4.1990, p. 32, at recital 16).

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Official Journal of the European Communities

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(132) The quantification of

effect of

the restrictive

the
cumulative networks and the other factors contributing
to the foreclosure of the UK on-trade beer market, and
of the significant contribution made by S&N’s network
in recitals 95 to 130
to that effect, as
in restricting
their
demonstrate
competition and trade between Member States with
respect to the UK on-trade beer market.

laid out
appreciable nature

therefore does not fulfil the conditions of Article 6 of
the Regulation, which requires a specification by brand
or denomination (42).

(136)

It is for this reason that the standard leases do not fulfil
the conditions of the Regulation.

7. Conclusion

2. Individual exemption

(133) The

exclusive

non-competition
obligations of the leases fall foul of Article 81(1) since
the introduction of the leases in 1985.

purchasing

and

2.1. Improvement in distribution

2.1.1. General considerations

B. ARTICLE 81(3)

1. Regulation (EEC) No 1984/83 (the Regulation)

(134) The Court has confirmed in the Delimitis judgment
the Regulation
that Article 6(1) of
(paragraph 36)
requires that the exclusive purchasing obligation on the
part of the reseller shall relate solely to certain beers or
to certain beers and drinks specified in the agreement.
The purpose of requiring that they be so specified is to
prevent
the supplier from unilaterally extending the
scope of the exclusive purchasing obligation. A beer-
supply agreement which refers, for the products covered
by the exclusive purchasing agreement,
to a list of
products which may be unilaterally altered by the
suppliers does not satisfy that requirement and thus
does not enjoy the protection of Article 6(1). The Court
thus concluded (paragraph 37) that the conditions for
the application of Article 6(1) of the Regulation are not
exclusive
satisfied if
purchasing terms are not
the
agreement itself but are stated to be those set out in the
price list of the brewery or its subsidiaries, as amended
from time to time.

listed in the text of

covered by

the drinks

the

(135) The standard leases provide for a specification of the
beer tie by type which allows S&N to add to, delete or
substitute the brands of beer that
it supplies to the
lessees by amending the contents of its price list from
time to time for specified beers. The specification of the
beer tie by type thus allows S&N unilaterally to extend
the scope of the exclusive purchasing obligation and

(137) A beer-supply

for

leads

generally

agreement

to an
improvement in distribution as it makes it significantly
easier to establish, modernise, maintain and operate
premises used for the sale and consumption of drinks
(see also recital 15 to the Regulation). This is true for
the brewer/supplier who does not need to integrate
vertically as well as
the lessee. The letting of
premises at an agreed rent as in the S&N standard
leases, particularly in view of the restrictive UK licensing
system, is a method of providing the means of a lessee
to operate such premises and, as such, allows a low-cost
entry of a newcomer on the on-trade market for the
distribution of beer. The system whereby brewers in the
UK allow an independent business person to operate a
thereby
licensed property owned by
increases the options for entry into the market.
In a
way, property tied houses are sometimes described as a
(cid:145)half-way house(cid:146) between being a manager
(in a
managed pub owned by the brewer/pub company) and
owning one’s own pub (which may be loan tied or
totally free).

the brewer

(138) The incentive on the reseller,

the

purchasing

following from the
non-competition
and
exclusive
obligation, to devote all the resources at his disposal to
the sale of the contract goods will thereby generally lead
to an improvement of the distribution of the contract
goods. In other words, as is stated in recital 15 to the
Regulation, such agreements lead to durable cooperation
between the parties allowing them to improve or
maintain the quality of the contract goods and of the
services to the consumer and sales efforts of the reseller.
They
and
consequently a cost-effective organisation of production
competition
and distribution and the pressure of
the
between products of different makes obliges

allow long-term planning

sales

of

(42) Paragraph 41 of the notice to the Regulation. See footnote 15.

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undertakings involved to determine the number and
character of premises used for the sale and consumption
of drinks in accordance with the wishes of customers.

(139) With regard to long duration of

the

exclusivity
obligation and non-compete clause contained in the
leases it has to be noted that special rules are applied in
cases where the premises used for
the sale and
consumption of drinks are let by the supplier to the
In this respect reference is made to Article
reseller.
8(2)(a) which
purchasing
that
obligations and bans on dealing in competing products
specified in the Title may be imposed on the reseller for
the whole period in which the reseller in fact operates
the premises(cid:146). On this basis the long-term duration of
the exclusivity obligation and the non-compete clause
contained in the lease therefore do not constitute an
obstacle to exempting the exclusive obligation and non-
compete clause.

(cid:145)exclusive

states

(140) Furthermore,

the specification of

the tie by type is
considered to enable a more practical operation of
exclusive beer-supply arrangements in the UK than the
specification provided for
in the Regulation. The
specification of
the tie by type makes it easier to
introduce the brands of foreign or new brewers to their
price lists because it does not require the consent of all
the tenants (43). This is particularly the case in view of
the large number of beers supplied by S&N to the
lessees and of the frequency with which S&N adds or
substitutes a beer on its price list,
including foreign
brands. This is important in view of the high percentage
of all beer sold in the UK as draught beer in pubs, and
the foreclosure of some 70 % (in 1989) or a maximum
of around 58 %, but most likely at least 50 % (in 1997)
of the UK on-trade by UK brewers: nevertheless, foreign
or new brewers may still find it particularly difficult to
penetrate the UK market
is further
noted that, in any case, the tenant would not be in a
position to add brands as the brewer would anyway
have been allowed to prohibit sales by the lessee of the
other brands of the same type in his outlet through the
non-compete clause exempted under Article 7(1)(a) of
the Regulation. The tenant is therefore in no position to
affect, whether positively or negatively,
the level of
foreclosure in the UK on-trade beer market.

independently.

It

(141)

is correct

this change

company. Where

It
that a lessee might be forced to buy
unfamiliar products when S&N sells his tied house to
another
takes place
(cid:145)overnight(cid:146),
it may have a considerable impact on
turnover in the respective house, and thus for the
individual
from a
lessee
competition point of view,
the contractual structure
offers, in such circumstances, an opportunity for new or
increased entry for other brewers, national or foreign. If
such a change takes place on a gradual basis, it might
not have a detrimental impact on the individual lessee’s

concerned. However,

position. In this respect, it can be noted that a gradual
change of brand portfolio will probably even occur in a
in order to take new or changing
declining market
consumer preferences
it
into account. Furthermore,
would not be in the long-term commercial interest of
the (cid:145)new(cid:146) owner to ruin the profitability of his newly
owned premises by offering brands the customers would
not be interested in.

2.1.2. Price differentials

(142) However, the Commission considers that where there
are price differences, faced by the tied lessee, it has to
be
above described
advantages can materialise.

assessed whether

further

the

(143) Price discrimination is an important element

in the
economic justification for an exemption to exclusive
in the first
purchasing agreements. This is because,
place, the possibility to discriminate is enabled by the
exclusive purchasing agreement, which for the duration
of the agreement gives the purchaser, unlike the other
clients of the producer, no legal sourcing alternative. A
therefore decide to (cid:145)cash in(cid:146) on his
brewer might
leverage vis-(cid:224)-vis his tied customers.

they cannot outweigh in the longer

(144) Secondly, with regard to the condition related to the
improvement in distribution, the Commission considers
that
someone who faces an appreciable (cid:145)net(cid:146) price
discrimination might have difficulties to compete on a
in
level playing field. Therefore, any improvements
distribution resulting from such agreements may remain
theoretical, or be structurally inhibited in such a way
that
term the
anticompetitive features of the agreement. This idea that
price discrimination can be incompatible with Article
81(3) is also expressed in the Regulation where recital
21 points out
in which
agreements satisfying the conditions of this Regulation
nevertheless have effects incompatible with Article 85(3)
the Commission may withdraw the
of
benefit of
laid
down in Article 14 of the Regulation, include unjustified
price discrimination (44).

the exemption(cid:146). These circumstances,

(cid:145)in particular cases

the Treaty,

that

(145) The relevance of

to the
standard leases, in the context of the UK on-trade beer
market, is that the lessee who faces (unjustified) price

the above considerations

(43) In so far as the underlying agreements are in conformity with

Article 81.

(44) See Article 14(c)(2) of

less
the Regulation:
favourable prices or conditions for sale [(cid:133)] without any objective
justified reason(cid:146).

(cid:145)the application of

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Official Journal of the European Communities

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differentials may not be in a position to compete on a
level playing field. His business, all other conditions
being similar, will be less profitable or might even
become unprofitable. The impact of this adverse effect
on profitability, either at the moment of entering as a
newcomer into the market or during any considerable
period in time during the operation of his business,
means that the lessee may be unable to keep up with
his competitors, who can make use of the beer price
discounts either by passing them on in part to the final
consumer by lowering temporarily or permanently the
price at which they sell the same beer, or by investing
in their total pub (cid:145)offer(cid:146)
family
lead, all other
facilities, and so forth). This will
conditions being equal,
loss of
competitiveness for the lessee, whose clients will receive
a better offer for the same price in other pubs.

to an even further

(new kitchen,

toilets,

into

account

(146) Unjustified price discrimination will only have an
appreciable negative impact on the competitiveness of
the lessee, and will therefore only affect the appreciation
of any lack of improvement in distribution, if and when
it is significant and lasts over a considerable period of
time. It is estimated that the level of discounts (before
taking
justification)
any
traditionally found on the UK on-trade market up to the
mid-1980s (MMC report of 1985: individual free houses
receiving a discount from 3 to 5 %) were not of such a
significant nature. However, since that date, and over
the situation has
the period of
altered and certain groups of purchasers
receive
discounts of a substantially higher level
than those
granted to the tied lessees. This was looked at in some
detail in the OFT report.

the standard leases,

possible

(147) Such higher discounts

available

exclusive

agreement with

to all other
are
operators in the UK on-trade market who do not have
an
purchasing
similar
obligations and with whom S&N trades: wholesalers,
pub management companies and other brewers, and the
the discounts
individual
granted to wholesalers, the own managed houses, and
pub management companies and other brewers are, on
average, higher than those granted to the individual free
traders.

Furthermore,

traders.

free

(148) Most of

the direct competitors of

the tied lessees,
namely brewers’ managed pubs, managed and tied
houses of pub companies,
loan-tied houses and free-
trade operators, and clubs (being only to a limited
extent direct competitors of the tied lessees in view of
the restricted access) are thereby enabled to buy their
beer cheaper than the tied lessees.

(149) As

for

the above competitors, only the free-trade
operators (the non-loan tied supplies to clubs have been
included in the S&N data on the discounts for the free-
trade operators) directly purchase their beer on market
terms from S&N; this group is considered to be the
(cid:145)reference group(cid:146). They are indeed the only group where
(cid:145)the supplier [(cid:133)] applies less favourable prices [(cid:133)] to

resellers bound by an exclusive purchasing obligation as
level of
compared with other
distribution(cid:146) (45) (italics added).

resellers at

same

the

(150) Table 3 (recital 77)

indicates clearly that

the price
differential between the price paid by tied lessees (the
S&N list price minus discounts on cask-ale purchases)
free-trade
and the average price paid by individual
the
in view of
operators has
increasing discounts granted to such individual
free
traders.

increased every year

2.1.3. Countervailing benefits

(151) However, S&N has argued that the relationship with its
lessees should not only be judged by reference to the
price the lessees pay and that
the whole business
relationship should be taken into account in order to
judge whether the lessee is able to (cid:145)survive(cid:146)
in the
market place, and, hence, whether the improvement in
distribution can be argued.

(152) The Commission accepts this argument. However, this
implies an inherently difficult comparison between, on
the one side, clearly quantifiable price differentials and
on the other side, more (cid:145)quantity(cid:146)-related aspects of the
business relationship.

(153) The

of

so-called

description

(cid:145)quantifiable
the
countervailing benefits(cid:146) in recitals 50 to 76 reflects the
difficulties involved in such quantification. However, in
view of the arguments described there in support of the
methodology for each of the benefits and the factual
these
information which backs up the results
different
the
the Commission considers
result, described as (cid:145)Conclusion(cid:146) in Table 3, provides a
reasonable instrument for the Commission to decide,
within its discretionary margin in applying Article
81(3), whether the (cid:145)practical(cid:146) operation of the standard
leases brings about an improvement in distribution.

for
that

items,

(154)

In its assessment of the conditions of Article 81(3), and
in particular where a retroactive exemption is requested,
the Commission cannot make an overall assessment for
the whole (cid:145)retroactive(cid:146) period, but
should evaluate
whether at all times the conditions of Article 81(3) are
fulfilled. The Commission considers in view of
the
(cid:145)standard(cid:146) nature of the notified agreements which cover

(45) Article 14(c)(2) of the Regulation.

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several hundred individual agreements,
the intrinsic
complexity of the data and the limited availability of
data on bases other than annual, that it is reasonable to
limit its assessment of whether the conditions of Article
81(3) are fulfilled to a year-by-year assessment.

(155)

It is apparent from Table 3 that for all the years the
price differential is more than compensated by the rent
It is therefore not necessary to examine the
subsidy.
other quantifiable countervailing benefits identified in
recitals 79 to 81. The (cid:145)average(cid:146) lessee is therefore, on an
overall assessment of
the business relationship with
S&N, in a position to compete on a (cid:145)level playing field(cid:146)
with his free-trade counterpart.

(156) The Commission therefore concludes that for the whole
duration of the standard leases there are no arguments
to support
the improvements in
distribution described in a general terms above have not
been obtained.

the conclusion that

(157) The standard leases,

thus

have
distribution on the UK on-trade beer market.

contributed

including the tying restrictions,
of

improvement

an

to

2.2. Benefits to the consumer

recital 16 of

the Regulation indicates

(158) With regard to the general benefits created by tied
that
leases,
(cid:145)consumer benefit from the improvements described, in
particular because they are ensured supplies of goods of
satisfactory quality at fair prices and conditions while
being able to choose between the products of different
manufacturers(cid:146) (46).

(159)

In addition to these general references, it can be noted
that property ties create an incentive for brewers to
invest, or maintain investment, in outlets that may be
too small to be economically run by the brewers’ own
a means of
managers. The
maintaining pubs that might otherwise close, or not
attract the investment made by S&N and/or the lessee.
The continued availability of those outlets and/or the

system is

therefore

that

is self-evident

to the consumer.

improved facilities due to investment(s) made is a clear
the
It
benefit
property ties of a particular brewer can only be
considered to contribute to this benefit if the long-term
the houses is not endangered.
operation of
In other
in market circumstances there are price
words, when,
differences, such differences are broadly offset by other
specific benefits. As indicated above, this is the case
with S&N.

(160) With regard to the specification of the tie by type, the
Commission also notes that in the period 1990 to 1997
S&N introduced on average around five brands each
year into its leased public houses. These brands include
well known foreign brands such as Budweiser and Miller
Pilsner and less well known brands such as Webster’s
Green Label ale.

(161) The Commission therefore concludes that a fair share of
to the

the standard leases accrues

the benefits of
consumers.

2.3. Indispensability of the restrictions

(162) The exclusive purchasing obligation,

together with a
non-compete clause, is indispensable to the advantages
produced by beer-supply agreements, as noted in recital
137. As described in recital 17 of the Regulation these
advantages cannot otherwise be secured to the same
extent and with the same degree of certainty.

(163)

It can also be noted that the specification of the beer-tie
by type is indispensable for the ease of introduction of
brands to the tied networks of the brewers on the UK
on-trade beer market (recitals 140 and 160).

2.4. Possibility

of

in
eliminating
respect of a substantial part of the market in
question (47)

competition

(46) This refers to the possibility under Article 6, read in conjunction
with Article 7(1)(a) of the Regulation, whereby lessees can buy
beer brands of a different type from those supplied under the
agreement and can offer these to the consumers. This possibility is
equally maintained by the standard leases, i.e. the procedure for
the non-specified types.

(164)

is evident

that S&N cannot eliminate competition
It
from a substantial part of the market as they accounted

(47) A different

concept

from (cid:145)significant

contribution to the

foreclosure of the market(cid:146).

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Official Journal of the European Communities

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for only around 28 to 29 % of the UK on-trade beer
market in 1997. Moreover, even taking into account the
fact that in 1997 at most 58 % of the UK on-trade beer
market
for beer was foreclosed through the parallel
networks of brewers’ agreements, S&N’s agreements do
not lead to the elimination of competition in respect of
a substantial part of the UK on-trade beer market.

2.5. Conclusion

(165) The standard S&N leases, and the beer tie (exclusive
purchasing and non-competition obligations) which
they contain, fulfil the conditions of Article 81(3).

C. RELATION WITH ARTICLE 28

(166) The SLTC model and an individual tenant states that the
Commission cannot grant a retroactive exemption given
the Commission’s established position by way of the
procedure under Article 226 of the Treaty against the
the Metro I (48)
(cid:145)guest-beer clause(cid:146). On the basis of
judgment,
it is argued that it would be an improper
exercise of the Commission’s powers under Article 81(3)
to permit a retroactive exemption which would bless,
under the competition rules, what is considered to be a
clear breach of Article 28.

is without prejudice to a final

(167) The compatibility of the guest-beer law with Article 28
for Article 81 purposes. First of all, a
is irrelevant
in respect of an
to Article 81(3)
decision pursuant
agreement that incorporates up to April 1998 only the
(cid:145)old(cid:146) guest-beer clause, namely the cask-conditioned
beer,
judgment on the
Article 28 matter. Furthermore, the Regulation exempts
agreements for use in all Member States whereby the
brewer/landlord does not have to grant a right similar
to the guest-beer clause. This is because the brewer/
landlord can impose a non-compete obligation for all
brands of beer of the same type as the brands he tied
for in the agreement. The inclusion of the (cid:145)old(cid:146) guest
beer was thus already a liberalisation of what was
therefore,
allowed under the Regulation and cannot,

give rise to a concern under Community competition
law.

(168) As the Article 28 issue is irrelevant,

for the reasons
stated above, it was not necessary for the Commission
to refer to this issue in the notice. The notice was,
therefore, complete. Interested third parties are entitled
to submit observations not only on explicit points
mentioned in a notice pursuant to Article 19(3), but on
all other points they consider relevant.

D. RETROACTIVE NATURE AND DURATION OF THE
EXEMPTION

(169) The standard leases are agreements in the sense of
Article 4(2)(1) of Regulation No 17 where (cid:145)the only
parties thereto are undertakings from one Member State
and the agreements [(cid:133)] do not relate to imports or to
exports between Member States(cid:146). It follows from Article
6 of Regulation No 17 that for such agreements the
date from which a decision pursuant to Article 81(3)
takes effect may be earlier than the date of notification.

(170) The Court has held in its

judgment

in Fonderies
Roubaix (49) that (cid:145)the fact that the products involved in
[the agreements to be assessed] have previously been
imported from another Member State does not by itself
these agreements must be regarded as
mean that
relating to imports within the meaning of Article 4(2) of
Regulation No 17(cid:146). Therefore, the application of this
Article should not be excluded in view of the brands on
S&N’s price list
that are imported from outside the
United Kingdom.

(171) Since it has been found above that the standard leases
have fulfilled the conditions under Article 81(3) since
the date of the first introduction of one of the notified
agreements on the market on 1 January 1985,
this
Decision should apply from 1 January 1985.

(172) Pursuant

to Article 8(1) of Regulation No 17, an
exemption should be issued for a limited period. The
period until 31 December 2002 is appropriate, as the
remaining S&N leased estate is small and expected to
decline as public houses are sold off or converted into
managed houses. The exemption period therefore allows
S&N to make its commercial decisions on the remaining
legal
tenanted houses with a reasonable
certainty,

level of

(48) Case 26/76, Metro v. Commission, [1977] ECR 1875.

[1976] ECR 111, at paragraph 8.

(49) Case 63/75, Fonderies Roubaix v. SociØtØ Nouvelle des Fonderies

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HAS ADOPTED THIS DECISION:

Article 2

Article 1

The provisions of Article 81(1) of

the Treaty are,
1.
to Article 81(3), declared inapplicable
to the
pursuant
individual
lease agreements in the standard form of (a) the
(cid:145)English leases(cid:146), (b) the (cid:145)Scottish leases(cid:146) and (c) the (cid:145)short-term
leases(cid:146), and to the exclusive purchasing and non-competition
obligations ((cid:145)beer tie(cid:146)) which they contain.

This Decision shall apply from 1 January 1985 until

2.
31 December 2002.

This Decision is addressed to:

Scottish and Newcastle plc
50 East Fettes Avenue
Edinburgh EH4 1RR
United Kingdom.

Done at Brussels, 16 June 1999.

For the Commission

Karel VAN MIERT

Member of the Commission