MPs voted through a cross-party amendment to the Small Business, Enterprise and Employment Bill, which would allow tenants to opt out of being required to sell only alcohol provided by their pub company.
Business minister Baroness Neville-Rolfe said the Government would accept the principle of the amendment and seek to make it workable.
But Lord Hodgson said he was “very disappointed” the Government was not going to consider overturning the Commons defeat.
The Tory peer said the issue was not as “simple and straightforward” as MPs thought and the pub sector was “under serious strain” for other reasons.
Referring to his career at Marston’s, he said: “Twenty-five years ago, the company of which I was a director would have operated probably a dozen pubs in Kidderminster, the home of the carpet trade.
“The carpet trade has gone and there are three pubs left.
“In areas of Nottingham, Leicester, Manchester, Leeds and Birmingham the increase in the Muslim population who don’t drink leads to many pub closures.
“It is exceptionally hard for a publican who has put ten years of his life into trying to build up a business to accept the inevitability of these tides of history.”
Lord Hodgson said the issue was one of the three main reasons pubs were going out of business, along with the “inexorable rise of regulation” and the availability of cheap alcohol in supermarkets.
He added: “The reasons for closure may be portrayed as rapacious owners increasing rent wishing to profit by turning pubs into houses or corner stores, but the tide is running against the ordinary pub.”
Lord Hodgson said there was a danger companies would not invest in improving pubs if landlords could opt out of tied arrangements.
“No pub owner is going to invest many thousands of pounds, hundreds of thousands of pounds in some cases, if the tenant can then walk away from supplier agreements,” he said.
He said removing the tie would remove the “ladder” by which many people could become self-employed landlords. Pubs closing because traditional working class areas have been taken over by Muslims who don't drink, claims Lib Dem minister