The introduction of The English Devolution and Community Empowerment Bill on July 10 has caused a stir with a surprise bombshell for commercial landlords.
The new Bill contains provisions to be inserted into the Landlord and Tenant Act 1954 and will ban upwards only rent review in new UK commercial leases. This will apply regardless of whether the review is based on open market rent, index-linked or turnover rents.
Similar rules will apply when setting the initial rent for a lease granted under a ‘put option’ where the tenant can be required to take a new lease, but these rules don’t seem to apply when the tenant simply has an option to renew the lease.
The new Bill will also give tenants the power to trigger a rent review where their lease does not allow them to do so.
Will my lease be affected?
The proposed ban will only apply to leases where a tenant is in occupation for business purposes.
This is not a retrospective ban. Leases that existed before the Bill comes into force (when or if it does) will not be affected. Leases entered into under agreements made before the ban will also remain unaffected.
However, any tenancies that are renewed after the Bill comes into force will be affected, regardless of whether the renewal is agreed or statutory.
What will the ban cover?
The new provisions will apply to any rent reviews where new rent is unknown and undetermined on the date the lease is entered into. If the rent is ‘stepped’ (increases are pre-agreed in the lease) then the ban will not apply.
The ban impacts rent reviews calculated by:
- Open market rent;
- Indexing/inflation; and
- Turnover.
In place of upwards only rent reviews, rent would be calculated using the method outlined in the lease. For example, by tracking changes in the Retail Price Index (RPI). This means the rent could go up, down or stay the same.
Can the ban be avoided?
In short: no.
Any agreement that attempts to circumvent the new provisions will be void. Additionally, a tenant will be able to trigger the review process if a landlord decides to avoid starting a rent review in case of a downwards result.
What happens next?
Upwards only rent review is not a common practice globally. The UK falls into a minority for treating this as the market standard. A ban was considered previously in 2001, but the government ended up backing down on these plans.
Ireland banned upwards only rent reviews in 2010. There was some short-term market instability as a result of this, but the market did eventually adapt to this change.
The new Bill is being brought in to try to revitalise the UK’s struggling high street. However, there are concerns that a sudden change may negatively impact the real estate and financial markets that thrive under stability. RICS has warned that “it is essential that this Bill does not create market uncertainty at a time when many businesses need confidence”.
Upwards only rent reviews can be a major factor that make business leases attractive to investors and lenders, creating a stable guaranteed cash flow over the lifetime of a lease.
It is important to note that a falling market and a downwards trajectory for open-market rents and inflation would be rare, but it could still happen. Abolishing the long-standing practice of upwards only rent reviews may put the security of business leases as investments at risk.
The proposed legislation will be subject to consultation and review by Parliament, and there is a possibility that it will never become statute.
There is no doubt that this ban would be welcomed by tenants but would raise some concerns for landlords and commercial property investors. Even if the measure does not become law, it may be wise to consider its potential impact now.
For more information or guidance, contact the Real Estate team at Glaisyers ETL.
