Life has its ups and downs… What’s the current position with the proposed ban on upwards only rent reviews?
The bombshell
Last summer, out of the blue, the government announced that it intended to abolish upwards only rent reviews. Strangely, they opted to do that as part of the English Devolution and Community Empowerment Bill (“the Bill”), rather than in a property focused bill. The vast majority of the huge 380 page Bill has nothing to do with rent reviews. But, snuck in at the back, are a set of provisions banning upwards only rent reviews.
Current position
The Bill is following the usual parliamentary process. Having made its way through the Commons, on 20 January it reached the committee stage of the House of Lords – that’s the stage where there is a line-by-line analysis of the wording of the Bill – and that may well result in changes.
Why have the Government done this?
The aim of the ban is to help small businesses on the high street. It’s pretty to clear to anyone who knows anything about this subject that the ban will help few (if any) of those tenants. Leases to small high street retailers are generally for short terms (less than five years) and those leases don’t have rent reviews in them – and they’re contracted out of the security of tenure legislation. Notwithstanding that, the Bill will have a significant impact and can’t be ignored, even if the unintended consequences may be to inhibit growth, further assist strong and powerful tenants, and potentially discourage speculative development in more economically challenged areas.
The changes…
So, what are the likely changes and how do they work?
New leases only
The ban on upwards only rent reviews applies to all new commercial leases occupied for business purposes.
So the good news is that the ban isn’t retrospective. If you have an upwards only rent review in a current lease, that’s fine - it still works. In addition, if you have an agreement for lease which is entered into before the Bill is enacted, any lease granted pursuant to that will also escape the ban. But once those existing leases expire, the ban kicks in.
However, the ban also catches renewal leases. That includes ’54 Act renewals, even where the original lease had an upwards only review.
Upward only reviews…
Where a rent review is linked to a variable measure - such as market rent, inflation or turnover - after the ban, the rent must be capable of moving both upwards and downwards.
Open market reviews
So, if you include a traditional rent review provision for the rent to be calculated by reference to the rent that the property would achieve in the open market then, if the market falls, so will the rent. To offset that significant risk landlords are increasingly likely to shift towards index linked reviews.
Index linked reviews
If a lease provides for rent to be increased in line with an inflation linked index, like the Consumer Prices Index, then – as with open market reviews - if the index falls, so will the rent. That said, it is rare for inflation to fall over an annual period (and very rare over a five year period) so the risk would be significantly less than for an open market review provision.
Turnover rent reviews
Tenant turnover rent clauses are caught too – if the tenants turnover falls in a particular period, landlords will no longer be able to keep rents artificially high: they will have to take the rough with the smooth and accept a lower rent.
Fixed increases
Some better news. Fixed or stepped rent increases are still permitted. Fixed increases can be identified and determined at the outset, so they escape the ban as the ban focusses on undetermined sums. Some landlords (and tenants) may prefer to opt for the certainty of fixed increases and avoid the ban altogether.
Anti avoidance
As you might expect, you can’t contract out of the ban – and there are a number of anti avoidance provisions, including:
- a sweeping provision preventing any provisions requiring the tenant to pay any difference in rent as a result of the ban;
- a right for tenants to initiate reviews. That stops landlords from avoiding any reduction in rent by simply not triggering a review;
- covering put and call options, so new leases granted under such options can’t contain upwards only terms.
The Bill also overrides any headlease terms requiring subleases to contain upwards only provisions (which creates potential inconsistencies between headlease and sublease income that intermediate landlords will have to navigate).
Timing
Whilst the Bill has progressed more quickly than first anticipated, it’s not expected that the ban will take effect before the end of this year – but watch this space.
The key message…
Upwards only rent reviews have been a cornerstone of UK commercial leasing for decades, but that era is drawing to a close. There are likely to be further changes to the Bill before it becomes law, but the direction of travel is clear.
Whilst the Bill is comprehensive, there are lots of options and choices about how to mitigate the risks. Our expert team deals with rent reviews and lease negotiations on a daily basis and would be delighted to help you understand the implications for your business.
For further information please contact James Styles, Catriona Berman or your usual Real Estate contact at Stephenson Harwood.
