Upwards Only Rent Reviews In Commercial Leases – Government Proposes Ban

Tucked away in Schedule 31 of the English Devolution and Community Empowerment Bill, introduced to Parliament on 10 July, is a proposal to end the common practice of upwards only rent reviews in commercial leases.

Whilst the Bill mainly deals with devolution but this surprise bombshell was introduced without prior consultation or warning, and if enacted would have a significant impact on the commercial lease market.

It is proposed that the prohibition would apply where four conditions are met:

• Condition A – the lease is a business tenancy (with very limited exceptions).
• Condition B – the lease is granted after the prohibition comes into force (i.e. it will not apply to existing leases – but it will apply to renewals).
• Condition C – the lease contains “relevant rent review terms” – meaning provision for increase of rent to a sum that cannot be calculated at the grant of the lease (which would include open market, index linked reviews and turnover base rents).
• Condition D – the method for determining the new rent includes two elements (whether or not it also include other elements):
  • Element 1 is that a “reference amount” of rent is calculated by reference to the amount of inflation or any other index or multiplier or the tenant’s turnover or a hypothetical market rent or other notional rent.
  • Element 2 is that the amount of the new passing rent will be (or could be) different to the reference amount. Condition D is therefore met even if only part of the rent is subject to the method.

If the application of the rent review terms in a lease results in a reference amount which is lower than the current rent, then any rent review terms in the lease which attempt to implement a new passing rent that is higher than the current rent (i.e. any ‘upwards only’ rent review provision) will have no effect. Instead, the amount of the new passing rent will be the same as the reference amount, which could be lower than the current rent.

A landlord will not be able to avoid a downwards rent review simply by deciding not to serve a rent review notice on their tenant. Under the proposed legislation, all tenants to whom the provisions apply will be able to serve notices to trigger the rent review, where their landlord fails to do so.

According to the Ministry of Housing, Communities and Local Government, the provisions are intended to address vacancies on high streets and support small retail businesses. However, they are expressed to apply to all business tenants to whom the Landlord and Tenant Act 1954 Act applies, so will benefit all commercial property tenants, including the occupiers of offices, retail parks, industrial and logistics properties. In reality the occupiers of high street shops are perhaps amongst the business tenants least likely to have rent review provisions in their leases, as they are often short-term leases.

As the ban would only apply to leases to which LTA 1954 applies this means that entities holding head-leases or intermediate leases will not be have the same protections as their occupational sub-tenants, as occupation is a prerequisite for protection under LTA 1954. So  superior landlord could have an upwards only review in a superior lease but the occupational tenant’s landlord will not be able to enforce an upwards-only rent review against them. That will obviously leave an income gap, with the prospect of the occupational tenant paying less rent than their own landlord is paying.

If these provisions are enacted unaltered, index-linked rent reviews may be popular, although rents could still fall if the index falls.

If the proposals are enacted then this will have an impact not only on the terms negotiated in leases, but also valuations of commercial properties and investment and lending strategies.

It is early days and the bill will have to make its way through the parliamentary process, which is likely to take six to twelve months. There will no doubt be much lobbying and it may well be that the Bill will be amended during that process.