Proposed Ban of upwards only rent reviews

In an effort to save the high street, the government has proposed to ban upwards only rent reviews in commercial leases, without any consultation with professional bodies. It has caught the commercial property sector completely by surprise. Currently, nearly all rent reviews in a commercial lease only allow for the rent to go up and there has been no recent indication that this was to change.

Will my lease be affected?

The new provisions of the Landlord and Tenant Act 1954 are contained in the English Devolution and Community Empowerment Bill (the Bill) and will apply to the following leases:

1. leases within the Landlord and Tenant Act 1954 (i.e. leases with ‘security of tenure’);
2. contracted out leases (i.e. leases without ‘security of tenure’);

• leases (including renewal leases) granted after the provisions come into force: the provisions will not apply retrospectively to existing leases;

1. leases with rent reviews, such as index linked reviews which measure inflation, or market or turnover rent. Index linked rent review clauses with minimum increases and or maximum increases (known as a ‘cap and collar’ in the industry) will also be caught. Leases with no rent review provisions will not be caught by the Bill; and
2. where the tenant occupies the premises for the purposes of its business – this means that headleases would not benefit from the proposed legislation.

Can the rent go down?

If a lease satisfies the new provisions and the rent review produces a new rental figure lower than the existing rent, then the rent will go down to that lower figure, despite what the lease may say to the contrary. This would only happen in a falling rent market (i.e. properties attracting a lower rent) in the case of a market rent review, or a drop in inflation, in the case of an index linked review.

Can the landlord simply not implement a rent review?

Under the Bill, a tenant can also trigger a rent review on or after the agreed rent review date, even if the lease says only the landlord can do this.

What next?

It may not be until 2027/2028 that the Bill becomes law. The Bill will need to be debated and may be subject to change, especially given the government did not first consult the sector and will need to take into account how it has reacted.

What will the impact be?

Leases already evolve over time in line with the market: retail leases contain more turnover based rent provisions, and leases are generally shorter and more flexible, with tenant break options, for example.  The actual impact could therefore be limited.

In the case of the high street, it’s understood that many high street leases don’t have rent reviews because the leases are now too short to warrant them. If a tenant can no longer afford its rent, it has been shown that it can force a landlord’s hand and obtain a reduction through a Creditor’s Voluntary Arrangement (‘CVA’). The major challenge faced by the high street is perhaps not the rents paid to their landlord. That said, some businesses will of course benefit from an inflated rent potentially going down, without having to go down the insolvency route.

One development could be a reduction in investment in commercial property, because of the risk of lower rental income from an asset. Borrowing could therefore also be adversely affected. This would negatively impact the whole industry.

Leases themselves will of course adapt to the new legislation, with rent review clauses allowing for a downward review.

It remains to be seen however how the commercial terms will change but it’s likely that most landlords will opt for an index linked review, given inflation usually only goes up.  Lease terms could also get shorter (in order for the landlord to re-negotiate a rent rather than rely on a potential downward rent review). Rent frees could perhaps be reduced and the initial rent charged higher, as landlords may not be able to rely on long term rental growth.

In the immediate term, Landlords may want to grant longer leases before the Bill comes into force, given the provisions will not act retrospectively. Tenants, on the other hand, are likely to request upwards / downwards rent reviews into any new leases now, in light of the potential changes.

If you need assistance or require more information,  get in touch with our Commercial Property solicitors.