How Covid-19 has impacted commercial lease rent reviews

When the first lockdown hit the UK in March 2020, there was a lot of speculation as to  how it would impact the commercial property sector. A key concern for landlords was how rent review provisions would apply.  

There are many variations on how rent reviews in commercial leases are assessed but the most common rent review provisions in modern day leases are as follows: 

Upwards-only rent reviews

 An upwards-only rent reviews will never result in the rent payable under the lease reducing. These clauses are usually phrased so that the reviewed rent will be the higher of: 

• The market rent at the date of the review. 
• The rent that was being paid at the rent review date. 

Leases with these reviews will ensure the landlord will at least retain the level of rents being paid before COVID-19 despite the uncertainty of market rents post pandemic.  

Upwards and downwards -Market rent 

This type of rent review seeks to set the rent to a level as reflected by the open market. In this case a landlord could end up having to charge a lower rent where rent values dip. 

The term ‘open market’ can be assessed in different ways but for rent review purposes, the open market is one ‘that includes all possible lessees each of whom has had an equal opportunity of bidding to become the lessee on the letting’.  

Obviously, this type of review is greatly affected by the state of the property market at the relevant review date. 

RPI/CPI rent review

An RPI rent is a rent which increases in line with the Retail Prices Index (RPI). Increasing rent in line with the RPI is a form of indexation. RPI is based upon changes to retail prices which may not be an accurate reflection of the value of real property. The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services. CPI is the most widely used measure of inflation. The Government proposed reforms on how RPI should be assessed in the March 2020 budget.   

The office for National Statistics and the Treasury released their response to the August Consultation on RPI reform in November 2020. To put it simply, the new methodology will be applied to the long-run series based on the old methodology. A method used commonly internationally.  

The office for National Statistics have followed international guidance and made adjustments to better reflect 2020 expenditure for the period of 2021. RPI is usually slightly higher than CPI usually by 1%. 

This approach will remain quite popular with landlords as even during the pandemic it has seen rent levels rise.  

According to a study carried out by Savills*, saw Q2 of 2020 being the weakest quarter on record for investment activity in the UK commercial property market, and that investment volumes in the first half of 2020 were 43% below the five-year average. This shows how any landlord with an upwards/downwards rent review could be suffering if they have a review due.  

Please speak to our specialist Real Estate team to assist you with any rent review queries.