On 10 July the Government published the English Devolution and Community Empowerment Bill. This Bill includes a ban on upwards only rent review clauses in commercial leases.
The ban is not retrospective. It does not affect existing leases entered into before the Bill comes into force (commencement). Nor will it apply to leases entered into after commencement pursuant to pre-commencement agreements for lease. There is no indication yet on timing.
If an existing (pre-commencement) lease is renewed in the future, the ban will apply to the renewal lease.
The rent review provisions are in schedule 31, tucked away at the back of a 338-page Bill that deals mostly with local government issues. In summary:
- The ban on upwards-only rent reviews will apply to all business tenancies, meaning leases where the tenant is occupying the premises for business purposes. It applies whether or not the lease is contracted out of the 1954 Act.
- As currently drafted, it appears that the ban may not affect leases when the tenant has vacated the premises or has sublet them.
- The ban will apply to any rent review where, on the date the lease is granted, the new rent is not yet known and cannot yet be determined. This means "stepped" rents with pre-agreed increases are not affected.
- The ban will affect rent reviews governed by (1) traditional market rents, (2) index-linking, (3) turnover rents and (4) side-by-side rents.
- If the review clause contains an upwards-only provision, it will be of no effect. The higher amount is not payable. The new rent is what the figure would have been without the upwards-only clause.
- If the rent review process requires a trigger notice to get started, then the Bill gives the tenant the right to trigger the process if the lease has allocated this power only to the landlord. The same applies to referring any dispute for expert determination.
FAQs
- Inflation rarely goes negative. So, if a lease provides for an index-linked review every five years, in practice that means there will probably be an increase. Is that still allowed?
Yes, this is valid.The ban applies only to clauses which say the rent absolutely cannot go down. If in practice the index doesn’t go down, that is fine.
- A lease has an initial rent of £100,000. At year five, there is an index-linked review subject to a cap of £110,000. The actual indexed rent is £115,000. What's the outcome?
The new rent is £110,000. The cap is valid. The Bill is only concerned with a minimum rent, not a maximum.
- A lease has an initial rent of £100,000. At year five, there is a review to the higher of market rent and index-linked rent, whether or not higher than the passing rent. The market rent is determined to be £90,000 but the indexed rent is £110,000. What's the outcome?
The new rent is £110,000. So, we see that a review to the higher of market rent and indexed rent effectively guarantees an upwards-only rent, unless inflation is negative over the review period (which would be very unusual).
- A lease has an initial rent of £100,000. At year five, there is a review to the higher of market rent and £95,000. The market rent is determined to be £90,000. What's the outcome?
The new rent is £90,000. The £95,000 "floor" or "collar" is ignored.
- The rent is fixed in the lease at £70,000 in year one, £80,000 in year two and £90,000 in years three to five. Is that OK?
Yes. The ban doesn’t apply to rent increases fixed in advance, i.e. stepped rents.
- A lease has an initial rent of £100,000. At year five, the review clause says the rent will increase by 15%. Is that allowed?
Yes, it's just another version of a "stepped" rent. The new figure can be determined at the outset so it's not covered by the ban.
- A lease is granted for five years at a rent of £100,000. At year five, the landlord has a put option by which it can require the tenant to take a renewal lease at the higher of market rent and £100,000. Is that allowed?
No, the Government has thought of that workaround and included it in the ban.
The Mishcon de Reya view
A ban on upwards-only rent reviews was mooted 25 years ago, but the Blair Government settled for non-mandatory provisions in the RICS code. The present Government seems to have concluded that these are insufficient.
The ministerial press announcements accompanying the Bill suggest that the proposed ban will help invigorate high street retail and food & beverage providers. In our experience, many such tenants are on shorter leases without rent reviews, and therefore this legislation won't directly help them.
The British Property Federation has criticised what it calls "interference in long-established commercial leasing arrangements without prior consultation or warning”.
Upwards-only rents underpin property valuations for investment and lending decisions. A ban on upwards-only reviews may undermine some of the basis of these valuations, leading to reduced investment in the areas which the Government is trying to help.
In practical terms, we may see increased reliance on index-linked rents. While it won't be valid to have a lease clause saying that the review is upwards only, in practice it is rare for the RPI or CPI to decrease over an extended period.