The English Devolution and Community Empowerment Bill (Bill) contains a surprise ban on upwards-only rent review provisions in new commercial leases.
Where a lease is caught by the legislation, it will effectively remove the upwards-only element. For example, if there is a review to the higher of the open market and passing rent, where the open market is £50,000 per annum and the passing rent is £55,000 per annum, the new rent would be £50,000 per annum.
The ban would apply to all business tenancies in England and Wales (commercial leases to which Part II of the Landlord and Tenant Act 1954 applies). This includes “contracted-out” leases.
According to legal firm Addleshaw Goddard, the ban will not be retrospective. Only tenancies granted after the provisions are brought into force will be caught. Tenancies granted pursuant to contracts made before the legislation comes into force will not be caught.
“What is not permitted is an upwards-only review mechanism where the potential rent increase is not ascertainable at the time of lease grant. Therefore, open market, index-linked or turnover reviews, coupled with an upwards-only element, will be caught. Stepped or fixed rental uplifts and upwards/downwards reviews will be allowed. Other exceptions may be brought into force through secondary legislation,” the firm said.
“If there is a rent review mechanism in the lease which only the landlord can trigger, the legislation allows the tenant to also trigger that review (thus preventing landlords from controlling triggering a review only in an upwards market).”
Notably, there are anti-avoidance provisions preventing side arrangements requiring tenants to pay top-ups where rent has been reviewed downwards.
Landlords are also prevented from using put options to require a tenant to take a lease at a rent which would also effectively avoid the legislation.
Why it matters
Upwards-only reviews are a cornerstone of the commercial property investment market, notes Addleshaw Goddard.
“The impact on rental income serving debts should not be underestimated if upwards-only rent reviews are prohibited. Tenants will welcome the opportunity for downwards review, but, if enacted, the proposals will undoubtedly change the way leases are negotiated,” the firm said.
It added that landlords may seek to price-in fixed uplifts, and tenants may seek other advantages in return.
“Given the potentially significant impact on the commercial property investment market, it feels likely that amendments will be proposed to this Bill on its journey through Parliament (only the first reading has taken place so far),” Addleshaw Goddard said.
“There has been no industry consultation prior to the Bill, so we expect heavy lobbying to commence. There will be strong views from both the landlord and tenant communities.”
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