The end of upwards-only rent reviews?

Part of this Bill aims to bring to an end ‘upwards-only’ rent reviews. The Government has stated that the purpose of such changes are to ‘make commercial leasing fairer for tenants and ensure high street rents are set more efficiently’. However, the consequences appear to be far further reaching.

What is an ‘upwards-only’ rent review?

‘Upwards-only’ rent reviews prevent the rent payable under a lease from decreasing. In the right circumstances, the rent might stay the same on a review, but it will not reduce.

The Bill aims to ban these reviews in new leases and allow for the possibility for commercial lease rents to decrease at the time of the review. This wouldn’t necessarily prevent the rent from increasing, but the important note is that rent review mechanism must not prohibit the possibility of a decrease.

Will this impact all leases?

The Bill aims to apply to new commercial leases to tenants who intend to occupy for the purpose of a business. There are exceptions to this, such as agricultural tenancies. The Bill is not retrospective and would not apply to existing leases or those leases which are (1) granted before the ban comes into force or (2) granted pursuant to a contract which came into force before the ban.

Are there ways around this? For example, deliberately not triggering a rent review as a Landlord

The Bill contains a number of anti-avoidance measures. This includes provision for a tenant to trigger a rent review, even if this option is not provided for in the lease. This would therefore prevent Landlords from holding off on reviews which are likely to result in a decrease in rent.

The Bill is likely to impact the way in which rents are structured in future leases. Some landlords may lean towards stepped rents which are fixed throughout the term. It is also likely that index-linked rent reviews will become more common, as opposed to open market reviews.

Potential issues for Underleases

Whilst many landlords will be pleased that the legislation does not apply to existing leases, this is potentially problematic for tenants when granting underleases. If a headlease was granted prior to the ban which contains an upwards-only rent review, this will be enforceable. However, if the tenant wants to grant an underlease, any matching upwards-only rent review in the underlease will not be lawful and the tenant may find themselves footing the bill for any resulting gap between the rents. Alternatively, the tenants may find that their landlords refuse to consent to underleases where there is a risk of a shortfall.

Uncertainty

The prospect of a ban on upwards-only rent review clauses introduces a degree of uncertainty into the commercial property market. With landlords and tenants both adjusting to a new landscape, there may be a transitional period in which landlords seek to lock-in favourable terms before the Bill is enacted, and tenants push for better terms in anticipation of the change.

This could result in a spike in lease renewals, negotiations, and disputes over the terms of existing leases that contain upwards-only clauses. When looking at similar provisions enacted in Ireland, it seems that there is a precedent for an initial period of uncertainty, followed by a ‘new normal’ as the market adjusts to new methods used to structure leases with the most advantageous terms in the circumstances.