Summary 

Proposal to ban upwards-only rent reviews

• 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. 
• 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. 
• Lease renewals granted after the provisions are brought into force will 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.
• 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 controlling triggering a review only in an upwards market).
• 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. 

How would the ban work?

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 £50k p.a. and the passing rent is £55k p.a., the new rent would be £50k p.a. 

Impact 

• Upwards-only reviews are a cornerstone of the commercial property investment market. 
• 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. Landlords may seek to price-in fixed uplifts, and tenants may seek other advantages in return.
• Will we see more index-linked reviews in leases (albeit without the collars as those will be prohibited) where the likelihood of negative movement on the index is slim? 
• According to the Government, stakeholders have reported that “upwards only rent review clauses are artificially inflating commercial rents and ultimately pricing out small businesses from town centres”. Whether the proposals will have the positive impact the Government hopes remains to be seen. Many leases granted to small businesses on the high street, for example, are not of sufficient length to include rent review provisions in any event.
• The proposals may focus investors on finding that rare asset class which escapes capture from both these proposals and the proposed residential renter reform.

What next?

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). 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.

The BPF has not provided a formal response currently. According to Green Street News, Melanie Leech, Chief Executive of the BPF, said: “Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the devolution bill.”

What should you do now?

• As the prohibition does not apply to existing leases, landlords should consider how the proposed ban could impact future rent projections on voids and space coming up to lease-expiry, as well as how that will impact on income stream requirements from lenders.
• Both landlords and tenants should consider any current negotiations for new leases that are underway and whether this announcement gives them more or less leverage.
• Tenants negotiating renewal leases may wish to see what develops and await the outcome if time constraints allow.
• You may wish to make your views known via the BPF or other industry associations (for example, RICS has also stated it will be working with members and industry to respond and shape the proposed legislation). Indications are that the next reading of the Bill will be after the summer break, so time is of the essence in relation to the market response.