Proposed ban on upwards only rent review provisions

The Government has surprised all in the commercial property sector with the publication of the English Devolution and Community Empowerment Bill on 10 July, which includes a ban on upwards-only rent reviews in commercial leases with the stated aim to "make commercial leasing fairer for tenants, ensure high street rents are set more efficiently, and stimulate economic growth”.

The proposed ban is at the very early stages of the Parliamentary process and will need to pass through the relevant Parliamentary stages and procedures before becoming law.  However, while a similar proposal under the Blair Labour Government fell short of legislation, the Government appears to have approached this project with considerable vigour, and, to date, zero consultation.

What is an upwards only rent review?

An upwards-only rent review clause is a standard provision in most commercial leases.  The use of such a clause means that, on review, the rent will either increase (by reference to a variable factor such as open market rent or an appropriate index) or remain the same and cannot fall below the rent payable at the review date (the passing rent) even where the market rent has fallen.

Key provisions of the ban

The key provisions to introduce the ban are set out in Schedule 31 to the Bill:

• Scope: The ban will apply to new leases of commercial premises granted after the Bill comes into force (the commencement date) where the tenant occupies for business purposes.
• No retrospective effect: The ban will not apply to leases entered into before the commencement date, or leases entered into pursuant to an agreement entered into before the commencement date.
• Fixed increases: Stepped rents, where the rent will increase to an agreed sum or by an agreed percentage each year will not be affected by the ban.
• Non-compliance: If a lease that is entered into after the commencement date includes a banned upwards-only rent review clause, the rent will be determined without reference to the banned clause.
• Anti avoidance: The Bill includes robust anti-avoidance provision and it will not be possible to agree to contract out of the ban. Additionally, tenants will be given powers to trigger rent reviews to prevent landlords from avoiding a rent reduction by simply not initiating the review.

Is reform necessary?

Whilst rent review clauses have remained largely unchanged in recent years, the trend is certainly for reduced lease terms, with many leases granted for just five years with no review, and the use of break clauses and index linked rent reviews (in addition to or instead of open market value reviews) have become more common.  As a result, it is relatively rare for a tenant to be burdened with the liability to pay a rent of more than the market rent.

What could this mean for future reviews?

It will be interesting to see how the market will respond to the proposed ban.

It is unlikely that we will see an increase in the use of stepped rents, save for very short lease terms.  However, we may well see landlords move to a “dual rent review” mechanism with rent calculated by reference to the higher of the open market rent and an index-linked rent.  While it is possible, in the absence of an upwards only provision, that the open market rent may fall below the passing rent, trends would indicate that an index linked rent would be unlikely to generate such a result.

The industry has come out fighting, and it remains to be seen if the Bill receives the support necessary to progress smoothly through the necessary channels to become law.