Proposing the elimination of rent increases exclusive to tenants in new business leases in England and Wales, the Government suggests a change in policy.
The UK government has unexpectedly introduced a proposal to ban upwards-only rent reviews in most new business leases in England and Wales, as outlined in Schedule 31 of the English Devolution and Community Empowerment Bill. This bill, currently under parliamentary consideration, aims to prevent artificially high rents during economic downturns and stimulate economic growth by ensuring high street rents are set more efficiently.
Key details of the proposed ban include its application to all new business leases across sectors, prohibiting rent review clauses that allow rent only to stay the same or increase, and rendering ineffective any upwards-only rent review clause in leases granted after the schedule comes into force. The ban also affects put options where tenants can be required to take a new lease, but call options (tenant-initiated lease renewals) are not covered.
The government's rationale for the ban is to protect tenants from artificially high rents during economic downturns, which can lead to higher consumer prices. However, commercial property investors, including pension funds, are expressing concerns about increased uncertainty introduced by rent reviews that can go downward as well as upward. This uncertainty may discourage investment, particularly for smaller pension schemes reliant on rental income.
The change represents a significant shift from long-established market practice and presents challenges and opportunities for the management of commercial lease portfolios. Some commentators note that recent trends toward shorter leases in retail may reduce the practical relevance of upwards-only clauses.
The ban could lead to more flexible and potentially fairer rents but also increased volatility in rental income and commercial property values. Rental income stability may be impacted due to increased rent variability and the risk of downward adjustments during downturns. The valuation of commercial property could also be affected, with potential pressure on values due to unpredictable cash flows and a reduction in premiums attached to long leases with stable upward-only rents.
Investment appeal could be reduced, especially among risk-averse investors like pension funds, due to increased risk. Lease negotiations may become more complex with tenants able to trigger reviews at will, potentially leading to more balanced power for tenants but also more disputes over rent adjustments.
The bill also includes an anti-avoidance measure, prohibiting contractual "put options" entered into after the ban comes into force, which require tenants of existing tenancies to take a new lease of the whole or part of the premises currently let to them. Landlords might price in higher fixed rents on the grant of a tenancy to negate the impact of the ban, which could prevent the use of risk-sharing models.
As the bill progresses through Parliament, the final terms and timing remain subject to change. However, if enacted, the ban on upwards-only rent reviews will introduce a material change in commercial leasing in England and Wales, altering how rents adjust in response to market conditions and shifting risks between landlords and tenants.
- The proposed ban on upwards-only rent reviews in new business leases may have significant implications for real-estate investment, as it could create uncertainty for commercial property investors, particularly smaller pension schemes, who rely on rental income.
- To stimulate economic growth and prevent artificially high rents during economic downturns, the UK government plans to ban upwards-only rent reviews in most new business leases, which could lead to more flexible but potentially fairer rents in the finance and real-estate sectors.
