Government plans to ban upwards only rent reviews catch everyone by surprise

With no prior warning or consultation, Schedule 31 of the English Devolution and Community Empowerment Bill published last week contains a ban on upwards only rent reviews in commercial leases (i.e. rent review clauses where the rent can only stay the same or go up – it cannot go down). 

Any provision contained in a lease granted after the Schedule comes into force which results in an upwards only review will be of no effect. The ban will apply to index-linked reviews, open market reviews and leases where rent is determined by the tenant’s turnover.

The Schedule to the Bill also contains provisions allowing tenants to trigger or operate rent reviews where a lease does not permit them to do so. It also covers put options (i.e. where a landlord has an option to require its tenant to take a new lease) by banning clauses in them preventing the rent payable under a new lease from being lower than the rent payable under the existing lease. Oddly, call options (where a tenant has an option to call on its landlord to grant a new lease) are not covered, even though they are equally likely to contain a mechanism for fixing the rent at the start of the new lease.

It is fair to say that reaction to this news has been mixed. 

The tenant’s perspective

According to the government, upwards only rent reviews “pit landlords against businesses and can make rents unaffordable and cause shops to shut" and the ban:

“will help keep small businesses running, boost local economies and job opportunities and help end the blight of vacant high streets and the unacceptable anti-social behaviour that comes with them.”

The landlord’s perspective

On the other hand, the Chief Executive of the British Property Federation has slated the proposals, stating that:

“Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the Devolution Bill. It risks investor confidence at a time when development viability is already seriously challenge.”

Whatever your view on the rights or wrongs of this, the timing of this significant development is a bit odd for two reasons:

1.    The government had not given any prior indication that such a radical policy was in the pipeline and the proposed ban has therefore caught everyone off guard. It is true that the supposed iniquities of upwards only rent reviews have been talked about for years. However, this is the first time a government has published proposed legislation to ban them.

2.    When bans have been discussed in the past (e.g. during the previous Labour government), commercial leases tended to be longer, with five-yearly open market rent reviews being the norm. These days, many commercial tenants are reluctant to commit themselves to longer term leases, so five-year leases with a fixed rent (and no review) are increasingly common. With that in mind, you have to wonder whether a ban will have such a significant effect in regenerating the high street as the government hopes.

Of course, this is only the first draft of a long and complex Bill dealing in the main with English devolution and there is still an awful long way to go before any ban becomes law.