The Fight Over Upwards-Only Rent Reviews

The English Devolution and Community Empowerment Act has now received Royal Assent, bringing the proposed ban on upwards-only rent reviews one step closer to reality. Although the changes are not expected to come into force until 2027, the legislation is already creating uncertainty across the commercial property market.

In this episode, Richard and Lizzie break down what the Act actually says, the key amendments introduced during its rapid passage through Parliament, and the major questions that still remain unanswered. 

Richard also explores the implications for landlords, tenants, investors and lawyers, including the retrospective impact on certain renewal options and what this could mean for lease negotiations going forward.

A must-listen for commercial property professionals trying to understand one of the most significant proposed shifts in leasing practice for decades.

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Transcript

Lizzie Collin
Hello and welcome back to the Unpacking the Case podcast. Today we're looking at one of the biggest proposed changes to commercial leases in decades, the ban on upwards only rent reviews. The ban is unlikely to come into force until 2027 but the market is already paying very close attention, particularly because some of the latest amendments could affect decisions being made on leases right now. In this episode we're going to refresh everyone's memory on what the legislation actually says, discuss what is still uncertain and most importantly ask the big question, what does the future hold? We are here to talk about a topic we've spoken a little bit about over the last, well, nearly a year. and that is the ban on upwards only rent reviews. So the English Devolution and Community Empowerment Act received Royal Assent on the 29th of April. So with it come some updates around this. So do you want to start with refreshing our memories on what it says and what it's all about?

Richard Snape
Yeah, it took everybody by surprise on July the 10th last year. when the English devolution and community empowerment bill was laid in front of the House of Commons. And no one was expecting this. So it's about English devolution. It's about all the English councils going unitary in the future, which is a story in its own right, but doesn't really directly affect leases. But at the end, there was nothing to do with the rest of the act and also bail at the time, but also something which applies in spite of the name to England and Wales. And that was the ban, the proposed ban on upward and only rent reviews. And when the legislation comes into force, they'll have to have upwards and downward rent reviews with certain criteria have been met. It went through the House of Commons by the end of October of last year. There were a few amendments in the House of Commons, one quite obvious one, which had been forgotten initially. But it sped quite rapidly for the House of Lords for such a massive piece of legislation. And it received the Royal Assent on April the 29th, as you said, which is a week today, I think, a week yesterday since when we were recording now. And it's not going to be enforced for a while, the ban on upward only reviews. They are looking at, they said 2027, 2028 for the impact statement initially, but they're now sort of suggesting more like 2027. So sufficiently close to be worried about. And it's going to presume it's almost upon us. They've got to produce regulations and they're going to have some consultation before the regulations. Strange time, they should have really would have imagined that consultation before they introduced the thing, but because it came completely formed out of the blue. I made a freedom of information, I didn't tell you this, Lizzie, I made a freedom of information request as to discussions and what consultation went on. Did I tell you that?

Lizzie Collin
You did. I don't think it went anywhere, did it? It's not in a public interest for.

Richard Snape
You to know about. when they should have responded and said it wasn't in the public interest for me to find out. And I'm now a marked man. This could be the last time we speak. I appealed it. Did I tell you that?

Lizzie Collin
No, I'm not sure I heard this bit of the story.

Richard Snape
No, I appealed the original decision and they reiterated it wasn't in the public interest for people to know why major acts of Parliament that changed the whole economy were introduced and who was consulted upon. So there we go, I say. I'm deemed to be a troublemaker. Now, shall I give you, I'll give you the sort of gist of it, but we can look at the changes. Is that okay?

Lizzie Collin
Yes, please.

Richard Snape
It depends on four things, the initial legislation when it was introduced. The first was it would apply to leases that came within the 54 Landlord and Tenant Act, section 23 of the Act. It says you have to occupy under a lease as opposed to a license, at least partly for business purposes. And you have to have an occupation, you have to have a lease and business purposes. We'll come back to the occupation point shortly because there was an obvious area there which I'll come back to, which has been amended. And it actually includes things like mixed business residential. unless you are breaching the terms of the lease or you're just taking work home with you, mixed business, residential, commercial leases. The case in 1978, Sherrill Investments and Saldana about that. But the second requirement or the second proviso was that condition was that it wasn't going to be retrospective. It would only apply to leases created from the day the legislation comes in. And if there was a pre-legislation agreement for lease, then it wouldn't apply to the pre, so the pre whatever the legislation comes in, it wouldn't apply to the agreement for lease either. They have changed that to some extent and parts are now retrospective, but I'll come back to that. Thirdly, there had to be some method of reviewing the rent and the rent wouldn't be able to be calculated in advance, the reviewed rent. So it wouldn't apply and this wasn't changed to things like fixed increases of rent and stepped rents. And 4thly, it had to have a method of reviewing the rent whereby it was either by something like index linking RPI or consumer prices index, which is supposed to be taken over in the future, or a market rent review clause or a turnover rent based on profits. So those are the provisos.

Lizzie Collin
So what changes have been put into place?

Richard Snape
Well, the first one was the occupation point. Basically, if you've got a sublease, then there's only one person or one body that can be an occupation. And that's almost certainly the subtenant. There's a case, House of Lords case in 1996 about that case called Grayson and P&O. It's not completely inconceivable it's going to be the superior tenant, but it's almost certainly the subtenant. So if you had a, if they didn't change that, if you had a sublease, the sublease would be subject to, you know, come within the 54 Act definition. I should have stressed that the definition includes excluded leases as well. They're still within the 54 Act and just been contracted out. But you know, the sublease would have been within the ban. but the superior lease wouldn't be, which will be a terrible kind of for cash flow problems and the likes. So now the other, the Commons introduced it last October, there's no need for physical occupation. So both the superior tenant and the sub-tenant will be subject to the ban on upward only rent reviews. The other change that changes, well on March the 17th this year, It was introduced by government into the House of Lords and it's now passed through the House of Lords and will be law. It's got an element of being retrospective to it though because if you've got an option to renew the lease, an option to put or an option to call or an agreement to lease to the same tenant, anything called a tenancy renewal arrangement basically, then as of March the 17th it's going to be subject to exercise the option, it'll be subject to the upward and downward rent review. So people are going to have to start thinking about this right now as to what they, do they continue with options and so on. They, that includes not just an option within the lease that's been created since March the 17th, but a separate option created by a separate document. And also, they, I lost track. Oh yeah, they It doesn't make clear, supposing you've got an option and a lease that was created on March the 17th or an option in a separate document with an upward only rent review. What happens if you exercise the option prior to whatever the implementation date is? They haven't made it clear, but I can't see how it can take the effective that at that time because the legislation won't be enforced. And also they have dealt with, in a rather cack-handed way, subletting that if you've got something in the superior lease that basically a clause that bans subletting unless there's if there's an upward and downward rent review, which has been, you know, sort of included from on high, then With existing leases, including existing leases, that clause will be void. You can't have a ban on the sublease having an upward and downward rent with you. So those are the changes and it looks to be in place in the not too distant future. Some people have been buried their hands in the sand about it, but it's on its way.

Lizzie Collin
So what's still to be determined?

Richard Snape
Well, They haven't made clear, although the government in their guidance seems to suggest that what if you have more than one mechanism of determining the rent review? Could you use several different mechanisms and then choose the highest if you like? And the suggestion seems to be you can do that. You can have whatever market rent with your turnover rent, whatever. And you'll have to pay the highest of the, you know, it'll have to be downward if needs be, but you can just select on the highest. And the other thing is the government promise. I know this is something you're interested in, Lizzie. It's what's going to happen with rent collars and rent caps. So then if you want to come in there.

Lizzie Collin
It's never going to get old, this joke, is it? I'm not going to live this one down.

Richard Snape
You shouldn't have mentioned it. You shouldn't have mentioned that.

Lizzie Collin
I should just plead ignorance. That's usually my usually my tactic.

Richard Snape
Because on the face of it, rent collars and minimum rents would be banned under this legislation. If it's going downwards below the rent collar, it'll have to go downwards. Originally, when this was just after this was laid in front of Parliament, the government did say that at a later stage, we need to pass through Parliament, they'll look into separate regulations on rent collars and rent caps, specifically if you can have a rent collar, as long as there's a sort of similar rent cap, if you like. And we don't know what's going to happen there yet, but we'll have to see about that.

Lizzie Collin
So what are the consequences of this? What do you think the future holds for upward only rent reviews?

Richard Snape
It's obviously going to be a problem for landlords, especially if the rental income and the tenant secures your, services, your debts and the likes. And, people want a steady cash flow. Although you can understand, you know, if the market turns to the worst, why can't tenants see the benefit of these things? I think, well, there's one big issue I still have with this legislation. Ostensibly, the government was saying the reason for this is Because the high street needs help, high street retail needs help. And if the market falls, why shouldn't they see the benefit of the market fall? And fair enough. But for the fact that the high street tends to be three or five year leases without rent reviews. So it will be irrelevant to the people who the government say need the most help. And if they're not getting through, tenants want short term leases, they've learned the lessons of the financial crisis of 2008. And and COVID a few years ago, they want shorter leases, they want flexibility in that kind of market anyway. And I suspect in the future, the most obvious way in the high street retail sector of making sure there won't be an upward and downward rent review is just have three or five year leases. The other possibilities that HC talked about is People are going to have to think about options to renew. And I should be thinking about those right now, if not since March the 17th. But do you go for things like index linking, which is subject to the upward and downward rent review provisions. But if you take inflation and index linking over a period of a few years, it's never going to go, well, it hasn't ever gone down sustainably or persistently. So it might be, or do you go at least partly for fixed and stepped rents, which are not subject to upward and downward rent reupervisions. And also, there's a lot of discussion. I'll leave it to the valuers. Is it going to make rents higher initially? Landlords are going to have to claw back the money somehow. It depends on the market, obviously, and who needs who the most, but is it going to do that? Or is it going to cut back on things like rent-free periods being offered from landlords or inducement periods? capital contributions and the likes to carry out works on the premises initially, which landlords like because they can offset against capital allowances. But these things might just have to change. There's a lot for the lawyers to think about and there's even more for the surveyors and asset managers. And no doubt we'll be looking at it in a little bit more detail when we see what the regulations have to say and know about rent collars.

Lizzie Collin
Okie dokie. Thank you very much, Richard.

Richard Snape
My pleasure as well, Lizzie.