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With temperatures soaring last week, something other than the weather was making the property industry hot and bothered - the shock announcement that the Devolution Bill proposed a ban on upwards-only rent reviews in all new commercial leases in England and Wales (the "Proposal").
One of the purposes of the Devolution Bill is to "end the blight of vacant high streets and the unacceptable anti-social behaviour that comes with them." Now that the dust has settled, we look at whether, should the Proposal become law, it will achieve its aims.
The first thing to note is that the Proposal will not have retrospective effect and will only apply to tenancies granted after the provisions come into force. The Proposal will apply to all business tenancies under the Landlord and Tenant Act 1954 (the "1954 Act") (even those that are contracted out of the 1954 Act) and all renewal tenancies if the rent under those tenancies is subject to review by reference to inflation or any other index or multiplier, tenant turnover, the actual rent or a hypothetical market transaction.
The Proposal will render any upward only rent reviews unenforceable which is a major departure from the current market norm.
Unlike standard upward only rent review provisions, if the review mechanism in the tenancy would (absent an upwards-only stipulation) result in a lower rent than the passing rent (due to a falling rental market, deflation or a drop in the tenant’s turnover for example), the reviewed rent will be reduced to that lower figure.
The current drafting suggests that stepped rents with pre-agreed increases may not be caught, however, this may change over the course of the Bill's lifecycle.
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In practice, should the Proposal ever become law, given that inflation rarely goes negative, an indexed-linked rent should, to an extent, counter the impact of the upwards-only ban (which could, in fact, lead to the opposite result of that intended by the Bill in circumstances where inflation outpaces the growth that would be seen in comparable open market transactions).
Given that most modern retail leases are five years or less, contrary to its intentions, the Bill may have very little impact on high streets (unless the passing of the legislation leads to retail tenants seeking longer leases). Instead, it is more likely to impact leases of offices, retail parks, logistics and industrial properties, where they tend to be longer with rent review provisions, which almost invariably provide for upwards only reviews.
Another unintended consequence of the Proposal as drafted is that, as the ban only applies to business tenancies (i.e. occupational leases), it is very possible that an income shortfall may appear between what the intermediate tenant receives from the occupational tenant and what it then pays to head lease holder. It remains to be seen whether such points are picked up in the Parliament as the Proposal goes through its various readings.
A long, long way to go
In its enthusiasm to 'protect' high street tenants from rents that do not fall when the market falls, the Government has proposed changes that may be likely to impact less on high street tenants and more on long term investment portfolios where upward only rent reviews underpin the property valuations. To do so without any warning, consultation or consideration is a bold move and one that may, in time, lead to a Government climbdown once it has had a chance to digest the reaction of the property industry.
Given the likely impact on valuations and inward investments, the Proposal is likely to continue to be met with strenuous opposition and there is a good chance that even if the Proposal gets to its third reading in the House of Lords, it will look very different to what it looks like today.