Commercial Property Upward Only Rent Review (UORR) ‘Ban’ – The Law of Unintended Consequences
The Government is proposing under the English Devolution and Community Empowerment Bill to “ban” upwards-only rent review (UORR) clauses in new commercial leases in England and Wales. The stated policy aims are to “make commercial leasing fairer for tenants, ensure high street rents are set more efficiently, and stimulate economic growth”.
What does the UORR ‘ban’ involve?
• The ban on upward only rent reviews would apply to all business tenancies in England and Wales within or outside the security of tenure provisions of the Landlord and Tenant Act 1954 applies).
• The ban will not be retrospective and will only apply to those tenancies granted after the ‘ban’ comes into effect including new leases and lease renewals.
• The ‘ban’ includes upward only rent reviews, index-linked or turnover reviews. Stepped or fixed rental uplifts and upwards/downwards reviews will be allowed. Anti-avoidance mechanisms such as side letters or other methods to avoid the legislation will be banned.
• Both landlords and tenants will be able to trigger rent review mechanisms.
Who is affected by the UORR ‘ban’?
Landlords
• Upwards-only rent reviews have been an integral of leases within the commercial property investment market.
• Investors, from sole owners, property companies and pension funds rely on fixed rents or upward only rent reviews for income and servicing debt and could therefore face a fall in such income if downward rent reviews are effectively permitted. Consideration of lease expiries will be even more crucial if existing tenants decide to renew.
• Landlords may lose interest in commercial property as an asset class.
Tenants
• Tenants will of course welcome the removal of upward only rent review mechanisms, in particular during a downturn.
• We could see more shorter contracted out leases (as opposed to longer leases with rent reviews) and so this will give tenants less occupancy protection for their businesses to trade from. It is more likely to lease to rents increasing for contracted out leases.
What could be affected by the UORR ‘ban’?
Commercial property valuations.
• Valuers, investors and lenders of commercial property will have to factor in the possibility of the successful implementation of the UORR ‘ban’ by the Government. Given the current situation, this leads to uncertainty and potentially a downward trend in values and yields.
Rent Review Disputes
• Given the potential for downward rent review provisions, along with upward only mechanisms, rent review disputes between landlords and tenants are likely to increase. The RICS has Arbitration and Independent Expert panels for appointments to determine such disputes but will these be able to handle the potentially significant increase in applications to determine these?
Business Rates
• Has Government created a problem of its own making? Business rates assessments for commercial properties are made by reference to rental valuations at a given date. Will Government accept falls in future rates revenue if rental values fall? Government could potentially seeks to get around the problem by reinstating transitional phasing to limit decreases in business rates liability or increase to the business rates multiplier as a mechanism to limit a reduction to rates revenue. However this will clearly be at odds with the intention of the proposed UORR ‘ban’ if Government refuses to pass reductions to commercial property occupiers.
Industry reaction
Typically by Government, there has been no industry consultation prior to the Bill and it is unlikely that the impact on commercial property as an asset and factor of production have been considered, nor the potential impact on business rates revenue. The Bill has only had a first reading in Parliament and there will undoubtedly be arguments for and against by landlord and tenants respectively.
Graham + Sibbald are a large UK wide multi-disciplinary firm of Chartered Surveyors and Property Agents who will be pleased to advise new clients on all their property related matters.
