Like many in the commercial property sector, I was initially shocked by the Government’s recent announcement to ban Upwards Only Rent Reviews (UORRs). At first, I agreed with the concerns of many fellow professionals.
However, with time to reflect, I believe the impact may be far less significant than first feared.
The UK commercial property market is remarkably resilient. Throughout my career, we have seen numerous legislative changes, which when first announced, industry commentators said would have significant detrimental impact, but this never transpired.
So, for now I am ‘sitting on the fence’ as to what the eventual impact will be, but my initial thoughts are:
Government’s Rationale
To revive the UK’s declining high streets and their so called levelling up agenda, as an estimated one-in-seven high street units are standing vacant.
Ministers argue that UORRs drive up rents even during economic downturns, resulting in tenants being driven out, due to unaffordability, which contributes to many shop closures.
Their goal is to make commercial leases fair to both parties, to help keep small businesses afloat and healthy, and to breathe new life back into struggling town centres.
The government argues that banning UORRs will result in rents reflecting the true market conditions that tenants’ businesses are operating in, rising or falling based on open market values, inflation, or turnover.
When was your last experience of a rent review in a ‘struggling’ high street? Landlords are extremely fortunate to let a property for 5 years, without a break in the third year – so no rent reviews.
Likely Impact of the Ban
Many, like me in the industry, will have experienced the dramatical reduction in leaselengths, from the old 25 years ‘norm’, to what we have today – the average retail lease length is currently just over 4 years.
Most small businesses, especially on struggling high streets, do not have rent reviews.
Who still have rent reviews? The majority are; corporate office occupiers, tenants of prime and super prime retail, industrial and warehouses, large leisure premises and F&B. Plus, tenants who want to guarantee their occupation of their property, as it is vital for their business.
If rent reviews do become upwards and downwards, landlords may be less willing to grant leases longer than five years, preferring flexibility over the uncertain long term income.
This could be Detrimental to Tenants
1. Loss of Certainty
Some tenants want ‘long’ leases because their premises are vital to their business. Therefore, tenants could lose business certainty, and it could jeopardise their business continuity.
2. Reduced Incentives for Tenants
It is commonplace for tenants to be granted 10 year lease, with a 5 year tenant’s break, with the tenant receiving a pre-agreed rent free period or reduced rent period if they do not activate their break.
If the 5th year rent review is upwards and downwards, landlord are unlikely to agree addition incentive in year 5. This will leave the tenant worse off, as they will still paythe same increased market rent, but they will not receive any incentive for not breaking their lease.
If the market does dramatically fall over 5 years, the tenant can break their lease, or threaten to and renegotiate, which provides an adjustment mechanism of the rent at the 5th year.
Is the Solution?
Could the solution for future rent reviews to be:
• The RPI or CPI increase from when the lease was granted;
or if higher;
• The open market rental value of the property
This aligns with the Government’s aim, as both methods can theoretically result in rent decreases.
But when was the last time RPI and CPI fell? RPI – in March 2009 for a period of 7 months, but in modern history it has always increased over a 5 year period.
Why is the Government doing this?
Their proposal is likely to have minimal impact on their goal of helping keep small businesses afloat and healthy, and to breathe new life back into struggling town centres – as most of these leases don’t have rent reviews.
Is this the Government’s attempt to shift the debate away from reforming Business Rates?
Final Thought
If this ban results in landlords increasingly only granting 5 year leases this could have a significant impact on any future proposes changes and reforms to the Landlord and Tenant Act 1954.
Richard Russell is the Principal of RR Consultancy, a boutique commercial property consultancy, and who has worked within the lease advisory sector in the UK for 25+ years.