WILL A BAN ON UPWARDS ONLY RENT REVIEWS WORK?

A proposed government measure to ban ‘upwards only rent reviews’ in England and Wales is aimed at protecting tenants from paying artificially high rents during economic downturns – a laudable enough aim, writes Kevin Atkins. 

But will it undermine investor confidence, reduce the willingness of lenders to finance commercial property investments, and adversely affect returns for pensions schemes, especially smaller SIPPs?

Many leases currently have these upwards only rent reviews, where the rent after review will be the higher of market rent or the existing rent that the tenant is paying.  This means that in a market where rents are sliding – as we have seen particularly in the retail sector – occupiers could end up stuck with a rent which is above market level.

The proposed measure to ban such clauses, contained in the snappily-titled English Devolution and Community Empowerment Bill, will apply to all new business leases, not just those in the retail sector, if it becomes law.  Existing leases will not be affected by the change.

Whilst this will clearly be good news for tenants, it could have implications for investors.  The possibility of falling yields and a lack of certainty about rent levels could affect the value of freehold investment, and it’s likely that lenders will be more cautious when it comes to financing such investment, especially in sectors where the risk of declining market rents is higher.

As with any change in legislation, investors will be able to find mitigation strategies, such as agreeing an above market rent in exchange for rent incentives via a side letter– thus hiding the true value of the deal, keeping rents artificially high and muddying transparency in the market.

Others have suggested that leases might be written with a landlord-only review trigger (giving the investor the upper hand when deciding the optimum time to review), although it’s not clear how enforceable this would be.

Other solutions could be inflation-linked rents, tying any increase to the value of money rather than of property (surely not what the government intends), or shorter leases without statutory protection to keep the negotiating power with the landlord.

If this proposed measure becomes law, it will be more important than ever for landlords and investors to seek professional advice before writing new leases.

It’s difficult to argue with the intention of supporting bricks and mortar retailers, but interfering in the market like this doesn’t seem the best way to do it.  Surely it would be better to tackle things like business rate reform, over which the government has direct control.