Proposed Provisions
The Bill had its first reading in the House of Commons on 10 July. The Bill includes provisions which if enacted as drafted will prohibit upward only rent reviews in new leases.
It is proposed that the new provisions will be incorporated as new Schedules to the Landlord and Tenant Act 1954 (1954 Act).
What leases does the proposed ban apply to?
It will apply to business tenancies -
- as defined by Part 2 of the 1954 Act, whether or not excluded from the security of tenure provisions of that Act.
- granted after the new provisions come into effect, unless granted pursuant to a contract entered into before that date (the ban will not be retrospective).
- which are subject to rent review provisions (whether in the lease or in a separate document) such that the rent may change during the term of the lease to an amount that is not known or cannot be calculated when the lease is granted (fixed increases will be permitted).
Subject to some exceptions, Part 2 of the 1954 Act applies to any tenancy where the property comprised in it is or includes premises which are occupied by the tenant (or a group company of it) and are so occupied for the purposes of a business carried on by it or for business and other purposes.
If the tenancy does not fall within that definition the ban will not apply. Occupation is required to satisfy the definition, indicating that the ban only applies to the lease where the tenant is in occupation and not to a tenant holding the premises under a superior lease who is not in occupation.
The ban will apply to lease renewals, whether under the 1954 Act or otherwise, if they are tenancies falling within the above definition.
Tenant power to invoke a rent review where the lease requires action to start a rent review
It will not be possible to get around the ban by including provisions in the lease stipulating that only the landlord can instigate a rent review, for example, by stating the rent review provisions will only be operational if the landlord triggers them by serving notice on the tenant. That would allow the landlord to choose not to invoke the rent review if the result is likely to be unfavorable to it.
If the rent review provisions require action to trigger them and the lease prevents the tenant from taking such action, it will be able to use powers granted to it under the Bill to trigger the review itself.
If action is necessary for the review to operate effectively and the lease prevents the tenant from taking such action, the Bill grants it the power to do so. For example, if the lease allows the landlord, but not the tenant, to refer the matter to arbitration if the rent cannot be agreed, the Bill will allow the tenant to do so.
Put Options
If a landlord has power in a lease or other agreement or arrangement (‘put option’), entered into after the Bill takes effect, to require a tenant to take a new lease and the initial rent under that new lease is not known and cannot be determined when the put option is entered into, similar provisions will apply. This will prevent the rent in the new lease being calculated as an amount which is the higher of the passing rent in the initial lease or as determined pursuant to a rent review type formula. This provision would stop transactions being structured by the grant of successive leases which the landlord can require the tenant to enter into without rent reviews in order to get round the ban.
Anti – Avoidance
Agreements that seek to avoid the provisions of the Bill will be void.
Putting rent review provisions in a separate document (for example a side letter) to seek to circumvent the ban will not work.
Comment
According to the guidance published by the Government that accompanies the Bill, upwards only rent review clauses “lead to a number of market inefficiencies including higher rents during economic downturns, leading to lower profits for tenants and a risk of higher prices for consumers. Stakeholders, including small businesses and academics, report that UORR clauses are artificially inflating commercial rents and ultimately pricing out small businesses from town centres.”
Conversely, Melanie Leech CBE, Chief Executive, British Property Federation, has been reported as stating 'Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the Devolution Bill. It risks investor confidence at a time when development viability is already seriously challenged.’
'Unfortunately, this is another example of a government getting mired in detailed market issues, rather than focusing on the big picture of enabling and empowering local public and private stakeholders, including property owners and their customers, to work together to drive economic growth and create thriving town centres.'
What Next?
The Bill is only in the initial stages of its progress through Parliament. RICS has said that ‘Over the coming weeks and months, [it] will work with members and industry to respond and shape the proposed legislation, to ensure we can create an environment that attracts and encourages investment, as well as businesses of all sizes.’
In the meantime, landlords may be considering whether in the future they will be agreeing lease terms that include stepped increases or making more use of CPI/RPI linked reviews. Whilst rent determined on that basis could go up or down, landlords may consider periods of inflation are more likely than deflationary ones. Consideration will also need to be given to rent free periods and other incentives offered to tenants.
Upwards only rent reviews generally provide that the rent payable from the review date is the higher of the passing rent and the rent determined by reference to a mechanism for calculating it (‘the reference amount’). The Bill is drafted so that the rent at review cannot be higher than a reference amount and specifies which types of mechanism to determine the reference amount are caught by the Bill.
If there is more than one such mechanism to calculate the reference amount, the Bill does not appear to preclude rent being reviewed to the higher of those amounts. For example, the reviewed rent could be the higher of the market rent and an indexed linked amount. Landlords of retail premises may seek provisions reviewing rent to the higher of a percentage of turnover and a notional rent (not being a minimum fixed amount) - both falling within the definition of reference amount.
As stated above the provisions ban upwards only rent reviews based on market rent, or other notional rent, inflation or other index or multiplier, turnover or side by side. A method for determining rent falling outside those arguably would not be caught by the ban.
If the ban goes ahead, we may see parties negotiating more complex rent review provisions in leases.
Client Alert 2025-190
