Goodbye to upwards only rent reviews?

Open market rent reviews have been the norm for decades, ensuring rents either increase in line with market conditions or stay the same.  These reviews have long been criticised by tenants for stifling flexibility and burdening businesses, especially in uncertain economic times, but loved by landlords as they provide predictable income streams which support asset valuation.

My take on the proposal?  This will be a welcomed shift by retail and hospitality tenants who have been hit by rising national insurance contributions along with business rates and day-to-day costs still being incredibly high (that being said, this legislation will also benefit office occupiers and those operating out of industrial premises.)

What will replace upward only reviews?

1. Will landlords want to run the risk of a downwards review?  Lease terms have been getting shorter over the years so landlords may decide to take rent reviews off the table all together.  Unless you are a major tenant, with the ability to negotiate it may be a “take it or leave it” scenario.
2. Will RPI/CPI rent reviews take over?  Both index-linked rates have rarely decreased over an extended period of time; however, the draft legislation seemingly may also ban upwards only index linked reviews, so if you are thinking about moving to an index-linked system, you might need to think again.
3. Will agreed stepped rents become more prevalent? Fixed increases provided certainty for both parties whilst also maintaining asset value and removing the costs associated with rent reviews. I’m not sure if anyone would actually sign up to fixed increases for more than a five year term in practice so we might be back to shorter leases.

Should the Government have looked at other options first?

1. How about business rates reform?

The business occupier community has been calling for business rates reform for years. Effectively the equivalent of council tax for commercial premises, these rates impact commercial occupiers more than online retailers. Would the Government have been better off:

a. Introducing more frequent revaluations of business rates?
b. Trusting local councils to set their own business rates?
c. Reforming criteria on which business rates are assessed on?

This certainly may have been seen by both landlords and tenants to be a fairer way to strike a balance between the parties instead of landlords having to take the brunt of the reform here (who are still feeling the after-effects of Covid with vacant properties and many of their tenants still struggling to pay rent in full and on time).

2. Are they asking the private sector to do more because they cannot afford to?

When Rachel Reeves became Chancellor she set herself two self-imposed fiscal rules: that day-to-day spending would be paid for with government revenue and borrowing was only for investment purposes.   This has left the Government with very few options to help commercial tenants. As tax cuts are out of the question for the foreseeable future, it seems that the Government has decided that the best way forward is to shift this burden onto the private sector.

3. Will this limit investment?

Rents in prime locations are a fairly safe bet but if there’s a risk rental levels could fall, are funds and private investors going to be interested in secondary or tertiary locations which are in need of investment? If you look at the wave of reform heading this way (the abolition of no-fault residential evictions, cheaper lease extensions, a move to commonhold, building safety regimes and MEES compliance) property isn’t the attractive use class it used to be. Will the market adjust or could the Bill cut off much needed investment to the high street?

We’ll keep our eye on the bill as it goes through parliament, and if you’re unsure how your rent review will work in practice, get in touch for a chat.