Government warned that upward-only rent reviews could damage confidence

The government’s plan to ban upward-only rent reviews for commercial leases has the potential to significantly unsettle the UK’s commercial property market, according to warnings.

The clauses mean landlords can increase rent at review points but never reduce it — even if market rents fall.

However, experts at property consultancy Fisher German warned that the proposals will only serve to create market uncertainty amongst landlords and the UK investment market at a time when businesses need confidence.

The proposal is in the form of a late amendment to the English Devolution and Community Empowerment Bill, which is in the early stages in the House of Commons.

Rupert Collis, partner and head of commercial lease advisory at property consultancy Fisher German, said: “I was surprised there was no consultation before announcing what could amount to a substantial shift to landlord & tenant legislation and property valuations because of the repercussions this could cause.

“Our high streets are changing, and no-one wants to see row after row of empty units. But the proposed change will not affect existing contracts, it will ban the introduction of upward-only rent review clauses in new agreements.

“Landlords will need to choose between agreeing fixed rents or introducing a review clause that allows rents to fall as well as go up.

“It is apparent that the government seems to have misunderstood what an upward-only rent review means, believing that the review must result in an increase.

“The truth of the matter is that the UK investment market is not geared up to have rent reviews that can go up as well as down – it is driven by predictability and income certainty from the landlord side.”

Share prices of UK Real Estate Investment Trusts were trading down on the morning after the announcement.

Miles Youdan, a partner in the investment team at Fisher German, said: “This legislative instrument from the government appears to be poorly conceived and is likely to have significant unintended consequences.

“For many decades, upward-only rent reviews have given the UK property market a competitive edge over other international markets.

“Removing this mechanism could negatively affect inward investment and capital values, forcing tenants to pay higher rents to maintain the same capital value.
“Additionally, landlords might implement fixed increase reviews, exacerbating the situation.”

David Laws, partner and head of offices and tenant representation services at Fisher German, said: “Whilst on the face of it, rents that move upward and downward during the term of a lease are an attractive proposition for the tenant, the reality is that shorter leases, without rent review, are becoming increasingly common as occupiers seek greater levels of flexibility in their lease commitments.

“The average office term lease is now three-to-five years. Coupled with the office sector moving towards an ‘all-inclusive fixed cost model’, one has to question whether such a ban, if it ever came into force, would have the impact the government seeks to achieve.

“Early break clauses and tenant options to determine leases allow the perfect platform for lease terms and rent to be renegotiated at that moment in time, when ultimately the market forces of supply and demand will inevitably be the determining factor.”