News

Some proposals under the recently introduced Bill- the English Devolution and Community Empowerment Bill (‘Bill’) have created a stir in the commercial property world, writes Nikita Pandey, a Commercial Property Solicitor at Larken & Co. The relevant part of the Bill proposes to introduce provisions under the Landlord and Tenant Act 1954 (‘LTA’) which would ban upwards-only rent review clauses in commercial leases. 

Commercial leases containing rent review clauses allow for the rent to be reviewed and revised by the landlord keeping in mind the open market rent and inflation at the time of the review. 

Currently as it stands, the rent reviews are mostly upward in nature regardless of market conditions. It is arguable that this practice has kept rents high, especially during economic downturns, and has contributed to business closures and the decline of local retail areas. 

When the proposed provisions to ban upward only rent reviews are implemented the revised rent could end up lower than the current rent being paid. 

The ideology behind the proposed introduction to the LTA is to try to allow rents to fall in line with market conditions so that commercial tenants are less burdened by unsustainable costs, and it might help keep small businesses running for a long period. We have all witnessed the decline of our traditional high streets in recent years and the impact that the rise of online shopping as well as increasing high street rents has had on that. The hope is that the proposed ban will create a fairer environment for commercial tenants, particularly small businesses, and improve the viability of local high streets.  

The proposed ban is to catch all leases under the LTA taken for business purposes i.e. leases on property taken on to carry out any trade, commerce, profession or employment, and includes any activity carried on by a body of persons whether corporate or unincorporated. The ban would even apply to leases contracted out of the security of tenure provisions under the LTA and agreement for leases and will also apply to all renewal leases where the tenant has security of tenure under the LTA, whether the renewal is determined through the courts, or by way of agreement between the parties. The ban will be prospective, not retrospective and only apply to leases and renewals granted after the provisions come into force.

For the proposed ban provisions to apply, the lease must contain a rent review provision whereby the rent will or might change during the term of the lease and the amount of rent increase is not known or cannot be determined when the lease is granted. Leases containing fixed rental increases or stepped rents- where the future level of rent is known at the outset will not be caught by the prohibition. 

The rent review provisions under the lease must also be by reference to inflation or any other index, e.g. CPI or RPI, or the actual rent for the premises, a hypothetical market rent, or other notional rent, for example turnover. If these conditions are met and the amount calculated is actually lower than the current rent, the new passing rent will need to be the lower amount. 

The proposed provisions also allow tenants to trigger a rent review clause by notice in writing so long as the time for initiating the rent review has not lapsed. This would be regardless of whether the lease clauses state otherwise. Currently the practice is that time in a rent review is not normally of the essence, and the landlord can initiate a review any time before the next review date. However, with the introduction of the tenant’s ability to initiate a rent review, falling within the requisite time period to initiate such a review will become crucial for the tenants. A tenant will also have the option of serving a written notice against the landlord if the landlord is delaying the review process, opening the doors to claims for potential breaches of the lease by commercial landlords.

The Bill does include anti-avoidance provisions to prevent mechanisms that might attempt to dodge the proposed ban, including agreements outside the leases such as informal agreements between parties and side letters,  that seek to require the tenant to pay increased rent.

Whilst the intention of the proposed provisions is to assist commercial tenants, commercial landlords might be left in a soup. Upwards only rent reviews allowed for commercial landlords to have a stable source of predictable income. However, the backlash might be that commercial landlords decide to grant leases with high initial rents and fixed increases and might not be as open to allowances granted to tenants such as rent-free periods.

 It will certainly be interesting to see how commercial landlords and tenants react to the proposed ban, when implemented.