Last summer, the Government introduced the English Devolution and Community Empowerment Bill, and the clue is in the name for the purpose it serves. Yet Part 5 of the Bill surprised the commercial property sector. Despite its purpose of empowering communities, the Bill included a clause banning upwards only rent reviews (UORRs). This ban may potentially weaken the position of commercial property landlords and investors. WPI Strategy believe there could be £2bn less invested each year.
What are UORRs?
UORR clauses allow rents to increase in line with market conditions but never decrease. Typically triggered every five years, they are a standard feature in commercial leases. The ban allows rent to both increase and decrease when tied to specific measures, such as inflation or other indices.
Significantly, there was no prior consultation in relation to the ban. The British Property Federation noted that the announcement without consultation ‘spooked investors’ and that the ban is generally an interference on commercial leasing practices. Overall, a consultation should have taken place, but another question of importance is what is it doing in this Bill?
A Curious Commercial Clause in a Community Bill
The inclusion of a commercial lease clause in the Bill centres on one key word in the short title: ‘Community’. The Government aims to strengthen communities by revitalising high streets, especially since one in seven retail units in the UK remain vacant. Our regional high streets often resemble ghost towns, and it is common to speculate on how long a new shop will last. However, isn’t the rise of e-commerce to blame? Another factor is the burden of high business rates. Therefore, it seems unusual for the focus to have shifted to rent reviews. More importantly, while the purpose of the ban is to revitalise high streets, it affects all commercial leases, including offices and data centres, resulting in a ‘blanket ban’. Is this approach proportionate?
Rethinking the Blanket Ban
“By applying a blanket ban on upward-only rent reviews across all commercial property, it risks undermining the very investment that funds town-centre regeneration, data centres and mixed-use developments.” – Martin Beck, former HM Treasury economist.
A blanket ban is disproportionate, but a targeted ban could be of partial use. Imagine Parliament decides to ban all outdoor advertising across the UK to reduce visual clutter in central London. This would be viewed as disproportionate and affect areas without the same issues. A blanket ban on all commercial leases should be viewed in the same regard.
So, what is the best solution? Many shops do not have UORR clauses especially since many high street leases are five years or less. However, for high street shops that do have this clause, a targeted ban could at best solidify the practice.
So, it would seem that the ban is likely to have little impact on high streets but a larger impact elsewhere. A prior consultation could have substantiated this. These consequences will now be considered:
- Pension Funds: An Official Impact Assessment (OIA) was conducted rather than a consultation. However, it failed to consider losses to pension fund investments, which hold around £101bn in UK property, 96% of which is commercial, according to WPI Strategy. This oversight could significantly affect pension pots.
- Impact on Statutory Renewals: The ban on UORRs affects new leases and renewals, including statutory renewals. This could trap many landlords into a warped agreement that they did not initially enter. Furthermore, this could potentially result in a two-tier market where new leases are more desirable.
- Landlord and Lender Stability: For landlords, UORRs have provided a reliable foundation for stable returns, even in volatile markets. Having these clauses can derisk projects seeking commercial investment. Removing them could potentially hinder future investment.
- Tenant Benefits: In the commercial property landscape there is a compromise. Landlords have the benefit of stability from UORR clauses and tenants may receive benefits in return, such as larger rent-free periods. The ban could impact these benefits.
- Rent Review Triggers: Following the ban, landlords will be prevented from avoiding rent reviews on the scheduled date if they perceive market conditions are unfavourable and rents might decrease.
Thus, if regenerating the high street was truly the goal, business rates or incentives to shift commercial trends towards the high street would be the focus, or at the very least a clause targeted at the intended beneficiaries. As of now, the consequences of the ban impact the non-intended more. Nevertheless, it is important to assess how the Bill is doing currently and what landlords may need to consider in the future.
Staying Ahead
The Bill is currently in the Committee Stage in the House of Lords, undergoing line-by-line scrutiny. Baroness Scott of Bybrook aims to remove the ban, but this amendment has not yet been proposed and could take place in March. If the Bill is passed, we could expect changes in late 2026 or 2027.
In response to the ban, landlords may adopt strategies like fixed or stepped rent increases, or index-linked rents tied to inflation, as these are less likely to decrease compared to market rents. They may also set higher initial rents to safeguard against decreasing market conditions. Additionally, opting for shorter leases with more landlord break clauses could be another tactic.
Conclusion
The commercial landscape has increasingly become a labyrinth, filled with unexpected twists and obstacles, with further reform expected. While the commercial property sector has shown adaptability, policies like the blanket ban on UORRs inadvertently signals to investors to take a step back and reassess. It is crucial to strike a balance that encourages investment while addressing the needs of high streets and other sectors.
As ever, commercial landlords need to prepare for all upcoming landlord and tenant reforms. Drafting new or renewal leases will be crucial. If you need assistance, please contact our Real Estate team here, who are experts in this area.