Tucked away in Part 5 (section 71) and Schedule 31 to the (confusingly called) English Devolution and Community Empowerment Bill, the Government has hailed an end to upwards only rent reviews in commercial leases, in England and Wales. The intention is to insert a new section 54A and Schedules 7A and 7B to the Landlord and Tenant Act 1954

This seems a little too late for “saving the High Street” in some places. It poses some questions:

1. Is this legal change retrospective? (Cue commercial landlord and tenant lawyers frantically checking 80% of the leases advised on over the last few years);
2. Does this apply to inflationary index-linked reviews?
3. How does this affect turnover rent increases?
4. How does this impact stepped rents?
5. What types of commercial leases does it apply to?

Let’s drill into these questions in more detail.

The changes will apply to leases where four conditions are met.

1. The lease is one to which the Landlord and Tenant Act 1954 applies – it will include most premises which are leased by businesses including not for profit organisations;
2. The lease is completed after the law comes into force, and is not granted under a contract entered into before the law comes into force e.g. an agreement for lease which is exchanged before implementation of the new law will not be caught by the rules;
3. The lease is subject to “relevant rent review terms”: a) the amount of rent payable during the lease will or may change and b) the amount of rent under review payable during the term of the tenancy is i) not known and ii) cannot be determined at the time when the tenancy is granted;
4. The rent review terms include Elements 1 and 2:

Element 1

Rent that is determined by reference to: a) inflation or other index or multiplier of rent, b) the amount of either or both of: i) actual rent for the property or ii) a hypothetical market rent, or other notional rent  or c) the tenant’s turnover.

Element 2

A new rent that is different to the passing rent or could be so.

So in answer to the questions (1) – (4):

1. No, the legal change to commercial rent reviews is not retrospective (phew!). It will apply to leases completed and entered into after implementation (expected in 2027 or 2028). This will include renewals of existing leases and it will also apply to reversionary leases, where the term start date is expressed to commence after the grant date or the date of actual lease completion.
2. The rent review can be by reference to an index e.g. CPI or RPI. If this produces a figure that is lower than the passing rent, then the passing rent will be lower figure. So, the rules do not currently allow a collar i.e. minimum amount.
3. Yes, as the rent payable after the review date will not be known when a lease is entered into.
4. These will be unaffected, as the increase is known at the time that the lease is entered into.
5. It will apply to leases of properties used for business purposes. This will include not for profit businesses, although it will not capture agricultural or mining leases.

Conclusions

The changes may result in shorter term leases or possibly higher starting rents or fixed, stepped rents (taking into account average inflationary increases). We consider that index linking will become more common, possibly also in setting the starting rent. In certain sectors, e.g. retail and hospitality it is possible that turnover rents may be used more, to supplement the main rent.

Landlords and tenants are still likely to be advised to consider assumptions and disregards in open market rent review clauses carefully – especially in the context of high rent leases with expensive fit outs. The new passing rent will not be able to go up beyond reviewed rent, but the landlord will want to ensure it does not go down.

There appears to be less incentive for landlords to agree rent free periods, where the overall rent they may achieve over the term could stay the same under the new provisions.