A recent government proposal to change landlord and tenant law as it relates to commercial properties in England and Wales has generated strong opposition amongst landlords, not least because of the lack of warning or consultation. Whilst there is no suggestion yet that it will be extended to Northern Ireland or be picked up at Stormont, it perhaps shows an interesting direction of travel of travel in the wider United Kingdom.
In July this year, the Ministry of Housing, Communities and Local Government (MHCLG) introduced the English Devolution and Community Empowerment Bill at Westminster. While the majority of the Bill relates to devolution of power from Westminster to local authorities and measures to strengthen local government, Part 5 of the Bill contains provisions that would prohibit most upwards-only rent reviews in commercial leases, a ubiquitous and long-established aspect of such leases in the UK.
The Bill would insert two new provisions in to the Landlord and Tenant Act 1954 (largely the equivalent of the Business Tenancies (Northern Ireland) Order 1996):
- The first provision would prohibit most upwards-only rent reviews in commercial leases in England and Wales. The prohibition would apply to new leases and to renewal leases, but not to existing leases. Index-linked reviews would be permitted but the resulting rent must be able to be lower than the passing rent. Stepped rents, where the future level of rent is known at the outset of the lease, are not caught by the prohibition.
- The second provision, which will affect many fewer leases, would prohibit put options where the tenant can be required to take a new lease and the rent payable at the start of the lease cannot be determined when the put option is entered into. The starting rent must match the rent payable under the previous lease. This prohibition would only apply to new leases.
The stated aim of these provisions is to protect tenants against inflated rents when the market is low. The Bill is only at the committee stage in its passage through Parliament, but these provisions have caused concern amongst landlords and their lenders. The effect of the provisions could affect property valuations and cause lenders to be more cautious as the rental income stream could reduce over the term of the lease. The provisions may also speed up the growing trend for shorter leases that avoid rent reviews entirely. Typically rent reviews take place every 5 years during the term of a commercial lease and increasingly leases of high street properties are for only 5 years or less so the government’s proposal may have little impact in that area. More likely to be impacted by the provisions are offices and retail parks, and industrial and logistics properties where leases are typically for longer terms. The change might well see customary landlord’s incentives such as rent frees and contributions to tenant fit out costs being curtailed to counter the impact of the changes.
Changes in market practice that become established in England and Wales, even if the legal framework driving them does not apply here, are likely to influence the market in Northern Ireland, not least because so many of the bigger players in the NI market are based in England.
Separately to the proposed ban on upward-only rent reviews, which will only directly affect England and Wales, we will all be affected by forthcoming changes to the methods and data sources used by the UK Statistics Authority to compile the Retail Prices Index. Rent reviews which are linked to inflation, as measured by RPI, will be affected by these changes which will come in to effect in 2030 and simply put, the changes are likely to lead to lower returns for landlords with RPI-linked leases.
Please do not hesitate to contact Graham Pierce and the commercial property team on 028 90 434015 for any commercial property queries.
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