Property professionals say plans that prohibit upward rent reviews in commercial leases will “destroy property value.”
Deputy Prime Minister Angela Rayner last week included the measure in the government’s UK decentralization and community authorization bill.
The legislation recommends repealing these provisions in new commercial leases covering high street operations, offices and manufacturing industries in England and Wales.
“Up to the rent-only review clauses lead to many market inefficiencies, including higher rents during economic downturns, resulting in lower profits for tenants and higher prices for consumers,” the bill said.
Some agricultural leases will be exempted.
The legislation added: “After the injunction, the requirement to not reduce the rent will not be enforced if it is only in a new or updated commercial lease in the new rent review clause; the new rent will be determined by any method specified in the lease, for example, according to the Changes in the Retail Price Index.
“New rents may be higher, lower or the same as previous rents.”
But Gavin Whitney, a partner at Vladgate Law Firm, said the move brought significant changes to the commercial property market with minimal consultation. ”
Whitney added: “Up-only rent review is a standard feature of nearly every commercial lease, providing real estate investors with a predictable source of income that is the basis for mortgage lending and long-term investment strategies and prevents inflation.
“The risks of this proposed ban are serious and unexpected damage to the wider economy that is already under pressure.
“By destroying property values, it can reduce the returns of daily owners and pension funds, which makes many worse, including government revenue through lower capital gains taxes and stamp duty land taxes.”
“Real estate landlords, including pension funds, will argue that banning upward rent reviews will undermine the value of the property and make it difficult to obtain loans to fund new commercial property developments,” added Nick Mattison, managing director of public relations at Mattison.
Mattisson believes the move changes “the commercial property goes from a secure fixed income style investment to a more volatile fixed income style for cash flows.
“The retail industry is very clear that some unusual characteristics of the UK property market (e.g., the only rent review and too long leases) greatly increase their costs.”
