Introduction

Real estate owners and occupiers alike were astonished, earlier this month, to see that the English Devolution and Community Empowerment Bill contains provisions that, if enacted, would override contractually-agreed rent review provisions in new commercial leases and would allow upwards-and-downwards provisions in their place.  They would also permit tenants to initiate rent review processes regardless of the terms of the lease.

Which leases would be in scope?

All leases of licensed premises and business leases granted after the Bill is enacted, except for any granted pursuant to a contract entered into before the provisions come into force.  This would include agreements for lease – it is unclear if it would also include call options and contractual rights to renew.  Business leases are defined by reference to the Landlord and Tenant Act 1954 (both those with and without security of tenure) and is therefore limited to occupational leases as opposed to headlease or investment leases.  The new rules would not apply to existing leases.

How would the ban work?

The Bill proposes that where a lease contains a rent review whereby rent will be reviewed to the higher of the passing rent or the rent reviewed by reference to a variable such as market rent, turnover rent or an index like the RPI or the CPI, the new rent will simply be that reference rent whether an increase or a decrease.  Pre-determined stepped rents will not be affected by the new regime.  The Bill provides for additional regulations containing further exceptions which, according to the explanatory notes, might include caps and collars.

How is the real estate industry reacting?

It is disheartening that these provisions were not included in the Law Commission's recent review of the Landlord and Tenant Act 1954, and industry bodies such as the BPF have expressed surprise that no consultations were conducted prior to the publication of the Bill.  Various parts of the real estate sector have also pointed out that although the Government has trailed these provisions as being intended to "make commercial leasing fairer for tenants, ensure high street rents are set more efficiently, and stimulate economic growth", this new regime would affect many more leases than the high street shops, pubs and restaurants that the Government seems to have in its sights.  Office leases and healthcare leases will be amongst those adversely affected, and investors such as pension funds may be deterred from investing in real estate assets in future if they cease to provide a reliable income stream.  The leases that Government intended to benefit, ie leases of high street premises, already tend to be shorter than others, and often contain a range of tenant-friendly provisions such as rent-free periods, break rights and capital contributions for fit-outs.

Further thoughts 

It is important that affected parties explain to Government what the ramifications of this proposal could be for the real estate sector and for the wider economy.