At the end of last week, the English Devolution and Community Empowerment Bill was introduced to Parliament. Of particular interest to the commercial real estate market will be Section 71 and Schedule 31 of the Bill, which propose amendments to the Landlord and Tenant Act 1954 (LTA54) to prohibit upwards-only rent review provisions in commercial leases. If enacted, this would be a significant change to market practice with ramifications far wider than the immediate landlord and tenant relationship.

Which tenancies will be within scope?

As currently drafted, the relevant provisions will only apply if all of the following conditions are met:¹

• Condition A: The tenancy is one to which Part 2 of the LTA54 applies (i.e. a business tenancy that can benefit from security of tenure).

The wording of this condition is such that it would be satisfied even if the relevant tenancy was contracted out of security of tenure.

Residential tenancies are, based on this wording, currently out of scope.

• Condition B: The tenancy is granted after the provisions come into force (and not pursuant to a contract entered into before the provisions come into force)

As drafted, the provisions are not intended to have retrospective effect. This will likely encourage landlords to secure letting arrangements ahead of any provisions coming into force.

• Condition C: The tenancy must contain relevant rent review terms – basically that the rent will change but the amount that will then be payable will be unknown and incapable of determination.

Stepped rent increases, where the amount of rent and the date of the increase are known at the start of the lease, would appear not to satisfy this condition.

• Condition D: The relevant rent review terms must include the following two elements:
  
  
  • Element 1: An amount of rent is calculated by reference to inflation (for example, index-linked), open market rents or tenant turnover (reference amount).

  The wording is wide enough to bring into scope the most common forms of rent review.

  • Element 2: The revised rent (referred to in the Bill as the new passing rent) will or could be different from the reference amount.

What do the provisions do?

The relevant provisions state that, if the revised rent produced by the rent review provisions would be more than the reference amount (even if still smaller than the existing rent), then the rent review terms would be of no effect and instead the revised rent would be the reference amount. This would mean that, irrespective of the drafting used, the rent could go down at rent review.

Other provisions

Also included in the Bill are provisions empowering tenants to take any action necessary to initiate a particular rent review or to enable a rent review to operate effectively.

There are also provisions equivalent to the prohibition on upwards-only rent reviews in relation to rent determination for new leases granted pursuant to put options (i.e. where the tenant can be required by the landlord or another person to take a new tenancy of the whole or part of the relevant premises).

Avoidance

Unsurprisingly, the Bill contains wide anti-avoidance provisions.

While the Secretary of State is to be empowered to make exceptions by regulations, no indication is given as to what those could be.

Comment

In summary, the proposed abolition of upwards-only rent reviews could significantly affect lettings, investment and finance across the property market. However, as the Bill remains at an early stage, its future is uncertain and the current proposals may be altered or abandoned entirely. What is clear is that these developments will be closely watched by all market participants.

1. This is a summary – there are further details in the draft Bill.↩