If a lease has an “upward only” rent review clause, then the rent can never go down; it either increases at review, or remains the same as before the review date, even if rental values have declined. The UK Government has for almost a decade been pressing the property industry to self-regulate, in order to make commercial leases more tenant-friendly, and in particular, to abolish upward only rent reviews. This has been strongly resisted by the property industry, who compromised by introducing a voluntary Code for Leasing Business Premises in England and Wales. There has apparently not been a wide uptake of the Code.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.

The Code says that rent review clauses should be clear. Landlords should on request offer alternatives to upward only rent reviews, such as up/down reviews to market rent, with a minimum payable equivalent to the initial rent, or reference to another measure such as annual indexation, and for both landlords and tenants to be able to start the rent review process. The Code recognises that landlords may want to charge a higher initial rent in return for an alternative review mechanism.

The Republic of Ireland has now abolished upward only rent reviews for all new leases entered into after 28 February 2010, unless the lease is granted to comply with an earlier contractual obligation. The law is not retrospective, and therefore tenants in existing leases will not benefit from the change in law. The property industry in the Republic has been dismayed at what it considers to be potential great harm to the Irish investment property market.

The UK is in a minority in allowing upward only rent reviews. In USA and many parts of Europe, leases are for short periods with no rent review clause, but contain an option to extend the term, subject to agreeing rent and other matters. In Australia, Hong Kong and Dubai, commercial leases are traditionally for very short periods. In these countries, a new lease may or may not be agreed, and the rent payable will be what the market can bear at that time.

Certainty of a minimum rent income has been a big driving force in allowing lenders to fund commercial property in the UK. If there is the prospect of rents going down, they would be unlikely to lend. A significant amount of UK commercial property is owned by UK financial institutions, property companies, and by investors from outside the UK; the attraction of investing in UK commercial property is the landlord-friendly regime (and in particular the upward only rent reviews) and (usually) the availability of loan facilities to assist with the purchase. 

Commercial leases are more frequently being granted for a shorter term of 15 or 10 years, often with break options in favour of the tenant. This perhaps makes the argument for abolition of upward only rent reviews irrelevant, however, it is unlikely to go away, and landlords should be prepared for a change in the law.

In Scotland and England, most leases contain upward only rent reviews, but frequently, leases do contain interesting alternatives - some provide for the rent to be reviewed in line with inflation, and some provide for fixed increases throughout the term, so that the parties know exactly how much rent is to be paid for the whole duration of the lease. Landlords may want to consider drafting their leases in future to provide for either of these, or indeed to provide for a minimum increase based on inflation or to have a fixed multiplier.

The new law in the Republic of Ireland is not retrospective, but it does not follow that if a similar law were introduced in the UK, it would similarly not be retrospective. However, it is anticipated that it would not be backdated to catch existing leases.

Further Information

For further information on the issues raised in this ezine, please contact: Ken Gerber, Gavin Thain, David Hunter or your usual contact within the Commercial Real Estate Team.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.