The long-standing debate over rent reviews has been re-ignited following recent comments made by Stephen Marks, CEO of French Connection. As reported in the Independent and Fashion United, Mr Marks has challenged the existing market practice in the UK of ‘upward-only’ rent reviews and has highlighted the damage it is causing to retailers. Many retailers complain that the current regime of ‘upwards-only’ rent reviews is unfair, particularly to those who signed-up to long term leases (of 10 – 20 years) at a rent which is now well above the market rate, without any scope to reduce the rent during the life of the lease. Where the market rate has fallen, the existence of ‘upwards-only’ rent reviews gives a competitive edge to new entrants into the market who will be paying a lower rent to their competitors who entered into leases when the market rate was much higher.
Mr Marks’ comments follow a recent pledge by the Irish Government to retrospectively ban upward-only rent reviews in all leases. The outgoing Irish Government banned upwards-only rent reviews in new leases signed after February 2010, but this recent step of applying the ban to all leases has been met with concern from a significant number of institutional landlords and developers.
Commercial landlords argue that if the UK were to follow the Irish example, it will harm property values, particularly since income stream is one of the biggest factors in determining the value of an investment property. The security of the income stream will be undermined if tenants are able to reduce their rent on review. This may, in turn, make banks even more cautious about lending against commercial property in the future.
In the past, the UK Government has declined to legislate against upwards-only rent reviews and has focused on tenants having more flexibility to assign and/or sublet their premises. However, given the current tough trading conditions, Fashionista envisages that the UK Government will come under pressure again to reassess the situation and follow the Irish example. Whilst a step in this direction will be applauded by retailers, will Mr and Mrs Smith (the average consumer) be prepared to accept the inevitable negative effect on their pension and investments?
2 Comments
I have had some interesting discussions in recent weeks about the possible impact of the Competition Act on leases following the withdrawal of the exception for land agreements with effect from 6 April this year. For example, restrictive covenants will be unlawful in certain circumstances and, if so, the market rent should be less; and, if so, does this invalidate an upwards only provision?
Thanks for your comment.
Whilst it depends on the wording of the lease, in my view, it is unlikely that the unlawfulness of a particular restrictive covenant (whether imposed on a landlord or a tenant) will invalidate the upwards-only rent review mechanism.
Given that most upwards-only open market rent review clauses are constructed on the basis that the reviewed rent will be the greater of: (i) the current rent payable; and (ii) the open market rent; in the event that a restrictive covenant is not taken into account on review (for the reason that it is unlawful), it will merely affect what the market rent is on the review date. If the market rent is determined to be less than the current rent payable, the tenant will still be required to pay rent at the level of the current rent (as it is the higher figure of the two).