BOMBSHELL BAN ON UPWARD-ONLY RENT REVIEWS

The government’s recent announcement that it plans to scrap Upward Only Rent Reviews (UORRs) on commercial premises took the property community by surprise. 

MK2 Real Estate’s Mark Johnson and Paul Rixon explore the implications for landlords, tenants and investors. 

In an attempt to revive struggling High Streets the government has decided to “protect” retailers and leisure operators by banning UORRs. 

The proposal is included in the English Devolution and Community Empowerment Bill. The government said UORR clauses “pit landlords against businesses and can make rent unaffordable and cause shops to shut.” However, if it becomes law, the ban will apply to all new - not retrospective - business tenancies, including offices, warehousing and data centres.  

The measure has caught the commercial property industry off guard. There has been no consultation and there are widespread concerns that the impact of this move has not been fully considered. 

With regard to the High Street specifically, in the wake of the pandemic many landlords have already recalibrated rents to accommodate declining tenant revenues. Shorter leases with no rent review provision, rents pegged to market rates and - in the case of larger occupiers - turnover rents, are all now much more common. With High Street rents having, by and large, adapted to market forces, the need for government intervention is questionable. 

Looking at the wider commercial property market, UORRs underpin valuations for investment and lending decisions. If they are banned, valuers will be inclined to push up yields to compensate for less certain income, which in turn could force lenders to lower their LTVs. 

For new developments, pre-lets on long lease terms are invariably required to secure funding. But if landlords are unable to guarantee rental uplifts over the medium-long term, lender sentiment will inevitably be affected. 

For overseas investors and funders, the UK is fairly unique in providing rental certainty through UORRs. It’s what has made this market a haven for foreign capital. If assets are down-valued, pension funds could move money out of bricks and mortar, favouring the safer returns offered by bonds and gilts. 

And just how much protection would the removal of UORRs really provide for tenants? Could landlords be tempted to reduce rent free periods or seek a premium rent from day one, for example, to compensate for the lack of rental certainty? Pegging rents to the Retail Price Index or the Consumer Price Index also has its pitfalls, if there is a short-term hike in inflation, for instance. There are no guarantees occupiers will be any better off.

In addition, and with the ban applying to new leases only, we could see the emergence of a two- tier rental market with the seemingly less onerous upward and downward rent review clause attracting a premium rent at review in a rising market.

At a time when the government is looking to grow the economy, the consequences of removing UORRs needs to be fully examined. The property sector must engage with the government as the legislation passes through parliament, to ensure the industry’s case is heard. There is a real danger that development and investment in commercial property will stall as a result. 

Mark Johnson is a founder of MK2 Real Estate and jointly manages the firm’s investment team. Paul Rixon is a registered valuer and heads MK2’s lease consultancy team.