The second reading of the English Devolution & Community Empowerment Bill is taking place in Parliament, with experts saying its contentious proposals to ban upward-only rent reviews is already holding back investment in UK real estate.
The second reading has been introduced by Deputy Prime Minister and Housing, Communities and Local Government Secretary Angela Rayner. This afternoon she has confirmed the Bill will ban the "unfair practice of upward-only rent reviews".
The government took the market by surprise on 10 July when it announced plans to ban upward-only rent reviews for commercial leases as part of the Bill. Upward-only reviews are common in UK commercial leases and mean the rent can only increase or stay the same at review.
The government said the change will not affect existing contracts but would ban the introduction of upward-only clauses in new agreements. Landlords would need to choose between agreeing fixed rents or introducing a review clause that allows rents to fall as well as go up.
Following the ban, if a UORR clause is in a new or renewal commercial lease, the requirement for rent not to decrease will be unenforceable. The government says: "The new rent will be determined by whatever methodology is specified in the lease, for example in line with changes to the retail price index. The new rent may be higher, lower or the same as the previous rent."
Responding to the reading of the Bill, James Cleverley, the Conservative Party Shadow Secretary for Housing, Communities and Local Communities described it as a "superficially attractive set of proposals", but asked "what actual assessment has been made on the effect on valuation of commercial property, including properties that are owned by the Local Authorities themselves?"
Cleverly added: "If [Rayner] is confident it is such a good idea, why was there no scrutiny, consultation of those proposals. Do ministers really think that that is best practice when creating a stable investment environment and confidence in people spending money in high street properties, commercial properties that keep our communities alive."
Alison Taylor, a former managing director for Avison Young in Glasgow, who is now Labour's MP for Paisley and Renfrewshire North, stood up to call for an amendment to the clause to ensure it is focused where it is needed most.
Taylor said the proposal to implement a universal ban creates uncertainty for the funding of property development. She also raised the concern it would apply to all commercial properties and not just high street retail.
"My concern is that this legislation would apply to all commercial properties, not just high street retail or small business properties. As currently drafted, the Government proposals would impact not just on high street retail but all commercial sectors as well. I know that all members will intuitively feel that UORRs are unfair, but this is a simplistic view. One of the earliest pioneers of UORRs was the Church of England Church Commissioners. They did this to ensure certainty of income to the Church and remain one of the largest landowners in the country.
"My concern is that this well-intended focus on the genuine problems of small businesses and the high street could have unintended consequences for the broader property development sector. I encourage an amendment to this clause to ensure it focuses where it is needed most, without impacting on all sectors of property."
Melanie Leech, chief executive, British Property Federation said: “It was good to see a number of MPs raise the issue of the proposed ban on Upward Only Rent Reviews during the Second Reading of this Bill. The way the announcement was done – without warning or consultation – has spooked investors, particularly international investors, and hurt the UK’s reputation for stable policymaking. The measure won’t even affect many retail leases as they are too short to include these rent review clauses, but will instead affect sectors like offices and logistics, and the ability of long-term investors to invest in modern workplaces. We will continue to raise this issue with MPs and Peers as the Bill progresses.”
Ahead of the second reading, the Local Government Association, which acts as the voice of local government, said it is helpful that existing leases, including those with council landlords, will continue to operate under their existing terms, including any rent review clauses.
But it warned that while a ban on upward-only rent reviews for new leases may appear to help keep rents down and therefore be more attractive to businesses, it is concerned about potentially unintended consequences of the long-term viability and attractiveness to investors and developers. This includes for councils, many of which are significant landlords in their high streets.
It has called on the government before introducing any new legislation, to consult widely and collect evidence on: what are the determinants of empty high street shops and the extent that upward-only rent reviews are a significant factor; and the impact that a ban on such reviews may have on future viability and attractiveness for investors.
The British Property Federation says the proposals are unlikely to achieve the aim of helping high street retail and hospitality as shops are more likely to have shorter leases without any rent review clauses.
It warns a ban would negatively affect capital available to invest in modern offices, logistics and industrial facilities. Also, it said the initial decision to announce this without warning or consultation has "harmed investor sentiment and willingness to invest in UK property".
Leona Ahmed, real estate partner at law firm Taylor Wessing, agrees: "We are seeing a big increase in enquiries from investors on the government's proposed introduction of a ban on upwards-only rent review clauses in the English Devolution and Community Empowerment Bill, for which there was no prior indications or warnings.
"The government is trying to address the issue of declining high streets, where tenants opening shops in these areas are no longer benefiting from consistent footfall. As a result, commercial rents can become unsustainable for small businesses if they face potential increases that are not known at the outset. But there are alternative solutions to this issue besides banning upwards-only rent reviews. A blanket ban on upwards-only rent review clauses risks making commercial property investment less attractive to investors and lenders. Why would you buy something if you're never going to get an uplift in the income and therefore increase your returns?"
Ahmed says that while the ban suggests that it will apply broadly to "new commercial leases", sectors such as hotels and purpose-built student accommodation may be less affected due to the nature of how rents are structured in these asset types. "For example, hotel leases often involve management agreements with an operator, so the trend has been away from leases, and have different metrics for the way in which rent is calculated so the reality is this asset class is unlikely to be impacted and PBSA leases typically include fixed rents or stepped increases linked to CPI."
Ahmed says that most importantly the government may not fully appreciate the signal this sends to domestic and international investors.
"The sudden announcement, without consultation, undermines confidence in the stability and predictability of the UK real estate market. They didn’t properly stress test this with the industry. Engaging with the BPF and other institutional landlords would have provided a more balanced view of the market impact. The problem is, even if the proposal is dropped, the reputational damage may already be done – against the backdrop of a series of measures affecting the sector.
"If this initiative, which was introduced with no prior warning, is ultimately not enacted, the government risks creating a climate of uncertainty. Investors may begin to question what other interventions might follow or lose trust in the UK’s regulatory environment. This is not unlike the sentiment shift seen in the US market following abrupt policy changes and the 'on/off' nature of their implementation."
The wider Devolution Bill proposals can be read here.
Deputy Prime Minister Angela Rayner said the Bill would "help rebuild the foundations of a good life for all communities by ... handing back power to local people with skin in the game".
The BPF describes the Bill as introducing an opportunity to create a requirement on strategic authorities, through their Spatial Development Strategies, to plan for jobs as well as homes, to ensure that balanced sustainable communities are created. "We believe the crucial role of SDSs in planning for employment land, particularly logistics, needs stronger recognition as the government’s devolution agenda takes shape and the Bill should be amended accordingly."
The BPF says it does support the objective of simplifying and standardising local government structures in England.
"Larger units of governance that can exercise greater powers over planning, borrowing and regeneration will be more conducive to creating investable propositions for long term investors in places. However, in those areas where local government is being reorganised, we are concerned that the ability of local planning departments to process applications efficiently may be compromised."
The BPF warns that any further devolution of Homes England's functions should be done with an eye to the implications for providers of affordable housing.
"For registered providers of affordable housing that operate on a national scale, existing divergence in rules on grant bids and ongoing compliance outside/within London can create complexity and burden for operators."
This story will be updated with any important objections and comments as the Bill is presented.