Upward-Only Rent Review Ban in the UK: Lessons from Ireland

Our Real Estate and Dispute Resolution teams consider the UK Government’s recent proposal to ban upward-only rent reviews in commercial leases. A similar measure was introduced in 2010. Drawing on the Irish market’s experience, we explore how the ban could reshape rent review practices in the UK and look at the practical implications for lease negotiations.

More than 15 years after a similar statutory provision was enacted in Ireland, the UK Government has recently issued a Bill which proposes to ban upward-only rent reviews, or “UORRs”, in commercial leases.

The English Devolution and Community Empowerment Bill has only recently been introduced to the House of Commons and therefore has not yet been subjected to the usual pre-legislative scrutiny. Its eventual passage into law could mark the beginning of a wide-ranging shift in rent review practices in commercial leasing in England and Wales.

There are many provisions of the Bill, as drafted, which largely mirror those contained in Section 132 of the Irish Land and Conveyancing Law Reform Act 2009. The 2009 Act is the Irish statutory equivalent which operates to ban UORRs in commercial leases.

In this article, we examine the impact of the prohibition in Ireland, the market’s response, and consider whether this offers any insight into the likely effect of the forthcoming prohibition in the UK.

Why is the proposal being introduced now?

The UK Government has noted that the aim of the ban is to:

“remove landlord manipulation of the market, with the aim of making commercial leases fairer for tenants, the market more efficient, and ultimately contribute to thriving highstreets and economic growth”.

This closely reflects the sentiment in Ireland at the time of the introduction of section 132 of the 2009 Act. However, in reality the very strong market rent growth in Ireland since 2010 has meant that the real-world effects of the prohibition may have less significance than originally envisaged.

What leases will be covered by the ban?

The explanatory note that accompanies the Bill references that the proposed ban will apply prospectively to all commercial leases to which the Landlord and Tenant Act 1954 applies. This reflects the prospective-only application of section 132 of Ireland’s 2009 Act. That particular application of sector 132 resulted in a situation where there are now two classes of lease:

• Those which were entered into before the ban on UORRs, and
• Those to which the ban applies.

In reality, it may take time for the UK courts to fully determine some less obvious effects of the legislation, such as the issue which arose in Ireland in Reox Holdings Plc v Cullen and anor[1]. In this case, the Irish High Court held that a guarantor who took over responsibility for a lease after the introduction of the ban on UORRs could avail of the ban in the replacement lease. This applied even though the replacement lease mirrored the terms of the original lease, which had been entered into before the ban took effect.

A comparison with scenarios arising following the introduction of the ban on UORRs in Ireland

The introduction of the ban on UORRs in Ireland resulted in the increased use of a number of approaches, outlined below. We understand that some of these approaches will be allowed under the UK Bill, as drafted, while others will be restricted.

Fixed rental increases: These provisions set the passing rent at pre-agreed intervals, which is fixed at the time of entry into the lease. The explanatory note accompanying the Bill suggests these will be enforceable under the Bill as the rent is calculable at the time of entry into the lease.

Landlord-only trigger provisions: These provisions allow for rent reviews to take place only at the request of the landlord. It allows for a scenario where a landlord may choose not to trigger a review if the market conditions have declined, and the rent review clause is linked with prevailing market rents. The explanatory note suggests that under the Bill, any clause which allows only one party to trigger a rent review, usually the landlord, will be unenforceable. In these scenarios, the tenant will also be able to trigger the review by providing the requisite notice to the landlord.

Contracting out of provisions: Under both Irish and UK landlord and tenant law, parties are free to contract out of security of tenure rights under the respective Acts, ie. to agree in the lease documents that the rights do not apply to the lease. However, parties are not allowed to contract out of UORR protections under section 132 of Ireland’s 2009 Act or the proposed UK Bill. The explanatory note suggests that any agreement which seeks to do so will be void.

“Cap and collar” provisions: These provisions have become quite common in Ireland. They essentially allow for upward and downward movement of rent that is payable following a review. The “cap” limits the potential increase, while the “collar” limits the potential decrease. The provisions of the UK Bill do not currently allow for the use of cap and collar clauses. However, the explanatory note does suggest there may be instances where these will be allowed in the future.

Index/turnover linked provisions: These provisions link the rent to be paid in the next period with the change in a given index, usually the Consumer Price Index. The explanatory note suggests that under the Bill, these clauses will be enforceable, but any term which proposes to prevent downwards rent reviews will be unenforceable. Likewise, any provision linked with the tenant’s turnover which seeks to prevent downwards rent reviews will be unenforceable.

“Greater than” provisions: The explanatory note suggests that the Bill will effectively ban “greater than” provisions. These provisions note that when rent is being reviewed, that it will be fixed at the greater of (1) the rent paid before the review, or (2) the rent as adjusted in line with the CPI/turnover of the tenant. According to the Bill’s explanatory note, if provisions like this are included, the method which produces the lower rent will apply.

After 15 years, what effect has 2009 Act had on the Irish market?

In the early years of the ban on UORRs in Ireland, the most obvious effect was the creation of a two-tier rent market, where pre 2010 leases containing UORRs remained operational. However, as the market has subsequently evolved, the use of the various approaches mentioned above have become more common. We will continue to watch, with interest, how the UK legislation progresses and, once introduced, is applied.

For more information and expert advice on commercial disputes, contact a member of our Real Estate and Dispute Resolution team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] Reox Holdings PLC v Cullen & Davidson, [2012] IEHC 299