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News - 16 April 2004

Hated Upward Only lease clause may go

Most commercial leases since the 1970s have a clause which states that when the rent is reviewed it can only go up, never down. Good news for the landlord but bad news for the tenant but the government looks unfavourably on such clauses and would like to replace them with open market rent reviews.

After a miserable response to a voluntary code of practice implemented two years ago, the ODPM is issuing a consultation document outlining alternatives to this most despised of clauses which forces tenants to soldier on paying high rents even if the economy is on its knees or the location from which they trade has ceased to be attractive.

Leases with this type of clause are unique to the UK and are generally seen as a limit to the flexibility and competitiveness that businesses often need to grow. The Treasury is also concerned about their effect on business but despite concern at the highest levels, the government is unlikely to legislate against them. Any attempt to do so would meet stiff opposition from the powerful property industry lobby even though their record of self-regulation is pitiful.

Small businesses find the clause the most difficult to bear and during the recession of the early 90s many Brighton businesses were driven to the wall by rental levels that were set in the boom years of the late 80s. Independent retail was particularly badly affected and the vacancy rate in the North Laine area rose to nearly 17% at one point. Today is stands at less than 2%. More enlightened landlords granted personal concessions to their tenants and lowered the rent for a short period (usually one year) but the headline rent remained unchanged. So that at the next rent review the upward only clause kicked in with the starting point for negotiation back at the high rent levels set in the late 80s. There was no compulsion for the landlord to offer a personal concession and many refused.

The situation was only resolved when enough businesses had gone bust and property had stood empty for up to eighteen months and private landlords lowered their asking rents and attracted new tenants with new leases. Ironically this then set rental precedents that helped to keep the rents down in the mid 90s when the economy had recovered. This was probably no consolation to these businesses that didn’t get the personal concessions to help them survive the earlier recession and consequently disappeared without a trace.

When the consultation document is published it will apppear on this site.

Read related items on:
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