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News - 3 September 2004

Landlords squeal at ODPM proposals on “upward only” clause

The UK’s largest landlord – Land Securities – has condemned the ODPM’s survey of business opinion on the scrapping of the hated “upward only” rent review clause common in most commercial leases.

This is the clause that states that rents can only go up, never down regardless of trading conditions, economic downturn or degeneration of a trading area. CEO of Land Securities, Francis Salway suggested at a CBI sponsored seminar on the subject that tenants in new developments would be hard hit by the possibility of legislation to impose open-market rent reviews. His argument is based on the fact that developers will not be able to guarantee rental levels to lenders and consequently they will have to pay higher rates of interest, which will inflate the cost of new developments and initial asking rents.

Similarly the owners of shopping malls claim that their commitment to marketing and servicing will suffer if rental income declines when the economy enters a downturn and open-market rents would result in lower rack rents.

The argument of the large property investor is one end of the spectrum of commercial leases. At the other end we have the independent retailer – a species that could become endangered in the not too distant future – for whom an upward only rent review is often the difference between survival and failure. The problem with the current review system is that it relies upon previous reviews or lease renewals of other premises in the same street to provide evidence for the next rent review. But if the rent can never go down (“upward only”), the very best that a shopkeeper can expect, even in the direst of economic recessions, is for the rent to remain the same. In the depths of a recession it is not uncommon for shops to go out of business because “ rental evidence” is cited from a year previously when the economy was robust. If there isn’t anything to refute it, it sticks and more businesses are saddled with rents they can’t meet because of declining turnover. Eventually enough shops stand vacant for long enough for private landlords to panic and reduce their asking rent. Gradually new tenants are attracted in but, ironically those that survived the recession often by the skin of their teeth, now have to compete with other shopkeepers in the same street who are enjoying much reduced rents while theirs remained the same because of the “upward only” clause.

The risk in retail should be shared by landlord and tenant. This way long-term relationships are established and some measure of stability is conferred upon retail areas. This new round of consultation has been sparked by an almost total failure of the industry to introduce a voluntary scrapping of the clause. The Office of the Deputy Prime Minister has not yet decided whether to proceed with the proposals to end upward only rent reviews. It will be a test of his mettle to see if he will take on some of the most powerful property owners in the country.

For details of the ODPM consultation click on the link below or look in Consultation Opportunities on the right hand side of the Home Page.

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