Lessons the UK might glean from Ireland's prohibition on escalating rental renewals
The ban on upwards-only rent review clauses in commercial leases, introduced in Ireland in 2010, has provided useful lessons for the UK as it considers a similar move. The Irish experience suggests that the market can adapt to the removal of upwards-only reviews without catastrophic effects, but the UK may see shifts in initial rent pricing, lease structuring, and negotiation dynamics that could have mixed effects on tenants and landlords.
In Ireland, the removal of upwards-only clauses has not caused severe disruption. The market adapted without the drastic instability some predicted. This experience suggests that fears of significant market turmoil from banning upwards-only reviews may be overstated.
In contrast, the UK government is currently proposing a similar ban on upwards-only rent reviews for business tenancies, to be inserted into the Landlord and Tenant Act 1954. Key points and potential UK implications include:
- Rent can now move up or down at review, removing the previous security landlords had that rents would never decrease.
- This may prompt landlords to increase initial rents or use fixed/stepped rent increases to hedge against downward reviews, potentially leading to higher starting rents that could disadvantage tenants despite the ban’s intention to protect them.
- The ban is non-retrospective; it applies to new leases or renewals after the law takes effect, not existing leases.
- The ban covers rent reviews based on open market rent, inflation indexing, or turnover rents, but not fixed stepped increases pre-agreed in a lease.
- It may change lease structures, with landlords possibly offering shorter leases without security of tenure to manage risk.
- The policy has been controversial due to lack of prior consultation, with industry bodies expressing concern over sudden interference in commercial lease arrangements.
The Irish upwards-only ban did not result in a significant two-tier market between leases granted before and after the 2010 ban. However, the UK may see different outcomes due to differences in market conditions and investor adaptability. The Irish markets moved on, and 'green clauses' have since become a more important consideration in the marketplace.
International investors in the Irish market were already used to flexible lease arrangements, which may have facilitated the smooth transition. In contrast, the UK markets may require more time to adapt, given the prevalence of upwards-only rent reviews in the past.
The growth of online shopping and the impact of the pandemic have radically changed commercial property markets, prompting the review of the '54 Act. The ban on upward-only rent review clauses is a key focus of the Law Commission's review of the '54 Act.
In conclusion, the Irish experience offers valuable insights into the potential impacts of a ban on upwards-only rent review clauses in the UK. While the market may adapt, there could be shifts in initial rent pricing, lease structuring, and negotiation dynamics that could have mixed effects on tenants and landlords. The ban aims to make rent reviews fairer and market-reflective, but risks unintended consequences like higher base rents or more rigid lease terms as landlords seek to protect income.
- The Irish market has demonstrated that the removal of upwards-only rent review clauses can coexist with elements of the finance, technology, and education-and-self-development sectors, such as the growth of online shopping and the impact of the pandemic, resulting in a change in the commercial property market.
- The UK government's proposal to ban upwards-only rent reviews for business tenancies could potentially influence the lifestyle choices of tenants and landlords, as changes in rent pricing, lease structuring, and negotiation dynamics may lead to varying outcomes for both parties.
