News

Upward-only review deal clinched

News

Estates Gazette

03 November 2001

Landlord and tenant groups reach agreement advocating reviews to open-market rents
Andrea Cockram

A compromise between landlord and tenant groups over upward-only rent reviews was reached this week.

A new code of practice enshrining an agreement that landlords will offer priced alternatives to upward-only reviews was finally agreed on Tuesday following government threats to outlaw the practice.

Regeneration minister Sally Keeble said that the agreement reached by the Commercial Leases Joint Group was “a real achievement”.

The group’s main advice is: “Rent reviews should generally be to open-market rent. Wherever possible, landlords should offer alternatives that are priced on a risk-adjusted basis including alternatives to upward-only reviews.”

The agreement applies to new leases. Occupiers have agreed that any downward review will be no lower than the initial rent.

The president of the British Property Federation, Jeremy Newsum of Grosvenor, said: “This is a very good result for property owners and occupiers. I think we will find that the days of the ‘standard institutional lease’ are numbered.”

British Land chairman John Ritblat endorsed the code, but said: “The property industry is built on tens of billions of pounds of funding from pension funds. I don’t think the government understands the impact of removing the certainty which forms the base of this investment.”

The code calls for “those funding property to make every effort to avoid imposing restrictions”.

But Helical Bar managing director Michael Slade said: “It is na9ve in the extreme to expect banks and funds to avoid putting restrictions on the type of rent review landlords may offer. There is nothing to stop landlords setting a high initial rent in order to safeguard our income, and we will do so.”

Dr Karen Sieracki, of property research firm KASPAR Associates, said: “Institutions will need to test the scenarios emanating from the likely possibilities in the lease, and this should be priced in accordingly. My concern is that valuers will be excessively cautious.”

Peter Damesick, head of research at IRE, said: “What this means is that landlords will have to completely change their leasing strategies. Instead of reaching for the top-shelf to get the same 70-page lease out for each tenant, they will have to offer a menu of leases. It will also mean that tenants will find themselves paying premiums for some types of lease structures.”

The draft code will now be circulated for views. If accepted, it will be widely distributed among occupier groups and come into force next spring.

BPF/IPD 2001 annual lease review

This week the BPF produced its annual lease review showing that this year has seen the sharpest fall in lease length since 1995. Just 6.1% of new leases are now of the once-standard 25-year length. The number of five-year leases has doubled.

Landlord and tenant groups reach agreement advocating reviews to open-market rents Andrea Cockram A compromise between landlord and tenant groups over upward-only rent reviews was reached this week. A new code of practice enshrining an agreement that landlords will offer priced alternatives to upward-only reviews was finally agreed on Tuesday following government threats to outlaw the practice. Regeneration minister Sally Keeble said that the agreement reached by the Commercial Leases Joint Group was “a real achievement”. The group’s main advice is: “Rent reviews should generally be to open-market rent. Wherever possible, landlords should offer alternatives that are priced on a risk-adjusted basis including alternatives to upward-only reviews.” The agreement applies to new leases. Occupiers have agreed that any downward review will be no lower than the initial rent. The president of the British Property Federation, Jeremy Newsum of Grosvenor, said: “This is a very good result for property owners and occupiers. I think we will find that the days of the ‘standard institutional lease’ are numbered.” British Land chairman John Ritblat endorsed the code, but said: “The property industry is built on tens of billions of pounds of funding from pension funds. I don’t think the government understands the impact of removing the certainty which forms the base of this investment.” The code calls for “those funding property to make every effort to avoid imposing restrictions”. But Helical Bar managing director Michael Slade said: “It is na9ve in the extreme to expect banks and funds to avoid putting restrictions on the type of rent review landlords may offer. There is nothing to stop landlords setting a high initial rent in order to safeguard our income, and we will do so.” Dr Karen Sieracki, of property research firm KASPAR Associates, said: “Institutions will need to test the scenarios emanating from the likely possibilities in the lease, and this should be priced in accordingly. My concern is that valuers will be excessively cautious.” Peter Damesick, head of research at IRE, said: “What this means is that landlords will have to completely change their leasing strategies. Instead of reaching for the top-shelf to get the same 70-page lease out for each tenant, they will have to offer a menu of leases. It will also mean that tenants will find themselves paying premiums for some types of lease structures.” The draft code will now be circulated for views. If accepted, it will be widely distributed among occupier groups and come into force next spring. BPF/IPD 2001 annual lease review This week the BPF produced its annual lease review showing that this year has seen the sharpest fall in lease length since 1995. Just 6.1% of new leases are now of the once-standard 25-year length. The number of five-year leases has doubled.