Labour’s proposed changes to rental laws ‘set to cost commercial property owners £11bn’

Potential Impact of Ending Upward-Only Rent Clauses

The government’s intention to eliminate “upward-only” rent clauses is expected to give retailers more leverage to negotiate lower rents, according to Mike Kemp.

Concerns Over Property Value Decline

Labour’s initiative to restrict rental charges imposed by commercial landlords could result in a reduction of up to £11 billion in the value of retail and office properties, warns former Treasury economist Martin Beck.

Beck, who served at the Treasury from 2001 to 2012 and is now chief economist at WPI Strategy, cautions that the proposed overhaul of rental regulations may trigger a 15% drop in property prices, leading to substantial financial losses for owners of commercial real estate.

Government’s Proposed Changes

The planned reforms would abolish lease agreements that contain “upward-only” rent clauses, which currently permit landlords to increase or maintain rent levels but never reduce them.

Officials believe that removing these clauses will help struggling high-street businesses secure rent reductions during lease renewals.

Expert Warnings and Industry Reaction

However, Beck argues that while the government’s aim to shield small businesses from escalating fixed costs is understandable, the policy’s broad application could have unintended negative consequences.

He notes, “By imposing a universal ban on upward-only rent reviews for all commercial properties, the policy could deter the investment needed for town centre revitalisation, data centres, and mixed-use developments.”

Such a move, Beck warns, could significantly reduce property values, diminish pension fund returns, and jeopardise the financial viability of many regeneration projects.

Background on Upward-Only Rent Reviews

For decades, upward-only rent reviews have been standard practice in the UK property market. These clauses protect landlords from declining property values or economic downturns by ensuring rents can only rise or remain steady, never decrease. However, they are often criticised for forcing tenants to pay above-market rates.

Industry Caught Off Guard

The property sector was surprised when the government included a ban on upward-only rent clauses in its English devolution bill last year, without prior consultation. This move sparked significant backlash from industry stakeholders.

Beck also highlights that the proposed changes could negatively affect pension funds, which collectively hold around £96 billion in commercial property, as falling property values would erode their investments.

He adds that the Prime Minister’s goal of stimulating economic growth through a surge in construction could be undermined, as the reforms might threaten major projects like data centres and urban regeneration schemes.

Traditionally, pension funds, local governments, and other investors support these projects with the expectation of steady, long-term rental income growth to justify their investments.

Historical Context and Government Response

Back in 2004, Tony Blair’s administration considered banning upward-only rent reviews but ultimately decided against it.

A spokesperson for the Ministry of Housing, Communities and Local Government stated, “Upward-only rent clauses make it harder for small businesses to thrive on our high streets and leave them vulnerable to economic shocks.”

They added, “Our English Devolution and Community Empowerment Bill will eliminate these outdated clauses in new and renewed leases, aiming to create more job opportunities and stimulate economic growth.”