Rent showdown

By BEN LAURANCE FOR MAILONLINE
Updated:

 

A HUGE shift of power away from owners of commercial properties towards the businesses renting them could be triggered by this week's Budget. The move would force landlords to offer more flexible leases and it could spell the demise of upward-only rent reviews.

Financial Secretary to the Treasury Ruth Kelly said at the time of last year's Budget that the Government was worried about the stranglehold that leases impose on many business tenants.

'Inflexible lease terms can restrain business growth and expose firms to undue risk,' she said.

Kelly announced that the Government had commissioned a study to see if a voluntary code of conduct was giving sufficient protection to tenants.

The first results from the investigation were due by the end of last year, but still they have not been published.

Whitehall insiders now believe that the Treasury has concluded that relying on a voluntary code to ensure that leases are flexible and fair has failed to have any significant impact. There has been a code of practice since 1995 and the most recent version was drafted less than two years ago.

The property industry appears to have accepted that a consultation process will be launched that will spell out options for reform and could mark a first step towards legislation.

More than 98% of commercial leases have upward-only rent review clauses. With a typical 15-year lease on a shop to a retailer, the rent comes up for renegotiation after five years and again after ten. The lease allows for the rent to go up if the property market as a whole has risen. But even if the market has slumped, the shop rent is never cut.

Chris Robson, head of property for McDonald's in Britain and a vocal critic of the present lease arrangements, says: 'I have always been sceptical about whether this lease code would work.

'From McDonald's experience, I see absolutely no evidence of a change in the market as a result of the lease code. If we at McDonald's can't get flexibility, then it must be even more difficult for smaller independent occupiers.'

The British Retail Consortium also believes the voluntary code has failed to shift the balance of power away from property companies.

Rachel Burns, the consortium's assistant policy director, says: 'Unless the interim report shows positive evidence that the market has changed, I don't see what would be gained from waiting before starting the consultation process. Time is running out for the voluntary approach.'

As well as seeking changes on rent review clauses, the consortium wants tenants to have greater freedom to cut short a lease or sub-let the property to another retailer.

The issue of lease flexibility falls within the remit of the Office of the Deputy Prime Minister, but the Treasury now appears to be taking a more pro-active approach.

Ian Fletcher, director of commercial policy for the British Property Federation, says: 'There are good reasons why upward-only rent reviews are a good thing. It makes it easier and cheaper when arranging finance, for example.

'And over the past two years, there have been some very short leases offered.'

• Digby Jones, director-general of the CBI, is urging the Government not to use the coming Budget to remove the cap on business rates that has pegged them to inflation.

'The Chancellor must not allow business rates to change,' Jones told Financial Mail. 'Such a move would kill off enterprise. This is the Government's chance to reach out to small businesses.'

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