Could ban on upward-only leases come to Scotland?

But after including the proposal as part of the English Devolution and Community Empowerment Bill, on 29 April this year the legislation received royal assent. That does not set a date for when the new laws come into effect, but it is now much more likely they will be implemented in the not-too-distant future.

There are still some important details to be ironed out. For instance, a consultation on how the ban on upwards-only rent reviews affects indexation and the inclusion of caps and collars in leases still needs to be conducted. But what we do know is that it won’t affect existing agreements, which provides a reasonable amount of time for landlords to prepare.

That is particularly true from a Scottish perspective. The legislation only applies to England and Wales, so there is no immediate direct interest for owners of commercial properties north of the Border or tenants thereof.

While there are already important differences between the property regimes north and south of the Border – not least in terms of security of tenure, along with the rating and taxation systems – many in the Scottish property market will be watching what happens in the months ahead. With an election just behind us, it wouldn’t be a surprise to see this proposal form part of wider reforms of commercial leases north of the Border.

If it does surface as an issue, policymakers should bear in mind that the term ‘upwards-only’ is a misnomer. Under these terms, the rent on a property cannot go down – but it can stay the same. In challenging markets, where occupiers are struggling, that is more often than not what is agreed. More relevantly, rents only go up if the market evidence justifies an increase since the lease was taken or the last review took place.

The other important point is that a range of alternative lease arrangements have already emerged to help address rebasing rents. Reviews can track the retail or consumer price indices, fixed uplifts may be set, changes may be aligned with occupier turnover, or agreements can be made on a short-term basis – for five years with a break at three, rather than ten and five. All of these are mechanisms by which landlords can circumvent the new rule, and many retail leases have been agreed on those bases.

While supporting the high street seems to be the primary motivation behind the legislation, the hard reality is that there is simply not the level of demand there once was for retail space. In Scotland, requirements are concentrated on prime locations such as George Street in Edinburgh and Glasgow’s Buchanan Street, with tertiary, high street, and secondary shopping centres struggling.

The situation likely has little to do with landlords or the terms they offer – no property owner wants its asset to sit vacant. In fact, the likelihood is that it will force them to be less generous with capex support for fit-outs through rent-free periods, which may have the unintended consequence of stymieing activity as occupiers need to invest more up front.

Ultimately, there is no credible alternative to the current rent review system that doesn’t already exist. Investors buy, manage, and improve property in the hope of a return – introducing a huge amount of uncertainty on that front only serves to undermine the market, without addressing the underlying issue such a policy would be trying to fix.

Andrew Hill, lease advisory partner, Knight Frank Scotland