Upwards-only Rent Review Clauses (Abolition) (Hansard, 18 May 1993)

§ Mr. Richard Ottaway (Croydon, South)
I beg to move, That leave be given to bring in a Bill to abolish upwards-only rent review clauses in commercial leases; and for connected purposes. To the uninitiated, the subject matter of the Bill may sound rather obtuse and dry. However, it is of profound importance to the micro-economies of all our constituencies.
Most commercial and retail properties are leased. The type of commercial lease currently used for most shops and offices has its origins in the mists of time, but leases are now regulated by the Landlord and Tenant Act 1984 and are in a fairly standard form, which is widely used across the country. Apart from the usual protection of the landlord and the tenant, the key features of the English commercial lease are that it runs for anything between 10 and 25 years, and that the rent is set at the outset.
However, as market rents over a long period are hard to predict, leases also provide for a review every three to five years to reflect changes in the market. If rents in the local vicinity have risen, the tenant will have the rent raised at his rent review to reflect the local market conditions.
A rational person would expect rents to fall if the market has fallen. Unfortunately, that is not the case. Since the 1960s, an insidious clause has been introduced into commercial leases, the effect of which is that, at the review, the rent can never go down, but can only go up. It is called an upwards-only rent review clause, and it is in wide use. To anyone with the barest understanding of economics, it is obvious that there is a conflict between the requirements that rents be set at a market level and that they only go upwards.
The House may wonder why the matter has not been brought to its attention before. The answer is simple. Since the clauses were introduced in the 1960s, the market has always been rising, so the inconsistency has never caused a problem until now. Commercial leases currently undergoing review had their last review in the late 1980s, when market rents were at an astronomical high. As my hon. Friend the Member for Tiverton (Mrs. Browning) said in her Adjournment debate last November, demand for commercial properties far exceeded supply in the 1980s. Between 1985 and 1990, rents rocketed by no less than 145 per cent., when the increase in the retail prices index was just 33 per cent.
Likewise, office rents were subject to similar increases. As an illustration, the high water mark of office rents was probably set by Messrs. Saatchi and Saatchi, who rented their headquarters in Berkeley square at £68 per square foot. That set a precedent in the west end, which led to spectacularly high rents in all the surrounding properties. But since then, the, market has plummeted. The current tenants of Saatchi's building are now sub-letting empty space at £35 per square foot and making up the difference out of their own pocket.
Opposition Members may feel that that could not happen to a better company. However, not only the smart offices of Mayfair are affected. Some small shopkeepers in Croydon are going out of business because such high rents are demanded of them. I am sure that all hon. Members have heard similar stories in their constituencies.
159 The quarterly survey of small business in Britain, published by the Small Business Research Trust, states that probably more than 250,000 firms are now locked into agreements which allow no downward flexibility in rent. That fact alone has a significant impact on the economy, and it brings me to my central point: that such clauses should be abolished, for the simple reason that they distort the operation of a free market.
How can a shopkeeper compete with a new tenant who moves into empty property next door paying current low rents, while he is bound by high rents set at the height of the boom in the late 1980s? A market that permits an upward ratchet of prices but does not allow them to fall is a distortion. It cannot be in the national interest.
Some may argue that the Bill is contrary to the right of parties to negotiate freely the terms of their lease. Some may argue that people can sit in the landlord's office for a cosy chat and ask to have the onerous clause omitted. First, anyone who has had to negotiate a commercial lease in recent years will probably say, "Tell that to the Marines." For decades it has been a landlords' market. Any attempt to renegotiate a lease is simply met with the response, "Take it or leave it".
Secondly, we have introduced many laws to ensure the operation of a free market. Those measures include the abolition of retail price maintenance, the restrictive trade practices legislation and the anti-monopoly laws and the establishment of the Monopolies and Mergers Commission. We have given many powers to the Office of Fair Trading. The House has not hesitated to ensure the fair operation of a free market, and should not do so now.
Some people may say that bankers are less likely to lend money for property development if they feel that the rental income will fall, but that is a fallacious argument. There is 160 little point in businesses being driven to bankruptcy by the operation of such clauses when they are manifestly seen not to have worked. A constituent recently came to see me. He ran a small tobacconist shop in Coulsdon and said that he could not continue in business at the present rent when rivals could open up in the empty shops next door at a fraction of the cost—

§ Mr. David Winnick (Walsall, North)
Tories.

§ Mr. Ottaway
The hon. Gentleman says that it is being done by Tories, but it is happening in his constituency as well. Is it in the best interests of the banks, tenants or general public? The excessive rents that many businesses are paying are both inflationary and a cause of continued business failure. They have failed in their sole original function to guarantee rents to the landlords and their bankers.
It is important that we learn valuable lessons from the recession, so that it may lead to a sustained recovery. I believe that the abolition of upwards-only rent review clauses in commercial leases will be beneficial to the future economic health of this country. That is why I seek the leave of the House to introduce the Bill.