What the ban on upwards-only rent reviews means for the retail sector

The fact that there has been no discernible response from the retail market, either from industry bodies or the companies themselves, endorses our observations that UORRs are already viewed as a largely irrelevant anachronism on the high street.

Seemingly unrelated but very timely, the recent decision of British Land and aberdeen to sue John Lewis over allegedly unpaid click & collect revenue as part of a turnover lease clause signed in 1979 is clear evidence of a market that has long moved on from a one-dimensional sphere of UORRs into something infinitely more complex – but equally contentious.

Retail has been singled out as one of the driving forces behind scrapping UORRs and, by implicit extension, one of the key beneficiaries of the legislation. If the latter notion is questionable, the former is significantly time-lagging. All the same, the retail market provides an interesting blueprint as to what the landlord–tenant relationship may look like in a post UORR world.

Historically, retail became synonymous with UORRs, retail occupiers continually calling them out as an inequitable and unfair constraint to them doing business. The balance of power lay firmly with landlords; retailers were at the mercy of an ever-spiralling cost base over which they had very limited control. There was a constant chorus of discontent from retailers in opposition to long (25 year) leases, subject to UORR.

The operative word here is ‘historically’. The retail market has evolved significantly over the last 20 years, as much by default as by design, with the market undergoing deep-seated structural change. The relationship between landlords and retail tenants has moved on considerably as part of this process of change, as have lease agreements.

In essence, UORRs are a legacy issue in retail, rather than the status quo. Very few leases agreed in recent years or going forward contain UORR obligations. Tenants have sought far greater flexibility generally, and in the midst of this, more rigid bastions such as UORRs have gradually fallen by the wayside. 

In this regard, the changes in legislation are likely to have minimal impact on the retail sector, insofar as they only apply to new leases, rather than existing ones. So, any notion that the change in legislation will benefit the retail sector and ‘breathe new life into the high street’ is woefully misguided. Twenty years ago, it would have made a positive difference, but not now. Government intervention is late - and now needless.

Any lobbying from the retail sector now focuses squarely on business rate reform, rather than the ‘old news’ of UORR. Any expectation that this will stymie rental growth and bring high street rents to a more affordable level rides roughshod over what has happened over the last 20 years, which have already seen massive rebasing in rents (by -8% between 2008 and 2013 and by a further -22% between 2017 – 2022).

In short, retail has moved on significantly from rigid UORR leases. They have been replaced by a multitude of other options, bringing a suite of alternatives into

play. In general, leases have reduced significantly in length (25 years to 10 or just five), with multiple break options (landlord/tenant/mutual). Nearly all leases on unit shops these days are five year leases with no review. 10 year leases typically have a break at five, effectively allowing the tenant to reset the rent and negate the simultaneous review. Landlords and tenants will invariably agree fixed or index-linked uplifts anyway, rather than open market reviews.

There are also a whole host of potential variations of terms that go beyond lease length, e.g. turnover rents or TOC (total operating costs) deals, bringing negotiations not just on rent but service charges, business rates and even insurance into play - tenants effectively recognising that there are many more occupational cost levers to pull than just negotiating on rent.

If retail is a blueprint for other sectors, the message is that landlord–tenant relationships will be less rigid and the former will see less certainty than they may have become accustomed to. More uncertainty, far more complexity, but the trade off is far greater flexibility and transparency - and that may ultimately be mutually beneficial for both landlords and tenants.

Twenty years ago, retail lobbied hard against UORR leases. Hopefully, we won’t have to wait 20 years for the reform to business rates the retail sector is clamouring for now – and so desperately needs. If any Government is predisposed to bringing about positive change to leasing structures and easing burdens on high street retailers, business rate reform should surely be the obvious place to start?