Is this the end of upwards only rent reviews? If so, is this good or bad news for GPs?
The Government has announced significant plans to ban upwards only rent reviews in commercial leases.
This may have flown under the radar for some given that these, potentially seismic, changes are not to be found in a new Landlord and Tenant Bill but appear towards the end of the English Devolution and Community Empowerment Bill.
In this article, Bryn Morgan, premises partner in our primary care team, considers these changes and how they may impact general practice and future development of the primary care estate.
What are upward only rent reviews?
Upwards only rent reviews have been a staple of the commercial property market for many years without government intervention. A typical arrangement may provide for rent reviews every five years, on the basis that the new rent will be the higher of (a) the market rent at that time and (b) the rent payable immediately before the review.
By way of example, the rent could be set at £200,000 per annum but, if the rental market has fallen by the time of the next review, the same premises may then only demand a rent of £190,000. In this scenario, the Landlord risks losing £10,000 of annual income and an upwards only rent review would avert this by keeping the rent at £200,000.
There are of course arguments that such arrangements are unfair to tenants, who see their costs increase in a rising rental market but do not benefit from better deals available to other tenants in a falling market. However, a counter argument is that upwards only reviews provide certainty for landlords, developers and their funders which provides stability for investment and property development.
What does the Bill say?
Broadly the Bill seeks to override upwards only rent review provisions in new commercial leases, whether these be linked to market rent, inflation or tenant’s turnover.
The changes would not affect the terms of leases entered before the Bill comes into law but would apply to new commercial leases and, also, renewals of leases under the Landlord and Tenant Act 1954.
How does this affect GPs and the development of the new surgery premises?
You may be forgiven for asking what impact could this have on GPs who usually receive rent reimbursement for their NHS surgery premises? It is certainly not a change of law that is directed at primary care and indeed the impetus appears to be a desire by the Government to help small business and to end “the blight of vacant high streets”.
However, the proposed changes are not limited to retail and high streets but would apply to any commercial lease, including those entered by GPs of surgery premises. GP premises funding is already subject to regulation under The National Health Service (General Medical Services – Premises Costs) Directions 2024 which, in a well negotiated lease, should be reflected in the rent review provisions.
A GP friendly lease will typically provide the Landlord with control over whether to commence a rent review. If it chooses to review, the new rent is often capped at the level approved by the ICB, on the basis of a value for money report from the District Valuer, subject to an appeals process.
This means that in a falling rental market, the Landlord can simply decide not to review and, in doing so, preserve the existing rent. However, the Bill as drafted contains an anti-avoidance measure which would give the Tenant the right to trigger a review regardless of the terms of the lease.
These changes are likely to generate concern amongst developers and funders of new primary care estate. Under many schemes, the development costs (eg of the land, planning and construction) are often underpinned by the GPs taking on a lengthy lease commitment (often between 20-25 years) with the upwards only rental income backed by the system of rent reimbursement.
What we do not know is how the market would react to a ban on upwards only rent reviews. We could see higher rents demanded to secure the financial viability of new surgery schemes, which would create further pressure on limited NHS resources. Some investors, already affected by rises in construction costs and interest rates, may be put off funding schemes without security of a base line return over the full duration of the lease. No doubt the market would adapt but how and how quickly remains to be seen.
What next?
The Bill has just begun its way through Parliament and it will take potentially 6 to 12 months before it becomes law. In the meantime, no doubt there will be significant debate and lobbying on the proposed changes and their potential impact across the whole of the commercial property market.
GP surgeries and their development is a niche part of this market but one which is not immune to such a significant change in the law and that could suffer niche effects. It is important that Parliament considers this impact, particularly when calls for bigger and faster investment into an ageing primary care estate continue to grow louder.