Will legal reform boost Commercial Real Estate?

The rate of spiralling inflation is starting to ease and global analysts are reporting the first positive investment returns in Commercial property since almost a year ago.

While there is still uncertainty, financial resilience seems to be the keyword with optimism expressed from recent reports from JP Morgan, Deloitte and MSCI.

Some legislative changes are currently proposed that may help CRE on an upward trajectory by giving business tenants greater flexibility in their lease agreements along with the potential for a more realistic and fairer rating system. What will be the impact?

The Landlord and Tenant Act 1954 has been criticised for being inflexible, bureaucratic and out of date, causing extra costs and delays for both landlords and tenants."
Rob Flint, Commercial Surveyor, Norwich.

Review of the Landlord and Tenant Act 1954

The Law Commission has pledged a review of the outdated Landlord and Tenant Act 1954 with the aim of publishing a consultation paper by this December. Then there are the separate proposals to reform the business rates system with the Non-Domestic Rating Bill, currently at its second reading in the House of Commons.

Rob Flint, Commercial Surveyor, based in our Norwich office, who specialises in valuations, rent reviews and lease renewals, said: "This is a significant development for both Commercial landlords and tenants in the UK.

"The Act has been in place for over half a century and gives businesses the right to acquire a new lease of their premises after their existing one has run out, otherwise known as security of tenure. However, it has been criticised for being inflexible, bureaucratic, and out of date, causing extra costs and delays for both landlords and tenants.

"This review is particularly timely given the recent disruptions to the Commercial property market caused by the pandemic and the shift towards online retail.

"The review aims to develop a modern legal framework that is widely used rather than opted out of, and that helps businesses to grow and communities to thrive. This will give landlords and tenants greater flexibility to adapt their leases to changing market conditions and should lead to more efficient use of Commercial space.

"For Commercial landlords, the review could result in a more streamlined process for leasing their properties, reducing the administrative burden and costs associated with renewing leases. This could also lead to a reduction in void periods between leases, increasing the occupancy rate and improving the financial performance of the property.

"For tenants, a more modern legal framework could give them greater security and flexibility in their leases, allowing them to adapt to changing market conditions and invest in their businesses with greater confidence. 

"Overall, the review of the Landlord and Tenant Act 1954 is a positive development for both Commercial landlords and tenants in the UK, as it has the potential to create a more efficient and flexible Commercial property market that supports business growth and community development."

Nigel Hodge, Partner, Commercial, also based in Norwich, also deals with service charges, rent reviews and lease renewal advice for Commercial property. He acts for freeholders and resident management companies with regards to the management and service charge for Residential property.

"The Act reflects a time when the standard commercial lease was 25 years...tenants are looking for shorter leases with flexibility because of market uncertainty since 2020."
Nigel Hodge, Partner, Commercial, Norwich.

He said: "The Act reflects a time when the standard Commercial lease was 25 years. Leaseholders had the ability to transfer/assign their lease but this still retained liabilities for all previous tenants under the original lease until the Landlord and Tenant (Covenants) Act 1995.

"Tenants are looking for shorter leases with flexibility because of market uncertainty since 2020 and this is the case with now with most categories of properties.

"As commerce has evolved, leases have become shorter with 10 year leases including tenant breaks becoming the norm.

"Now though and even on larger Commercial properties where fit out costs are higher, tenants are looking for flexibility in leases and five year leases with three year tenant breaks are becoming more common.

"A more streamlined process would be beneficial as lease renewals have effectively taken the place of rent reviews but tend to have greater complexity and administration to them.

Marie Gutteridge, Commercial Surveyor, based in our Lincoln office, in Doddington Road, who also specialises in lease renewals, rent reviews and all aspects of Commercial property leases, said: "If the outcome of the review of the Landlord and Tenant Act is to remove the security of occupation, this may impact on tenants' willingness to invest in premises for fear of not being able to remain when their lease comes up for renewal.

"However, I agree with Nigel that, in an ever changing world and market, a review of a legislation which was set when leases of 25 years was the standard norm is perhaps timely to keep in line with changes in property particularly post COVID."

Business Rates Reform

If the rates reform results in lower rates sooner for businesses, this has to be good news but of course the reverse will be in a market where rents are increasing."
Marie Gutteridge, Commercial Surveyor, Lincoln.

Rob Flint: "The Non-Domestic Rating Bill proposes incentivised property improvements and more frequent revaluations reflecting current market conditions.

"The measures would review and reform business rates in England, making them fairer with reassessments every three years instead of the current five, meaning those with falling values would see their bills drop sooner.

"All this is a hugely positive development with the potential to create a more efficient and flexibile CRE that supports business growth and community development."

Marie Gutteridge: "If the rates reform results in lower rates sooner for businesses, this has to be good news but of course the reverse will be in a market where rents are increasing and an increase in rates will come sooner if they are reviewed every three years.

"The issue businesses have is the additional burden of rates and therefore thresholds, exemptions and rate relief are where the focus should be."

If you are a Commercial investor, landlord or tenant or who needs advice, please contact Rob Flint and Nigel Hodge in our Norwich office on 01603 629871 or Marie Gutteridge in our Lincoln Doddington Road office on 01522 457173.