Upward only rent review and RPI
71. The Trade and Industry Committee recommended
that upward only rent review (UORR) clauses should be abolished.
This appears to be the case for new leases, and the pubcos have
assured us that where such clauses remain in existing leases,
they will not be enforced. However the Fair Pint Campaign told
us that UORR clauses have simply been replaced by annual Retail
Price Index (RPI) rental increases.
This was denied by the pubcos. Enterprise told us:
completely contrary to the evidence that was given
by an earlier witness suggesting that we try and negotiate wider
conditions in return for removing [UORR clauses], it is absolutely
not the case.
However in our survey 27% of lessees told us that
RPI clauses did in fact replace their UORR clause
and 17 of these were Enterprise lessees. In addition ALMR
have told us that:
where downward rent reviews are agreed on non-RPI
leases following negotiation, the pubco has asked for the terms
of the lease to be changed to provide for an annual increase in
line with RPI, even though the Code of Practice is silent on that
point. In some cases, this has nullified the benefit of a rent
Once again, the evidence given to the Committee from
the pubcos does not quite tally with the information we received
from other sources.
72. We have also been told that in some leases
it states that if the index decreases rent will remain the same
and not decrease. David Morgan said:
In the Enterprise Inns Retail Partnership Agreement
which is now common throughout the entire estate and is the basis
of lease agreements in the generality, Schedule 3 contained within
that agreement, deals with rent reviews. Schedule 3, Section
1 "Annual Reviews" states in paragraph 1.1 that the
rent will be increased by the same percentage as the increase
in the Retail Price Index over the 12 month period since the previous
annual review date. In paragraph 1.3, it clearly states: "if
the index has decreased during the relevant 12 month period, the
rent will remain the same". Quite simply, the rent is not
capable of a downwards review until the fifth year.
However Enterprise said in evidence
All new ETI agreements state that rents will be "adjusted"
in line with RPI, whether upwards or downwards, and in the current
period of rapidly falling inflation this will serve to limit,
or even remove, annual increases for licensees with indexed agreements.
Punch has undertaken to reduce rents if RPI decreases.
73. Enterprise defended the indexation of rent
saying that indexation substantially lessened the likelihood of
a significant change to the rent at the time of review, as rent
was adjusted to take account of inflation during the period between
cyclical reviews. In addition Enterprise said that many people
actually preferred the "smoothing" effect of indexation
between rent reviews.
Greene King agreed saying:
The RPI adjustment is seen by tenants as preferential
as it enables better financial planning over the term as opposed
to a potential 'hit' at review.
74. In contrast, opponents of RPI adjustments
argued that they meant, on a compounded basis, rent increased
by approximately 25% over the five-year period between rent reviews.
ALMR highlighted findings by Fleurets which showed that indexing
had increased the pubcos share of the divisible balance from 50%
to a 55-60% share over a five-year period.
75. Our witnesses are divided
over the merits of annual RPI rental adjustments. The pubcos claim
this prevents lessees having to deal with a large increase in
the five yearly rent review; lessees consider it a way of gradually
increasing pubcos' share of the profits, and of reducing pubcos'
share of the risk. The evidence is finely balanced, and we are
not the appropriate body to resolve the question. Two things are
clear; firstly, pubcos' greater bargaining power has enabled them
in at least some cases to insist that upward only rent reviews
are replaced by annual rental adjustments in line with RPI; secondly,
if rental is linked to RPI it should be done in a way which enables
reductions when appropriate.