Business Rents

Petition – in the House of Commons at 10:41 pm on 10th November 1992.

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Motion made, and Question proposed, That this House do now adjourn.—[Mr. Robert G. Hughes.]

Photo of Angela Browning Angela Browning , Tiverton 10:42 pm, 10th November 1992

The issue that I raise tonight is crucially important to small businesses, not just in my constituency but throughout the United Kingdom. As all hon. Members know, Britain's small businesses provide the very bone marrow of our economy, and the retail sector alone—from the corner shops, which are the kernel of a local community, to the large retail chains—directly employs well over 2 million people. It is without doubt one of the most important engines for economic growth.

Britain's small businesses have suffered a number of powerful body blows in the past few years, not just because of the global recession but because of the uniform business rate—particularly in the south-west—and the sky-high real interest rates needed to bring down inflation. Not one of those factors, however, has had such a devastating impact on our small businesses as the antiquated and deeply unjust system of commercial leasehold that exists in this country, uniquely in the European Community.

The origin of the current crisis—I use the term advisedly—lies in the huge escalation that took place in rents for shops and offices in the late 1980s. As a result of a number of factors, the period between 1985 and 1990 brought huge and, as it subsequently turned out, unsustainable pressure on the demand for what was then a limited resource—prime shopping sites in our high streets. The market mechanism responded accordingly, and as demand increased, rents soared—way above the relatively modest growth in sales that took place even in the boom conditions that existed at the time.

It is a little known fact, but an extraordinarily potent one, that, between 1984 and 1988, retail sales grew by just 25 per cent., while rents rocketed by no less than 60 per cent. Even more dramatic is the escalation of retail rents between 1985 and 1990—up by 145 per cent., when the increase in RPI was just 33 per cent.

That was bad enough even before the recession struck, but when it did, demand for sites vanished and customer spending plummeted, unlikely ever to return to the unsustainable levels that it reached in the late 1980s.

Photo of Mr David Nicholson Mr David Nicholson , Taunton

Does my hon. Friend agree that the uniform business rate, about which she complained earlier, was directly related to the soaring level of rents? UBR and rate valuation are linked to rents.

Photo of Angela Browning Angela Browning , Tiverton

My hon. Friend makes a good point. That has exacerbated the position for small businesses.

While the market mechanism has responded in boom conditions, it has completely failed to respond to recession. In a free and fair market, rents for leasehold premises should have taken account of all the relevant economic factors and fallen accordingly. Instead, they have defied the laws of economic gravity, remaining on top of the outrageously high plateau they had reached in 1990, while the spending power of their customers has been gutted. The market, it appears, is neither free nor fair.

It is a chilling fact that, if sales grow at an annual level of between 0 per cent. and 4 per cent., in line with the Government's target for inflation, it will take up to 15 years for that growth in sales to catch up with the increased rents that most small businesses now pay—provided that there are no further rent increases. Many businesses will not survive for that long.

There are three roots to what is, essentially, economic dyspepsia. I want to draw each of them briefly to the Minister's attention, since urgent reform is, I believe, essential if any sort of future for hundreds of small businesses in my constituency—and, indeed, countrywide—is to be secured.

The first is the iniquitous upwards-only clause—a remnant, long overdue for abolition, from the days of double-digit inflation. At a time when one of the main challenges facing the Government is how to adapt to a new age of falling prices and disinflation, it seems utterly ludicrous that rents, unlike any other commodity, and, as we all know, unlike house prices, can move upwards only and are prevented from falling to reconcile demand with supply—the very core of the market mechanism.

Photo of Anthony Steen Anthony Steen , South Hams

This issue affects small shopkeepers in every high street throughout the country. Does my hon. Friend agree that lawyers should not advise landlords that they have to insist upon using that clause? There is nothing to stop lawyers saying, "Abandon that clause." Instead, lawyers are giving landlords unsound, unhelpful advice.

Photo of Angela Browning Angela Browning , Tiverton

I am grateful to my hon. Friend. I hope that he will forgive me if I press on with some speed, because I have other factors to mention.

Allied to the blatant negation of the market is the second problem—the dominance of the 20-to-25-year institutional lease, which is virtually unknown outside this country. These long leases mean that tenants are unable to escape unjustified rents. In addition, they also prevent small shops from moving from existing premises to new shopping centres or, in the case of offices, to business parks, when local market conditions dictate. As experience in high streets throughout the country, from large cities to small market towns, demonstrates, consumers are departing from traditional shopping areas, leaving those that they used to shop with trapped by hopelessly unprofitable long-term tenancies.

The third root of the present problems is the system that is in place to resolve disputes between landlords and their tenants. When a tenant disputes the rent at a review, he or she must appeal to a third party arbitrator against whose decision there is no appeal. To resolve that dispute, the arbitrator summons evidence of the rental levels agreed for "comparable" properties.

Comparable evidence includes both rent reviews and new lettings, but such a system effectively means that evidence or reviews must be based on the peak of the market. The recession means that there are few new lettings on which to draw. What few new lettings exist are obscured by a miasma of confidentiality clauses concealing the real market rent. There is therefore effectively no way for the true state of the market to influence an arbitrator's valuation.

Empty shops and offices—an excellent indication of what rental levels ought to be—are not admissible as evidence; nor are other factors, such as the level of unemployment, the rate of inflation, or the balance of supply and demand. Yet again, the market cannot work because a free flow of readily available information—the heartbeat of the market mechanism—is totally absent from the system. The cumulative effect of each of these problems is, sadly, all too often bankruptcy.

The story does not end there, however, for yet another part of our medieval system of retail rents is the horrendous concept of original tenant liability. This system, which the Scots have been clever enough to avoid and which is unique to England and Wales, means that, when a bankruptcy occurs because of a dramatically uplifted rent at review, tenants far back in the lease assignment chain, even if they occupied a property for only a few months decades earlier, can find themselves presented with a liability of nightmarish proportions.

One bankruptcy swiftly follows another, and produces a great deal of personal anguish. I have known of three such cases since I became Member for Tiverton in. April, one of which led to the couple concerned facing the prospect of having to sell the matrimonial home to discharge the debts of people whom they had never met. The effect that it had on their health was dramatic. They were under permanent medication from their doctor, and it damaged their lives tremendously.

Photo of Bob Spink Bob Spink , Castle Point

I have experienced similar disgraceful examples in my constituency, as have many other hon. Members, and we must do something to change the law.

Photo of Angela Browning Angela Browning , Tiverton

Many hon. Members have experience of constituents being placed in that distressing situation.

These four burdens—the outdated arbitration system, a complete lack of transparency, upwards-only clauses and original tenant liability—are bravely borne alone by Britain's small businesses. Our punitive system of commercial leasehold exists nowhere else in the European Community, and it is high time that we came into line with the modern market-oriented systems of our competitors.

Photo of Mr David Mitchell Mr David Mitchell , North West Hampshire

M y hon. Friend has put her finger on the point that is causing grave concern in my constituency and throughout the country. I know that members of the Small Business Bureau are experiencing difficulty with upwards-only clauses in rent reviews and with the awful business whereby, if a company goes bankrupt, there lands on the assignee of the lease a liability from years before to find a high level of rent that it cannot possibly meet.

Photo of Angela Browning Angela Browning , Tiverton

I have raised a lot of problems today, and in the short time available in an Adjournment debate I have little opportunity to outline in detail the possible solutions.

A number of organisations, most notably the Property Market Reform Group, with which I have had a number of interesting discussions, and a group of businesses organised by Sir Desmond Pitcher, are working hard on behalf of Britain's small businesses to establish a consensus for reform and to hammer out practical solutions.

Among those which seem to be the most interesting are the establishment of a lands tribunal to take over the arbitration of disputes and the setting up of an open register of rents to provide information for those arbitrations. I therefore urge my hon. Friend the Minister urgently to consider a complete review of the legislation covering leasehold law. This will he a positive measure by Government to assist small businesses without being a burden on the taxpayer and will be widely welcomed.

To date, the Royal Institute of Chartered Surveyors and the various other landlord interests have shown no interest in reforming the system. The previous price of such grievous and indeed callous inaction—mounting unemployment and high streets littered with "To Let" signs falling into decay—is too high. The Government must step in and act in the name of natural justice and to free up the market and safeguard the future of thousands of small businesses from Tiverton to Tyneside.

Photo of Tony Baldry Tony Baldry Parliamentary Under-Secretary (Department of Environment) 10:53 pm, 10th November 1992

I, and I am sure the whole House, are grateful to my hon. Friend the Member for Tiverton (Mrs. Browning) for raising the important subject of leasehold premises—shops and offices. She put her case with lucidity and care.

The Government fully appreciate the concerns of business tenants facing problems with rents and other aspects of their tenancy agreements. The recent report, "Retail Rents: Fair and Free Market?" by Professor Burton, which the Property Market Reform Group commissioned, criticises the so-called institutional leasing system and proposes radical reforms to the operation of the letting market.

No one can deny that present property market conditions are severe. They are, however, not unprecedented in what, for a long time, has been a cyclical market. Understandably, there are a number of problems facing tenants at the moment, and they arise from a variety of causes.

Business leases are founded on the package of rights and obligations for tenants and landlords set out in part II of the Landlord and Tenant Act 1954, which includes security of tenure and the right to renew a lease, and freedom for the parties to negotiate tenancy agreements on the open market.

The 1954 Act has worked well, providing a well-understood and balanced framework for the commercial property market through all the ups and downs of the past 40 years. We have rightly kept the Act under close consideration. When a review of part II was conducted in the mid-1980s—with particular reference to small businesses—it was concluded that the Act generally strikes a fair balance between landlords and tenants.

We are currently considering the Law Commission's report, which recommends changes to the working of the Act while leaving its fundamentals unchanged. We continue to look carefully at all the implications, and I have been interested to hear the views expressed by my hon. Friends this evening. The fundamentals of the legislation have endured for 40 years. Clearly, any major reform would require a substantial justification.

Photo of Tony Baldry Tony Baldry Parliamentary Under-Secretary (Department of Environment)

If my hon. Friend will forgive me, I do not intend to give way just yet, because a number of points have been raised and it would be unfair of me not to try to cover them in this short debate.

Over the years, the United Kingdom economy has benefited from substantial inward investment in business property, which, to a degree, has been attracted by the sophisticated property market in this country. Business is the lifeblood of our economy, and we need to have tenants whose businesses are thriving. We also need a healthy commercial property sector nurtured by landlords who invest for the future.

Successive Governments' policy of non-intervention in business tenancies gives tenants and landlords freedom to negotiate the terms of the lease including the length of lease, rent levels, rent reviews and dispute terms, in the light of current market circumstances, thus avoiding the distortions that invariably result from statutory controls. In exercising his or her business judgment, the tenant will obviously take fluctuations in the marketplace into account. Clearly, an important part of that business judgment is taking appropriate professional advice about the terms of the agreement and market rental levels on commencement.

Many of the present problems relate to the terms of a private contract. It is entirely a matter for negotiation what terms are included. Upward-only rent reviews, for example, have understandably been mentioned this evening, but they are not covered by a specific statutory provision, being neither prescribed not proscribed by law. It is for contractual negotiation between an individual landlord and tenant at the outset whether such terms are included in a lease.

Under an upward-only rent review, rents increase to the market levels pertaining at the time of review. If market rent levels are less than the current rent, there is no increase, but no entitlement to a reduction under the lease. My hon. Friend the Member for South Hams (Mr. Steen) made an important point here: as these are contractual terms entered freely by the parties, which can be freely varied by the parties, it may well be in the best interests of the landlord to agree to other rental levels in the light of current difficult market conditions in order to avert the risk of a vacancy arising if business pressures on the tenant become unsustainable. That is an important point, of which all involved should be well aware.

Similarly, it is entirely a matter for the parties negotiating the lease to decide what, if any, arbitration clauses are included in the terms of the agreement. On the basis of those terms, rent reviews take place, although in some instances a landlord and tenant may agree to go to arbitration even when that is not specified in the lease. The Government take the straightforward view that landlords and tenants should be free to negotiate agreements in the open market on whatever terms they decide. It is in both their interests that they should have flexibility to agree terms in the light of particular circumstances and not be constrained by statutory provisions.

The 25-year term, common in institutional leases, has been said by some to handcuff tenants to landlords, but it is a contract term which the parties have freely and voluntarily agreed. There is no statutory obligation to agree this length of lease. Also, it has to be recognised that statutory measures to proscribe such leases could have adverse implications for future investment and ultimately lead to a shortage of premises to let.

I turn briefly to the report's proposal for the compulsory registration of all the terms of United Kingdom commercial property leases with the Land Registry. What happens now is that leases over 21 years are registrable, but, contrary to what is implied in the report, the 1954 Act specifically states that copy leases and copy mortgages are not available as of right under the Act. Professor Burton's proposal would involve changing the law, would be resource-intensive, and would not be favoured by those concerned with commercial confidentiality. Moreover, it is not clear whether such a change involving charging would be warranted, and indeed, whether it would achieve the desired transparency.

As regards rent dispute procedures, the comments of my hon. Friend the Member for Tiverton, together with the associated recommendation for an enlarged Land Tribunal, have been noted with interest. However, such suggestions have been made before, of course, and raise far wider considerations. That is not a reason why they should not continue to be considered, but one must recognise that there are considerable implications and ramifications if one considers how the state might start to interfere in what has hitherto been freedom of contract between willing and voluntary partners.

Photo of Michael Fabricant Michael Fabricant , Staffordshire Mid

Is my hon. Friend aware that upward-only clauses in leases are unlawful in certain European countries?

Photo of Tony Baldry Tony Baldry Parliamentary Under-Secretary (Department of Environment)

Of course, it is perfectly possible for Parliament to decide to do anything that a sovereign Parliament decides to do. The structure of the 1954 Act has endured very well and its framework has lasted for more than 40 years. The framework has been based on parties voluntarily and freely entering into contracts on the basis of informed opinion, judgment, knowledge and professional advice. If Parliament starts to interfere statutorily in those freedoms, sooner or later distortions will arise. That is exactly what happened in the domestic market when Parliament began to interfere with the Rent Acts. We will be living with the consequences of that for some time to come.

The Government are very conscious of the dangers in regulating and interfering with well established market practices for determining commercial rent levels, whether by index-linking or by any other mechanism. Moreover, if rents are held down by some statutory device, eventually, over time, markets will become distorted, and the supply of commercial premises available for new lettings will decrease as investors turn away from the property market. The last time a rent freeze was tried in the 1970s, it had exactly just such indirect, unintended and undesirable effects.

The question of unfair lease assignment clauses and privity of contract, graphically highlighted by my hon. Friend the Member for Tiverton and reinforced by my hon. Friends the Members for Castle Point (Dr. Spink) and for Hampshire, North-West (Sir D. Mitchell), is the responsibility of my right hon. and noble Friend the Lord Chancellor. I can assure the House of the Government's awareness of the understandable concern over this matter. In fact, it was considered by the Law Commission in its report "Privity of Contract and Estates" which examined the present rule, under which a leaseholder remains liable to comply with his obligations under the lease until it ends.

The Law Commission has recommended a major modification whereby both parties should cease to have any liability when they part with those interests, except in cases where it is objectively reasonable that their liability continue. My right hon. and noble Friend is considering the report with care, and hopes to be able to make a statement about it in the near future.

Retail and office businesses sectors were markedly affected by the revaluation in 1990, because of the large change in the relative values between different sectors of the economy and parts of the country since the 1973 revalution. However, it is important to recognise that, overall, the rates paid by businesses as a whole after 1990 were kept broadly the same in real terms as in the last year of the old rating system.

For businesses which face increases following the reforms, we introduced generous transitional arrangements to phase in the changes gradually. We believe that, when it comes to the 1995 revaluation, those businesses with the highest values will find that market rents for the type of property that they occupy may well have fallen relative to rents for other types of property. If so, this will be reflected in lower values than would otherwise have been the case. So some businesses which fared badly as result of the 1990 revaluation might well see reductions next time.

Photo of Nigel Evans Nigel Evans , Ribble Valley

The debate tonight is extremely important. My hon. Friend the Member for Tiverton (Mrs. Browning) stressed how many small businesses there are in Britain, from small corner shops to retail chains which employ 2 million people. I know the industry well, as I am a small business man and own a corner shop. I know how important small businesses are to Britain. Does my hon. Friend agree that it is amazing that not one Labour or Liberal Democrat Member is here this evening to listen to the debate?

Photo of Tony Baldry Tony Baldry Parliamentary Under-Secretary (Department of Environment)

My hon. Friend makes his point tellingly. Of course, small and medium-sized businesses make a major contribution to the economy and life blood of Britain.

We remain of the view that we should retain the uniform business rate without major changes. Small businesses have benefited from the new system. A revaluation was long overdue and was therefore bound to result in large changes of rates burden for some people. However, as I said, those businesses which fared badly as a result of the 1990 revaluation might well see reductions next time.

I thank my hon. Friend the Member for Tiverton for expressing her anxieties fully and with care. They are clearly echoed by Conservative Members, if not by Members from other parties. It is precisely because we are aware of the difficulties that we recognise the importance of safeguarding the balance of rights and obligations of tenants and landlords contained in part II of the Landlord and Tenant Act 1954.

Photo of Anthony Steen Anthony Steen , South Hams

I practised at the bar for almost 20 years before I came to the House. I dealt with the 1954 Act, so I am familiar with it, and I am glad to know that the Lord Chancellor is considering certain alterations to the asylum clause. But 300 corner shops have been emptied between Bristol and Penzance because the recession has had such a unique effect on the fortunes of small businesses. That has required and demanded that my hon. Friend the Member for Tiverton bring the matter to the House. The unique circumstances of the recession, which may continue for another two or three years, have resulted in the anxieties of so many Conservative Members—

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

Order. Interventions must always be brief, but particularly so in a short Adjournment debate.

Photo of Tony Baldry Tony Baldry Parliamentary Under-Secretary (Department of Environment)

We are well aware of, and by no means insensitive to, the concerns raised in the debate, and we fully appreciate the difficulties that many businesses face. We must consider carefully any suggestions that could upset the balance of rights and obligations for tenants and landlords set out in the Landlord and Tenant Act 1954, and whether we shall help or hinder by upsetting that balance and interfering with the freedom to negotiate the terms of business leases in the market place.

My hon. Friends can rest assured that Government Ministers with responsibility for such matters, including my right hon. and noble Friend the Lord Chancellor and others—will take careful note of what my hon. Friends have said. The Law Commission has made several recommendations in a number of areas and will consider those with care. We must recognise that the 1954 Act has endured well for more than 40 years and has provided a framework of rights and obligations which has served the business community extremely well for many years.

Question put and agreed to.

Adjourned accordingly at nine minutes past Eleven o'clock.