Upward-only is downright wrong

by * , Thursday 28th July 1994 00:00

In a free market everything should find its true value: the cost of a meal in a restaurant or of a night's stay in a hotel, for example, are subject to competitive pressures that mean the prices which can be charged for both can rise or fall.

Over the past few years the recession has ensured that prices have remained extremely competitive. This has also meant that the costs of such things as food and equipment have also been pegged down.

But there is one glaring exception to this law of supply and demand: property rents. A combination of very long leases, frequently up to 25 years long, and clauses that stipulate that rents can only increase, have conspired to make life almost unbearable for many businesses.

That is why the hospitality industry warmly welcomed the Department of the Environment's announcement, just over a year ago, to review the way commercial property leases operated. It led to optimism that the Government really would do something to ease the plight of small businesses struggling to survive the recession.

But last week any glimmer of hope was dashed when the Government announced it was to do nothing about upward-only rent reviews because of the wide variety of lease options now available.

There may be some truth in that argument, but doing nothing means that the appalling mess created by the false boom of the late 1980s could happen again at some time in the future. That boom meant that while the retail price index went up by 35% between 1986 and 1991, average rents increased by 140%.

Since then the combination of upward-only rents and low inflation has led to thousands of businesses being locked into outrageously high rents. Examples provided to Government by the Property Market Reform Group included one Soho restaurant where the rent went up from £60,000 in 1980 to £90,000 five years later and to a staggering £235,000 in 1990.

Another restaurant in the same area saw its rent increase from £26,250 to £80,000 at a review five years ago. It is now locked into that higher rent while the open market rent on similar properties is just £55,000.

The Government is keen to show off its free market credentials and is also reluctant to add more legislation to the statute books. In many areas, such as employment law and food hygiene controls, that approach has been welcomed by the hospitality industry.

But sometimes legislation is needed in order to maintain a free market and prevent stronger parties from unfairly using their strength. By failing to act on rents, the Government has got it badly wrong.


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