Banning Upward Only Rent Reviews

01 Sep Banning Upward Only Rent Reviews

How Would Changing Rent Reviews to Upward and Downward Reviews Impact Your Business?

The English Devolution and Community Empowerment Bill which is currently making its way through Parliament includes a provision that would prohibit the use of upward-only rent review clauses in new commercial leases. This has the potential to cause wide disruption to the relationships between landlords and tenants as well as potentially affecting commercial capital values and rents (both before and after any potential rent reviews). While this is not yet law, it is worthwhile looking at the potential impact and asking what may change and whether the provisions will actually create the benefits that Parliament is seeking.

How do Rent Reviews Work?

At their core, rent reviews allow the rent payable under a lease to be adjusted at pre-agreed intervals. This is because leases are often for many years and landlords don’t want the rent to be eroded by inflation or other market forces.

Rent reviews can come in a variety of forms including most commonly:

Stepped rents – the rents are all agreed at the start. E.g. Rent will be £X for the first year, £Y for years 2 and 3, and £Z for years 4 and 5.
Open market rent reviews – this is the most common form of rent review. On the rent review date, the parties agree (or an expert will determine) what that property would be let for on the open market.
Index linked rent reviews – these work by tracking an index (commonly Retail Prices Index (RPI) or Consumer Prices Index (CPI)) and the rent moves in line with the index.

Rent reviews are typically upwards only. This means that if the rent review would give a lower rent, then instead the rent stays at the same level. This provides certainty to landlords as to what their income will be and to any secured lenders to ensure that the capital value of the security will not be negatively affected if market conditions move.

What is the Proposed Ban?

The Bill proposes a ban on upward-only rent reviews in all new commercial leases granted after the legislation comes into force. While the phrasing of the provision may change as the Bill proceeds through the Parliamentary process, the intention is clear: to ensure that rents more accurately reflect prevailing market conditions – both upward and downward. As you would expect there are wide ranging anti-avoidance provisions including a ban on contracting out. It should also be noted that currently these would only affect new leases; however it is not yet clear what the practical impact of this will be on lease renewals conducted under the Landlord and Tenant Act 1954. The bill also includes the power to introduce exceptions via regulation but there is little further explanation on this.

Impact on Landlords And Lenders

For landlords, particularly institutional investors and pension funds, the proposed ban could diminish the appeal of commercial property as an investment. Upward-only rent reviews have long been viewed as an important risk mitigation tool, protecting against declining rental values and tenant-driven market volatility. Their removal introduces the potential for rental income to fall, which could:

Increase the perceived risk profile of commercial property assets.
Lead to more cautious lending terms from banks and other financiers.
Prompt reassessment of yields used in valuations.

It is also worth noting that where properties have been used to secure borrowing, such loans often contain covenants relating to rental value and income to repayment levels. If rents are reduced on rent review following the proposed ban this could bring the landlord into breach of their banking covenants. It will therefore be important for landlords to consider their borrowing arrangements and for lenders to consider the effect on their security portfolios to ensure that these provisions are addressed.

The capital value of commercial property is often closely tied to its rental income stream. Upward-only rent reviews have historically provided valuation certainty. Their removal could:

Lower investment values, especially in locations or sectors prone to rental volatility.
Introduce complexity into valuation methods.
Deter investors who rely on consistent, predictable returns.

In turn, this could affect development viability, particularly for speculative schemes where projected rent profiles can be integral to funding.

Ireland may serve as a useful comparison, having banned upwards only rent reviews in 2010. After some short-term volatility, commercial investment stabilised as the market adapted.

Impact on Tenants

While the policy intent is to ease pressure on tenants by allowing rent adjustments in line with market downturns, the effect may not be uniformly beneficial across the market. In the short term, landlords may respond to the additional income risk by:

Increasing headline rents to hedge against future rental declines.
Reducing lease incentives (e.g. rent free or rent reduction periods).

Paradoxically, tenants could find themselves paying more at the outset.

The Wider Challenges Facing the High Street

Landlords, tenants, lenders, and their respective legal advisors will need to reassess how rent review clauses are drafted and negotiated. Open market reviews with flexibility both upward and downward potential may still be viable, as may index linked reviews but (subject to the precise phrasing of the legislation if passed) caps and collars may become a breach of the ban and may need to be rethought. While turnover rents might be seen to reflect a truer picture of the property’s place in the market, the practical difficulties and drafting complexities continue to make these a less favoured option in most instances. Each potential solution comes with its own legal and commercial considerations, and expert advice should be sought to ensure that the most suitable options are chosen.

While the proposed ban seems to be a big deal, the market trend continues to be shortening lease terms. Historically, retail leases might run for 25 years and the time in which a gap between open market rent and current lease rent can form could be prolonged. Now, we frequently see leases of only 5 or 10 years; therefore, the impact of banning upward only reviews is somewhat mitigated by the fact that the lease will probably be up for renewal not long afterwards. It is therefore arguable the Bill is attempting to solve the wrong problem. While there are a number of factors, the decline in high streets and town centres is not solely caused by rent reviews (demonstrated by the number of empty commercial units that are not subject to rent review provisions). It is more likely the changing consumer patterns, lack of footfall, high costs of bricks and mortar shops (as opposed to warehouse and home delivery models), online competitors and the lack of an equivalent to business rates are having more of an impact on our town centres. The high street should be a place where people and businesses meet. If we want them to thrive then we must consider what challenges those businesses actually face and address those challenges. The proposed ban may create further problems, by reducing the investment appeal of commercial properties on the high street, at precisely the point when it needs investment or re-purposing. When combined with the currently high street rental auction powers given to local authorities, it will be a challenging time for commercial property owners.

The Bill is currently scheduled to move into its second reading in the House of Commons on 2 September 2025.

For more information on how this could impact your business, contact Michael Goldfinch on 01327 301771.