Senior Associate London
"Recently, the UK government proposed a ban on upwards-only rent reviews in business tenancies."
Recently, the UK government proposed a ban on upwards-only rent reviews in business tenancies. The unexpected inclusion of this proposed ban in the English Devolution and Community Empowerment Bill (the “Bill”) triggered widespread concern across the real estate sector, with industry stakeholders questioning the timing, rationale and potential consequences of the Bill.
The proposal has already created uncertainty in the market, with growing worries about tenants delaying negotiations or prolonging holding-over periods under the Landlord and Tenant Act 1954 (“LTA 1954”) until the Bill has passed.
What is affected?
The proposed ban would prohibit the use of upwards-only rent review clauses in new commercial leases, including:
- open market rent reviews;
- index-linked reviews; and
- turnover-based reviews.
The ban would also prevent collared or minimum uplift reviews.
Leases containing any clause that restricts rent from falling would be rendered unenforceable to the extent that they would result in a higher rent than the passing rent.
What is caught?
The ban would apply to all commercial leases to which Part 2 of the LTA 1954 would apply irrespective of whether the lease is contracted out of the LTA 1954, including renewal leases granted after the passing of the Bill. The ban will not apply retrospectively to existing leases, nor leases granted pursuant to an agreement for lease entered into prior to the implementation of the ban.
As Part 2 of the LTA 1954 requires the tenant to occupy the premises for a business purpose, where there is a headlease/underlease arrangement, the ban would not apply to the headlease but could apply to the underlease which, following a rent review, could result in the occupational tenant paying less rent than their own landlord.
The Bill makes it clear that parties will not be permitted to contract out of the ban and anti-avoidance measures will be introduced to prevent landlords circumventing the intended effects of the Bill. Tenants will also have the right to initiate rent reviews under the Bill, providing them with greater control over their timing.
Implications for the market
"The introduction of uncertainty in a market that thrives on predictability is expected to impact both property valuations and borrowing arrangements."
Upwards-only rent reviews are a well-established feature of commercial leases, providing investors and lenders with a stable means of forecasting income. The introduction of uncertainty in a market that thrives on predictability is expected to impact both property valuations and borrowing arrangements.
In sectors such as care homes and student accommodation or other liability matching assets, the impact could be particularly severe. These sectors rely on long-term leases with stable income to attract institutional investment. Without the assurance that rents will not fall, investors are likely to reassess the viability of business leases as an investment. This may lead to reduced funding availability and higher interest rates from lenders. This could, in turn, affect the viability of new developments and the delivery of essential services such as care homes.
Commentary on the government’s proposal speculate that upwards-only rent reviews artificially inflate rents and have priced small businesses out of town centres and contributed to high vacancy rates, and that the ban will help retail tenants. However, industry stakeholders argue that retail tenants are the least likely to benefit from the ban as, in practice, high-street retailers are more likely to take shorter leases without rent reviews.
How might the market adjust?
In the absence of upwards-only rent reviews, landlords may favour:
- higher initial rents to compensate for the risk of reduction at review;
- index-linked reviews over open market reviews to reduce the risk of downwards review; or
- fixed or stepped rent increases to provide certainty.
Whilst such models offer a degree of protection for landlords, they are all of course subject to tenant agreement and the relative bargaining position of the parties.
How did it work in Ireland?
Ireland implemented a similar ban on upwards-only rent reviews in 2010.
Its immediate impact was a shift in lease structuring. Landlords began negotiating higher initial rents to offset the risk of future rent reductions. Some leases adopted fixed uplifts or index-linked reviews (albeit fewer than anticipated), which provided some predictability but often failed to reflect actual market conditions.
Legal uncertainty also emerged. Several high-profile disputes regarding ambiguities in lease drafting and interpretation highlighted the complexities involved in transitioning to a new rent review regime.
As the ban in Ireland did not have retrospective effect and has only been in place for 15 years, we may not yet have seen its full impact, with many assets still valued based on older leases still capable of implementing upwards-only reviews.
England and Wales’ larger and more globally integrated property market may experience more complex and unexpected consequences of a ban. However, the Irish experience suggests that whilst markets can adapt, the transition is likely to be turbulent and the consequences may take time to materialise.
What’s next?
The Bill is approaching its second reading in the House of Commons, which is expected after the Parliamentary summer break. The Bill must pass through further stages including committee scrutiny before it can receive Royal Assent and become law. The process may be expected to take six to twelve months.
The inclusion of such a major reform within a broader devolution bill is contested amongst industry stakeholders, particularly because there was no prior consultation with the property industry. Many stakeholders believe that the rent review ban will become a focal point for negotiation and lobbying as the Bill progresses.
Conclusion
"Stakeholders across the property industry will need to prepare for a new era of lease negotiation and risk management."
The proposed ban on upwards-only rent reviews represents a major shift in commercial leasing practice. Whilst the government’s intention may be to create a fairer rental market, the proposed ban introduces significant uncertainty for landlords and investors. The impact will be felt most acutely in sectors that depend on long-term, stable income streams and the transition is likely to be complex and contentious.
As the legislation progresses, stakeholders across the property industry will need to prepare for a new era of lease negotiation and risk management. The government must ensure that the final framework strikes a balance between tenant protection and the need to maintain a healthy, investable property market. The lessons from Ireland suggest that while markets can adapt, the path to adjustment is rarely smooth.
London Trainee Prumjot Soor also contributed to this article.
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