Upward-only rent reviews under scrutiny: reshaping commercial leases

With the English Devolution and Community Empowerment Bill continuing its progress through Parliament, one proposed reform has generated significant discussion in the commercial property sector: the proposed prohibition on upward-only rent reviews in commercial leases. If enacted, this change would mark a notable shift in how commercial rents are reviewed and negotiated, with potential implications for both landlords and tenants.

What is a rent review?

A rent review clause is a standard provision in a commercial lease that allows the rent to be reviewed at specified points during the term. Under the current legal framework, rent review clauses are frequently drafted so that the rent may only increase, or remain the same, following a review. These are commonly referred to as upward-only rent reviews. Such clauses have long been regarded as providing landlords with income certainty, particularly in inflationary or volatile markets.

Why is this an issue?

Whether upward-only rent reviews are viewed as fair largely depends on perspective. From a landlord’s standpoint, upward-only rent reviews protect the value of its investment and ensure that rental income does not decline during the lease term. For tenants, however, the position can be more challenging. Where market rents fall, a tenant may still be required to pay rent at a level above the prevailing market rate. This can be particularly burdensome where a tenant is committed to a long lease with limited break options, potentially resulting in sustained financial pressure that does not reflect market conditions.

What is the government seeking to achieve?

One of the stated aims of the Bill is to address perceived imbalances in the commercial leasing market, particularly for business tenants. By preventing rent review clauses that only allow rent to move in one direction, the proposed reforms are intended to ensure that rents more accurately reflect market conditions at the time of review. In principle, this may give tenants greater confidence and predictability, knowing that rent could move downwards as well as upwards, depending on the review mechanism agreed in the lease. It may also encourage some tenants to commit to longer lease terms, providing greater continuity of occupation. However, it is important to note that the removal of upward-only rent reviews does not guarantee rent reductions. The outcome of any review will continue to depend on the wording of the rent review clause itself, including the valuation assumptions and the chosen review methodology.

Potential implications for the commercial property market

While the proposed reforms may benefit some occupiers, their broader impact on the commercial property market remains a matter of debate. Institutional landlords typically place a high value on income certainty and long-term asset performance. The introduction of rent reviews that allow for downward movement may alter the risk profile of certain investments. Industry commentators have suggested that this could influence how such landlords approach new lettings, including how initial rents are set or how lease terms are structured. That said, predictions that institutional investors will withdraw from the market altogether remain speculative, and the long-term effects of the proposed changes are not yet clear. As with any legislative reform, the practical consequences are likely to vary depending on property type, location, and market conditions.

What is the scope of the proposed ban?

As currently drafted, the proposed prohibition would apply to new commercial leases and lease renewals entered into after the relevant provisions come into force. Existing leases would not generally be affected. The ban operates through amendments to the Landlord and Tenant Act 1954 and applies to business tenancies, including leases that are contracted out of the Act’s security of tenure provisions. It is not limited solely to leases that benefit from statutory protection. The legislation also includes anti-avoidance measures intended to prevent the use of alternative drafting to achieve the same upward-only effect.

How can we help?

If you are approaching a lease renewal, considering letting commercial property, or entering into a new lease as either a landlord or tenant, it is important to understand how these proposed changes may affect your position.

Our commercial property team provides clear, practical advice tailored to your business objectives. With over 40 years’ combined experience, our Commercial Property Partners, Nick Carter and George Panteli, can guide you through the implications of the proposed reforms and assist in negotiating lease terms that best protect your interests.