Proposals to ban upward-only rent reviews. What you need to know.

The Government recently announced that it is proposing to abolish upward-only rent review provisions for new commercial leases. 

Firstly, what is an upward-only rent review? An upward-only rent review is a clause within a lease which states that rent can only stay the same or increase in line with market value on rent review dates and cannot in any circumstances decrease from its current level.

What is the Government proposing?

Announced in the English Devolution and Community Empowerment Bill, the proposals would prevent landlords from including such provisions. The policy aims to “make commercial leasing fairer for tenants, ensure high street rents are set more efficiently, and stimulate economic growth”.

If this new legislation was to come into effect, rent reviews in newly granted leases would need to reflect the open market, whether this be up or down, with the intention of providing a fairer system for tenants.

Why are upward-only rent reviews an issue?

Upward-only rent reviews are a problem for tenants in commercial property because they can lead to rents being higher than the market rate, especially during economic downturns, making it harder for businesses to remain profitable.

For landlords and investors, the main problem is the risk of a downturn in commercial property investment due to potential future uncertainty, and the possibility of lower returns on investment, though some investors favour this review method for its predictability.

Will this apply to all commercial leases?

The legislation is not retrospective, so existing leases wouldn’t be affected, only new ones.

What impact could this have on tenants?

It seems apparent that the new legislation, if passed through Parliament, seeks to provide a fairer and more balanced environment for tenants enabling rent to decrease in line with market rates. This in turn could help to potentially ease financial pressure, improving business sustainability and encouraging smaller sized businesses to commit to longer leases knowing rent levels will be at market rent. 

What impact could this have on landlords?

For landlords, the proposed change might introduce greater uncertainty in income. Currently, the upward-only rent review system provides some level of financial stability and predictability whilst the tenant is in occupation. 

If rents can decrease in line with market rates, landlords may experience fluctuations in rental income which could impact their ability to meet repayment obligations or plan for longer-term investments, with further consequences being that commercial property may become a less attractive asset for investors seeking consistent returns. 

The proposed abolition of upward-only rent review clauses marks a significant shift in the balance between landlord and tenant interests within the commercial leasing market. While it may create new challenges for landlords, it represents a move towards greater clarity and fairness in rent assessments upon a rent review. 

Potential risks and trade-offs?

Overall, it’s likely that commercial tenants are set to benefit from the proposed ban, with stronger protections against higher-than-market-rate rent. However, some industry experts warn that it could prompt increased initial rents or shorter lease terms.

What happens next?

The Bill still needs to work its way through Parliament, so we don’t expect this new legislation to come into effect just yet. We will of course make sure you’re kept up to date with any further developments.

If you have any questions relating to commercial property, our team is here to help. Get in touch today.