Publication
Publication
In an unexpected move, the Government has announced plans to ban upwards-only rent reviews in new commercial leases under the English Devolution and Community Empowerment Bill. This announcement has attracted a lot of attention from the property market and, if enacted, would bring one of the most significant changes to English commercial leasing in quite some time.
Upwards-only rent reviews are a long-established feature of commercial leases in England and Wales. In simple terms, they allow the rent to be adjusted at set intervals – typically every five years – but only if the market rent has increased. If the market rent has decreased or stayed the same, the rent remains unchanged. In other words, the rent can increase or remain static at review – but it can never decrease, even if market conditions falter. To illustrate, if a tenant pays rent of £100,000 per annum, but the market rental value falls to £90,000 per annum at the time of rent review, the tenant still pays £100,000. If the market rent rises, so does the rent.
This approach provides valuable certainty for landlords, investors, and lenders: knowing that rental income cannot fall helps underpin property values and long-term investment decisions, especially for pension funds and other institutional investors seeking reliable returns.
However, for tenants, it means the risk of being locked into above-market rents during economic downturns—a situation which can affect business viability.
Primarily intended to create a new framework of devolution of powers to local governments, the Bill is not, at first glance, particularly relevant to the real estate sector. However, tucked away towards the end of the Bill are proposals to ban upwards only rent reviews for new commercial leases which are within the scope of the Landlord and Tenant Act 1954 (the “1954 Act”) – in short, this captures leases of premises which are occupied by a tenant for business purposes but is not limited to leases which have security of tenure under the 1954 Act.
The ban is not retrospective and does not affect leases that already exist, but it would apply to lease renewals (including statutory renewals under the 1954 Act) – presumably, the Government’s intention is to balance reform with stability for existing landlord/tenant relationships (although this may result in the creation of a two-tier market, where new leases are more attractive to tenants).
Anti-avoidance measures aim to prevent circumvention, such that landlords and tenants are prohibited from agreeing to an upwards-only review even if both wish to do so. What’s more, there are provisions in the Bill which enable tenants to trigger the rent review even if the lease reserves this right solely to the landlord.
We presume the intention here is to prevent landlords from seeking to avoid triggering a rent review on the pre-determined rent review date if the market is not favourable from their perspective on that date (in other words, if the rent is likely to fall).
The Bill affects all types of commercial property—not just retail or high street premises.
The Government believes that mandating the ability for rents to adjust downwards during economic downturns will foster more vibrant local communities and reduce empty storefronts on local high streets. Indeed, the policy’s stated aim is to “help keep small businesses running, boost local economies and job opportunities and help end the blight of vacant high streets and the unacceptable anti-social behaviour that comes with them.”
Supporters view this as a vital measure for reviving the high street, particularly given that around one in seven shops in the UK now stands empty. Vacancy rates are even higher in certain regions, such as the North East and the Midlands, where estimates suggest that as many as one in five shops are vacant. Many tenants argue that upwards-only rent reviews bind them to elevated rents even when market conditions deteriorate – and so the economic logic behind the proposal hinges on aligning commercial rents with market realities, with a view to alleviating these pressures and supporting businesses most at risk.
Certain stakeholders have warmly welcomed the proposal. The Federation of Small Businesses has hailed it as a potential lifeline for small businesses grappling with rising costs, whilst UK Hospitality (the trade body for the hospitality industry) commented that “unjust upward-only rent review clauses have been hitting hospitality businesses for decades” and describe the proposed ban as “the right move”.
The commercial property sector, caught off-guard by the lack of prior consultation, has voiced concerns about a range of unintended consequences. Melanie Leech CBE, Chief Executive of the British Property Federation, has described the ban as “interference in long-established commercial leasing arrangements” and warned that it could undermine investor confidence. For landlords, upwards-only rent reviews have been a cornerstone of predictability, ensuring stable returns regardless of volatile markets – their removal could lead to a revaluation of investment properties and potentially deter the inward investment that is essential for economic growth.
The logic of a blanket ban across all commercial properties has also raised eyebrows. Whilst the Government’s stated aim is to revitalise the high street, the draft Bill affects all commercial premises in all locations—not just retail tenancies in areas which are struggling to attract investment. If the goal is to rejuvenate high streets, why entangle logistics parks and office towers? High street retail, with its acute sensitivity to consumer trends and the impact of e-commerce, resulting in declining footfall and rising vacancies, faces significant challenges and unique pressures not shared by other commercial property sectors. Critics argue that a one-size-fits-all approach fails to reflect the property market’s diversity and complexity – leading to criticisms that the policy has been rushed through without any grasp of the sector’s complexities. The lack of consultation (described by the British Property Federation as a “stunning oversight”) amplifies concerns that the policy is a blunt instrument.
The breadth of the proposal means that City offices will too be affected. The significant inducements typically offered to tenants (such as rent-free periods and contributions to fit-out) are all predicated on a baseline rental return for the minimum term of the lease (i.e. prior to the first break or lease expiry). Presumably, agents will need to consider the impact of this proposal on inducements, given the greater uncertainty over rental levels.
There is also scepticism over whether the policy will deliver its primary objective. If the central issue is vacant high street properties, banning upwards-only clauses in leases that do not exist will not address those vacancies. As for occupied properties, the argument that tenants are trapped in long-term leases with outdated or artificially inflated rents is undermined by data: recent statistics show that 90% of new commercial leases in England and Wales are for terms of under five years (and therefore unlikely to contain a rent review clause).
Beyond this, there is disquiet about perceived government overreach and the erosion of the principle of freedom of contract – the idea that private parties should be free to negotiate terms that suit their commercial interests. Significant lobbying from the property industry is expected. Upwards-only rent reviews have long provided institutional investors and pension funds with stable and predictable income streams, and banning these clauses could spark a decline in property values. International investors – attracted by the UK’s stable property market – may also be deterred, reducing much needed capital inflows at a time when economic resilience is paramount. The repercussions could extend beyond the property sector too, affecting pensioners and savers (who rely on these funds for retirement security).
While there is broad support for revitalising the high street, many believe that tackling deep-rooted challenges—such as the rise of e-commerce and shifts in consumer behaviour—requires thoughtful, long-term and more nuanced strategies. Quick fixes that disrupt established leasing practices risk falling short of producing the lasting transformation that is required.
If upwards-only rent reviews are banned, several outcomes are likely to emerge:
a. More fixed or stepped rent increases: Landlords may choose to include fixed or stepped rent increases within leases to maintain some predictability over income.
b. Greater use of index-linked rents: Linking rents to an inflation measure (such as the Consumer Prices Index) may become more attractive for landlords, since these are less likely to decrease than rents tied directly to standard market rates.
c. Rents being set at artificially inflated rates: Landlords may set higher rents at the outset to weather against the possibility of a falling market and a downwards review come the rent review date. This risks inadvertently harming tenants, and negates the policy’s intended effect.
d. Shorter lease terms with no rent review and more break clauses: Leases may become shorter, with greater use of break clauses to allow both landlords and tenants more flexibility to reset. However, short-term leases without rent reviews (often on turnover rents) are already common in many retail locations, so the Government’s reforms may have limited effect where these practices are already standard.
Rather than a sweeping ban, many in the industry suggest that nuanced reforms may better balance tenant relief with market stability. Some options include:
a. A targeted ban for high streets: Limiting the ban to high street retail leases, defined by specific geographic criteria, would address the Government’s main policy concern whilst preserving upwards-only rent reviews in other parts of the market where the market dynamics differ. This would address those leases which do contain rent reviews (albeit, as noted above, many retail leases are already on short terms with no rent review).
b. Incentives for voluntary change: Instead of banning upwards only rent reviews, the Government could incentivise the voluntary adoption of market-linked rent reviews through tax breaks or grants for landlords – this preserves contractual freedom whilst encouraging tenant-friendly practices.
c. Phased or pilot implementation: The Government could test the ban in pilot zones (for example, high streets with high vacancy rates), which would allow the Government to gather evidence on the effects and refine the approach before rolling it out more widely. This would give both landlords and tenants time to adapt and provide valuable feedback.
At this stage, it is still early days. The Bill has only had its first reading in Parliament, with no date yet scheduled for a second reading. Substantial Parliamentary debate and scrutiny lie ahead before any new law is finalised.
This is not the first time that a plan to ban upwards-only rent review has been hatched. Most recently, the Commercial Rent (Prohibition of Upward-Only Reviews) Bill – a private members’ bill introduced in 2022 – did not advance due to insufficient Parliamentary time. While Ireland banned upwards-only reviews in 2010, and these clauses are rare in some other jurisdictions, the UK market was largely unprepared for the Government’s latest announcement.
These proposals are a continuation of the Government’s ambition to reinvigorate high streets and town centres. The market is still getting to grips with the changes introduced by the Levelling-Up and Regeneration Act 2022 giving local authorities new powers to conduct high-street rental auctions (which we’ve written about in: Under the hammer: Can councils truly transform high streets with new auction powers?) and proposals to reform the security of tenure regime (see our article: Security of tenure for “contracting out” – the latest Law Commission update). More legislative change will inevitably mean further disruption and uncertainty.
The Government faces a careful balancing act: it must weigh the concerns of the property industry against the significant challenges faced by businesses and tenants. Despite the Bill’s wide-ranging proposals, landlords will still have avenues to achieve income certainty (such as through the use of stepped rents). Given the resilience of the commercial real estate sector, there may be room for cautious optimism that the market could withstand the initial disruption that would inevitably arise if these proposals are implemented
The jury is out as to whether this policy will deliver the vibrant, bustling streets the Government envisions, or risk unsettling a key pillar of the UK economy. One thing is certain: if passed, this will be one of the most significant changes to English commercial leasing in quite some time.
If you wish to discuss any of the issues discussed in this article, please do not hesitate to reach out to your usual Linklaters contact.