Upwards-Only rent reviews: What the proposed ban means for Commercial Property

For as long as most landlords and tenants can remember, commercial rents have only gone one way at review. That may be about to change. The Government’s proposed ban on upwards-only rent reviews would be one of the biggest shifts in commercial leasing for a generation. It could affect not only how new leases are drafted, but how property is valued, financed and managed for years to come.

In this article, Jennifer Lilley of the Godwins’ Property team explains what the proposals mean in practice. She covers why existing leases are likely to stay protected, why the real impact may come at renewal, and what landlords, tenants and investors can do now to prepare.

A fundamental change to a long-established practice

For decades, upwards-only rent reviews have been a defining feature of commercial leases. Whether linked to open market rent, an index such as RPI or CPI, or turnover, these provisions have allowed rents to increase at review dates whilst preventing them from falling if market conditions deteriorated.

For landlords and investors, this has provided income certainty and supported asset valuations. For tenants, it has often resulted in rents becoming detached from market reality during periods of market decline.

The proposed reforms seek to alter that balance by ensuring that future rent review mechanisms can reflect both upward and downward movements.

What is changing?

Broadly, where a rent review formula does not fix the reviewed rent at the outset of the lease, provisions preventing the rent from falling are expected to become ineffective once the new regime takes effect.

The changes are likely to affect many of the review mechanisms commonly encountered in commercial leasing, including:

• Open market rent reviews;
• Index-linked reviews;
• Turnover rent provisions; and
• Other arrangements designed to guarantee a minimum increase regardless of market conditions.

The legislation is also intended to prevent parties from achieving an upwards-only outcome through alternative drafting methods.

Existing leases are expected to remain largely unaffected

One of the most significant aspects of the reforms is that they are not generally retrospective.

Existing leases containing upwards-only rent review provisions are not expected to lose that protection simply because the legislation comes into force. Accordingly, the immediate impact on existing income-producing assets is likely to be limited.

The greater significance lies in how future leases and renewal arrangements are structured.

Why renewals matter

For many landlords, the real impact of the reforms may arise at lease renewal rather than on the commencement date of the legislation.

A landlord who currently owns an investment property let on a lease containing upwards-only rent reviews may assume that future rental growth is protected. Whilst that may remain true during the existing term, the position could be very different when the tenant renews or a new lease is granted.

Any replacement lease entered into after the new regime takes effect may be subject to the new rules, meaning the landlord may no longer be able to rely on traditional upwards-only review provisions.

In practical terms, today’s lease may be protected, but tomorrow’s lease may not be.

A practical example

Assume a landlord grants a 15-year lease containing five-yearly upwards-only rent reviews.

The review provisions within that lease would generally be expected to remain effective. However, if the tenant renews the lease after the new regime has come into force, the replacement lease may fall within the new statutory framework.

The result could be that:

• The existing lease continues to benefit from upwards-only reviews;
• The renewed lease does not;
• Future rents under the renewed lease may be capable of moving both up and down; and
• Long-term income projections may differ from those originally anticipated.

For investors, this distinction is particularly important. Property values are often influenced not only by current rental income but also by assumptions regarding future leasing events and rental growth.

How does this affect landlords, investors, lender and tenants?

The implications extend well beyond lease drafting.

Landlords may need to reconsider lease lengths, rent structures and asset management strategies. Investors and lenders may have to revisit valuation assumptions that have historically relied upon rents moving in only one direction. Tenants, meanwhile, may benefit from rents remaining more closely aligned with prevailing market conditions.

As a result, the reforms have the potential to influence:

• Lease negotiations;
• Investment appraisals;
• Property valuations;
• Funding and lending decisions;
• Portfolio management strategies; and
• Acquisition and disposal decisions.

A window to prepare

Although implementation remains subject to commencement regulations, landlords should use the lead-in period to assess how future renewals may affect their assets.

Particular consideration should be given to:

• Properties where lease renewals are expected within the next few years;
• Assets whose value depends heavily on future rental growth;
• Existing renewal options and rights;
• Portfolio business plans that assume continuing upwards-only reviews; and
• Alternative rent structures that may be appropriate for future lettings.

For some landlords, the greatest effect of the reforms may not be on existing leases at all, but on the income generated by the next generation of leases.

Looking ahead

The proposed ban represents one of the most significant reforms to commercial leasing practice in recent decades.

Whilst existing leases are expected to remain largely protected, future transactions are likely to look very different. The long-term impact is likely to be felt gradually as leases expire, renewals are negotiated and new leasing practices emerge.

For landlords in particular, the key message is clear: focus not only on the leases you have today, but on the leases you may need to grant tomorrow. Understanding how renewal arrangements and future rent reviews could operate under the new regime will be essential to protecting long-term asset value and income.

How we can help

The Godwins’ Property team advises landlords, tenants, investors and lenders across Hampshire and beyond on every part of commercial leasing. That includes rent review provisions, lease renewals, acquisitions and disposals, and longer-term planning for property portfolios.

If you have renewals coming up, are negotiating a new lease, or want to understand how the proposed reforms could affect the value of your property, now is the time to talk it through. Please contact Jennifer Lilley or another member of our Property team on 01962 841484 or at info@godwins-law.co.uk

We’ll help you understand where you stand and plan for what comes next.