Upward-only rent reviews are common in UK commercial leases and mean the rent can only increase or stay the same at review.
The announcement was made today (10 July) as part of the English Devolution and Community Empowerment Bill which was introduced to Parliament.
The unexpected pledge to ban upward only rent reviews (UORR) clauses in commercial leases applies to England and Wales. The government said these “pit landlords against businesses and can make rents unaffordable and cause shops to shut”.
It added: “This will 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.”
The change will not affect existing contracts but will ban the introduction of upward-only clauses in new agreements. Landlords will need to choose between agreeing fixed rents or introducing a review clause that allows rents to fall as well as go up.
The government says the commercial leasehold sector has historically regulated itself via industry-approved Codes of Practices where the impact of upward-only rent review clauses are explained and alternatives are encouraged, but it says multiple research studies have found this self-regulation approach to commercial leasing in England and Wales is not working well.
The government says some very limited areas such as agricultural leases will be exempt from the ban. The ban will also apply to renewal leases where the tenant has security of tenure under Part II the Landlord and Tenant Act 1954.
Following the ban, if a UORR clause is in a new or renewal commercial lease, the requirement for rent not to decrease will be unenforceable. The government says: “The new rent will be determined by whatever methodology is specified in the lease, for example in line with changes to the retail price index. The new rent may be higher, lower or the same as the previous rent.”
The wider Devolution Bill proposals can be read here.
Melanie Leech CBE, Chief Executive, British Property Federation, slated the proposals: “Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the Devolution Bill. It risks investor confidence at a time when development viability is already seriously challenged.
“Unfortunately, this is another example of a government getting mired in detailed market issues, rather than focusing on the big picture of enabling and empowering local public and private stakeholders, including property owners and their customers, to work together to drive economic growth and create thriving town centres.”
Craig Beaumont, executive director at the Federation of Small Businesses, said in a statement: “A typical small firm in premises has faced rising rents and rates among all the other costs like national insurance contributions, so this change should bring some relief for small businesses negotiating their next lease.”
Neil Seager, managing partner, at Haslams Chartered Surveyors said the news of a potential ban on upward only rent reviews had “sent shockwaves through the commercial property sector”.
“The lack of consultation with industry stakeholders is concerning – at best, and at worst, a sign of governmental mismanagement. While the principle of upward-only rent reviews aligns with free market dynamics, the real issue lies in the uncertainty this move introduces. The commercial property investment market is fundamentally underpinned by the predictability of upward only rent reviews.
“Disrupting this framework especially at a time when the UK is actively seeking inward investment is both irresponsible and ill timed. Such a policy shift threatens to undermine development viability, stall market activity, and trigger a decline in asset values. Investors, faced with increased risk and reduced clarity, may well divert capital away from the sector. I would urge the government to conduct a comprehensive impact assessment and engage in broad based consultation with industry experts. Any legislative changes must be informed by robust data and a clear understanding of all the consequences.”
Hanover Green principal Colette Williamson said: “This is an unnecessary headline-grabbing intervention that has not been thought through. It will harm investment confidence in many sectors and markets which are already struggling, for instance South East offices. In other sectors it is overkill where short leases with no rent reviews are already the norm, for instance high street retail. Upwards and downwards rent reviews are already available by negotiation.”
In a LinkedIn post, James Carruthers, a partner at property consultant GFW, said: “It might have been wise for the Government to have taken consultation on this first before announcing what could amount to a substantial shift to Landlord & Tenant legislation and property valuations.
In most valuation cases, market evidence tends to depict a range of potentially applicable values. If this comes to pass, I can see increasing polarisation between Landlords and Tenants rent positions, likely increasing the [number of ]cases referred for third-party determination, applying greater costs all round and so not necessarily the cost-saver which the Government might be anticipating. What also of investment property asset valuations, and the implications for the pension schemes and other institutions which hold them, if long-term rental growth can no longer be counted on?”.
The share prices of leading UK REITs have been trading down on the morning after the announcement. By 11:18 am Segro’s share price was down 1.21% at 655p, Landsec’s share price was down 0.86% at 575.50p and British Land’s was down 1.03% at 348.39p.
