The end of upwards only rent reviews

Answer

On 10 July 2025, UK Parliament lit a fire under the UK's commercial real estate sector. Without warning or consultation, it introduced the English Devolution and Community Empowerment Bill, which, pursuant to Schedule 31, proposed to ban upwards only rent review clauses in commercial tenancy agreements. This unanticipated move could prohibit a deep-rooted, market-standard practice and the implications for tenants and landlords are still being considered.  

What’s an ‘upwards only rent review clause’?

An ‘upwards only rent review clause’ is an extremely common contractual provision in a commercial lease that restricts rent adjustments during periodic reviews to increases only. Under such clauses, the rent at review will either remain at its current level or increase to reflect market rates, but it can’t fall below the existing rental amount regardless of market downturns or changes in property values.

To illustrate how this works, consider a commercial tenant that enters into a 10-year lease for retail premises at an initial rent of £100,000 per annum, with rent reviews every five years. The lease contains an upwards only rent review clause in line with the Retail Prices Index (RPI). At the first rent review in year five, if the RPI shows a 10% market increase over that period, the rent will be adjusted upwards to £110,000. However, if market conditions have deteriorated and RPI has fallen by 10%, the upwards only clause prevents any reduction; the tenant will continue to pay £100,000 per annum.

The clause effectively provides landlords with protection against market downturns or poor economic conditions and is, in many ways, central to the full repairing and insuring (FRI) concept of an investable lease. Ensuring tenants bear the full risk of adverse market movements creates an asymmetrical risk allocation that favours the landlord.

The government's proposal undermines this. Its impact assessment emphasises the purpose of the bill is to "help remove potential landlord manipulation of the market, with the aim of making commercial leases fairer for tenants, the market more efficient, and ultimately contribute to thriving high streets and economic growth".

Scope of the proposed ban

Should the bill go on to receive royal assent in its current form, the restriction would extend to all new business tenancies in England and Wales that fall within the scope of Part II of the Landlord and Tenant Act 1954. Any attempt to implement a clause deemed to be an upwards only rent review clause in such a new lease would be rendered unenforceable.

The anti-avoidance provisions included in the bill prevent landlords from finding workarounds to the ban by reclassifying or supplementing rental streams. They can’t, for example, restructure lease terms with alternative mechanisms that work to increase rent and effectively achieve the same result as an upwards only rent review. They can’t 'contract-out' of the legislation moving forward.

The ban isn’t retrospective, and won't extend to existing leases or reversionary contracts for future leases (eg, an agreement for lease) granted before the effective date of the legislation; however, it’ll be interesting to see the practical consequences for such properties on the open market, either in terms of attracting new tenants for assignments or at rent review generally.

Implications on landlords

The most significant concern for landlords relates to their ability to meet their financing obligations. Under the new regime, landlords face a new exposure to negative market conditions and potential lower yields on their investments, all of which can jeopardise loan repayments on debt-financed properties. When market rents fall, landlords will now be required to reduce rents accordingly upon rent review, creating a direct impact on their cash flow. This raises serious questions about how landlords will maintain compliant with loan-to-value ratios, debt service coverage ratios and other financial covenants typically required by lenders in commercial property financing arrangements.

Given that the bill fundamentally undermines the FRI model of commercial leasing, it’ll be interesting to see whether landlords will begin to explore alternative rental structures, such as stepped arrangements, whereby the lease provides for pre-agreed (as opposed to open market) rental increases throughout the term of the lease. Perhaps a rent review clause might be drafted to match the rent with the Retail Price Index plus 2%, for example.

It's still a gamble on market trends and a potential limitation on property values, but it’ll be interesting to see what prospective tenants will tolerate. Alternatively, landlords may simply offer shorter tenancies, contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954, mitigating their exposure to market downturns over a longer or renewal term.

Implications on tenants

Tenants stand to gain enhanced negotiating leverage in lease negotiations. The shift in the risk allocation between landlords and tenants alters the negotiating dynamic, potentially enabling tenants to achieve more balanced lease terms that reflect true market conditions throughout the lease term.

Of course, tenants also need to consider the broader market implications of this legislative change. While the ban may reduce rent inflation for some tenants, by ensuring their rents can decrease in line with market conditions, it could simultaneously impact on landlord capital streams into the commercial property sector. And a reduced investment appetite might in turn ultimately affect the quality and availability of business premises. Consequently, tenants may find themselves with greater negotiating power in individual lease arrangements but potentially facing a constrained market with shorter terms on offer and fewer high-quality commercial properties available. If this is the case, the initial rents may be higher and the opportunity for fit out discounts may be reduced.

Conclusion

Lawyers are already considering appropriate protections for their landlord clients from the potential negative impacts of the newly proposed legislation. As previously mentioned, shorter tenancies, excluded from statutory security of tenure rights, manipulated RPI adjustments and stepped rent structures may become more common. Initial rents may increase and landlord contributions fall.

Whichever path individual clients settle on, the ban on upwards only rent review clauses is likely to have significant ramifications for the broader economy, extending well beyond the immediate landlord-tenant relationship. The legislation may aim to create fairer market conditions and support economic growth, but exposing landlords to increased market volatility will likely drive down commercial property values, with huge knock-on effects for investors. Many institutional investors rely on commercial property investments to generate stable, long-term returns – for example, pension funds are substantially exposed to commercial real estate as an asset class. New law could therefore trigger a broader reallocation of capital away from the sector, potentially creating a negative feedback loop where reduced investment further constrains the availability and quality of commercial premises, ultimately impacting economic growth across the economy. Furthermore, analysis of the Irish commercial property market following its ban of upwards only rent review clauses in February 2010 revealed significant market distortions, including a two-tier pricing system where pre-ban leases commanded premium valuations from investors. However, it’s difficult to truly judge the extent of the impact in Ireland as the legislation's introduction coincided with the post-2008 financial crisis property market.

In the last quarter of 2024, government data suggests one-in-seven high-street properties were vacant, highlighting the enormity of the challenge this new legislation seeks to address. It remains vital, however, to avoid a rush of unintended consequences that might ultimately only further destabilise an already fragile post-covid commercial property market. If passed into law, the success of the legislation will depend on whether innovative lease structures and investment strategies can maintain market viability, while achieving the government's goal of thriving high streets.

The English Devolution and Community Empowerment Bill's second parliamentary reading is scheduled for 2 September 2025…

Oliver Scragg is a solicitor apprentice at Taylor Wessing