Shock and Law: UK Government's Surprise Proposal to Ban Upward-Only Rent Reviews

Types of Rent Review to Be Banned 

The proposed ban targets any rent review clause in a commercial lease (including retail, offices, logistics, etc.) that sets an undetermined rent at the outset of the lease and prevents the rent from ever decreasing. This includes market rent reviews, index-linked reviews with 'collars' and turnover rents. Fixed or 'stepped' rents, where increases are pre-agreed, are not affected, as these do not rely on a mechanism where the new rent is unknown at the start. Once the legislation is in force, any upward-only rent review clause in a new lease will simply be unenforceable.

Which Leases Will Be Caught? 

The ban will apply to all new commercial leases—across all sectors, not just retail which seems to have been the sector the government has focussed on—where the tenant occupies the premises for business purposes. This is regardless of whether the lease is 'contracted out' of the security of tenure provisions in the Landlord and Tenant Act 1954 ("LTA 1954"). Renewal leases granted after the law comes into effect, including those under the LTA 1954, will also be subject to the ban.

Leases That Escape the Net 

Existing leases entered into before the law takes effect will remain untouched—the ban will not be retrospective. Leases entered into after the law comes into force, but which are pursuant to an agreement for leases made beforehand, will also be exempt. Notably, leases where the tenant has wholly sublet and is not in occupation also appear to be outside the scope of the ban.

Anti-avoidance Measures 

To prevent landlords from sidestepping the new rules, the draft legislation includes anti-avoidance measures. For example, if a landlord tries to delay a rent review, tenants will have the right to trigger it themselves. Any attempt to force a tenant to take a new lease at a higher rent via a put option will also be void. 

Room for Exceptions? 

The Secretary of State will have the power to grant exceptions and make transitional arrangements, though the details are not yet known.

What Does This Mean for the Market?

For Tenants: The government's intention is clear: to give tenants more flexibility and bargaining power. If market conditions deteriorate, rents could fall, helping occupiers.

For Landlords: Landlords, on the other hand, face a new world of uncertainty. The risk of falling rents at review could make cash flows more volatile and undermine traditional property valuations. In response, landlords may look to:

• Shorten lease terms, allowing more frequent renegotiations.
• Favour fixed or stepped rent increases.
• Insert more landlord break options.
• Exclude security of tenure under the LTA 1954 as standard.

Ironically, these changes could result in higher starting rents and less flexibility for tenants—the very opposite of what the government intends. There may also be a shift toward simple index-linked reviews (CPI/RPI) (which are not subject to the ban as drafted) if landlords estimate that inflation will likely keep rents moving upwards in line with the trend the government is seeking to disrupt.

For Investors: Investors may start to favour assets with more predictable income streams, potentially leading to a split in demand between different lease structures and property types.

The Australian Experience

In Australia, this restriction is a feature of retail leasing. Our Australian offices report that landlords increasingly then moved to indexation of rents and attempted to impose shorter terms. The State of Victoria chose to legislate to provide for minimum five-year terms to mitigate this unexpected impact.

Looking Ahead

The proposed ban is still some way from becoming law. Its aim is to help small businesses and revitalise high streets, but in practice, small business tenants tend to be on shorter leases without rent reviews anyway. There is a real risk that the legislation could have unintended consequences, leading to higher initial rents, shorter leases and a less attractive market for institutional and overseas investors. This could, in turn, hinder investment and development in the very areas the government wants to support.

It remains to be seen whether the government will amend the Bill to reflect landlord concerns about this potentially seismic shift, and how landlords, tenants and investors will react if the Bill becomes law. Watch this space.