Supporters of a ban argue that:
- upwards-only rent review clauses keep rents artificially high;
- put pressure on struggling high street businesses; and
- prevent tenants from benefiting when market conditions shift in their favour.
As a result, the government has been exploring reforms through its review of the Landlord and Tenant Act 1954. One proposal under serious consideration is the banning of upwards-only rent review clauses.
What could a ban mean for your premises?
A ban on upwards-only rent review clauses may that mean there is greater flexibility for a commercial tenant to negotiate lease terms for rent so that rents are more closely aligned to real market conditions. In turn, this could improve affordability, especially for smaller or independent businesses.
Conversely, a ban on upwards-only rent review clauses may create less stability for landlords. It may mean that landlords see lower returns or greater volatility in income.
There is also a risk that property valuations could become more sensitive to market fluctuations, potentially affecting investment decisions and financing options for landlords. This might prompt landlords to look for alternative rent structuring mechanisms. One example of an alternative rent structuring mechanism is the stepped increase rent model. Under this mechanism, the rent increases are pre-agreed between the parties and applied at the fixed intervals throughout the lease, allowing more certainty of income for landlords. However, where the property value increases and the agreed rental increase does not correlate with this, the landlord will be at a disadvantage.
Each rent structuring mechanism will have its own pros and cons.
Will existing leases be affected?
It is unlikely that the ban would apply retroactively. Existing leases with upwards-only rent review clauses would probably remain enforceable, however, landlords will need to adapt their leasing strategies in future negotiations and renewals. Landlords should also be mindful of when leases are due for renewal with tenants as they may seek different terms if there is a possibility of adopting a rent review mechanism that could include a rent decrease on review if the market valuation warranted this.
Legal advice may be useful when renegotiating terms in light of potential legislative changes and landlords should assess the exposure of their portfolios to upwards-only rent review clauses. Landlords should consider how alternative rent review mechanisms, such as open market reviews, index-linked increases or stepped rent, could be implemented in new leases.
Can we help?
The proposed ban on upwards-only rent reviews could significantly reshape the commercial leasing landscape in the UK. While the intention is to create a more balanced and responsive rental market, the shift could introduce new challenges for both landlords and tenants.
Whether you are letting out space or occupying it, now is the time to assess your current lease terms, understand the potential impact of reform and plan accordingly.
Contact the team at Downs Solicitors to see how we can help.
Contact Ayesha Begum
