UK Government plans to ban upward-only rent reviews. Opinion: Simon Morris, Duncan Kite and Oli Horton

To the surprise of virtually everyone in the commercial property sector, on 10 July the government announced plans to ban upward-only rent reviews (UORRs) for commercial leases in England and Wales. The justification for the ban is that it will “help keep small businesses running, boost local economies and job opportunities and help end the blight of vacant high streets”.

At GCW, we see the potential outcome as rather more complex – but not necessarily as problematic as initial reports might suggest. So, what are the headlines for this proposal?

• Scope: the proposed ban will apply to new leases, including those contracted out of the Landlord & Tenant Act 1954. It will not be retrospective legislation, but will apply to renewal leases.
• What’s allowed: rent reviews can move both up and down, based on open market rents, inflation indices (RPI/CPI) or turnover — but ‘collars’ (minimum rent levels) won’t be permitted. Stepped/fixed increases remain possible.
• Who’s affected most: realistically, those properties where landlords and tenants desire longer leases – typically sectors such as prime and super-prime retail, food and beverage, supermarkets, large general merchandise stores and large leisure-space users – where rent reviews remain common, by virtue of 10, 15 or 20-year lease terms.
• Where the change will barely register: secondary and tertiary high streets, where most leases are already 3–5 years, often with no rent-review clause, independent cafés, takeaways and small shops — these will see little direct benefit, unless they hold long leases, which is unlikely.
• The often-quoted Irish precedent: when Ireland banned upward-only rent reviews in 2010, investment slowed briefly but recovered. The market adapted with inflation-linked, turnover, and open-market up/down reviews.

So this really only affects longer leases, of five years or more – in a leasing market that is significantly more balanced than at any time in recent memory. A landlord’s ability to simply impose a longer lease term and therefore upward-only reviews – where the rent can become out of kilter with the market – is a thing of the past.

Longer leases are agreed for the following reasons:

• Capex recovery by the landlord to satisfy an occupier’s requirements in creating the space:
  • The removal of a guaranteed rental floor undermines valuations for long-income assets, making it more challenging for landlord capex to be recovered and therefore space provided to satisfy occupier requirements.
  • Could lead to valuation dips, impacting financing and investor appetite in certain sub-sectors – especially REITs and pension funds historically reliant on predictable cashflows.
• Capex write-off by occupiers, where investment in the space is significant, and needs to be written off over a longer period.
• Certainty:
  • Where a tenant wants to secure their period of occupation and trade for a significant timeframe, without the risks of vacant possession being sought at expiry.
  • Where a tenant wishes to establish goodwill that can create a tangible value to the site or business as a whole for accounting or business-sale purposes.

There could be a shift to shorter lease terms, where landlords prefer regular lease renewals as opposed to upward and downward reviews. This could create significant issues for occupiers.

How do the parties navigate this change?

Addressing the crux of the legislation.

• The proposals enable greater fairness – rents can drop if market conditions worsen, particularly during micro or macro-economic recessions, pandemics or other factors affecting consumer behaviour.
• They reduce the risk of being locked into pre-crisis rents, a problem seen post-Covid when many operators exited leases through CVAs.

• Shorter lease terms and tenant breaks have already minimised the risks associated with this. Landlords are likely to push for shorter lease terms where a true open market review is being insisted on to offset risk.
• Landlords may reduce rent-free or incentive packages, if they can’t guarantee an upward-only outcome in five years. This could potentially stifle investment in the wider area.

Capex recovery for landlords to deliver space.

• Higher upfront rents would reflect the increased uncertainty at future rent reviews.
• Fixed stepped rents are still possible, offering predictable growth for investment-grade assets like supermarkets, hotels or retail warehouses (where longer-term leases are likely to remain desirable for both parties).
• Turnover rents could be adopted. These require a high degree of market intelligence, and sharing and interpretation of data, but could be a desirable outcome for well-informed landlords. As is often referenced, the outlet model proves this can work successfully for both parties.
• We might see a greater focus on indexation at review. This is already popular among both landlords and tenants. However, caps and collars are in place to buffer significant swings. The collar, or certainly a collar at zero and above, will be outlawed under this legislation. This is likely to result in a push for higher caps to reflect the risk.

Dealing with certainty/high-demand locations.

• In high-demand/super-prime locations, landlords may push harder for index-linked rents uncapped, exposing tenants to above-market increases in inflation spikes.

Some thoughts on indexation.

While collars and caps for index-linked reviews are almost ubiquitous, it’s interesting to note that:

• CPI has only been negative (-0.1%) once, in April 2015, since its adoption in 1996
• RPI has only been negative (-0.4%) once, in March 2009, since 1960
• The 15-year average for CPI and RPI indexes is 3.03% and 4.26% respectively
• As RPI is being retired, CPI is already the more usual measure.

Our conclusion.

For retail, food and beverage, and leisure sectors, the ban on UORRs will have its greatest impact in prime, long-lease environments where review clauses still hold weight.

Short-term: Expect uncertainty, valuation softening in some investment classes, and experimentation with alternatives – stepped rents, index-linked clauses, and turnover hybrids. Incentives may be pulled back, and lease terms may shorten.

Medium-term: As in Ireland, the market is likely to adapt – ultimately that is what markets do. Open-market up/down reviews could become the norm and rent models may evolve to be more performance-linked and partnership-based. We think that trend, if you can call it that, is long overdue. There is the potential for greater alignment to international leasing practices, which for the most valuable locations could increase the investor pool.

For tenants, this reform represents a rebalancing of risk – rents can finally track real-world trading conditions. For landlords, it is a challenge to preserve asset value and financing stability while staying competitive in attracting occupiers. For advisors, this might well be good news, as the changes are likely to introduce a new set of parameters for the parties to argue over! Those who have already invested time in understanding the financial mechanics of occupier businesses will see this as an opportunity to be even more empowered in this brave new world.

For every landlord or tenant that commends the government for making bold, visionary decisions, there will be many who feel the timing is astonishingly ill-considered, bearing in mind the Law Commission’s ongoing consultation on the L&T Act. Common sense would surely suggest that a more joined-up thought process could have resulted in even more radical change – and that, on balance, could have been good for landlords, tenants and consumers.

The one thing that seems most likely, is that this very specific enforced change will have little or no impact, good or bad, on the very things the government believes it is tackling. That is the real cause for concern.