Ministers are proposing to outlaw upward-only rent reviews on commercial property in England in a move designed to ease cost pressures on small businesses but one that could significantly reshape the dynamics of the commercial lettings market.
The measure is contained in a proposed amendment to the English Devolution and Community Empowerment Bill, which is currently making its way through Parliament.
If enacted, it would prevent landlords from relying on clauses that allow rents to rise at review points while never falling, a long-established feature of many UK commercial leases.
Upward-only rent reviews have been a standard mechanism in retail, office and industrial leases for decades, providing landlords and investors with predictable income growth and underpinning property valuations.
MOUNTING CONCERN
Critics, however, argue that such clauses can leave tenants paying above-market rents during downturns, particularly in sectors such as retail and hospitality.
The government has framed the proposal as part of a wider effort to support local economies and high streets by giving businesses greater protection against rising fixed costs.
According to the Department for Levelling Up, Housing and Communities, small businesses account for more than 99% of UK firms and employ around 60% of the private sector workforce, making property costs a key policy concern.
Lawyers warn that a ban may not lead to lower rents in practice.
Property lawyers and market analysts warn that a ban may not lead to lower rents in practice.
Instead, landlords could restructure leases to protect income, for example by agreeing fixed rental increases at the outset of a lease or shortening lease terms to allow more frequent renegotiation.
Such approaches are already used in parts of the market, particularly for smaller units and newer developments.
WIDER IMPLICATIONS
There are also potential implications for security of tenure. Under the Landlord and Tenant Act 1954, business tenants typically have a right to renew their lease when it expires.
Industry bodies including the British Property Federation have previously noted that landlords may be more likely to insist on tenants contracting out of these protections where regulatory or market risks increase.
The proposed change comes against a backdrop of uneven performance in the commercial property market.
While industrial and logistics assets have remained resilient, retail rents in many locations are still below pre-pandemic levels, according to data from MSCI and the Valuation Office Agency.
UNINTENDED CONSEQUENCES
Patrick Ansell (main picture, inset), Legal Head of Litigation at Taylor Rose Law Firm, says: “Apart from the commercial implications for landlords and investors of a ban on upward-only rent hikes on commercial properties, the proposals could also have unintended consequences from a legal perspective.
“For example, it is possible that landlords would seek to increase rent through alternative mechanisms such as fixed periodic increases agreed at the start of the tenancy rather than upward-only rent reviews.
“It is also possible that landlords could be more inclined to insist on contracting out of the security of tenure provisions under the Landlord and Tenant Act 1954, to avoid being tied to a tenant for an indefinite period with the risk of declining rent once they are in occupation.”
