Ban on upward-only rent reviews would create huge uncertainty – Propertymark

An industry body has warned that banning upward-only rent reviews in commercial leases would have “far-reaching consequences”.

Propertymark has called on the government to provide a detailed consultation and robust impact assessment, warning that reforms could weaken investment in the commercial property sector.

Last year, the government announced, under the English Devolution and Community Empowerment Bill, that commercial landlords will be banned from adding increase-only rent review clauses to new contracts.

The clauses, which typically occur every three to five years in a lease, allow rent to either increase or remain the same at each review, but never decrease, even if market rents have fallen, and this provides commercial landlords with stability and certainty over their income.

Reduce transparency in the market

In response to the government reforms, the industry body writes on its website: “Propertymark members considered that the proposed removal of upwards-only rent review clauses represents a significant intervention in the commercial property market with potentially far-reaching consequences.

“There was a clear view that comprehensive consultation with the sector will be essential before any secondary legislation is introduced, alongside detailed assessment of the likely impact on investment, valuation practices, business rates income, town centre regeneration and market transparency”.

Propertymark also adds that turnover rents may become more common.

The industry body said: “Landlords and tenants may respond to the ban by making greater use of side letters or informal agreements. For example, a lease could record a lower headline rent, while a separate agreement requires the tenant to pay a higher actual rent.

“This could reduce transparency in the market, distort comparable rental evidence, and increase legal complexity. It could also make disputes harder to resolve.

“Landlords may also make more use of turnover-based rents, where rent is linked to the performance of the business occupying the premises. While this may suit larger national operators with strong accounting systems, smaller independent businesses may struggle with the added reporting and administrative requirements.”

Huge uncertainty

Industry experts have also warned the proposed ban would create huge uncertainty.

Patrick Ansell, legal head of litigation at Taylor Rose Law Firm, said: “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.”

Sarah Keens, associate in the real estate team of law firm Charles Russell Speechlys, said: “This is a significant development for the commercial property market and creates potential interference with income stability mechanisms that underpin asset valuation, financing structures, and long-term investment strategy.

“We are already getting lots of calls from clients in the institutional investment market who are asking for advice on how this legislation will affect their ongoing strategy. On the face of it, for tenants it is a significant change, as they could benefit from potentially falling rents as rent review will be valued against the backdrop of market conditions.”

She adds: “However, no doubt the market will readjust as this change is implemented. Tenants have benefitted from financial and other incentives from landlords to enter into leases, whether through break clauses, rent free periods, or capital contributions; will we continue to see these in the market as landlords find ways to mitigate the impact?

“We may start to see higher headline rents, shorter leases, more frequent reviews, and greater use of indexation or pre agreed fixed stepped rents as investors look to secure rental income and market confidence.”