English Devolution Bill: Is it the end of upwards-only rent reviews?

A single clause buried in the English Devolution Bill could fundamentally reshape the UK commercial property landscape – with profound implications for landlords, tenants, and investors nationwide.

The hidden game-changer

Tucked away in the English Devolution and Community Empowerment Bill – legislation ostensibly focused on regional governance – lies a provision that has got the commercial property community talking. The proposed ban on upwards-only rent review clauses in new commercial leases, as well as renewals under the Landlord and Tenant Act 1954, represents a potential seismic shift in the landlord-tenant dynamic.

This isn't merely a technical adjustment to lease terms – it's a fundamental rebalancing of power that could redefine how commercial property operates in the UK.

Understanding upwards-only reviews: The status quo under threat

Upwards-only rent review clauses have been the bedrock of UK commercial leasing for decades. These contractual provisions allow rents to increase at predetermined intervals whilst preventing any reduction, regardless of market conditions. Whether through open market reviews, turnover-based assessments, or index-linked adjustments, the principle remains constant: rents can rise but never fall.

Historical context: Born from crisis

The prevalence of these clauses traces back to the turbulent inflationary periods of the 1970s and 1980s. Faced with rapidly rising costs and diminishing returns, landlords sought protection through contractual certainty. What began as a defensive measure evolved into market orthodoxy, becoming so entrenched that both parties accepted them as standard practice.

For landlords, these clauses provided:

• Income stability and predictable cash flows.
• Investment yield protection against market volatility.
• Inflation hedging during uncertain economic periods.

For tenants, however, the story was different. During recessionary periods, they often found themselves trapped paying above-market rents whilst their businesses struggled with declining revenues.

How it would work

If enacted in its current form, the Bill would:

1. Prohibit upwards-only rent reviews in all new leases granted after the commencement date.
2. Apply to lease renewals, even where the original lease contained upwards-only provisions.
3. Include robust anti-avoidance measures to prevent disguised upwards-only arrangements.

The legislation's anti-avoidance language is particularly significant – it would void any provision attempting to replicate upwards-only reviews through alternative mechanisms.

Market impact: Winners, losers, and unintended consequences

The tenant dividend

Tenants stand to benefit significantly from increased flexibility and protection against paying above-market rents during downturns. This could provide crucial breathing room during economic uncertainty and enable more responsive business planning.

Investor anxiety

Critics argue the ban could fundamentally undermine the UK's attractiveness to institutional investors and pension funds – groups that prize predictable, inflation-linked income streams. Key concerns include:

• Reduced investment appeal.
• Dampened development appetite as speculative projects become less viable.
• Tightened lending criteria as funders reassess risk profiles.
• Increased financing costs to compensate for rental uncertainty.

Development finance: A new reality

The ripple effects could be particularly pronounced in development finance:

• Forward-fund deals may require shorter review cycles or enhanced covenants.
• Banks may demand additional security or higher interest rates.
• Some speculative developments may become economically unviable.

Learning from Ireland: A precedent for optimism?

Ireland's 2010 ban on upwards-only rent reviews offers valuable insights. Despite initial market anxiety, the long-term impact proved more modest than predicted. The market adapted through:

• Shortened lease terms providing natural flexibility.
• Index-linked arrangements offering inflation protection.
• "Cap and collar" clauses balancing risk between parties.
• Increased transparency in rental arrangements.

Whilst short-term volatility occurred, commercial investment ultimately stabilised as market participants adjusted their strategies.

The new market landscape: Adaptation strategies

We anticipate several emerging market practices:

Structural Changes

• Shorter leases without rent reviews becoming standard, aligning with European norms.
• Increased break clause usage providing bilateral flexibility, (effectively getting you back to a shorter-term lease position).
• More frequent rent reviews on longer leases for regular market adjustments.

Pricing mechanisms

• Index-linked and stepped rents gaining even more prominence.
• Potential for inflated rents to counteract the uncertainty of future rents, especially in prime and eagerly fought for properties.
• Risk premiums in prime locations to compensate landlords, potentially offsetting some tenant benefits.
• Increased use of Turnover-based arrangements reflecting a more dynamic approach to rental value, aligning rent with business performance business performance.

Retail market trajectory

The retail sector, already transformed by post-COVID flexibility demands, will likely accelerate towards:

• Shorter-term leases without reviews.
• Performance-linked rental structures.
• Enhanced operational flexibility.

Transaction complexity: The new normal

The transition period will likely see:

Negotiation challenges

• Extended heads of terms discussions as parties model various risk-sharing mechanisms.
• Complex lease negotiations balancing flexibility with predictability.
• Higher professional fees reflecting increased transaction complexity.

Market adaptation period

• Temporary transaction delays as market practices evolve.
• Learning curve for legal and property professionals.
• Potential short-term market volatility.

The broader context: ESG and market evolution

This proposed change occurs against a backdrop of ongoing market transformation. The emergence of a two-tier market – premium ESG-compliant buildings versus legacy assets – demonstrates the property sector's capacity for adaptation.

Just as ESG requirements have created new opportunities and risks, the potential end of upwards-only reviews will likely generate winners and losers, with success depending on adaptability and strategic foresight.

Strategic implications: Preparing for change

Whether or not the Bill passes unchanged, the policy direction is unmistakable. The Government is prepared to challenge entrenched market norms in pursuit of a more balanced leasing environment.

For landlords

• Portfolio review: Assess exposure to upwards-only dependencies.
• Diversification strategies: Consider alternative income protection mechanisms.
• Development planning: Factor new risk profiles into project viability.

For tenants

• Lease strategy: Prepare for more complex but potentially favourable negotiations.
• Market timing: Consider the optimal timing for lease events.
• Professional support: Engage specialists familiar with evolving market practices.

For investors

• Risk assessment: Recalibrate investment models for new rental dynamics.
• Market positioning: Consider how regulatory changes affect competitive positioning.
• Due diligence: Enhanced scrutiny of lease terms and market exposure.

Conclusion: Embracing the evolution

The potential end of upwards-only rent reviews represents more than a technical legal change – it's a fundamental shift towards a more dynamic, responsive commercial property market. Whilst uncertainty inevitably accompanies such transformation, history suggests the market's remarkable capacity for adaptation.

The coming months will be crucial as the Bill progresses through Parliament and industry participants prepare for what could be the most significant change to commercial leasing practice in decades. Success will belong to those who embrace change, adapt quickly, and view regulatory evolution as an opportunity rather than merely a challenge.

The commercial property market has weathered countless storms and emerged stronger. This latest challenge, whilst significant, is unlikely to be different. The key lies in preparation, adaptability, and strategic thinking.

Ready to future-proof your portfolio?

Our Browne Jacobson retail specialists are available to discuss adaptation strategies and help navigate this evolving landscape.