“The timetable for implementing the Act is not yet clear, and the ban is unlikely to take effect until the latter half of 2027, but the touchpaper has been lit.”
– Mark Gauguier – Farrer & Co
Traditionally, upwards-only rent reviews have been a staple of the commercial property investment market, guaranteeing a minimum income stream to investors and lenders for the duration of a commercial lease.
This certainty has made commercial property an attractive asset class for both domestic and foreign investors and has formed an essential component in their valuation and modelling.
However, when the English Devolution and Community Empowerment Act 2026 received Royal Assent in April, the Government introduced the power to ban upwards-only rent reviews in commercial leases. The timetable for implementing the Act is not yet clear, and the ban is unlikely to take effect until the latter half of 2027, but the touchpaper has been lit.
Which leases will be affected?
The ban will catch all business leases which are granted after the Act comes into force, so long as the tenant is in occupation of the premises for the purposes of its business at the time of the review (or where the tenant potentially could be).
The ban will apply to any rent review where the new rent is unknown on the date the lease is entered into – i.e. where the revised rent will be calculated using an undetermined “reference amount” such as an open market rent (or other hypothetical basis), inflation index or turnover. However, the ban will not affect stepped rents or rents increased by a fixed multiplier, as these rent increases are pre-agreed and known.
In a concession to landlords, the Government has committed to consult on permitting collars and caps, i.e. to allow the rent calculated against the reference amount to fall or increase by a certain percentage (e.g. 5%), although the Government has indicated that any collar will need to have a reciprocal cap.
In a greater win for landlords, MHCLG has indicated informally that rent reviews can be determined against two reference amounts (e.g. the rent can be revised to the higher of (1) the open market rent, and (2) the passing rent adjusted in line with an inflation index), provided that the rent can potentially still be less than the passing rent.
We will have to see how the consultation and informal advice translate into secondary legislation and formal guidance in due course.
What are the impacts?
The sure return offered by upwards-only rent reviews has always been a key attraction for investors and lenders in commercial real estate. In recent years, the sector has, of course, been grappling with volatility in values and demand thanks to the high cost of debt and other macroeconomic and geopolitical factors.
Markets and investors thrive on stability, which makes further uncertainty unwelcome at a time when the sector would benefit from measures to instil confidence.
Nevertheless, it is relatively rare to experience a falling market and a downwards trajectory in open market rents and inflation, so the impact of the ban may have little significance in practice. It is also worth noting that upwards only rent reviews are not common outside the United Kingdom.
The experience from other jurisdictions which have abolished upwards only rent reviews (such as in Ireland and in some Australian states) indicates there may be some short-term market instability, while investors, lenders and valuers recalibrate their modelling and valuation bases, but that the real estate market will adjust and settle over the subsequent months and years.
Once the ban is implemented, the resulting market adjustment in England and Wales will depend on wider market conditions and the bargaining power between landlords and tenants. The market will shift to restructure rents; landlords may offer artificially higher initial rents in order to safeguard their rental income stream against future downward reviews, possibly offset with longer rent-free periods or other incentives to balance the initial headline rent.
Conversely, the market may settle with lower initial rents but with smaller incentives (e.g. capital contributions and rent-free periods) than are market standard at present.
We are also likely to see more leases with fixed and stepped rents or percentage increases to preserve income certainty throughout the term. Index-linked reviews may well gain in popularity (on the assumption that inflation will not become negative in the near future), and certainly it seems likely that landlords will want to use index linking if they are permitted to include two reference amounts in rent reviews. Caps and collars may become more prevalent if the Government consultation duly permits these.
In addition, the ban may prove a catalyst to accelerate the market trend for ever shorter lease terms, and we are likely to see more landlords break rights on rent review, as landlords seek more flexibility to renegotiate the rent. Nevertheless, tenants in sectors with expensive fit-outs will resist this, as there will be a shorter period to amortise and offset their initial capex.
What should landlords do?
Until we know the likely timescale for implementation and further details on key points, it is difficult for investors and lenders to evaluate their portfolios astutely and reset their risk assessments, valuation models and strategies.
Ultimately, however, the power of the ban is likely to be blunted if the Government makes the pragmatic concession to permit reviews with two reference amounts and a cap and collar arrangement, which will soften the impact on the real estate industry and help to preserve income certainty for investors and lenders.
This is not the forum for evaluating whether or not there is much merit in this particular Government intervention, but the ambivalence exhibited by the investor clients with whom I have spoken tells its own story; it’s not business as usual, but the sense is that there is more heat than light in this move.
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