Commercial landlords thought perhaps they would escape the kind of tenant empowering measures being meted out to residential landlords, those contained in the Renters’ Rights Bill. It seems they are going to be disappointed.
The English Devolution and Community Empowerment Bill, introduced to Parliament on 10 July for its first reading, has, tagged onto its end, a surprise bombshell for landlords and their business tenancies.
The Bill contains provisions, which will be inserted into the Landlord and Tenant Act 1954, banning upwards only rent reviews in new UK commercial leases. This will apply regardless of whether the rent review is based on open market rent, index-linked or turnover rents.
Similar provisions will apply to setting the initial rent for a lease granted pursuant to a “put option” (see below) under which a tenant can be required to take a new lease, but not, apparently, where the tenant has an option to renew.
The Bill also gives tenants the power to trigger a rent review (and take other actions to make the rent review happen) where the lease does not allow the tenant to do so.
For those old enough to remember, there have been previous attempts to ban upwards-only rent reviews, so it is by no means certain that this will happen, but it is certainly something to keep an eye on.
Warning: This article is for informational purposes only and does not constitute legal or financial advice. Always consult professionals for specific guidance.
Just imagine you’re a landlord, sipping your first cup of morning coffee, confident in your predictable income stream your commercial property portfolio produces, until you read your morning newspaper. Your commercial leases, just like countless others across the UK, have always included upwards-only rent review clauses, but this safety net is in danger of being holed.
Since the inception of the 1954 Landlord and Tenant Act, statutory restrictions in commercial leases have been kept to a minimum, these mainly to do with succession. UK Commercial leases therefore have traditionally been based on freely negotiated and agreed terms in negotiated contracts between the parties.
The upward only rent review ensures that rents never dip, they can never go down, only up or stay the same. If the market goes down, even when it goes down a long way, as during Covid, rents won’t be any less. This contractual clause has been the bedrock of commercial leasing for decades; it’s been a safety net for UK investors and a cornerstone of commercial property valuations.
Tucked away at the end of The English Devolution and Community Empowerment Bill’s 338 pages, there’s a government plot nobody saw coming; if the Bill becomes law without amendment, upwards-only rent reviews (UORRs) are set to be banned in all new commercial leases across England and Wales.
Ominously it does not stop there. Similar provisions will apply to setting the initial rent for a lease granted pursuant to a “put option” under which a tenant can be required to take a new lease - but not, apparently, where the tenant has an option to renew.
(A "put option" in this context is a contractual mechanism where a landlord has the right to require a tenant to enter a new lease - essentially, the landlord can "put" the lease onto the tenant. This is distinct from a tenant’s option to renew, where the tenant has the choice.)
The provision states that when a new lease is granted because of a put option (i.e., the landlord exercises their right to force the tenant to take a new lease), the initial rent for this new lease will be subject to the same rules as under the UORR ban.
This likely means the initial rent for a new term must be set based on open market conditions, without an upwards-only clause, allowing for potential upward or downward adjustments in future rent reviews.
The Bill will also give tenants the right to trigger a rent review at will. It could take other actions to make the rent review happen, where the current lease does not allow the tenant to do so.
This isn’t just a minor tweak to the Landlord & tenant Act, it’s a potential earthquake for the commercial property market which could have a devastating impact, particularly for institutional investors – the pension funds managing sprawling commercial investment estates, from high street department stores to retail parks, and from leisure premises to industrial buildings.
Small-scale landlords, those for instance leasing smaller high street shops, will be impacted less severely as their lease lengths tend to be shorter (5 to 10 years), but nevertheless, the ripple effects of this change could reshape their investment strategies as well.
So, the banning of UORRs has the potential to redefine the UK commercial landlord-tenant relationship and what it means for both the big players and the smaller operators on the UK’s commercial property scene. Landlord-tenant negotiations will likely be changed forever, as could the value of many commercial properties.
The government’s rationale is a continuation of successive government’s efforts to revive UK’s declining high streets and the so-called levelling up agenda. With an estimated one-in-seven high street premises standing vacant, ministers argue that UORRs are setting landlords against business tenants, driving up rents even during economic downturns, resulting in tenants being driven out, and contributing to many shop closures.
The goal therefore is to make commercial leases fair to both parties, to help keep small businesses afloat and healthy, and to breathe new life back into struggling town centres. By banning UORRs, the government argues, rents will reflect the true market conditions that tenants’ businesses are operating in, rising or falling based on open market values, inflation, or turnover.
This measure was floated by Labour back in 2001 but not acted upon, and in the Republic of Ireland UORRs were banned in 2010. But its sudden inclusion in a bill which focuses on devolution, without any prior consultation, has left the commercial property industry shocked and reeling from the possible consequences to their businesses.
The introduction of the measure is by no means a forgone conclusion. As the Bill begins its parliamentary journey, lobbying is expected to ramp up. A second reading, still unscheduled, will inevitably result in a clash between Labour’s tenant-friendly reformers and large institutional landlord investors’ concerns.
For large institutional investors, pension funds, the insurance companies, and the real estate investment trusts (REITS), any ban on UORRs feels like a plot that threatens their entire commercial property investment strategies.
These investors have long relied on the predictability that UORRs give them, a stable, inflation-linked income stream that enables them to plan and manage their own commitments. The UORR underpins property valuations, it supports borrowing for major developments, and it attracts overseas capital to the UK. Without it, the narrative goes, capital will flow elsewhere.
So, UORRs have provided investors with a financial safety net, ensuring rents never fall below the initial lease amount, even in a market slump. This stability is critical for institutional investors, who use guaranteed rental growth to secure loans and justify high valuations.
The proposed ban could lead to a “massive re-valuation” of investment properties. It could turn what are secure fixed-income assets into volatile ones. A large drop in property values would reduce returns for pension funds, impact their everyday investors and it would even affect government tax receipts from capital gains and stamp duty.
Melanie Leech, Chief Executive of the British Property Federation, has said of the ban:
“Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the Devolution Bill.”
She has argued that the ban risks denting investor confidence at a time when development viability is already stretched. For institutions, the loss of UORRs could make the UK a less attractive place to invest compared to other international markets, with returns becoming less predictable.
A possible effect of such a change: institutional investors could pivot to shorter leases or fixed-stepped rent increases. which at first sight appear exempt from the ban. However, whichever way you look at it, shorter leases would reduce long-term income certainty, and fixed increases are not guaranteed to keep pace with market growth, potentially alienating tenants and investors alike.
Some may switch to turnover-based rents or break clauses in an attempt to mitigate risk, but these add complexity and might lead to more disputes. The Irish experience offers a clue here: after their 2010 ban in the Irish republic, investors adapted using mechanisms such as floors on rent reductions. That’s one way, but the UK’s broader anti-avoidance provisions may limit such moves.
Institutional landlords may need to rethink their whole approach. They could try focusing on a more hands-on property management approach, upgrading their buildings to attract premium tenants who are willing to pay market rents without relying on UORR clauses. But this doesn’t get around the fact that financing terms are usually tied to steady rental income. The result is probably that some investors would exit marginal markets, secondary offices and retail, where values are already under pressure.
For small to medium-size commercial landlords, usually those landlords owning a small portfolio of perhaps mixed use (flats over shops) high street shops, small office blocks, and industrial units, the ban works two ways: these landlords usually lack the financial clout and diversified portfolios of institutional players, which makes them vulnerable to market shifts, but they are also more agile in adapting to change. What’s more they deal in short term leases of say 5 to 10 years which makes UORR less of a big deal. Ironically, this could bring opportunities to small-scale landlords.
Even so, a falling market would mean lower rents at review, directly hitting cash flow when many small-scale landlords rely on rental income to service their mortgages. A potential drop could strain their debt obligations, especially if lenders tighten criteria in response to an increased perceived risk.
Tenants would be empowered to trigger rent reviews themselves, to push for downward adjustments in tough markets. Small landlords willing to differentiate themselves by offering flexible terms such as turnover-based rents and/or more break clauses could find they become more attractive to small business tenants. By investing in property improvements, particularly measures to improve environmental efficiencies, something they are mandated to do anyway, they could command higher initial rents to offset the risk of future downward reviews.
The ban on upwards-only rent reviews (UORRs) in the Republic of Ireland, introduced in 2010 under Section 132 of the Land and Conveyancing Law Reform Act 2009, provides a useful guide to understanding the potential impact of a similar measure in the UK.
The ban caught the industry off guard; there was no prior consultation. It led to immediate concerns about reduced property valuations. The Irish Auctioneers and Valuers Institute (IAVI) and CB Richard Ellis warned at the time that the lack of guaranteed rental income would deter investors, particularly foreign ones, and make financing developments harder.
A division emerged between pre-2010 leases (those with UORRs) and post-2010 leases, which allowed upward/downward reviews. It created something of a two-tier market as properties with UORRs were seen as more secure, commanding higher capital values.
Landlords adapted by favouring shorter leases (e.g., 5–10 years with break clauses) over the traditional 25–35-year institutional leases. This trend, which by the way had already been underway due to market changes, mitigated the ban’s impact by aligning rents more closely with market conditions. Retail deals like the turnover-based rent arrangements agreed with Zara and H&M were increasingly used.
Despite the initial fears, the ban didn’t significantly affect investment. Overseas investment still flooded into Ireland post-2010, driven by a broader market recovery in the Republic and a favourable tax regime for business. Shorter lease terms and break clauses reduced the perceived risk of UORRs, making the ban less disruptive overall.
The ban on upwards-only rent reviews is a bold move to revitalise high streets and support small businesses, but it’s not without risks. Landlords should act now: review lease portfolios, model potential income drops, and explore alternative rent structures.
They should engage with industry bodies such as the British Property Federation to influence the Bill’s final form. For tenants, it’s a chance to negotiate leases that reflect true market conditions, potentially saving their struggling businesses from closure.
This proposal is more than a minor policy change. It represents a new chapter for the UK’s commercial property investing market. Whether from the point of view of a pension fund giant, or a high street landlord, it’s an unfolding story. If this becomes law, landlords will need to adapt to a new investing environment. Stay in touch with LandlordZONE for updates as this plot plays out.
Tags:
Comments