The recent publication of the English Devolution and Community Empowerment Bill has marked a significant, if unexpected, turning point in commercial property law with the proposed abolition of upward-only rent reviews in new commercial lease agreements. This proposal signals the government’s intent to address long-standing criticisms of rent review mechanisms that have often favoured landlords and limited tenant flexibility. This is particularly relevant in an evolving retail and commercial landscape where rents can quickly become unaffordable and compromise business viability.
The reform is framed within wider government legislation aimed at furthering its devolution strategy across England and Wales, with objectives to empower local authorities, foster community investment and remove structural barriers to economic participation. The introduction of leasing mechanisms that enable rents to fluctuate both up and down is intended to encourage more equitable commercial leasing arrangements that can revitalise high streets and support growth.
Upward-Only Rent Reviews
Upward-only rent reviews are a long-established, fundamental feature of commercial leases in England and Wales, stipulating that any reviewed rent must not fall below its current level, even if open-market rental values have declined. They allow the rent to be adjusted at regular intervals, usually every five years, and have traditionally been seen as offering income certainty to landlords, particularly institutional investors seeking assurance of the capital value of commercial lease portfolios.
However, various industry bodies, tenant groups and small business representatives have long challenged such clauses, claiming they create an inherent imbalance in landlord-tenant relationships and lock tenants into above-market rents and restrict their ability to adapt to dynamic economic or trading conditions.
The retail and hospitality sectors have been particularly critical of the practice, as these were severely impacted by the COVID-19 pandemic and subsequent economic headwinds that saw many businesses saddled with rent liabilities that bore little relation to declining footfall or profitability. The effects, however, are not limited to these industries and are felt by commercial tenants in all sectors.
Key Provisions of the New Bill
The ban applies to all new commercial lease agreements entered into after the legislation comes into force, including lease renewals previously under the Landlord and Tenant Act 1954. The ban, however, will not be retrospective, and existing leases remain unaffected unless renegotiated or extended.
While upward-only reviews are banned, the Bill still formally allows for open market rent reviews and index-linked rent reviews (e.g. tied to CPI or RPI), provided there is no restriction on the rent decreasing. However, inflation trends suggest that these leases will only increase and are therefore likely to undermine tenant protection. These areas are almost certain to attract further scrutiny as the Bill progresses through Parliament.
Certain types of leases may be exempt, including short-term tenancies of 6 months or less and agricultural leases, likely due to the unique nature of farming tenancies and the specific legislation that governs them. Any clause in breach of the new law will be rendered void and unenforceable, with tenants granted a statutory right to apply for declaratory relief or to have the lease modified.
Implications for Tenants
The immediate benefit for tenants is the potential for rent levels that more accurately reflect market conditions, including downturns. Businesses will be better positioned to negotiate lease terms that offer protection against economic volatility, enabling long-term financial planning and sustainability. Without rigid upward-only clauses, tenants gain greater negotiating leverage during lease renewals or mid-term reviews. This is particularly beneficial for independent businesses and SMEs, many of which were previously locked into disproportionately high rents.
The changes may also encourage new businesses to enter the commercial property market, particularly in areas where traditional leasing terms have acted as a deterrent and have suppressed interest. This could stimulate local economic regeneration and diversify existing high street offerings. The potential, however, is for landlords to set rents at artificially high levels at the outset to protect against adverse market conditions and the resultant drop in rent revenue.
Implications for Commercial Landlords
The lack of prior consultation has meant the proposalshave caught commercial landlords by surprise. For institutional investors in particular, this reform introduces greater uncertainty into rental income streams, as the guaranteed effect of upward-only clauses was a key element in asset valuation and investment models. The proposed changes may now need investors and lenders to adjust expectations and re-evaluate risk profiles, especially as the ban applies to all commercial properties and not just to high street locations.
Properties historically valued based on guaranteed escalating rents may see a softening in capital values as market-based reviews introduce downward risk. While this may not immediately affect prime locations with high demand, secondary and tertiary assets, particularly those in struggling town centres, may experience a more tangible impact and impact investment appetite.
A more tenant-friendly legal environment may require landlords to compete harder to retain desirable occupiers, which could lead to more collaborative landlord-tenant relationships, with incentives such as rent-free periods, fit-out contributions or turnover-based rents becoming more commonplace. These inducements are already common in some sectors but have the potential to extend to new tenants.
Broader Market Effects
The real estate and financial markets thrive on stability, and the commercial property investment sector is already under strain from high borrowing costs and fluctuating values and demand. The proposed ban is likely to impact the terms and costs of commercial development financing and acquisition, causing some investors to seek income opportunities elsewhere.
Furthermore, the proposal has been framed as a boost for high streets and retail tenants, but its real impact may not be as straightforward. Retail occupiers typically sign shorter leases that rarely include rent review clauses. Instead, they face unique pressures not shared by other commercial property sectors, such as high business rates, the shift to online shopping and declining footfall.
A one-size-fits-all approach is likely to have little impact on the retail sector but may destabilise other sectors where reform is not necessary. The commercial property sector already faces significant challenges from hybrid working, economic uncertainty and development viability. Regulatory uncertainty risks accelerating the problems of vacant high streets and struggling businesses. Questions of whether this Bill will address its core objective are, therefore, valid.
If implemented, property lawyers and surveyors will need to carefully re-draft commercial lease agreements and advise clients on which review mechanisms remain acceptable. Dispute resolution procedures may need to evolve as market-based rent determinations become more frequent, and potentially more contentious, in often ambiguous economic conditions. It is worth noting that the Bill has only had its first reading and will no doubt be subject to scrutiny in Parliament and consultation with the commercial property community.
Looking Ahead
The long-term impact will depend on how the commercial property market responds to the new legal landscape. Tenants will undoubtedly benefit from a system more aligned with market realities, but landlords will face a period of adjustment as they recalibrate risk, pricing and investment expectations.
There is no doubt that this reform represents a significant change to commercial leasing with the potential to rebalance the dynamics of the relationship between landlord and tenant. If integrated carefully, it could lead to a sustainable commercial property market more responsive to the needs of modern businesses and better aligned with the government’s vision for revitalised communities. Visit our website to learn more and subscribe to our Insights to receive our regular content.
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