PROPOSED BAN ON UPWARDS-ONLY RENT REVIEW CLAUSES: A SIGNIFICANT TURNING POINT FOR UK COMMERCIAL LEASING

In an unexpected proposal the UK Government has unveiled a legislative proposal to ban upwards-only rent review clauses (UORRs) in new and renewed commercial leases under the English Devolution and Community Empowerment Bill. This proposal if enacted will be one of the most significant changes to the commercial leasing sector. 

The aim of the Bill is to make commercial leasing fairer for tenants and ensure rents are set more efficiently and to stimulate economic growth. Whilst the policy is to support small businesses and revive high streets by making rent more flexible and responsive to market conditions, it is questionable as to how this will be achieved when the trend is for high street leases to be short-term.

What Are Upwards-Only Rent Review Clauses?

UORRs are lease provisions that permit periodic rent reviews, typically done every 3 or 5 years, however, they only allow rent to increase or stay the same but never decrease. So even if the market rents fall below the passing rent stated in the lease, the rent will never fall below that level.  Although these clauses may offer landlords a stable and predictable income, they can also drive up rental costs and contribute to rising vacancy rates, particularly in areas facing economic hardship.

Key Provisions of the Proposed Ban

Rent review by reference to market rent, notional rent, index linked or turnover linked will no longer be upwards-only or subject to a minimum uplift; the reviewed rent could go up or down. 

The Government’s explanatory notes make no exclusion of the use of ‘cap and collar’ limitations and no further details have been proposed at this stage.  Fixed or stepped rent increases (where rent increase is pre-agreed) at the lease’s outset will remain permissible.

Parties cannot agree to contract-out of the lease restrictions, as the proposal contains anti-avoidance provisions to prevent this.

Who Will Be Affected?

The ban will apply to:

• All new commercial leases occupied by tenants for business purposes entered into after the legislation comes into force.

  
  

• Lease renewals triggered under the current law.

  
  

• Agreements that force tenants to take on new leases at rents set using banned methods.

  
  

It will not apply to existing leases or contracts entered into before the legislation takes effect.

Implications for Stakeholders

For Landlords and Investors:

• Valuation uncertainty due to less predictable rental income.

  
  

• Landlord’s may favour shorter lease terms without security of tenure or include stepped rents to manage risk.

  
  

• Impact on financing especially where rental income projections are tied to guaranteed rental increase.

  
  

For Tenants:

• Greater negotiating power especially during renewals.

  
  

• Protection from market downturns with rents able to fall.

  
  

• Simplified lease terms which promote transparency and fairness.

  
  

What’s next?

This proposal is still in the early stages of the parliamentary process. The Bill has only had its first reading in Parliament, which is just the formal introduction, but the process could be concluded in 6 to 12 months. There’s no set date for the second reading, so the ban is far away from becoming legislation but in the intervening period there will be lobbying, and the Bill may be amended during that time.

The proposed ban on UORRs represents a significant shift in the UK’s commercial leasing framework. If enacted, it could not only foster a more balanced landlord-tenant relationship, but also support economic resilience and growth in the retail sector for instance. Careful thought needs to be given to all of the other factors that have affected the decline of the retail sector, not rent reviews alone.  However, its success will depend on careful legislative drafting, stakeholder engagement, and thoughtful implementation.

We will be keeping a keen eye on the parliamentary process and reporting further updates as matters develop.

For guidance and support on Commercial Real Estate, contact us on 0808 172 93 22, info@fgsolciitors.com or complete our quick contact form for a no obligation discussion!

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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.