Upwards-only rent reviews: What occupational landlords and tenants should be doing now

Recent legislation will prevent upwards-only rent review provisions from being used in new occupational leases once the relevant provisions come into force. Although implementation is not expected until a future commencement date, the direction of travel is now clear, and both landlords and occupiers should be considering how the changes may affect their leasing strategies.

Why does this matter?

Historically, rents could increase at review but could not decrease, even where market rents had fallen. 

The Government's view is that allowing rents to move both upwards and downwards will create a more flexible occupational market and reduce financial pressure on businesses during periods of economic uncertainty. 

In reality, the implications are likely to be considerably broader. Rent review provisions influence investment values, lending assumptions, development appraisals and portfolio management decisions. A change to the way rental income is reviewed inevitably affects the wider commercial landscape in which property assets are bought, sold and financed. 

Which leases will be affected?

The new regime is aimed at business occupiers and is expected to apply to occupational commercial leases in England and Wales, including many leases that are contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. 

Existing leases will generally remain unaffected, meaning landlords and tenants with current lease arrangements should not expect their existing rent review provisions to change automatically. 

However, the position can become more complex where lease renewals, options to renew or certain pre-existing arrangements are involved. Parties negotiating these provisions should seek advice at an early stage. 

What will this mean in practice?

For landlords

Landlords may need to revisit their approach to rental growth and income forecasting.

Many investment decisions and valuations have historically assumed that rent would either increase or remain static. Once upwards-only reviews are no longer available in new occupational leases, landlords may need to consider alternative methods of maintaining certainty, including fixed rental increases or other permitted review mechanisms. 

Landlords involved in development projects should also review their standard lease documentation to ensure compliance before the changes come into force. 

For tenants

Occupiers may welcome the opportunity for rents to reflect market conditions more accurately at review dates.

Businesses considering new premises should pay close attention to proposed rent review provisions and understand how future rent adjustments will operate. A review clause that permits rent reductions may assist with long-term budgeting and business planning where market conditions weaken. 

That said, tenants should not assume that every new lease will necessarily become cheaper. Market rents can still increase, and the outcome of any review will continue to depend on the agreed lease provisions and prevailing market evidence. 

Transactions currently in progress

The period before implementation is likely to create a number of practical issues.

Landlords and tenants currently negotiating leases, agreements for lease or renewal rights should consider whether the proposed transaction could be affected by the new legislation. The timing of documentation and the structure of future renewal arrangements may have long-term consequences that extend well beyond the initial term of the lease. 

Particular care should be taken where a transaction includes:

• Options to renew;
• Agreements for lease;
• Pre-let arrangements;
• Development leases; or
• Multi-let investment properties. 

Key takeaways

If you are negotiating a new occupational lease, now is the time to review your proposed rent review provisions.

Landlords should assess how the loss of upwards-only reviews may affect asset management and investment returns. Tenants should consider whether the new regime presents opportunities to secure more flexible lease terms. Both parties should review transactions currently in progress to identify any arrangements that could be affected by the forthcoming changes.

While further regulations and guidance are expected before the new regime takes effect, the commercial property market is already beginning to prepare for a significantly different approach to rent reviews in occupational leases.

If you are currently negotiating a new occupational lease or reviewing transactions in progress, our expert team can help you identify key risks and unlock new opportunities. Contact Lucy Zhu on 020 8461 6219, or member of our Commercial Property team.