Commercial Lease Reform: The Unintended Consequences of Banning Upward-Only Rent Reviews

The government’s surprise announcement yesterday to ban upward-only rent reviews (UORR) in commercial leases has sent ripples through the property sector. While positioned as a measure to help small businesses and revitalise high streets, this policy intervention may achieve the opposite of its intended goals.

What’s Changing?

As part of the English Devolution and Community Empowerment Bill, the government will prohibit upward-only rent review clauses in new commercial lease agreements across England and Wales. Under the new rules:

• Existing leases remain unaffected – the ban applies only to new agreements and renewal leases where tenants have security of tenure
• Landlords must choose between fixed rents or review clauses that allow rents to move both up and down
• Limited exemptions apply, including agricultural leases
• Enforcement mechanism – any UORR clause in a new lease will be unenforceable

The government argues that upward-only reviews “pit landlords against businesses” and contribute to unaffordable rents that force shop closures, creating vacant high streets.

The Market Reality: Why This Policy May Backfire

While the intention to support small businesses is commendable, the practical implications of this ban are likely to be counterproductive for the very tenants it aims to help.

Shorter Lease Terms and Reduced Security

The most immediate consequence will be landlords offering shorter lease commitments. Upward-only rent reviews have historically enabled landlords to offer longer-term leases with confidence that rental income would keep pace with inflation and market conditions. Without this protection, expect to see:

• Three to Five-year leases becoming the norm instead of traditional 10-15 year terms
• Reduced tenant security (so more leases being excluded from the security of tenure provisions in the Landlord and Tenant Act 1954) as landlords seek flexibility to reset rents more frequently
• Higher initial rents to compensate for the inability to guarantee future increases

The Fixed Increase Alternative

Many landlords will likely pivot to fixed annual rent increases, potentially creating a worse outcome for tenants. Rather than market-responsive reviews that might remain flat in difficult trading conditions, tenants could face:

• Predetermined annual increases of 2-4% regardless of market conditions
• Less flexibility during economic downturns when market rents might otherwise fall
• Higher overall cost over the lease term compared to market-responsive reviews

Investment Confidence and Development Viability

The lack of consultation and sudden policy shift raises serious concerns about investment confidence. The immediate market reaction – with leading REITs trading down following the announcement – signals investor nervousness. This could translate into reduced development activity as schemes become less viable, higher borrowing costs as lenders reassess risk profiles, and capital flight to markets with more predictable regulatory frameworks.

Alternative Approaches That Could Actually Help

Rather than a blanket prohibition, a more nuanced approach could recognise that different property sectors operate under distinct market dynamics. 

Retail leases, particularly on high streets, often involve shorter terms and more frequent rent reviews due to volatile trading conditions, whilst industrial and office markets traditionally rely on longer-term commitments with upward-only reviews providing investment stability. 

Similarly, size-based exemptions could protect genuine small businesses – perhaps those with annual turnovers below £2 million or occupying premises under 2,000 square feet – whilst preserving the investment framework that underpins institutional funding for larger commercial developments. 

Such targeted measures would address the government’s stated concerns about small business viability without undermining the broader commercial property investment market that supports economic growth and development.

The Bigger Picture

This policy exemplifies a broader trend of government intervention in commercial property markets without adequate consideration of market mechanisms. 

The commercial property sector is already facing significant challenges from changing work patterns, economic uncertainty, and development viability issues. Adding regulatory uncertainty into this mix risks accelerating, rather than addressing, the problems of vacant high streets and struggling businesses.

Conclusion

While the government’s desire to support small businesses is laudable, the ban on upward-only rent reviews represents a policy solution that fundamentally misunderstands how commercial leasing markets operate. Rather than providing the intended relief, this measure is likely to result in shorter, less secure tenancies with potentially higher overall costs.

The immediate market reaction and industry criticism should serve as a warning that good intentions do not always translate into good outcomes. The government would be wise to pause this legislation, engage in meaningful consultation with industry stakeholders, and consider more nuanced approaches that actually achieve their stated objectives.

The path to revitalising high streets and supporting small businesses runs through understanding and working with market dynamics, not against them. This ban represents a missed opportunity to develop truly effective policy that balances tenant needs with investment confidence – the foundation upon which a thriving commercial property market depends.

Image Credit