Upward only rent review – the end is nigh!
16 July 2025Jul 2025 – 1.0 Buried deep within the English Devolution and Community Empowerment Bill 2025 published on 11 July 2025 (“Bill 2025”) is, in the word of one commentator, a seismic proposal that will, if as and when the Bill becomes law, affect all landlords and tenants of commercial property. Despite buried deep, pages 322-329 are also the last few pages of this gigantic Bill, which makes them easy to find.
1.1 Bill 2025 is to “Make provision about combined authorities, combined county authorities, the Greater London Authority, local councils, police and crime commissioners and fire and rescue authorities, local audit and terms in business tenancies about rent.” (my italics)
1.2 Bill 2025 Schedule 31 – to insert Schedules 7A and 7B before Schedule 8 in the Landlord and Tenant Act 1954 – proposal is for upward-only rent reviews to be unlawful.
1.2.1 Some 30 years ago, the Government then proposed to ban upward-only rent reviews but was, following consultation with commercial property market industry representatives, such as the British Property Federation (whose members are landlords, investors, owners, developers, funders, agents) and trade bodies, such as the British Retail Consortium, defeated by the powerful landlord lobby and the Royal Institution of Chartered Surveyors. The RICS, reasoning it should be voluntary, subsequently issued The Code for Leasing Business Premises in England and Wales 2007, sub-titled Leasing Business Premises: Landlord Code.
1.2.2 The RICS quest for the Code was to promote efficiency and fairness in landlord and tenant relationships. It was not a mandatory Code, (meaning chartered surveyors did not have to advise and recommend landlords to agree to the Code’s suggestions), and more importantly it was not obligatory – as if the RICS, a non-statutory body, could in any event have insisted – for landlords and tenants. What the Code did do, however, was to provide tenants and legal advisers with a host of ideas for what could be agreed in the wording and phrasing of leases – and, in my view, paved the way for why solicitors when drafting leases and related documents for landlords sometimes give the impression of acting for the tenant.
[1.2.3 As an aside, the one thing that is important to remember when you instruct a chartered surveyor is that the person concerned, known as a member, must comply with numerous mandatory dictates by the RICS itself, even if such dictates conflict with what you as the landlord or tenant want. This is not professional advice and recommendation in the purist form, but indoctrinated advice and recommendation intended to make you feel guilty if you do not accept it. If you agree, then no issue. But if you succumb then if you are a tenant, you could be missing out on the potential for minimising your property costs, and if you are a landlord, the potential for maximising the performance of your investments.
1.2.3.1 More than 150 years ago a small group of surveyors decided they were superior to other surveyors at the time so set out to break the loyalty between other surveyors and their clients by the only way possible which was to give the impression that other surveyors’ standards were inferior. Nowadays, through its members becoming in-house surveyors infiltrating corporate landlords and tenants, for its virtual monopoly of dispute resolution and deciding rents, for the range of services its members provide, the grip that the RICS has on the property market is wide-ranging and the influence of its members akin to tentacles. It is telling that more and more experienced surveyors are not becoming chartered surveyors because they value their freedom of thought and the benefit of unrestricted advice to clients.]
1.2.4 I mention the above “as an aside” because, in my view, the reason the incumbent Government did not consult the commercial property industry before announcing this proposal to ban upward-only rent reviews was to avoid politicians being talked out of it again. The official reason for the proposal is to help rejuvenate ‘High Streets’ and small tenants leasing shops on the High Street, but if that were the only objective then the proposal could have been confined. It is not. The proposal affects all landlords and all tenants and all business tenancies under the Landlord and Tenant Act 1954 Part II – whether inside or outside the Act.
1.3 Bill 2025 is not law. To become law, Bill 2025 will have to be debated by Parliament, the House of Commons, the House of Lords, the Parliamentary committee stages, and so on. As it will be some time before Bill 2025 gets to the stage of Royal Assent, and an ‘in force’ date, whether the wording of the proposal will remain intact is unknown. So all that can be said about the proposal is at the second stage of its reading, now.
2.0 The phrase “upward-only rent review” is a technical term which, being popular, means different things to different people. For anyone who does not know what it actually means, there is no such thing as an upward-only rent review. The “upward” element does not refer to the valuation or calculation of the review rent itself, but to the rent payable after the review is agreed or ascertained as not less than the rent payable immediately before the review.
2.0.1 ‘Agreed’ means agreed by the parties to the review. ‘Ascertained’ means decided by a third party under the dispute resolution procedure in the lease. A third party may be an arbitrator or an independent expert, depending on the lease. Either or both parties are often represented by surveyors or others.
2.1 A typical rent review valuation basis is the (open) market rent – ‘open’ is considered superfluous. Since the RICS 2007 Code many rent reviews have also become index-linked, commonly to the RPI (Retail Price index), more recently to the CPI (Consumer Price index), and occasionally the CPIH (CPI plus housing costs). Those indices are measurements of inflation. The RPI (generally considered more favourable to landlords) is no longer an official statistic, but the Office for National Statistics continues to publish the RPI because it is widely used. In 2030, the RPI and the CPI are to be merged. Index-linked rent review is what is known as a formula review, an arithmetical calculation – it is nothing to do with the property, and outside the control of the landlord and the tenant. Index-linked reviews are typically found where the availability of open market rental evidence is difficult or impossible to find, in leases of specialist property categories and uses, and where the landlord wants to be reasonably sure of getting an increase that tallies with the commercial purpose of a rent review to keep pace with changing values.
2.1.1 A market rent does not exist in isolation. As I say, rent is the product of the terms and conditions of the lease or the lease to be granted. As there is no standard form of lease for commercial property, terms and conditions vary depending upon what the parties agreed before the lease was completed, and the same or different parties for any subsequent variations. A single word or phrase can often result in a substantial difference in rent. For example, if the basic market rent were £50,000 pa then for the landlord an ill-considered word or phrase might reduce the rent to £30,000 pa. Or vice versa. A word or phrase might be considered so advantageous that a tenant would be expected to pay a higher rent.
2.1.2 For a tenant, an index-linked rent review is a gamble on economic conditions. As the courts will not rewrite what in case law is known as a ‘bad bargain’, well-advised tenants will only agree to index-linked reviews subject to what is known as “cap and collar”. The cap is a maximum percentage increase, the collar a minimum percentage increase. Typically, a minimum would be 1% to 2%, the cap no more than about 6%. It doesn’t mean that the rent on review would increase by at least the minimum or the maximum, as that would depend upon the arithmetical formula in the lease, and the percentage change in inflation between the review dates. The norm is for the formula at each review date to be hinged to the index figure at the start of the lease. As the indices are published on or around the 17th of each month and one month behind, a well-drafted index-linked review will have as its base month the month that is 2 months before the start of the lease and 2 months before the review date.
2.1.3 In some leases, the rent is geared to the tenant’s business turnover. Known as a turnover rent, such leases are commonly found in edge- and out- of town outlet centres, designer outlets, and such like where the prices of goods offered for sale by retailers are approximately 70% of the prices of the same goods in the retailers’ high street shops. Less common are town centre shop leases whose upward-only rent reviews are a combination of market rent and or plus a fixed percentage of the tenant’s turnover.
2.1.3.1 In designer outlet centres and such like, the leases are normally outside LTA54 with regular or rolling mutual break rights – so that tenant can terminate if the venture isn’t profitable or the landlord can relocate or eject underperforming tenants – and the rent a minimum base rent plus a percentage of the tenant’s turnover (the percentage varies depending on the nature of the tenant’s business). The turnover exclusive of VAT.
2.1.3.2 For many years, I acted for a multiple retailer, the majority of whose shops were in outlet centres. Although, in most cases, the rent payable at each review could go up or down, one particular landlord’s leases enabled the rent payable at the previous review to become the minimum at the next review.
2.2 Currently, a typical rent review will either be to the (open) market rent or a combination of open market rent and index-linked. For the upward-only, the wording of the review is typically the greater (higher) of the rent passing immediately before the review date and the open market rent and the index-linking. In other words, if the market rent is lower and the index-linked calculation a decrease, the rent payable after the review is agreed or ascertained would be the same as the rent payable before the review.
2.2.1 Typically, the minimum rent payable at the first review will be the rent at the start of the lease (or if the lease does not stipulate otherwise, then average rent pa over the period between the start of the lease and the first review date, if at the start was a rent-free period or reduced rent). At the second review the minimum agreed at the first review, at the third review the minimum at the second review; and so on. So, for example, if an uncapped index-linked review increased the rent payable at the second review, then even if the index fell by the third review, the minimum would still be the higher agreed at the second review. It is not only uncapped index-linked reviews, but also cap and collar reviews that increase the rent between each previous review to a minimum rent immediately before a next review.
2.2.2 Where the upward-only review is to the market rent, the rent at each review depends upon what the parties agree, whether evidence-based or not, subject to the same as the rent payable immediately before the review date, no more, no less. Where an increase is agreed or ascertained, that rent becomes the minimum payable for the remainder of the lease term. If at the next review, the market rent is lower, the review itself is known as nil increase and the minimum rent continues. In practice, the premises become over-rented which can adversely affect the tenant’s likelihood of assigning the tenancy (lease); or sub-letting – if the lease requires any sub-let to be at a rent not less than the rent reserved in the lease.
2.2.2.1 Nil increase does not mean the market rent is too high: it can also mean the market rent is the same as the rent payable immediately before the review, or that any increase would be so slight as to be not worth pursuing. Not worth pursuing is a matter of opinion. For example, I have clients who will go to a third party for an extra £250 a year. As an increase is indicative of the direction the market for the premises is taking, any landlord concerned about the performance of the investment is unlikely to be content with nil increase. It is important also to note that assuming 10% yield, every £250 pa extra equates to £2500 capital value. For one property, that might not seem worthwhile, but it makes sense when multiplied by the number of properties in the.portfolio.
2.2.2.2 In my opinion, where surveyors go wrong is agreeing nil increase in a memorandum recording the revised rent because that is tantamount to confirming that rent is the market rent. Surveyors generally cannot be bothered to agree the actual market rent because they consider it academic when the rent payable is higher. However, what the memorandum should record is the actual market rent because the rent payable after the review is agreed or ascertained is a separate issue. When acting for a tenant, the advantage of insisting the market rent in the memorandum, even when the rent payable is higher, is that it can cause problems for landlords whose investments are mortgaged and the landlord needs to convince the lender the investment is performing. On occasions, in exchange for agreeing for the memorandum to be nil increase, I have, for the tenant, obtained reductions in the rent payable.
Whenever I act for a landlord on review to be decided by a third party, I make it clear to the third party that, unless the lease stipulates that the third party is to determine the rent payable, the third party should only decide the market rent.
2.3 Upward only rent review has been a feature of the commercial property market for decades. As a cushion for landlords, it is a pinnacle of investment finance and mortgage. At the very least, (assuming the tenant doesn’t go broke), the total rent payable throughout the term of the lease will never be lower than the starting rent multiplied by the number of years of the lease term.
2.3.1 On renewal of a lease, the upward-only cushion is no more. At the start of a renewal lease, the rent would be the market rent (without any index-linking) at the time. So if the market rent then is lower, then the starting rent for the renewal lease would be rebased. In the prevailing market, rebased rents are common.
2.4 Granting a lease outside LTA54 does not overcome the Bill 2025 proposal. All tenancies that are a qualifying tenancy within the meaning of the Landlord and Tenant Act 1954 Part II are affected by the proposal. (Please note: trying to avoid a business tenancy by calling the document a licence does not make it one. With commercial property, the deciding factor, whether the occupier has exclusive possession, is the law, not the label the parties give the document.) For a lease to be outside LTA54, the parties agree that LTA54 sections 24-28 are excluded – those sections concern renewal rights – but, apart from that, the tenancy is governed by the LTA54.
3.0 Whether market rent only or a combination of market rent and index-linked with a minimum, or a rent geared to the tenant’s business turnover subject to a fixed minimum, and where the rent payable after the review is agreed or ascertained is not less than the rent immediately payable before, and even if the starting rent would be higher, the Bill 2025 is for all upward-only reviews to be unlawful. So the rent on review could drop below the rent at the start of the lease (or the average above.)
3.1 However, it is not quite as severe as all that.
(1) The proposal is not retrospective, so existing leases and renewal leases granted before Bill 2025 becomes law are unaffected.
(2) Leases to be granted after Bill 2025 becomes law are unaffected where an agreement for lease had been completed before that date.
(3) Bill 2025 is not intended to prevent an increase; it is to remove the floor for preventing any decrease. A turnover-based rent review is okay, provided there is no base rent. An index-linked review is okay, provided there is no collar. At this stage, it is uncertain whether a geared lease with a minimum base would be banned if the tenant is not occupying for the purpose of a business.
(4) Bill 2025 only applies where at the review date the rent could not be known or calculated in advance or some other mechanism would render it upward-only.
(5) Bill 2025 does not prevent the parties from agreeing fixed rents at each review when the lease was granted. Such rents would then be known at the review dates.
(6) Bill 2025 does not prevent a fixed rent for the full term of the lease.
(7) Bill 2025 does not prevent an option to extend the term on expiry of the lease at a pre-fixed rent.
(8) Bill 2005 does not require rent reviews to be at regular intervals, let alone at 3, 4 or 5 yearly intervals. Provided it is agreed when each increased rent is payable, a pre-fixed rent or series of pre-fixed rents is a good way to save on legal costs for grant of a new lease and avoid the cost of agreeing or ascertaining an open market rent review. This concept is nothing new and is particularly appealing for long leases to restaurants, nightclubs, hospitality businesses, and the leisure sector. Subject only to whether the landlord or the tenant shares your imagination, anything is possible, provided it does not fall foul of Bill 2025.
4.0 Before the 1970s oil crisis, leases commonly had pre-fixed increases at regular intervals. For example, a lease for term 21 years had reviews at 7 yearly intervals, each review an increase equivalent to 10% on the starting rent and each subsequent review. With the oil crisis came inflation in a big way. When I was at school during the 1960s, the talking point about the economy every month was the balance of payments. After the oil crisis, the talking point become the rate of inflation. More recently interest rates have been the talking point, but inflation is never far away.
4.1 There is no link between market rent and inflation. But because market rent is subject to the terms and conditions of the lease and comparable evidence includes, but is not limited to, comparison with the lease of the evidence compared to the lease in question, a formula methodology for calculating rent is easier than a valuation opinion of a rent. Typically, leases entitle a third party to decide an alternative index, but a badly worded lease can allow a third party to determine a market rent methodology even where the lease omits the basis for so doing. Even if tenants do not realise that, per case law, they can require a landlord to action a rent review or lose the right to do so, under Bill 2025 a tenant could initiate and force a review regardless.
4.2 Bill 2025 anti-avoidance renders any agreement void if it purports to require a tenant to make a payment for any difference in passing rent to get around the requirements of the proposal.
4.3 Bill 2025 extends to what is defined as a ‘put option’ which is where a tenant is required to enter into a new lease. Typically, where a lease contains an option to extend the term on expiry of the existing lease, such an option is voluntary, the tenant doesn’t have to. Bill 2025 envisages a scenario where the landlord can require the tenant to enter into a new lease.
5.0 How tenants react to the proposal will depend upon their bargaining power and importance as an investment covenant. How tenants with lease renewals underway or imminent will respond to proposals that include upward-only reviews remains to be seen. Whether landlords will pre-empt and opt for fixed increase reviews to be more certain of an increase than the risk of an open market review, I would recommend. The market, however, is dynamic, continually changing. What might work one day might not the next day, let alone years later. In most cases, recently, depending upon the whereabouts of the property, a pre-fixed rent increase would have been a better bet than an open market rent.
5.1 How to compare a lease whose reviews are upward or downward with a lease whose reviews are upward only is the same as existing – a benefit to the tenant that arguably justifies a higher rent. But if as and when, then an upward-only review would be viewed as a disadvantage.
6.0 As Bill 2025 travels through Parliament and commentators suggest legitimate ways to circumvent the proposal and as anything else comes to mind, I shall update my analysis.
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