Ban on upwards only rent reviews (UORRs): your questions answered

The ban will apply to all leases where the leased premises are occupied by the tenant for the purposes of their business – this is the definition of leases which are within Part II which is contained in s.23 of the 1954 Act.

Amendments to the Bill in Committee Stage widen the scope of the ban to catch leases to which Part II “has the potential to apply”. This covers situations where Part II would apply if the tenant were in occupation for business purposes and the terms of lease permit such occupation, but the tenant is not actually in occupation or is not in occupation for business purposes. This is intended to address an anomaly in the original text of the Bill, whereby a tenancy will fall outside the scope of the Bill if the tenant had sublet the whole of the premises.

No – this is a misconception. Although the definition of “business tenancy” in the Bill is framed by reference to leases to which Part II of the Landlord and Tenant Act 1954 applies, when a lease is contracted out Part II still applies to it, it’s just that certain sections of Part II are disapplied.

As noted above, the definition now also catches leases where Part II “has the potential to apply”, meaning there are now additional situations where a lease will not have security of tenure (for example, because the tenant is not in occupation or is not in occupation for business purposes) yet will be within scope of the UORR ban.

There are no provisions in the Bill providing for the parties to contract out of the ban on UORRs. In fact, the opposite is true. The Bill contains anti-avoidance provisions which make it hard – or impossible – for the parties to get around the ban contractually, even if well-advised parties have freely agreed to do that.

The ban only applies to leases. If the arrangement is instead a true licence to occupy then the ban will not apply to it. Whether an arrangement is a lease or a licence is a question of fact in each case and is not determined by what the document calls itself. If an occupier under a purported licence has exclusive occupation of a defined area, there is a risk a lease will have been created.

UORR provisions in existing leases are out of scope and these leases will be allowed to run their course with no impact on the validity of UORR provisions (but see the question on transitional provisions, below).

However, existing leases may be affected in other ways – see the question on underletting, below.

Leases granted (or varied to include rent review provisions) under a contract entered into before the ban becomes law, are not subject to the ban.

The ban would not apply to the reversionary lease as the ban only applies to leases granted after the legislation comes into force. The date of grant is the date of completion of the reversionary lease and not the term commencement date, which may be many months or years later.

The UORR provisions in the headlease itself would not be affected as the headlease was granted before the ban came into force.

The requirement to include UORR terms in any underlease would be of no effect. New provisions introduced to the Bill in the Committee Stage contain significant restrictions on how underletting clauses in existing leases will operate. Any terms in an existing lease that would compel the inclusion of UORR clauses in underleases will not be effective and, if such a UORR requirement is present, the landlord also appears to also lose all control of any other requirements as to rent review terms on underletting (even those that do not involve any UORR provision, such as a specification that reviews in the underlease must be on the same dates as those in the headlease).

This is because the Bill states that, if an existing lease would require the inclusion of an UORR clause in an underlease, the superior lease will have effect as if it requires or permits the underlease to include rent review terms of any kind agreed by the parties to the underlease, and the superior landlord will have no say in the rent review terms which are included. This may represent a significant incentive for landlords to vary their existing leases (many of which will require UORR clauses in underleases) to exclude any offending UORR requirement on underletting before the Bill becomes law, in order to safeguard other controls on rent review terms in underlease.

Currently there is nothing in the Bill to prevent a cap applying because there’s no prohibition on the rent being artificially kept lower than what the variable rent review mechanism in the lease would produce.

However, it appears a collar would contravene the ban as this could potentially keep the rent higher than that mechanism would produce.

The Bill allows regulations to supplement its provisions. A stated example of how this might be used is “to allow for caps and collars to be used in a commercial lease, and the parameters for their use”. The reference to caps is intriguing, since they do not appear to be caught by the ban in any event. We await further details at this stage of how any exceptions might apply to collars.

This structure is common. This drafting currently allows landlords to ‘lock-in’ any annual inflationary increase, whilst ignoring annual dips (because of the upwards-only proviso). The actual rent is then adjusted only at the five-year point.

Whilst this situation is not expressly dealt with, we don’t think such provisions will be permitted if the Bill is enacted as drafted. If that’s the case, it will mean reviews look at the aggregate performance of the referenced index over the whole five-year period, with any ups and downs netting off against each other.

The Bill contains provisions allowing the tenant to trigger and progress rent reviews even where the lease does not allow the tenant to do so. Although much will depend on the drafting of the specific lease, landlords cannot simply refuse to trigger a review.

It’s true that RPI and other measures of inflation are rarely negative, but open market rents are more susceptible to local market fluctuations or global events like financial crises. The impact of the ban may not be as pronounced as it might have been when mooted around the turn of the century, when lease terms were typically longer and relied more on open market reviews.

However, we see several potentially significant implications for anyone investing in, developing or funding commercial real estate assets:

• An impact on property valuations, and potentially investor confidence, seems inevitable.
• We are already seeing shorter lease terms, but this trend may accelerate, as some landlords may be unwilling to agree to any leases which contain a rent review. At the end of the term, the parties could then freely negotiate the new rent if/when the lease is renewed. However, this would mean less security of income for landlords and less business certainty for tenants.
• Inflationary reviews could become even more common as they may be seen as a safer bet by landlords. However, whilst an index-linked review might seem a safer option for landlords, adopting that approach could mean they lose out on potentially higher open market rents at the time of the review.
• Stepped rents could come into favour, to bring leases outside the scope of the ban.
• Landlords may seek higher initial rents as a hedge against potential decreases. It is likely that tenants would seek other concessions or incentives in return for this.
• Landlords may be less prepared to offer protected leases, to retain flexibility at renewal.
• Finance may be harder to come by without the security of a minimum guaranteed rent.
• Despite one of the stated government aims of the ban being to reinvigorate the high street, we see this as an area where the ban will have more limited impact, because of shorter lease terms in that sector. Our contacts tell us they are more concerned about other issues for the high street, for example, business rates and employer’s national insurance.
• A cliff edge could be created as we approach implementation of the Bill. Landlords will want to push new leases (and renewals) through whilst tenants will have no incentive to hurry and may even seek upwards and downwards reviews before the ban comes in, in anticipation of it.

The ban is just part of a significant Bill which will require a lot of parliamentary time and scrutiny. It is difficult to envisage it coming in before late 2026 at the earliest, and it is likely to be longer. The process could be delayed further by industry lobbying, especially given the lack of consultation before the Bill was published.