​Ban on upward-only rent reviews could be ‘nail in the coffin’ for UK office sector

Proposed UK legislation designed to “help end the blight of vacant high streets” could miss its mark and place a further burden on the country’s embattled office sector, it has emerged.

Provisions in the English Devolution and Community Empowerment Bill, published in July, propose banning upward-only rent review (UORR) clauses in commercial property leases. These currently assure that rents for the term of a lease can only increase over its duration.

In its introduction to the bill, the government said that UORRs currently “pit landlords against businesses and can make rents unaffordable and cause shops to shut”. It added that the bill “will help end the blight of vacant high streets and the unacceptable antisocial behaviour that comes with them”.

However, rent reviews are usually instigated at the five-year term in commercial leases, meaning they are more likely to affect office tenancies. “Post-Covid, retail leases have been revolutionised, with high-street tenants often shifting to sign five-year terms with no built-in rent reviews,” noted Matthew Williams, partner at UK law firm Fladgate.

“That suggests another unhelpful hurdle for office leases,” he added, with terms of 10 and 15 years still common for the latter.

Landlords have long understood that offices in secondary locations require refurbishment or repurposing to ensure their survival. However, the bill could place further financial pressures on office owners. “Capital expenditure requires certainty of return,” Williams added, “which the provisions in the bill would remove”.

Yet, Jose Pellicer, partner at Evonite, sees a potential silver lining. “There is an argument that it could be the nail in the coffin for secondary offices,” he said. “But it also means that weaker product doesn’t become overrented. In a way, it could polarise the market, so that secondary valuations go down faster, and properties are therefore redeveloped sooner into assets that are more lettable and desirable.”

Industry was not consulted on ban

The chief criticisms around the provisions of the bill rather relate to the degree of risk that outlawing UORRs would introduce, creating a climate of uncertainty.

“Real estate investment has traditionally been seen as a real asset – ie you get a return net of inflation, although UORRs are an imperfect way to achieve this. Banning this creates short-term uncertainty, and uncertainty is always a problem for business. The property industry is therefore upset about the lack of consultation,” added Pellicer.

Melanie Leech, CEO of the British Property Federation, said: “Interference in long-established commercial leasing arrangements without any prior consultation or warning has no place in the Devolution Bill. It risks investor confidence at a time when development viability is already seriously challenged.”

Capital Economics draws useful comparisons with Ireland, where UORRs were outlawed in 2010. The research firm highlights that the Irish experience suggests that the ban “will weigh on future rental growth and widen property yield spreads to risk-free rates”. It also notes that it “would be another headwind for the recovery in commercial property values, which is already set to be weak by past standards”.

However, Pellicer argues that, while Ireland’s capital markets experienced “teething problems” after their ban, “it didn’t necessarily dent property investment”. He says: “2010 was a complex year in any case, but after the euro crisis was over investment in Irish property went on.”

The need for certainty

Notes accompanying the bill point out that existing legislation does not currently set any framework for rent review provisions in commercial leases, something which the bill will redress. The provisions will impact all business tenancies that contain rent review clauses, although some agricultural leases will be exempt.

Industry voices argue that landlords are already capable of working with distressed tenants without state intervention.

Gavin Whitney, partner at Fladgate, said: “Although UORRs have their critics, the market has shown – particularly during COVID – that it can adjust when rising rents conflict with declining tenant incomes. Implementing a broad legislative ban now feels excessive.”

While landlords would not be able to circumvent the legislation, they would still be able to issue contracts which include stepped rent increases, pre-agreed between landlord and tenant. “The advantage of these, for both parties, is certainty,” Williams added.

Representatives from the hospitality sector, in fact, would welcome the changes. Kate Nicholls, chair of industry association UKHospitality, said: “Unjust UORR clauses have been hitting hospitality businesses for decades, making rents unnecessarily expensive. They have been punishing the high street and constraining investment, and it’s the right move for the government to ban them completely.”

The bill still has a long journey through Parliament before it becomes law, but investors and tenants will be monitoring its progress.

“What you want from a government is for everyone to be treated fairly, that businesses don’t face onerous rental conditions – but, at the same time, that landlords have the certainty to be able to invest in real estate,” said Pellicer. “To be honest, UORRs are a bit anachronistic, and landlords with good properties will be able to negotiate stepped increases in leases under the proposed legislation in any case.”

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