A landlord’s return depends on more than the rent review clause. The starting rent, incentives, lease length, break rights and terms for subletting all form part of the same commercial deal. Changing one can affect the value of the others.
The planned ban on upward-only rent reviews makes that balance more important when agreeing new leases. Landlords will need to consider which terms offer meaningful protection, how much control they can retain over subleases and whether alternative rent arrangements will work in practice. Below, we look at the decisions to make at heads of terms stage and the drafting risks to avoid.
What should landlords consider when negotiating heads of terms before the ban comes into force?
Before the proposed ban comes into force, landlords should take the opportunity to carefully negotiate heads of terms as this is where the commercial foundations of the lease is set. Where possible, landlords may wish to secure an upwards only rent review and consider whether the timing of the transaction could affect their ability to do so. If future rent reviews become more uncertain, landlords may also seek a higher initial rent or explore alternative review mechanisms, such as index linked or fixed step increases, if permitted.
Landlords should also think more broadly about protecting the long-term value of their investment. This may mean negotiating longer lease terms, limiting tenant break rights or strengthening security provisions to provide greater income certainty. As changes to rent review provisions could affect property values and lending arrangements, it is also sensible to consider the expectations of any funders and how the agreed lease terms may impact future refinancing or a sale of the property.
Could landlords respond by offering shorter leases, higher initial rents or fewer tenant incentives?
To offset the increased uncertainty around future rental income, landlords may seek higher initial rents, reduce the incentives offered to tenants such as rent-free periods or fit out contributions or negotiate shorter lease terms to allow rents to be reviewed more frequently in line with the market. Greater emphasis may also be placed on securing stronger tenant covenants and other lease provisions that help protect the long term value of the investment.
However, many institutional landlords prefer longer leases because they provide secure income over a long period of time.
How will the ban affect superior leases, subleases and underletting requirements?
Where an existing lease requires a sublease to contain a particular type of rent review that would no longer be permitted under the new rules, the legislation does not simply remove the upwards-only element. Instead, it effectively removes the superior landlord's ability to dictate the rent review structure for the sublease altogether.
This means that the parties to the sublease may be free to agree a different form of rent review, such as an index-linked review instead of an open market review, provided it complies with the legislation. As a result, superior landlords could lose a significant degree of control over how rent is reviewed in sublet premises.
The intention is to ensure that tenants can still sublet without breaching their leases. However, the change could have wider consequences for landlords, investors and lenders who rely on sublease income reflecting the terms of the superior lease. It may make future income streams less predictable and reduce a landlord's ability to control the structure of subleases.
Although a landlord and tenant could potentially amend the superior lease to restore some control, this would require the tenant's agreement. In practice, therefore, the impact of these provisions may be more significant than many landlords initially expect.
What are caps and collars in rent reviews, and could they still be allowed?
A ‘cap and collar’ is a mechanism that limits how much the rent can increase or decrease at a rent review. The cap sets the maximum increase that can apply. The collar sets the maximum decrease that can apply. In other words, a ‘cap and collar’ allows rents to move both up and down, but within agreed limits. It is often viewed as a compromise between a fully upwards-only review and a completely uncapped market review.
When the Government publishes more guidance on the ban, it should consult on a possible "cap and collar" system, which could allow some movement in rent review outcomes while limiting extreme increases or decreases.
What are the main risks for landlords who try to work around the ban?
Landlords who want to preserve the effect of upwards-only rent reviews once the ban comes into force will need to proceed with caution. Attempts to achieve the same result through alternative drafting could be challenged, and there is a risk that the rent review provisions could be held to be unenforceable as a whole (rather than just the upwards only part).
This could create uncertainty over future rental income, lead to disputes with tenants and potentially affect the value of the investment. Aggressive drafting or attempts to sidestep the legislation may also damage landlord/tenant relationships and result in additional legal costs.
Instead, landlords should focus on adapting to the new regime by considering alternative rent review mechanisms, reviewing lease structures carefully and taking early legal advice to ensure that heads of terms and lease documentation are compliant and commercially effective.
What practical steps should landlords take now to protect income, asset value and lease flexibility?
Landlords should treat the ban as a live transactional and portfolio management issue, rather than waiting for commencement regulations. Practical steps include:
- Audit existing leases, agreements for lease, reversionary leases, renewal options, put/call options and underletting controls to identify arrangements that may be affected by the new regime.
- Review heads of terms currently under negotiation, particularly the timing of completion, rent review wording, renewal rights, incentives, break clauses and any agreement for lease or option arrangements.
- Update precedent leases and standard heads of terms so they do not rely on old-style upwards-only wording once the ban applies.
- Consider alternative rent structures, including fixed stepped rents, index-linked reviews, open market reviews capable of moving both up and down, turnover rents or hybrid models, depending on the asset and tenant covenant.
- Reassess financial modelling, valuation assumptions and lending requirements, particularly where future rental income supports borrowing, refinancing or investment decisions.
- Engage early with agents, valuers, lenders and legal advisers so that the commercial deal and lease drafting work together.
Speak to a property solicitor
Our property solicitors can support landlords by reviewing existing lease portfolios, identifying renewal and option arrangements that may create risk, advising on live heads of terms, updating lease precedents and drafting compliant rent review mechanisms.
We can also work alongside agents, valuers and funders to help landlords understand the likely impact on income, asset value and flexibility, and to structure future lettings in a way that remains commercially robust under the new regime.
If you have questions about the ban on upward only rent review or require advice about commercial or residential property, please don’t hesitate to contact our team.
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