Ban on upwards-only rent reviews receives Royal Assent
The English Devolution and Community Empowerment Act (the Act), which contains the ban on upwards only rent reviews, has now received Royal Assent. The ban is not yet in force as we await regulations to set a date for implementation, which we expect to be in 2027. The government has made several changes to the Act since we last reported on the proposed ban, including closing some loopholes and, very last minute, introducing a retrospective element for renewal arrangements that are entered into on or after 17 March 2026. Here we summarise the key aspects of the Act.
What does the Act apply to?
The ban on upwards only rent reviews will apply to all new and Landlord and Tenant Act 1954 (“1954 Act”) renewals that are entered into once the ban is in force. This will include contracted out leases and leases to which Part II of the 1954 Act would apply if the tenant were in occupation. This will therefore capture tenants who have underlet and wouldn’t usually have 1954 Act protection due to their lack of occupation.
The ban covers any rent review mechanism where the potential rent increase is not known at the date of the lease grant, and so will capture index linked rent reviews as well as open market reviews.
The Act also contains anti avoidance provisions which will prevent the parties from entering into any side arrangements that could enable upwards only rents, such as side letters requiring tenants to pay top ups where the rent has been reviewed downwards. Where a lease provides for only the landlord to trigger the review, the Act will allow the tenant to also trigger it. This will prevent landlords from instigating reviews in upwards market conditions.
When will the ban come into force?
The majority of the provisions will not come into effect until the Act is in force, expected to be at some point during 2027.
However, one amendment made by the House of Lords is to make the ban apply retrospectively to lease renewal arrangements that are entered into on or after 17 March 2026. This means that any options to renew, put or call options (whether contained in a lease or in a stand-alone agreement) or agreements for a renewal lease with an existing tenant will be caught if entered into from and including 17 March 2026.
The remainder of the Act does not have a retrospective element for the ban, so leases and agreements for lease with new tenants will not be caught until the Act is in force, unless they contain a renewal arrangement.
What is not caught?
Stepped rents
The ban will not apply to rents where the increase is certain at the outset, so stepped rents can still be used.
Review with two or more rental reference amounts
We have seen guidance from the Ministry of Housing, Communities and Local Government (MHCLG) regarding how the Act will work where there are two or more rental reference amounts in the rent review clause. For example, a scenario where the initial rent of £100,000 is to be reviewed to the higher of the open market rent and the existing rent as increased by RPI. The question was put to MHCLG as to what would happen if, for example, on the review date the open market rent is lower at £98,000 and the rent as reviewed by RPI is £105,000. Both of those figures are reference amounts, so which figure would be the one to use for the revised rent.
In this scenario, MHCLG has advised that where there are two or more reference amounts, the higher option will be valid if both parties have agreed this in the lease. So if one method produces a lower figure, and the other a higher figure, it is acceptable to use the higher figure as one of the chosen measures has legitimately increased. If both of the reference figures (for example, open rent and RPI) produce lower figures than the passing rent, the rent has to be able to fall to reflect that. This is where the ban is applicable, preventing the rent from remaining at the passing rent which would be higher than either of the chosen rent review reference amounts. This isn’t specifically stated in the legislation but the MHCLG guidance is helpful, and hopefully this can be clarified in secondary legislation.
Turnover leases
MHCLG has also indicated that in turnover leases, those terms have been pre-agreed by the parties and therefore the tenant should have awareness of the arrangement they are agreeing to. This is good news for landlords with turnover rent leases, as in many cases the tenant’s rent will increase by reference to the higher of an index linked increase and a percentage of the prior year’s turnover. MHCLG has confirmed that the higher of the two reference amounts can be used which means the rent will not take a dip if the index linked calculation produces a higher figure than the turnover figure, but of course the rent can go down if both reference amounts drop.
What about underleases?
Once the ban is in force, any provisions in commercial leases which require that an underlease contains an upwards only rent review will be ineffective. The Act sets out that the review terms are to be agreed between the underlease parties, meaning that the superior landlord will not have control over how the underlease rent review is set out.
Still under consideration
There is to be a government consultation on the use of rent caps and collars before the ban comes into effect so we don’t yet know if these will be permitted. It may be possible for the landlord and tenant to agree in the lease that the rent may not fall by more than a certain percentage. Indications from the government are that if a collar is to be permitted, then a corresponding cap should be imposed on the rent increase.
How will the ban operate?
If a review does get caught by the Act, the lease remains valid but the Act operates to remove the upwards only element. So for example if a lease contains the fairly standard wording that there is to be a review to the higher of open market rent and the passing rent under the lease as at the date of review, and the open market figure is lower than the passing rent, the new rent will have to be the lower figure.
Steps to consider now
If you are entering into tenancy renewal arrangements, such as options to renew or agreements with existing tenants for renewal leases, the ban already applies so you should consider drafting to protect the rental position. Your usual Forsters contact will be happy to review and advise further.
Going forwards, landlords and tenants will have to consider how they want to structure their lease rent reviews. We may see shorter lease terms being used so that landlords can renegotiate rent more frequently, or leases providing for more frequent rent reviews (which is common practice across Europe). Landlords could include landlord break clauses to allow them to determine the lease should the rent decrease. Another possibility is higher starting rents, although tenants would of course have to agree to this.
Looking ahead
This is obviously a huge change for the commercial real estate market, and whether this will have the Government’s desired effect of boosting business leases on the high street remains to be seen. Upwards downwards rent reviews are successfully used in countries such as Ireland and Australia, but we will have to see how this will impact the investment market in England and Wales.
For a detailed analysis of how the ban applies in practice, including worked lease scenarios, read our follow-up note here.
We are now awaiting the government consultation on caps and collars for rental increases, as well as government guidance on the legislation, and will keep you updated. In the meantime, if you have any questions please get in touch with us.
