The end of upwards-only rent reviews… or is it?

For many investors, particularly those negotiating with larger institutional occupiers, these alternatives may become increasingly important. A stepped rent structure can provide certainty by fixing future increases at the outset of the lease term. Likewise, inflation-linked provisions may offer a degree of protection against market fluctuations whilst avoiding some of the uncertainty associated with open market reviews.

Indeed, sophisticated landlords may conclude that such arrangements offer advantages that traditional rent reviews do not. By agreeing future uplifts at the commencement of the lease, both parties obtain greater certainty regarding future liabilities and returns.

In some circumstances, this may reduce the valuation disputes, expert determinations and litigation that have long been associated with open market rent reviews.

A new disputes landscape

While the Act may reduce some categories of dispute, it is likely to generate others.

For tenants, the ability to achieve a downward rent review fundamentally changes the economics of a rent review dispute. Historically, where a lease contained an upwards-only provision, there was often little value in pursuing a challenge if the market rent had fallen below the passing rent.

That dynamic changes entirely once rents can move in both directions. We may therefore see an increase in disputes concerning the operation of review provisions, particularly in sectors experiencing occupational weakness or market volatility.

New disputes may also emerge concerning the boundaries of the legislation itself. The Act contains anti-avoidance provisions designed to prevent parties from achieving indirectly what they are prohibited from doing directly. Much has already been written about possible ways of drafting around the ban. However, the legislation has clearly been drafted with such attempts in mind and seeks to render obvious workarounds ineffective.

How can investors respond?

For decades, UORRs have been a cornerstone of commercial property investment. They created certainty, assisted with valuation modelling and enabled investors to predict future income streams with a reasonable degree of confidence. Unsurprisingly, many landlords are now considering how to retain an increase in yield in a post-UORR environment.

Some investors may seek to offset the additional risk by negotiating higher initial rents. Yet others may favour stepped or inflation-linked rent structures instead of traditional open market review provisions. Purchasers may also reassess pricing assumptions and expected yields when acquiring investment property, with the possibility of future downward rent movements reflected in negotiations over price.

The abolition of UORRs is legally significant, but commercially it may prove less revolutionary than many commentators suggest. Birketts’ property disputes team can assist investors adapt by advising on purchase negotiations, lease structuring and alternative rent mechanisms.

Isaac Craft is trainee solicitor in the property disputes team at Birketts LLP