The potential impact of the government's proposed ban on upwards-only rent reviews on real estate loans

The UK government has proposed to ban upwards-only rent reviews (UORRs) in new commercial leases, and this has understandably been a cause for a lot of speculation as to the potential impact on the property sector.

As stated in the English Devolution and Community Empowerment Bill, the measure aims to empower tenants and revitalise high streets, but the potential effect of it on lenders and financers in the real estate sector could be significant.

What are upwards-only rent reviews?

UORRs are lease clauses that allow rent to increase at review points, but never to decrease – even if market rents fall. They’ve long been a cornerstone of UK commercial property investment, offering landlords and lenders predictable income streams and stable valuations.

The proposed changes

The proposed changes would apply to most new business tenancies in England and Wales (irrespective of whether they are inside or outside the security of tenure regime) that have a rent review method making the rent unascertainable at the start of the lease (eg, reviews by indexation, inflation or multiplier, open market rent reviews and turnover rent reviews).

Crucially, tenants would be empowered to initiate rent reviews, curbing landlords’ ability to delay adjustments during market downturns.

Possible impact on real estate loans

As currently drafted, the above proposals are not retrospective in effect and would only apply to new tenancies granted following the Bill being passed into law. However, the implications for lenders and borrowers could indeed be significant:

• Reduced income certainty: Without UORRs, rental income becomes more volatile, undermining the predictability lenders rely on when assessing debt service coverage and loan-to-value ratios. Lenders may lower conservative loan-to-value ratios or increase debt service coverage ratios.
• Valuation challenges: Property valuations may decline or become significantly more complicated due to the risk of falling rents, especially for long-term leases. This could affect refinancing terms and trigger covenant breaches.
• Higher lending risk: Lenders may demand higher interest rates or lower loan amounts to offset increased risk as the predictability of rental uplifts is diminished. There may be more stringent covenants around lease renewals.
• Shift in lease structures: Landlords might pivot to fixed or stepped rents, or shorter lease terms without reviews. While this may offer some stability, it could also reduce asset liquidity and complicate underwriting for lenders.

Sector-specific effects

Certain sectors may be more susceptible to changes than others. For example:

• Retail and hospitality: It’s possible that these sectors may benefit from greater flexibility, however, lenders could view them as riskier investments without UORRs to anchor valuations.
• Industrial and logistics: Typically reliant on longer leases with UORRs, these sectors may see a more definitive impact on financing terms and investor enthusiasm.

The change may deter institutional and overseas investors, who prioritise stable, upward-only income, while lenders may diversify across different asset classes, sectors and geographies to mitigate risk.

Looking forward

The Bill is still very much in its early stages, and due to a combination of fierce support and opposition, its future remains highly uncertain. The British Property Federation and other stakeholders are already voicing concerns about unintended consequences and lack of consultation.

In the meantime, borrowers and lenders would do well to:

• Audit lease portfolios for leases due for renewal and assess whether the proposed ban will impact future income streams, and (for borrowers) accelerate renewals to fall outside the new regime if necessary.
• Model potential impacts on valuations and loan covenants which may have been modelled on UORRs.
• If necessary, engage with each other, and with valuers, given the potential impact on property valuations and lending criteria.

To discuss any of the issues raised in this article, please contact Andy King or Amelia Hardman.