Commercial property investors could face an increasingly divided market as new restrictions on upwards-only rent reviews begin to distinguish older leases from those entered into under the reformed regime.

The English Devolution and Community Empowerment Act 2026 received Royal Assent on 29 April, establishing a statutory ban on upwards-only variable rent reviews in new commercial leases in England and Wales.

The provisions are not yet generally in force. Commencement regulations, transitional arrangements and further detail are still required, with legal commentators currently expecting the principal reforms to take effect during 2027 or 2028.

Existing leases are expected to remain unaffected. Agreements for lease entered into before commencement may also preserve the existing rent-review framework where the resulting lease is granted later, subject to the final transitional rules.

That distinction could have material consequences for commercial investment.

An existing lease containing a conventional upwards-only review may continue to provide a landlord and lender with contractual protection against a reduction in passing rent. A comparable property let after the reforms take effect may instead contain an upwards-and-downwards open-market review, a fixed stepped rent or another structure designed to comply with the legislation.

Two buildings with similar tenants, locations and physical characteristics could therefore produce different income profiles solely because of when and how their leases were negotiated.

For commercial lenders and valuers, the wording of the lease may become more important than ever.

The Reform Changes Income Risk Rather Than Simply Reducing Rent

Upwards-only rent reviews have long formed part of the institutional commercial property market.

Under a traditional open-market review, the rent is reconsidered at specified points during the lease. If the market rental value has risen, the rent increases. If the market has weakened, an upwards-only clause normally prevents the contractual rent from falling.

This creates a form of income protection for the landlord.

The rent may remain static during a downturn, but it cannot ordinarily be reduced through the review mechanism. That certainty has historically supported commercial property valuation, investment pricing and lender underwriting.

The new legislation changes that position for affected future leases.

Where the rent payable following a review cannot be determined when the lease is originally granted, any variable review mechanism will generally need to permit movement both upwards and downwards. Contractual wording intended to preserve only the upward element is expected to be unenforceable.

The reform does not mean that commercial rents will automatically fall.

It means that future rents may become more exposed to prevailing market conditions where a variable review takes place.

In a rising market, landlords may still benefit from higher rents. During weaker conditions, tenants could potentially secure a reduction.

The investment issue is therefore not simply that future leases will produce lower income. It is that the direction of future income may become less certain.

Existing Leases Could Acquire an Income-Certainty Premium

The grandfathering of existing agreements creates the potential for a two-tier market.

Properties already let under longer leases containing enforceable upwards-only reviews may retain an income characteristic that landlords will no longer be able to reproduce freely once the new regime applies.

That does not necessarily mean every older lease will become more valuable.

A long lease to a weak tenant at an unsustainable rent may remain less attractive than a modern lease to a strong covenant at an appropriate market level.

However, where two assets are otherwise comparable, the older lease may offer greater contractual protection against declining rental values.

That difference could influence the yield an investor is willing to accept.

A purchaser may place a premium on the certainty provided by the existing lease, particularly where the tenant is financially strong, the remaining term is substantial and there are no imminent break options.

The newer asset may require a higher yield to compensate for greater exposure to market rents at future review dates.

Knight Frank has described the ban as a fundamental shift for UK commercial real estate, with potential consequences across capital markets, leasing strategy and investment decision-making. It also notes that many parts of the market had already begun moving away from traditional review structures before the legislation was passed.

The eventual valuation effect is therefore unlikely to be uniform.

It will depend on property sector, location, lease length, tenant demand and the alternative rent structure chosen.

Lease Wording Could Directly Affect Borrowing Capacity

Commercial mortgages are largely underwritten against both the property and the reliability of its income.

The lender will typically examine the rent, lease term, tenant covenant, review provisions, break clauses, service-charge obligations and the property’s prospects of reletting.

The rent-review mechanism is relevant because it helps determine how stable the income may be throughout the loan term.

Where the lease contains an upwards-only review, a lender can usually model future income on the basis that the contractual rent will not decrease at that review, even if the wider market weakens.

That does not eliminate risk. A tenant can still default, exercise a break option or refuse to renew at expiry.

Nevertheless, the provision removes one route through which rent could fall during the existing lease.

Under an upwards-and-downwards review, the lender may need to consider the possibility that income will decline while the mortgage remains outstanding.

This could affect the maximum loan, interest-cover requirement, amortisation profile or lender margin.

The strongest assets may experience little practical change. A modern logistics facility in an undersupplied location, let to a strong tenant, may still support highly competitive lending.

A secondary office, regional retail unit or specialist property with weaker occupational demand may be treated more cautiously if the rent could fall at review.

The reform therefore introduces another layer of asset-specific credit analysis rather than creating one simple rule across the market.

Valuers May Need to Distinguish Contracted Rent From Sustainable Rent

Commercial property valuation already involves more than capitalising the current rent.

A valuer will consider whether the passing rent is above, below or in line with the market, when the next review occurs and whether any tenant break or lease expiry is approaching.

The reform could make that distinction more pronounced.

An older lease with an upwards-only clause may preserve a passing rent above the prevailing market level. The investor benefits from that contractual income for as long as the tenant remains liable under the lease.

A newer lease allowing downward movement may be more likely to realign with open-market rent at the next review.

That could affect both the value and the way a lender interprets the valuation.

A property can have a strong investment value because of its contracted income while carrying a lower vacant-possession or underlying market value.

Lenders may therefore scrutinise whether the security is dependent on one lease provision that cannot be replicated when the property is eventually relet.

The capitalisation rate applied to the income may also change according to how durable that income appears.

As the market develops, valuers may begin to report more explicitly on whether a property falls within the old or new rent-review regime and how that affects its investment risk.

Fixed and Stepped Rents May Become More Prominent

The legislation does not prevent landlords and tenants from agreeing the amount of future rent in advance.

This means fixed or stepped rental increases may become a more prominent alternative.

For example, a lease might specify an initial rent followed by pre-agreed increases at defined intervals. Because the figures or method are ascertainable when the lease is granted, the structure may fall outside the prohibition applying to variable upwards-only reviews, subject to the final rules and anti-avoidance provisions.

This could restore some income visibility for landlords and lenders.

A lender assessing a fixed stepped lease can model the contracted cash flow without relying on a future open-market valuation.

However, certainty carries its own risks.

If the agreed increases outpace the occupational market, the tenant may eventually be paying more than comparable occupiers. That could increase default, break or non-renewal risk.

If inflation and market rents rise faster than anticipated, the landlord may discover that the agreed steps provide less growth than a conventional review would have achieved.

Fixed increases therefore transfer the risk rather than remove it.

They replace uncertainty over the direction of a future review with uncertainty over whether the pre-agreed rental path will remain commercially appropriate.

Index-Linked Reviews Will Need Careful Drafting

Index-linked rent reviews are another potential response, but the treatment of upward-only indexation is central to the reform.

The Act is intended to prevent a variable rent from being structured so that it can rise but cannot fall. That means conventional index-linked clauses containing a zero-percent floor may be caught where the future amount is not ascertainable at grant.

Landlords may instead need to accept indexation that works in both directions, or adopt fixed increases that are known from the outset.

Caps and collars could also become more contentious.

A landlord may want protection against a sharp fall in an index, while a tenant may seek protection against unusually high inflation. Whether a particular formula complies will depend on its precise construction and the statutory anti-avoidance rules.

Commercial solicitors will therefore play an increasingly important role in ensuring that the intended economic bargain is both enforceable and financeable.

A clause that appears commercially attractive but does not comply with the legislation may be disregarded when the review occurs.

For an investor and lender relying on that future income, defective drafting could have a direct financial cost.

Tenant Covenant Strength May Become More Important

The removal of upwards-only protection could increase the importance of the tenant covenant.

Where future rent is more exposed to market conditions, investors may place greater emphasis on the likelihood that the tenant will remain in occupation, comply with its obligations and renew at lease expiry.

A financially strong tenant occupying strategically important premises may provide substantial income security even where the lease permits downward reviews.

A weaker business in a vulnerable sector may present significantly greater risk.

The interaction between lease structure and covenant will matter.

An older upwards-only lease to a weak tenant is not necessarily safer than a newer balanced review structure granted to a strong national or institutional occupier.

Similarly, a fixed stepped lease can offer visible rental growth, but that growth has limited value if the tenant cannot afford it.

Commercial finance will continue to depend on the complete investment profile rather than one clause viewed in isolation.

The reform may nevertheless force lenders and investors to assess those relationships more carefully.

Break Clauses Could Dilute the Value of Older Reviews

The presence of an upwards-only review does not guarantee long-term income.

A tenant break option may allow the occupier to leave before or shortly after the review date. A short remaining lease term can produce the same issue.

In practice, the landlord may need to renegotiate the rent or other terms to prevent vacancy.

This is particularly relevant because the commercial lease market has already moved towards shorter and more flexible agreements in several sectors.

Some market participants have argued that many modern leases expire or reach a tenant break before a conventional rent review becomes commercially significant.

As a result, an older lease should not automatically be valued more highly simply because it contains upwards-only wording.

The review date must be considered alongside the remaining term, tenant break rights and the likelihood of continued occupation.

A theoretically favourable clause may offer little protection where the tenant can leave.

Different Commercial Sectors May React Differently

The practical effect of the reform is likely to vary substantially between sectors.

Retail and hospitality occupiers have often faced periods in which contractual rents remained above the level supported by local trading conditions. The Government’s policy rationale has focused partly on preventing smaller businesses from being locked into rents that no longer reflect the market.

Landlords may respond through higher initial rents, shorter leases, fixed steps or more frequent renegotiation.

Office markets may experience a different outcome.

Prime offices with strong environmental credentials and modern specifications can continue to attract demand even where secondary space struggles. A two-way review may have relatively limited downside in a supply-constrained prime market but a more substantial effect on older buildings.

Industrial and logistics property may also be treated differently where occupational demand and supply remain supportive.

Specialist assets such as care homes, hotels, medical facilities and data centres frequently use bespoke lease and operating structures. Their financing may depend less on a conventional open-market rent review and more on the operator, profitability and alternative use of the property.

The reform is therefore unlikely to produce one consistent valuation adjustment across commercial real estate.

Refinancing Could Expose the Difference Between Old and New Leases

The distinction may become particularly visible when investors refinance.

A loan arranged several years earlier may have been underwritten using assumptions about rental growth and the protection offered by an upwards-only review.

When the facility matures, the lender will reassess the current lease and the property’s future income.

An existing grandfathered lease could support continued confidence where the tenant remains strong and the term is sufficient.

By contrast, an asset that has recently been relet under the new regime may require a different income stress.

A landlord could find that the property remains profitable but supports less debt than before because the lender gives less credit to future rental growth or applies a greater downside assumption.

This risk is especially relevant where the original acquisition used a relatively high loan-to-value ratio or an interest-only commercial mortgage.

If the refinancing valuation falls or the lender reduces its maximum leverage, the borrower may need to introduce additional equity.

The timing of lease renewal and loan maturity should therefore be considered together.

Agreeing new lease terms shortly before refinancing without understanding the lender’s likely treatment could inadvertently weaken the borrowing position.

Acquisition Due Diligence Will Need to Go Beyond the Headline Yield

A high initial yield can appear attractive when purchasing a tenanted commercial property.

However, the passing rent and acquisition yield reveal only part of the investment.

Buyers will need to understand whether the lease is protected under the old regime, when the next review occurs, whether that review can move downwards and how the rent compares with the occupational market.

They should also examine any tenant breaks, expiry dates, side letters, turnover provisions and concessions.

An asset with a high yield may carry greater risk because the passing rent is above market and likely to fall at review.

Conversely, a newer lease with balanced review provisions may still represent a strong investment where the current rent is sustainable and the tenant covenant is robust.

The finance should be tested before the buyer becomes legally committed.

A lender or valuer may interpret the lease differently from the purchaser’s investment model.

Where borrowing capacity is critical to completion, discovering that difference after exchange could create a serious funding shortfall.

The Reform May Not Deliver the High-Street Recovery Intended

Morr & Co has questioned whether the prohibition will deliver the dramatic improvement for commercial tenants anticipated by policymakers.

Nick Leavey, a commercial property partner at the firm, argued that the market is likely to adapt through alternative lease structures. He noted that while the removal of upwards-only reviews appears beneficial to tenants, landlords may respond by changing opening rents, lease lengths or review mechanisms.

The experience of Ireland, where upwards-only reviews were prohibited for new leases following the financial crisis, has frequently been cited in this debate.

Market adaptation can limit the practical effect of the headline reform.

Landlords may demand more rent at the beginning of the lease, agree fixed contractual increases or prefer shorter terms that allow the rent to be renegotiated at renewal.

Tenants may gain the ability to benefit from declining market rents but lose some of the incentives or certainty associated with a longer lease.

The eventual outcome will depend on bargaining power and local supply rather than legislation alone.

A business competing for scarce prime premises may still have limited negotiating leverage.

Lease Negotiation Is Becoming Part of the Finance Strategy

The reforms demonstrate why commercial leasing decisions should not be separated from property finance.

The wording agreed between landlord and tenant can affect the property’s investment value, the amount a lender will advance and the ease with which the owner can refinance or sell.

A landlord negotiating a new lease should therefore consider more than the immediate rental agreement.

The chosen mechanism should be reviewed with reference to the intended mortgage term, lender expectations and eventual exit.

A buyer considering a tenanted property should ask whether the income characteristics assumed in the purchase model will also be recognised by the valuer and lender.

Commercial agents and lease advisers need to understand how proposed terms could affect capital value, not merely the occupational negotiation.

Solicitors should be involved before heads of terms become commercially fixed.

Once a landlord has agreed the fundamental rent structure, redesigning it to satisfy a lender may be difficult.

Two Similar Buildings May No Longer Support the Same Loan

The central risk created by the reform is not that new commercial leases will become unfinanceable.

Commercial lenders already fund properties with fixed rents, turnover rents, indexation, short leases and a wide range of bespoke structures.

The issue is that lease wording may create a more visible distinction between assets that appear physically similar.

An older building with a grandfathered upwards-only lease may offer protected contractual income.

A neighbouring property with a newer lease may provide stronger tenant flexibility but expose the rent to a downward review.

One may receive a sharper valuation yield or higher loan-to-value. The other may require a stronger covenant, lower leverage or greater amortisation.

That divergence will not be determined by age alone.

The quality of the tenant, the sustainability of the passing rent and the remaining lease term will remain central.

Nevertheless, the new legal framework means the date and construction of the lease could increasingly affect both the cost and availability of commercial mortgage finance.

For landlords, investors and business owners, rent review is therefore no longer solely a matter for the lease file.

It is becoming a fundamental component of property valuation, credit analysis and long-term borrowing strategy.