Upward-only rent reviews:
what they really do.

Upward only does not mean upward. It means not downward.

The upward-only rent review is one of the most misunderstood clauses in commercial property, by landlords and tenants alike. It has a fearsome reputation, and it does shift the balance of a review, but it is far more limited than that reputation suggests. We act for landlords and tenants in roughly equal measure, and in practice the same point decides most of these cases: understanding exactly what the clause does, and what it does not.

What ‘upward only’ actually means.

An upward-only rent review clause provides that, at the review date, the rent is re-set to the open market rental value of the premises, but it cannot fall below the rent currently passing. If the market has risen, the rent rises to meet it. If the market has fallen, or simply stood still, the rent stays exactly where it is. What it never does is go down. That asymmetry is why upward-only clauses are standard in institutional leases, and why tenants dislike them.

A common misunderstanding.

The most common mistake, and I see it from both sides, is to treat an upward-only review as if it guarantees an increase. A tenant assumes the landlord’s figure must simply be paid; a landlord assumes the clause does the work for them. Both are wrong. Upward only sets a floor, not the rent. The rent at review is still the open market rental value, and an increase still has to be proved on the evidence.

If the evidence supports the landlord’s figure, the rent rises accordingly. If it does not, the rent is held at the passing level rather than reduced. On a sizeable unit, over the years remaining until the next review or expiry, the difference between those outcomes is substantial, which is exactly why both parties are well advised to get the evidence right rather than rely on the clause to settle it.

— The point in one line Upward only sets a floor, not the rent. An increase still has to be proved on the evidence.

How the rent is actually fixed.

The rent at review is not the rent of the actual lease in the real market. It is the rent of a hypothetical lease, on the assumptions and disregards the clause specifies, let in the open market on the review date. Those assumptions are where reviews are won and lost, by either side, and reading them precisely is the technical core of the exercise.

1. 01

   Tenant’s improvements are disregarded.

   Where a tenant has paid to fit out or improve the premises, the rent is generally assessed as if those improvements were not there, so neither side should be pricing the tenant’s own works into the rent. The disregard only operates, though, if the clause is read correctly and the improvements are properly identified and evidenced.

2. 02

   The assumed terms may not be the real terms.

   The hypothetical lease may assume a different term length, or particular user and alienation provisions, from the actual one. Those assumptions can push the rent above or below what the raw comparables suggest, depending on which way they cut.

3. 03

   Headline rents are not effective rents.

   A comparable let at a high headline rent with months of rent-free and a fit-out contribution is not worth its headline. Stripped of incentives and spread over the term, the effective rent is lower, and that is the figure that matters.

4. 04

   Size and configuration cut both ways.

   A large or awkwardly configured unit will not always command the same rate per square foot as the smaller, regular units often used as comparables. Quantum, zoning on retail, and layout all warrant adjustment, in either direction.

Evidence, and the traps in it.

A rent review is, in the end, an argument about comparables, and the biggest trap is taking headline rents at face value. It is easy to lean on headline figures, because they are higher, but the real work is to devalue the comparables properly: to strip out rent-free periods and capital contributions, to adjust for differences in size, location, configuration and lease terms, and to make sure the transactions actually relate to the review date rather than a stronger or weaker moment in the market.

Done well, that analysis is what turns a vague assertion that ‘the market has moved’ into a defensible figure, one that holds up in negotiation and, if it comes to it, in front of a third party. The same discipline serves a landlord justifying an increase and a tenant resisting an unsupported one. Good evidence, properly analysed, is simply the difference between a figure and the right figure.

A word on reform.

It is worth being aware that the policy climate around upward-only reviews is shifting. The Government has signalled an intention to restrict the use of upward-only rent review clauses in new commercial leases, and proposals to that effect have been brought forward. At the time of writing the detail, scope and timing are not yet settled, and any change would be expected to apply to new leases rather than to rewrite existing ones.

So for the great majority of live reviews, the position set out above is unchanged, and I would not advise anyone to run a current review on the strength of proposals that are not yet law. But it is a genuine development, and one worth watching if you are negotiating a new lease rather than reviewing an existing one.

When it is worth the fight.

Not every upward-only review is worth contesting hard. Sometimes the market genuinely has moved and an increase is fair; sometimes it has not and the passing rent should hold. Either way, a party who pushes a position the evidence will not support tends only to add fees to the outcome they were always going to reach. The judgement turns on three things: the gap between the passing rent and the defensible market figure, the size of the unit, and the unexpired term, because the difference compounds over every year until the rent can next change.

On a small unit with a year or two left, the cost of a contested review may outweigh the prize for either party. On a large unit with a decade to run, getting the rent right, whether that means a well-supported increase or holding it flat, can be worth a very great deal. The first job is an honest reading of the evidence; the second is the arithmetic. The rent review and lease renewal service page sets out how I approach both, and I am glad to do that assessment before anyone commits to a fight, whichever side of the lease you are on.