KBRA releases research analysing the UK government's proposed ban on ratchet clauses-provisions that stipulate upwards-only rent reviews-in new commercial leases in England and Wales. The report highlights how the reform, part of the English Devolution and Community Empowerment Bill, marks a fundamental shift in landlord-tenant dynamics, reducing income certainty for property owners while providing greater balance for occupiers. KBRA notes that the prohibition on upwards-only mechanisms, coupled with strong anti-avoidance measures, could heighten cash flow volatility, affect valuations, and increase refinancing risk, particularly for weaker retail and secondary office assets. However, in resilient segments such as prime industrial and retail, the impact is expected to be more limited. Drawing on Ireland's 2010 precedent, KBRA concludes that while the reform introduces greater downside risk, the overall credit implications will depend on sector performance, lease structures, and investor adaptability, with effects expected to play out over the short to medium term across asset classes.
Key Takeaways
- The bill proposes to prohibit upwards-only rent reviews in all new commercial leases in England and Wales, marking a major shift in landlord-tenant dynamics.
- Fixed stepped increases remain allowed, and index-linked or market rent reviews will be permissible only if they allow rents to adjust both upwards and downwards, without a floor. Caps are expected to be permitted (subject to regulations) and collars may be permitted only where they do not prevent downwards movement; collars that would effectively reinstate upwards-only outcomes would not be allowed.
- The bill includes measures to prevent landlords from circumventing the ban, including tenant rights to trigger reviews, restrictions on side agreements such as top-up payments, and prohibitions on contracting out.
- Landlords could face increased exposure to downwards rent adjustments, creating greater cash flow volatility and implications for property valuations, loan performance, and refinancing risk. This may present knock-on effects for commercial mortgage-backed securities (CMBS) transactions, where declining rental income can weaken debt service coverage, pressure credit ratings, and increase refinancing challenges at maturity.
- Ireland's 2010 ban on upwards-only rent reviews created a two-tier lease market but had limited overall impact, as it coincided with a cyclical recovery. The UK reform mirrors many Irish features but adds stronger anti-avoidance protections.
- The ban on upwards-only rent reviews increases downside risk in weaker sectors like secondary offices and retail, while in growth markets such as industrial and prime retail it reduces income certainty, with future rents driven by market conditions, lease timing, and tenant negotiations.
Click here to view the report.
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About KBRA
KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.
Doc ID: 1011588
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