How commercial leases are structured globally

With the English Devolution and Community Empowerment Act now receiving Royal Assent, and formally writing a ban on upwards-only rent reviews into law, how do commercial lease structures in England and Wales will compare with others globally, and does the approach other countries take to structuring such leases offer any insight on potential developments for new leases within England and Wales?

We consult with Knight Frank colleagues in Ireland, Spain, Germany, France and the US to understand commercial lease structures in these markets.

IRELAND

The shift from upwards-only to upwards-and-downwards rent reviews reflects a broader move towards market-responsive leasing, improving conditions for tenants but reducing perceived income security for property investors. This has resulted in a dual market of legacy upwards-only leases and modern flexible leases that continues to influence commercial property values and leasing strategies in Ireland.

UORRs (pre-2010 leases)

Prior to the Land and Conveyancing Law Reform Act 2009, Irish commercial leases typically included upwards-only rent review clauses, meaning that rents could either increase or remain static at the review date, but never decrease, regardless of market conditions.

Upwards-and-downwards rent reviews (post-2010 leases)

The Land and Conveyancing Law Reform Act 2009, which came into effect on 28 February 2010, fundamentally changed this landscape. Section 132 of the Act prohibits upwards-only rent review clauses in leases of business premises entered into after that date. Under the post-2010 regime, leases must permit rent to be reviewed both upwards and downwards, based on open market rental value. This has several implications:

• For tenants, it offers greater fairness and financial sustainability, as rents can decrease during market downturns.
• For landlords and investors, it introduces greater income uncertainty, which can result in more conservative valuations and affect borrowing capacity.
• For the market, it encourages more transparent and competitive pricing, aligning Irish lease practice with international norms.

SPAIN

In Spain, most lease agreements are indexed to the Consumer Price Index (CPI), with rent reviews generally carried out on an annual basis. Legally, both increases and decreases in rent are allowed, depending on the evolution of the index.

However, in practice, particularly in the commercial sector, it is possible for contracts to include negotiated clauses that prevent rents from decreasing, even when the CPI is negative. These indexation mechanisms typically follow one of these three formats:

• Fully open: allows for both increases and decreases based on the actual CPI.
• Positive only (0% floor): only increases are applied; if the CPI is negative, the rent remains unchanged.
• 0% floor and CAP: sets a minimum adjustment of 0% and a maximum cap (usually between 3% and 6%) on annual rent increases.

GERMANY

In Germany, commercial leases are usually linked to CPI. It is quite common to agree on a cap for indexation, for instance limiting rent increases to a maximum of 10%, even if the CPI goes up further.

Another approach that is often used is to have indexation kick in only after the first three years of the lease. However, it is not typical to combine both a cap and a deferral of the first adjustment in the same contract.

In theory, rents linked to CPI in Germany could also decrease if the index drops. While it is legally possible to include a floor that prevents rents from going down, this isn’t standard practice and is rarely seen in most lease agreements.

FRANCE

Under French legislation, the compulsory lease length is nine years, with break options agreed in advance at three-year intervals (e.g., 3/6/9 or 6/9 structures).

Annual rent indexation is usually based on indices such as the ICP, GDP, or ICC (Construction Cost Index).

Increasingly, service provision contracts have greater flexibility, allowing shorter lease terms (under three years) and enabling payment not just for the space itself, but also for a broader range of services.

UNITED STATES

Most commonly, leases in the US have an initial term of 5-10 years with a possible renewal option, with 10-year leases having two to three fixed uplifts over the period, pre-agreed at the outset. Operating expenses and taxes are set at a base level and increased annually at an agreed index. Alternatively, there can be fixed percentage increases in lieu of expense pass-throughs.

The removal of UORR aligns England & Wales more closely to current US practice, so removes a level of complexity for US occupiers. Whilst a significant shift for the UK, this could provide more clarity to a US occupier entering the market for the first time.