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Last Updated:
Dec 1, 2009 - 4:32:45 PM |
Ireland has banned upwardly-only rent review clauses in business leases; Claim move makes investment in Irish commercial property unattractive
By Finfacts Team
Dec 1, 2009 - 4:26:26 PM
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| The SCS / IPD Ireland Quarterly Property Index measures ungeared total returns to directly held standing property investments from one open market valuation to the next and in Q3 2009 returned -6.7%.
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The Minister for Justice, Equality and Law Reform, Dermot Ahern, TD today signed a banning order on upwardly only rent review clauses in business leases, under section 132 of the Land and Conveyancing Law Reform Act. The section will come into operation on 28 February 2010. It is claimed that the move will make investment in commercial property in Ireland, unattractive.
Ahern said: "The practice of including upward only review clauses in business leases is a deeply entrenched one. The time has come to end this practice. I look forward to more equitable business arrangements being put in place in the future which take account of the reality facing many business owners and retailers.
"I always made it clear that a reasonably lengthy period of time would be allowed to facilitate the market in taking on board the proposed change. I have never wavered in terms of my commitment to commencing this measure at the appropriate time. That time is now with us and, following on completing the necessary legal paperwork, the ban takes effect from the end of February."
Áine Myler, President of the Irish Auctioneers & Valuers Institute (IAVI) said: “This approach looks solely at the retail market and not at the commercial property market as a whole. It ignores issues in the office sector which are as important to the economic prospects of the country.
“There are clear circumstances where it works to tenants’ advantage to enter into a lease with upward-only reviews. Prolonged rent-free periods may be offered to compensate for fitting-out and moving costs without which a move to new premises would be unaffordable. This handholding move by the Minister dictates lease terms and precludes these choices for parties acting with professional property and legal advice,” she added.
In a submission to the Oireachtas Joint Committee on Enterprise, Trade and Employment the IAVI recommended that the legislation should at least allow tenants and landlords, acting under legal advice, to contract out of the Land Reform Act allowing them the choice to agree to upward-only rent reviews. This widens the choices available to landlords and tenants in the interest of both parties.
According to commercial property agents CB Richard Ellis, at a time when occupiers of commercial property around the country are facing huge cost pressures, this amendment at first appears positive. However, the amendment will do absolutely nothing to help existing tenants in the short-to medium-term and is potentially very harmful to the Irish investment market.
According to Marie Hunt, Director of Research at CB Richard Ellis, “This has come as a huge surprise to the industry. We understood that the Government had decided not to implement this measure. While no one is disputing the fact that tenants in many sectors of the property market have come under huge pressure in recent months and many are struggling to meet rent payments, the reality is that this move will do anything to improve the plight of retailers and office occupiers who are currently in such difficulties. This is because the legislation will not be retrospective and will only apply to new leases. Therefore, occupiers in existing leases will not benefit from this change and will have to continue lobbying their landlords to effect temporary rent reductions that will assist them to trade through the current downturn”.
CB Richard Ellis said the move will make it extremely difficult to obtain funding for investment purchases where new leases apply according to CB Richard Ellis. Banks fund and investors buy property investments on the basis of projected cash flows. Over the last few years, investors have purchased properties in the UK and Ireland on the basis that Landlord and Tenant legislation in both countries required that rents were reviewed every five years and there was security of income over the period of the investment.
CBRE said rents could remain the same at review and if there was justification for an increase based on inflationary trends and market evidence, this was factored in. However, the UK will now have different Landlord and Tenant legislation to that prevailing here. Retaining their current leasing structures, the UK will have a significant competitive advantage over Ireland in this respect and will therefore attract the lion’s share of investment, from overseas and Irish investors alike. The firm says this proposal also puts Ireland at a disadvantage to Continental European markets which have annual indexation of rents (linked to inflation), albeit with negotiated (up or down) rents at Year 5. This comes just as international investors have begun to express an interest in investing in Irish commercial property, it concludes.
