Retail Ireland, the IBEC group, says an urgent response is required from all stakeholders in the retail property sector to address the difficult trading situation faced by retailers, in particular reform of lease legislation.
Retail Ireland director Torlach Denihan said: "In view of the current economic climate, Retail Ireland calls on Government to reform legislation on retailer's leases. Arbitrators' hands are tied by the terms of leases that are unsuited to the current extraordinary situation. The main reforms called for are as follows:
(1) Arbitrators mandated to take account of prevailing economic and commercial conditions.
"To save jobs and keep as many otherwise viable and well run retail businesses open, arbitrators should be mandated by law to take account of prevailing economic and commercial conditions when reviewing rents.
(2) Disclosure of all material information to arbitrators
"When seeking a comparison-based upward rent review, a landlord should be obliged to give all material information to the arbitrator. Where an increase being sought is justified by a higher rent contained in a lease with another tenant, the landlord should be obliged to provide a comprehensive picture of his relationship with that latter tenant. Under the current process, landlord's are not obliged to divulge if a separate deal exists with the latter tenant that gives a major discount on the rent amount contained in the lease. Both the arbitrator and the tenant facing the rent review remain in ignorance of the real situation, and the incomplete information given to the arbitrator will probably lead to a misguided conclusion that a rent increase is justified.
(3) Power to insert break clauses
"The arbitrator should be empowered to insert a break clause into a lease where a tenant's business has deteriorated due to circumstances outside the tenant's control. The arbitrator should be empowered to form a judgement as to the reasons for the deterioration of the business with reference to prevailing economic and commercial circumstances. Break clauses were general practice before the boom years, but some landlords refused to provide them when times were good. It should be mandatory that they be contained in all new leases.
(4) Upward only rent review clauses
"New thinking was shown by the Supreme Court last December in the Linen Supply of Ireland case when it allowed the examiner to repudiate leases as part of a rescue package because previous arrangements were not working. New thinking is similarly required with regard to comparison-based upward-only rent review clauses in existing leases because they are not working in the current circumstances. New mechanisms are needed so that rent reviews and arbitrations take account of an individual tenant's circumstances. Government should build on the Minister for Justice's decision to abolish upward-only review clauses in new leases by reviewing how best to replace them in existing leases by more suitable mechanisms such as turnover-related reviews.
Mr Denihan concluded: "Retailers are taking in less money at the tills because sales are down and prices have been cut across the board. To survive, retailers have cut most overheads on their businesses. Rents are a huge component of the retail cost base but are almost impossible to reduce. Some landlords have successfully sought or are currently seeking very substantial rent increases under upward-only rent review clauses. Many tenants face rent increases of anything between a third and double at a time when their sales have suffered a huge drop.
"It is of note that the management of the retailer 3G Mobile has said that the decision to liquidate the business was due to extremely high rents and inflexible leases. A similar problem was evident in the case of Carluccio's Restaurant but was averted at the last minute due to constructive engagement between landlord and tenant.
"Unless there is lease reform, many more retail staff will join the 30,000 retail employees who went on the Live Register in 2009."
Last week, another industry group said it would challenge the constitutionality of the practice of upward-only rent reviews in commercial leases.
Retail Excellence Ireland (REI) confirmed that it had taken legal advice on the issue on behalf of its members and that retailers were looking for emergency legislation to be introduced.
‘‘We want to see the upward only clause deemed null and void at the time the lease is reviewed," said David Fitzsimons of REI.
‘‘Even if it was five years before tenants could alter their rents to the open market level, it would allow them to present data and financial projections to the banks with a far more sustainable rent cost into the future."
He said that the retail body would present a document outlining its constitutional challenge to Dermot Ahern, the Minister for Justice, in the hope that the minister would ‘‘sign off on it first," avoiding the need for further action.
‘‘If that fails we will move forward. Suffice it to say we will be putting significant effort into preparing a very strong case," said Fitzsimons.
Last year, Ahern introduced legislation prohibiting upward only rent reviews on new commercial leases, but it does not apply to existing leases.
