Irish Commercial Rents: The Minister for Justice and Law Reform, Dermot Ahern TD, today published the Report of the Working Group on Transparency in Commercial Rent Reviews.

The report calls for the setting up of a public database containing the details of letting agreements and rent reviews in the commercial property market. It has also drawn up a Rent Review Arbitration Code, which it says is aimed at providing a uniform procedure for rent review arbitrations in the commercial property market. The group wants those involved to accept the code on a voluntary basis.

The group was established following pressure from retailers about the boom time rents at a time of very poor sale conditions in the aftermath of the economic crash. Leases had 'upward only' rent review clauses but no facility to reduce levels. These one-way clauses have now been banned for leases entered into on or after February 28 this year. The group said it understood similar action for leases before that date was not possible for legal and constitutional reasons.

The group was also asked to address concerns about a perceived lack of confidence on the part of tenants in both the arbitration process and in arbitrators. Its report said there was a perception among some retail tenants that the arbitration process was 'inherently biased' in favour of landlords.

Speaking on publication, Ahern said: "When I established the Working Group I gave it very tight terms of reference aimed at developing practical solutions to some of the problems which confront the commercial property market and the retail sector in particular. I would like to commend the group for the efforts they have made to address the relevant issues."

"The recommendations proposed are sensible ones. I am happy to endorse them and I look forward to progressing them as quickly as possible. Their implementation will, of course, require the cooperation of all relevant stakeholders and I fully expect that the necessary cooperation will be forthcoming."

Last week Finfacts reported that more than a quarter of Irish commercial property income is over-rented (space that is let at a rent above its ERV (estimated market rental value), research by IPD, the London-based property index firm, shows. Sweeping declines in rental values has led to widespread over-renting across all sectors, reaching 26.3% by Q2 2010, according to the SCS (Society of Chartered Surveyors)/IPD Irish Quarterly Index.

Report of the Working group on Transparency in Commercial Rent

The President of the Society of Chartered Surveyors, Peter Stapleton has welcomed the recommendations.

Since April 2009, the Society had been advocating the need for agreed solutions amongst all stakeholders who are involved in commercial property and who have been experiencing serious difficulties over the past 24 months, in particular within the retail sector.

Commenting specifically on the two main recommendations in the Report, Peter Stapleton said that the Rent Review Arbitration Code 2010 will be very beneficial to all involved in a rent review as it will ensure that all parties will have a better understanding of the procedures underlying the arbitration process itself. This code, coupled with the recent enactment of the 2010 Arbitration Act will ensure that the parties are clear as to the basis for an arbitrator’s decision.

"It will go a long way towards restoring confidence in the outcome of rent review arbitrations which have for sometime suffered from an incorrect perception of bias towards the landlord. The Department of Justice Working group enabled an airing of views amongst all industry representatives which has created a better understanding of the pressures being experienced on all sides," Stapleton said.

List of Working group Recommendations

I. The group considers that public confidence in the outcome of rent review arbitrations in the commercial property market can best be sustained if there is a uniform procedure for the governance of such arbitrations. It therefore recommends an industry-wide acceptance, on a voluntary basis, of a code of best practice along the lines of the Rent Review Arbitration Code which is appended to this Report and further recommends that all stakeholders commit publicly to their willingness to adhere to this code.

II. The group also recommends that the operation of this code be reviewed no later than July 2013.

III. The group has noted that there are difficulties in obtaining accurate information about letting agreements and rent review transactions in the commercial property market. It therefore recommends the establishment of a public database in which would be entered the relevant details of letting agreements and rent reviews in that market.

The group points to the intrinsic link which exists between Recommendations I and III in that access to accurate information about letting transactions in the commercial property market is critical in terms of ensuring that arbitration awards in rent review disputes are based on the premise that all relevant information is available both to the arbitrator and to the parties to the dispute.

IV. The group also makes the following recommendations which are ancillary to its Terms of Reference but which may assist in facilitating the smooth operation of the rent review procedure:

• the parties to a commercial lease should, unless there is a particularly strong reason which warrants otherwise, ensure that the rent review clause is drafted in a neutral way which facilitates either party in instituting the rent review process;
• equally, the parties should review carefully the terms of any arbitration clause to ensure that, in the first instance, it allows them to reach a mutual agreement as to their preferred arbitrator. Where such an agreement cannot be reached, the clause should enable either party to approach a pre-agreed nominating body (which may be one of several mentioned in the clause) in order to secure the necessary appointment;
•  when a nominating body is approached in connection with an appointment they should make the appointment within a reasonable period of time and, ideally, within one month from the date of receipt of the application for such an appointment. The costs of the appointment should fairly reflect the administration costs of the organisation involved in the appointment;
• given that arbitration arises only where the parties have failed to reach an agreement on the reviewed rent, early recourse to mediation might be considered in an appropriate case in order to resolve the dispute, and
• rent reviews should take place as close to the review date as is feasible so as to avoid any unnecessary lag between the market conditions prevailing at that date and those prevailing at the time the review actually takes place.