Bewley’s case turned on ambiguities around lease

The win by Bewley’s will not sound the death knell for upward-only rent clauses yet

In ruling that the rent Bewley’s pays for its landmark site on Grafton Street must be allowed to fall in line with market rates, yesterday’s High Court judgment has delighted the owners of the famous Dublin café and drawn the keen attention of other tenants struggling under the onerous terms of upward-only rent reviews.

The Irish Commercial Tenants Association hailed the outcome as a “milestone” in its long battle against upward-only clauses, seeing it as “very positive news”, not only for the company but for all its members and even the economy in general.

The judgment is certainly a victory for Bewley’s, but it won’t sound the death knell for the upward-only rent clauses so unloved by Irish retailers.

Bewley’s case turned on a number of apparent ambiguities in the lease it agreed with the landlord of the Grafton Street site, Ickendel Limited, in 1987. That lease stipulated that the rent would be reviewed every five years. In 2007 – the year of the fourth review – the rent was fixed at €1,463,964.

READ MORE

By the time it came up for review again last year, however, the commercial rental sector was severely depressed after years of recession and the question of whether rent could go up as well as down was raised for the first time.

On this, the two sides’ reading of the lease was sharply at odds.

Ickendel, owned by the property developer Johnny Ronan, accepted that should there be deflation, the rent could remain at the same as that fixed in the previous review. However, whereas in Ickendel’s interpretation the rent could not go below the figure agreed in 2007, Bewley’s argued that the relevant “threshold clause” should be seen in the context of the entire lease. In other words, that the first rent fixed in 1987 was the base line below which rent could not go.

In a sense, the case turned on how one key phrase in the lease – “preceding period” – should be interpreted. Did it mean the preceding five years or the preceding 25?

Bewley’s argued that its survival was at stake. The rent on the Grafton Street site had doubled at the review in January 2007, at the peak of the property bubble, and the café was losing about €700,000 a year due to the high rent it had to pay.

To illustrate how steeply rents in the area had fallen in recent years, Gavin Ralston SC, for Bewley’s, pointed to a recent Dublin Circuit Court decision on a Burger King outlet on Grafton Street.

In that case, which involved the franchisee's application to court seeking renewal of its lease under landlord and tenant legislation, Mr Justice Matthew Deery granted a five-year lease and ordered the rent to be fixed at €205,250 a year – a reduction of 52 per cent from the previous rent.

That was the context, but what mattered to the court were the terms – and meaning – of the Bewley’s lease.

As Mr Justice Peter Charleton observed in his judgment, many leases contain an express clause making it clear that on review of rent, the sum payable is never to drop.

Such a clause, which would lock the tenant into an upward spiral on each rent review, did not appear in this lease. It was, in its own way, a relic of a time when neither party could imagine rents actually falling.

The court concluded that the parties had contracted for an open market rent and that the rent review clause could only reasonably be construed so as to allow for a fall in rent on each review, but never below the figure initially agreed in 1987.

“The parties bargained so as to agree never to fall below that initially agreed and I cannot see that they bargained thereafter for anything other than a fair open market rent,” Mr Justice Charleton wrote. “That can rise and that can fall.”

The Irish Commercial Tenants Association said it now hoped tenants would be prepared to take further action against upward-only rent reviews and the “feudal leases” which it said had contributed to the commercial property bubble.

Yesterday’s judgment won’t herald the the end of upward- only rent reviews; after all, it applies strictly to the specific circumstances of the Bewley’s case. But it is fair to assume quite a few tenants will this morning be carefully parsing their own leases in the hope of finding similar ambiguities.