Should the government ban upwards-only rent reviews?

Head to head: JOHN CORCORANsays "yes" and AIDAN O'HOGANsays "no".

YES

With the upwards-only rent review clause, the rent cannot fall to reflect the actual market rent. writes JOHN CORCORAN

MY COMPANY trades as Korky’s with shops in Dublin and Cork. Grafton Street is one of the most expensive rented streets in the world. In my own case from 1995 to 2005 my rent in Grafton Street went from around €120,000 to €445,000.

This is absurd and is recognised by everyone, save the landlords and the surveyors who fix the rent under what are known as upwards-only rent review clauses.

In a recent review in Grafton Street, the arbitrator increased the rent by 70 per cent – apparently oblivious to the current recession and property slump.

With the upwards-only rent review clause, the rent cannot fall to reflect the actual market rent.

This has prevented an adjustment taking place and is acting as a block to the recovery of the economy.

This problem extends right through the entire commercial property market. The protestations by the large institutional landlords and the surveyors are reminiscent of the comments made in Westminster in 1845 in defence of the Irish landlords response to the plight of tenants during the Famine. It reads well but is not a true reflection of the reality on the ground.

Thousands of jobs are being lost arising from the obduracy of the landlord and the inflexibility of the rent review mechanism. The opposition parties have recognised this problem with the Labour party introducing emergency legislation. Fine Gael will support this bill.

The Government, in a decisive move, is bringing in legislation before the summer break banning this type of clause, which will in part deal with the problem, but the Government has yet to publish its proposals for tackling existing leases.

Common sense has prevailed and the tenants have won the argument.

The job is half done and I urge the Government, with the support of the opposition, to complete the task and devise a mechanism to oblige the landlord to accept a market rent in all existing leases.

The market rent will have to be fixed by a body other than the Society of Chartered Surveyors which, through its submission to the Minister for Justice and its press releases, has thrown in its lot with the landlords and, along with them, is incapable or unable to recognise that the game is up, reform is inevitable and the upwards-only rent review clause an aberration from the past.

John Corcoran runs the Korky’s chain of shoe shops

NO

THE CLAMOURING by retail tenants to abolish upwards-only rent reviews has resulted in a political initiative to guarantee that reviews in future leases must be capable of being reviewed up or down, writes AIDAN O'HOGAN.

While it’s understandable that the Government might feel this is a good idea, any rational cost-benefit analysis of this proposal suggests the opposite. From existing tenants’ viewpoint, this proposed legislation has no impact on their leases – it only applies to new leases created after the date of legislation. But it will make it harder for existing tenants to offload their leases, since it will create two classes of leases: one of new leases with upward and downward reviews and another with upwards-only reviews. It’s obvious that prospective assignees would strongly favour the former to the disadvantage of existing leases. So the legislation does nothing to solve the problems of existing tenants.

But will it make landlords more amenable to accepting surrenders of existing leases from tenants? No, it will make landlords even more reluctant to accept surrenders of such existing leases – they will cling to what is to become a scarce and valuable holding. So this will polarise the positions of landlords and tenants.

Currently, both parties are free to negotiate whatever they want and, at the moment, it’s a tenants’ market. Moreover, any tenant who is occupying on a lease that was renewed under the 1980 Landlord and Tenant Amendment Act already had a statutory right to a new lease with upward and downward reviews.

Investors will pay significantly less for properties where there is no defined floor to the rent that may be payable. Pre-funding for developments will become virtually impossible. The planned legislation will certainly increase the NAMA debt since it will reduce the capital values of any existing investment properties or vacant commercial property where there is a possibility of new lettings in the future. We need to be aware of the impact this controversy is having on overseas investors. It is hugely damaging at a time when we desperately need inward property investment. So what can be done?

A simple amendment to permit the parties, by agreement, to “contract out” of this legislation would mitigate the value destruction impact of this proposal. All that said, we need to recognise the dilemma facing tenants and urgently find a solution – but this proposed legislation isn’t it. This will be very damaging to the State and without any real benefit to those who are lobbying for it: in the short to medium term they will realise that it has also damaged their interests.

Aidan O’Hogan is chairman of Savills