Major change in tenancy law introduced

SINCE MONDAY there has been a significant legislative change for business tenants in Ireland.

Tenants now have the freedom to "contract out" of - or get out of - statutory provisions under the Landlord and Tenant Acts, which automatically gives them the right to a new tenancy, in certain circumstances, after five years.

Many business tenants were forced to move from their premises because landlords wanted to avoid this automatic renewal right.

Up until now, the only sector of the business tenancy market that was allowed to contract out of these rights was the office sector.

So, for example, a person or a company renting a small office was able to contract out of their right to a new tenancy after five years, whereas multiple retail organisations renting an anchor unit in a shopping centre or multinational companies renting units in an industrial park could not. To overcome this anomaly, four-year and nine-month tenancies were developed for "non-office" business tenants, so that automatic renewal rights would not apply.

In 2003, a Law Reform Commission consultation paper on business tenancies commented that "this sort of anomaly does Ireland's reputation as a trading and commercially-orientated nation no good at all".

The Civil Law (Miscellaneous Provisions) Act 2008 now allows any tenant to contract out of its renewal rights.

This provision of the Act now allows all business tenants, regardless of user, to waive landlord and tenant rights, strictly provided they receive independent legal advice prior to the commencement of the tenancy and sign a waiver.

This will mean that the parties can now agree a term of more than five years which will reflect the commercial terms and realities with the knowledge that a landlord will have vacant possession at the end of the term, if required.

One advantage of this is that landlords and tenants can now agree commercial terms which will reflect their intentions and wishes.

Another plus is that this mechanism will be useful for existing tenancies where a tenant is on a short-term letting and has built up goodwill and a customer base in a particular premises.

Now, provided the formalities are properly followed, the landlord and tenant can seek to add another term at the expiry of the existing four-year and nine-month tenancy.

The new legislation could also mean that there is better product/space available for tenants as landlords will get back vacant possession at the end of each term and refurbish appropriately to attract new tenancies.

The legislation is particularly welcome in the current climate as start-up businesses/SMEs will be slow to enter into long leases with guarantees.

Many landlords wish to redevelop their premises and are either caught in the planning process or, where they have planning permission, are finding it difficult to get development finance.

Landlords (and their banks) need to get income from their property during the planning/pre-development process and this legislation will enable landlords to let to tenants without the concern that they could acquire renewal rights which would interfere with the landlord getting vacant possession of their property prior to redevelopment.

There could be some disadvantages to the new legislation. Most prudent landlords will insist on getting waivers for all leases going forward.

While powerful or anchor tenants can resist a landlord's request to contract out, many small businesses/SMEs or corner shops will not have this power and thus may have to accept that they will not have renewal rights. This will weaken their position.

The rule changes will not affect existing tenancies as the pre-conditions for waiving renewal rights will not have been complied with, i.e. the tenants will not have signed a valid waiver after receiving prior independent legal advice before the commencement of the tenancy. Accordingly the rule changes are not retrospective.

Landlords need to be careful not to take on more responsibility than is normal in the case of future leases. Generally in long leases landlords pass either the responsibility or the cost of maintaining the external and structural parts of a building to tenants either through a direct covenant to repair (in the respect of a tenant of a stand-alone building) or service charge (in respect of multi-let buildings).

However the standard four-year and nine-month letting agreement provides that the tenant has a responsibility to repair the interior only of a property with the landlord responsible for repairing the external or structural parts.

If consecutive leases are granted on the same terms this will mean that the landlord is taking a greater degree of responsibility and cost in relation to repairs. The advice to landlords would be to push the responsibility or costs of repairing the exterior or structural parts on to the tenant - this is a matter for negotiation.

In conclusion, the four-year nine-month tenancies will be phased out as parties can now negotiate lease terms that reflect commercial realities.

This welcome change will liberalise the business rental market and give landlords and tenants much greater flexibility to enter into lease agreements that suit their particular circumstances, which is crucial in these uncertain economic times.

• Aidan Marsh is a partner in the commercial property department of Beauchamps Solicitors