THE GOVERNMENT’S decision to proceed with legislation abolishing upwards-only rent reviews in commercial properties has come in for severe criticism from estate agents and the Society of Chartered Surveyors.

Michael Harrington, of commercial estate agents HWBC, said yesterday that the absence of income security in the future would inevitably result in the banks insisting on lower loan-to-value ratios for commercial property funding, higher margins and shorter term loans.

“All this will further reduce liquidity in a fragile market that was just about to move forward, encouraged by the recent interest from foreign investors.”

A campaign to end the upwards-only clause was mounted in recent weeks by shop tenants on Dublin’s Grafton Street where about half the stores are over rented by at least 20 per cent. Many landlords had begun to reduce rents on a temporary basis because of the sharp decline in consumer spending but pension funds which own a considerable number of the properties were reluctant to alter their long-term legal contracts with traders.

Much of the dispute between the two sides was centred on Canada Life’s ownership of Korkys shoe shop at 47 Grafton Street. Fourteen years ago the rent for the 84sq m (900sq ft) shop and overhead storage space was €120,000. It has since risen to €445,000 and despite an expensive advertising campaign and the offer of a €300,000 handshake by owner John Corcoran, he could not find a trader to take over the building.

Korkys is one of at least seven leases offered for sale on Grafton Street over the past six months which have failed to sell.

At least two new leases for shops on Grafton Street, due to be signed later this year, are expected to set lower rent levels which will inevitably lead to a two-tier rent system on the street – one for large, prestigious stores and the other for smaller units. The changes in the rent review procedures will not affect existing leases which in most cases are subject to legal contracts.

Though the ending of the upward-only rent review will also affect the office market, it is not expected to have wide repercussions. Most new tenants moving to offices already have short-term break options in their leases which allows them to walk away if the landlord demands excessively high rents.

Michael Harrington said that if the political intervention into what used to be a free market made it into law it was not certain that the consequences would be as beneficial to tenants as the sponsors had hoped.

Only time would tell whether landlord breaks in leases would increasingly coincide with rent reviews. In good times this would allow landlords to tap into the open market rent by ejecting their tenants.

It would also open the way for leases with no rent reviews for more than five years with an upfront loading to compensate for the lack of growth over the term. The concept of automatic CPI indexation would also have to be explored. Ken Cribben, president of the Society of Chartered Surveyors, said a study conducted by the society showed that 86 per cent of landlords had been prepared to grant rent reductions or rent holidays.

He said that if the upwards-only reviews were outlawed the property market would be less liquid and this would lead to lower stamp duties. “As landlords have, for the most part, reacted to keep their tenants in business, it appears ill thought out to introduce this legislation at this time.”

He acknowledged that the changes would affect pre-funding of developments where there would be no certainty of the rent levels in the future.