'Upward-only' rent reviews barred in new leases from 2010

 

THE GOVERNMENT has banned the use of clauses in business leases which provide for “upward-only” rent reviews in a move that came as a surprise to the industry.

However, the measure will apply only to new leases, providing no relief to companies in the middle of long-term contracts.

Businesses have complained that they are struggling to pay high rents, particularly in city centre areas, because they are tied to contracts that only allow for rents to be adjusted upwards, even though market rates have nominally fallen.

Minister for Justice Dermot Ahern yesterday signed a banning order on upward only rent review clauses under section 132 of the Land and Conveyancing Law Reform Act. He said the section would come into operation on February 28th, 2010.

“The practice of including upward-only review clauses in business leases is a deeply entrenched one. The time has come to end this practice. I look forward to more equitable business arrangements being put in place in the future which take account of the reality facing many business owners and retailers,” Mr Ahern said.

Retail Ireland, the Ibec group representing the sector, said it was looking forward to “more equitable” leases being put in place in the future “to take account of the reality facing many business owners and retailers”.

The Irish Auctioneers and Valuers Institute (IAVI) claimed the ban had been imposed without full knowledge of how the market operates.

Chief executive Alan Cooke said: “I think it’s going to lead to more short-term leases, which in itself doesn’t help development or confidence going forward.”

Property consultants CB Richard Ellis said the amendment would “do absolutely nothing to help existing tenants, and was potentially very harmful to the Irish investment market”.

Director of research Marie Hunt said the legislation will not be retrospective. Therefore, occupiers in existing leases will not benefit and will have to continue lobbying their landlords to effect temporary rent reductions that will assist them to trade through the current downturn.

Andrew Muckian, head of commercial property development at William Fry, said: “Today’s announcement has taken the commercial property market by surprise, as all the previous signals were that this ban was being deferred indefinitely. This move will create a two-tier market for the next several years. It will also have the added effect of creating valuation headaches for Nama.”

A campaign to end the upwards-only clause was mounted during the summer by tenants of shops on Dublin’s Grafton Street, where about half the stores are said to be “over rented” by up to 30 per cent.