Think twice before challenging upward-only rent reviews

The Supreme Court ruling earlier this month upholding what Bewley’s Café described as the “oppressive” €1.46 million annual rent on its Grafton street premises once again raised the vexed question of upward-only rent reviews.

Legislation enacted in 2009 prohibited upward-only review clauses from 2010 on but, due to strong constitutional protection of property rights in Ireland, the measures were not retrospective.

A High Court decision in March 2013 was a cause for optimism for tenants when it lead to hundreds of thousands of euro being knocked off Bewley’s rent. Many tenants who had found themselves paying rents well above the market rate saw a glimmer of hope in the decision and were waiting tentatively for the Supreme Court outcome on the landlord’s appeal.

The 1987 Bewley’s lease provided for reviews every five years with a clause that the rent would increase with market rates or be at least equal to the rent payable during the preceding period. The review carried out in 2007 set the rent at €1.46 million, a figure which, at the time, Bewley’s seemed willing to go along with. Fast forward five years, however, and market rates had plummeted.

Open to interpretation

In the High Court, the café argued that the rent review provisions contained in its agreement were ambiguous and open to interpretation.

They said their rent could not fall below a baseline of €213,000 (IR£168,000) agreed in the 1987 lease. On the other hand, Ickendel Ltd, the landlord, said the parties had agreed to review the rent every five years and that it would not fall below the amount payable in the preceding five-year period.

Mr Justice Peter Charleton agreed with the café and said there was ambiguity in the lease, meaning it could be interpreted to support either the view of Bewley’s, or Ickendel. The case went to arbitration to determine the rent payable on the 2012 review, with a figure of €728,000 being returned.

But this month a five judge Supreme Court unanimously allowed an appeal by Ickendel. Giving the judgement, Ms Justice Mary Laffoy upheld the arguments put forward by Ickendel, which were that the lease provided for a term of 35 years with five yearly reviews from January 12th, 1992. The landlord said the parties had intended there would be six successive five-year periods for which the rent could be reviewed and could not be construed as having any other effect.

In a statement delivered in the wake of the decision, Bewley’s said it was “immensely disappointed” that it would have to continue paying the “oppressive” rent.

While the case specifically concerned the Bewley’s lease, lawyers say the decision has at least provided other tenants with some clarity on the question of upward-only rent reviews. “It means that if somebody is thinking of challenging their lease, they’ll actually think twice about it,” says Thomas O’Malley, a commercial property and banking solicitor with McDowell Purcell. “

He says the courts won’t rewrite a deal that was done between two parties at the outset, assuming the deal was unambiguous. “It’s given a very clear ruling so I think that’s a help both for landlords and investors and also a help to tenants because they’re not going to waste money going into court.”

Barrister Michael Hourican, who specialises in landlord and tenant and equity law, agrees. “It didn’t strike me as a judgement that changes the law in any material sense or in any general sense,” he says.

“It’s about the interpretation of the lease. In any sort of interpretative contract case, the first thing the court will ask itself is what is the plain meaning of the words. If they have a plain meaning, well then really that’s the meaning that they have to be given.”

When the Coalition Government came to power in March 2011, it pledged to tackle upward-only rent reviews but dropped the plan in December of that year. “There was a substantial concern that any legislative scheme involving interference in the contractual relationships of private parties would find it extremely difficult to survive a Constitutional challenge,” said Minister for Justice Frances Fitzgerald in a recent response to a parliamentary question on the subject.

Property rights

Article 40.3.2 of the Constitution provides that the State shall protect the property rights of every citizen as best it may from “unjust attack”. Article 43.1 guarantees the State will not pass any law attempting to abolish the right of private ownership.

All of which means a referendum would be required to sort out upward-only rent reviews and it’s fair to say the Irish people would be reluctant to dismantle their property rights just to tackle legacy rent issues.

Alternatively, the Government could do away with upward-only rents by introducing a compensation scheme for landlords whose rights had been infringed. This would end up lumping the taxpayer with the balance – a not particularly palatable choice either.

Unsurprisingly then, as the minister said this month, “there are no plans to re-examine the decision which was taken in 2011, nor are any plans to have a referendum on this matter”.

A Private Member’s Bill on the issue, moved by Senator Feargal Quinn, will also likely be defeated by the Government.

So where does that leave tenants? On their own, really, with few options other than attempting to negotiate with their landlords.

“People do different things to try and force the landlord to negotiate,” says O’Malley. “A lot of people have negotiated because of the economic circumstances. People have maybe shown their financial wherewithal and ability to pay and landlords have said, ‘Okay, well I don’t want to lose you.’

“There is a certain relationship between the landlord and the tenant and if there isn’t a possibility of finding an alternative tenant the landlord will probably do a deal.”