Rent reviews

 

THE GOVERNMENT changed the law on commercial rents last month and banned upward-only rent reviews on future business leases. But because this change – welcome as it is – only affects leases taken out after March 1st, it has provided little financial relief to those businesses in greatest difficulty as a result of their existing tenancy arrangements.

Mainly in the retail sector, these businesses have been adversely affected by the economic downturn and by the inflexible nature of the commercial rental market. Some have been forced to pay higher rents as the economy has contracted, thanks to upward-only rent review provisions in lease agreements negotiated with landlords in much better economic times.

Throughout the State, many shopping outlets and businesses are struggling to pay high rents at a time of sharply falling consumer demand. Some hard-pressed companies have been forced into receivership or insolvency. In many instances, the commercial rents were agreed at the height of the economic boom when property prices were soaring, rents were affordable and upward-only rent reviews as part of the lease arrangements were not seen as presenting any future financing difficulty. However, given the sharp contraction in the economy over the past 18 months, today’s commercial realities are harsher and very different.

Landlords are in many cases major financial institutions – banks, insurance companies, pension funds – that have invested in commercial property to secure a financial return for their investors. Understandably, they are concerned to protect their investment. And to date, with some few exceptions, landlords have been unwilling to adjust downwards the terms of their lease agreements – which are legal contracts – with their tenants.

The Labour Party proposed a bill last week, which the Dáil rejected, to provide for a downward review of commercial rents on existing leases. Taoiseach Brian Cowen has stated that legal and constitutional difficulties would arise if property rights were to be affected retrospectively by the introduction of such a measure. Instead, the Government has set up a working group to examine commercial rent reviews in existing leases. The group is to report by the end of June and to make recommendations for change.

That could clarify many of the current difficulties and identify compromises and solutions that might prove mutually acceptable to landlords and their hard-pressed commercial tenants.