Upward-only rent reviews are damaging for businesses, for our towns and cities, they erode confidence and they cause businesses to close unnecessarily. We know this to be true and, as such, we worked in advance of the 2011 General Election to prepare to bring about an end to Upward-only rent reviews.
The retail sector has decreased in size by up to 35% depending on sector since 2007, and new market entrants can negotiate leases which take account of the fact that rent levels have fallen by around 40% from peak levels. Those already in the market are dependent upon a flexible approach being taken by their landlord to requests for a review. This puts existing businesses at a significant disadvantage.
The common practice of including Upward Only Rent Review clauses in commercial leases has not come about due to any legislative requirement, and parties have always been free to agree that more neutral review clauses be included in their leases.
The Programme for Government contained a commitment to introduce legislation to end upward only rent reviews for existing leases.
However, following extensive consideration and legal consultation on this matter, the Government announced in December 2011 that it had decided not to proceed with such legislation. 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.
In addition, the Government was advised that any model proposed would require the payment of compensation to landlords whose rights were infringed in order to ensure that the proposal would be compatible with the Constitution.
The Government was strongly of the view that payment of compensation to landlords in such circumstances could not be justified in the current economic climate.
For these reasons, the Government decided not to proceed with the development of the Landlord and Tenant Bill.
However, while legislative intervention may not be feasible, NAMA is playing a role in dealing with problems caused by upward only rent reviews applying to NAMA properties. By the end of 2012, the Agency had granted 212 applications for rent abatement with an aggregate annual value of €13.5 million. A further 56 applications are currently under review. Of the 276 eligible applications received to date only 8 have been refused representing a 97% approval rate by NAMA.
However, while this is taking place within NAMA, there are still a great many other anomalies around the country which are being caused by upward-only rent reviews: businesses moving out of premises, such as the previous occupants of a cinema site in Dublin, because an agreement can’t be reached on a reduced rent, only for a new tenant to ultimately move in for the level of rent proposed by the previous tenant and successfully trade for the next three years.
This happens up and down the country: a business is, on the face of it, successful, yet to survive needs a reduction from the 2007 level of rent: no agreement can be reached and therefore the hitherto successful business must close, only to be replaced by an identical business in the same location at, sure enough, a lower level of rent as it is now a new contract.
In terms of solutions, we know that payment of compensation to landlords by the Government would enhance the prospects of any putative legislation surviving a challenge on Constitutional grounds. However, there is no guarantee that payment of such compensation would render any legislation in this area Constitutional and, indeed, there are no further practical details worked out, such as where this money would come from.
The Government is therefore aware of the fact that it would have to take responsibility for funding a compensation scheme, either in the form of State-funded direct compensation or as indirect compensation through, for example, the taxation system. Given the current economic circumstances the Government is strongly of the view that it is not feasible to provide for a State-funded compensation scheme and, therefore, this avenue of possibility is currently closed off.
While upward-only rent reviews are undesirable, they are unfortunately something that it is not currently possible to tackle. If we had finances to set forth a compensation programme, it would perhaps be possible. However, given that we don’t, any move to interfere with existing contractual agreements would be ruled as unconstitutional and, as such, we can’t. While we work to create many, many measures to assist and help businesses – both new and old – which is paying off with 109 companies being created per day in August, the Upward-Only Rent Review problem is one that cannot be solved easily.