Promised in both the Labour and Fine Gael General Election manifestos, and in the subsequent Programme for Government, talked about by Minister for Justice, Equality and Defence, Alan Shatter for the past six months and the subject of much debate, speculation, dark warnings, impassioned pleas and on here, sometimes heated arguments; now at last, the outline of the Bill to do away with Upward Only Rent Review terms in all leases is exclusively revealed here today.
Minister Shatter has recently indicated that the Bill will come before the Oireachtas at the end of October 2011 or November 2011. The Bill, the Landlord and Tenant (Business Leases Rent Review) Bill 2011 will give commercial tenants – remember this doesn’t affect residential tenancies at all – the right to seek a current market rent. The heads of the Bill, which set out in general terms the operation of the new legislation, have been obtained on here and this blogpost interprets this information.
So here we go:
(1) The Bill will only apply to commercial leases created before 28th February 2010 [remember that leases created after this date were not permitted to contain Upward Only Rent Review clauses]
(2) For a commercial tenant to benefit from the Bill, they will need to rent a premises where the rent is higher than the market rent and the tenant will need demonstrate that the rent threatens the present or future sustainability of their businesses. There is no detail at this stage as to how sustainability will be measured, and this is likely to be a contentious part of the actual Bill. Also the tenant must demonstrate that reducing the rent to a market rent will significantly change the prospects for the sustainability of their business.
(3) Any new rent will apply for a period of five years, after which Upward Only Rent Review terms will kick back in.
The tenant submits a request to the landlord for a market rent, together with a brief justification for the request/change. The landlord must respond to the request within 28 days to advise whether or not they agree to the contract rent being substituted with a market rent. If the landlord agrees to a market rent being inserted in the lease, then the landlord and tenant must try to reach agreement on that rent. The landlord will be entitled to demand certain information from the tenant such as details of the control of any company, employee headcount, accounts and other financial information and importantly, information supporting the tenant’s claim that the sustainability of the business is threatened by the existing rent. The landlord must also make information available to the tenant showing loan obligations. The new agreed rent will come into effect two months after the original tenant request. So tenants should not be considering the format of their requests.
Obviously this is where the landlord and tenant were unable to agree a new rent in Phase 1 or where the landlord hasn’t responded to the tenant’s request. Both the landlord and tenant will be required to attend an as-yet-undetailed mediation service. Mediation must take place promptly – 28 days is mentioned but it is not quite clear as to when the clock starts, but it is implied that it will be 28 days after the landlord’s deadline for responding to the tenant’s original request or when landlord and tenant fail to reach agreement in Phase 1
If mediation fails to provide a solution acceptable to both landlord and tenant, then the tenant may apply to the Circuit Court for a decision. The application by the tenant must be within 12 months of making the original request. This is at odds with previous speculation about the legislation which suggested the tenant would be obliged to wait 12 months before applying to the Circuit Court. The Circuit Court can back-date its decision to reduce rent from two months after the original request by the tenant.
Importantly, rent arrears must be cleared by the tenant before the new market rent can kick in, so if a tenant has withheld rent in anticipation of the new legislation, they will need make good their arrears to the landlord in order to take advantage of this legislation. Also if the landlord is unhappy with the Circuit Court-determined rent, then the landlord can terminate the lease with the tenant within six months of the court’s determination. Importantly, the tenant can also terminate the lease if the court-determined rent is unacceptable. From a landlord’s perspective, this might be the most contentious part of the Bill.
So how might this work in a contentious case?
(1) 1st December 2011. Tenant submits written request to landlord seeking a reduction in rent payable under the terms of the existing lease
(2) 28th December 2011. Landlord declines to respond to the tenant. The tenant applies to the as-yet-undetailed mediation body.
(3) By 25th January 2012 the mediation body must issue its determination of the new rent
(4) If the mediation service produces a proposed rent which is not acceptable to either landlord or tenant, then the tenant will have until 1st December 2012 to apply to the Circuit Court for the court to impose a market rent in the lease.
And how might the finances work?
(1) The tenant presently pays €30,000 per month in rent. The market rent is €20,000.
(2) If the Circuit Court agrees to the reduction in rent from €30,000 to €20,000 then the tenant will be entitled to a refund from 25th January 2012, regardless of how long it takes the court to determine the new rent.
(3) The tenant must seemingly continue to pay the existing rent until the Circuit Court determines a new rent
(4) The new rent of €20,000 per month will apply from 25th January, 2012 to 24th January 2017, after which the rent will either increase to the market rent in 2017 or remain at €20,000. It will not reduce.
(1) It’s not at all clear what metrics or criteria will apply to tenants trying to demonstrate the sustainability of their businesses – now or in the future – is threatened.
(2) It’s not clear who will be undertaking the mediation
(3) It’s not clear how any costs will be borne by the landlord, tenant and court service.
(4) The new rent will apply for five years, it won’t be reduced or increased during that period. And the intention is that after five years, the rent will either stay the same or increase to the market rent then. The above process can only be invoked once, so if rents drop by another 20% say in 2013, tenants won’t be able to initiate a second bite at the cherry.
(5) There is no mention whatsoever of applying the scheme on a store-by-store basis. That will be a relief to many landlords who feared the likes of Tesco would seek a rent reduction on one premises, despite Tesco’s business overall being robust.
(6) There is no information on what happens to rent payable by the tenant until the Circuit Court makes its determination. The Bill seems to assume that the existing contract rent remains payable unless or until the Circuit Court issues its determination.
What effect will the proposed legislation have on commercial property values?
(1) There is some anecdotal evidence that the steep decline in Irish commercial property prices in Q2, 2011 of about 5% was in part attributable to the imminent introduction of this promised piece of legislation.
(2) At the start of this year, the Society of Chartered Surveyors in Irelandciting calculations from IPD claimed that commercial property prices might drop by 20% on average as a result of the mooted changes. Jones Lang LaSalle also indicated in July 2011 that changes to existing UORR arrangements might lead to a 20-30% decline in capital values.
(3) My guesstimate is that prices will drop 5-10% as a result of the above changes because some of the decline has already occurred in anticipation of the changes, and also the scheme is not as wide-reaching as might have been hoped for by some tenants. A key part of the proposed legislation – how tenants might evidence the threat to their businesses presented by current rents – is not yet detailed but it seems that even if the present rent is above market rent, the tenant will need jump through several hoops before they qualify for a rent reduction.
(4) If a building is subject to tenancies entered into after 28th February, 2010 -for example One Warrington Place whose tenant is Bord Gais – then the new legislation will not have any direct impact as these tenancies are excluded from the new legislation.
(5) Investors – domestic (a very rare breed) and international – may still have concerns about the impact of the legislation on potential investments, and they will be particularly interested to see how sustainability of existing tenancies will be measured, but there might be some cute manoeuvrings to finalise deals in advance of legislation which seems less intrusive than previously thought.