The latest on the Coalition’s pledge to legislate to allow upward-downward reviews in upward-only leases is, according to RTE broadcast news yesterday, that new Minister for Justice, Equality and Defence, Alan Shatter is to refer the matter to the Attorney General (AG), Maire Whelan to consider the compatibility of any change with our constitution. RTE made it clear that the matter has not yet been referred to the AG which is disappointing for landlords, investors, potential buyers/sellers, the property industry and commercial tenants – uncertainty surrounding the issue seems to be in no-one’s interest.
Meanwhile property powerhouse and NAMA panel valuer, CB Richard Ellis (CBRE) has issued a downbeat note on activity in the first quarter of 2011, saying that there were only two investment property transactions (really three because Google made two purchases). This, according to the note “follows a year in which 29 transactions with a combined value of almost €242 million were completed in the Irish market”. What the CBRE note doesn’t tell you is that the combined value of the three transactions mentioned for quarter one was over €210m (Google’s purchase of Gasworks House for “slightly over €100m” and Gordon House for €99.9m, both in Barrow Street and the sale and leaseback of Ericsson House, Clonskeagh, €10m). So on the face of it, the first quarter of 2011 has seen sales worth 87% of the total sales for all of 2010. Wow! Also I can’t seem to find any reference in the CBRE note to the purchase of 22-25 Clare Street by the Office of Public Works in February 2011 for €5.65m. Now I am being slightly mischievous because CBRE want to highlight the collapse in transaction volume but the fact remains that transaction value is considerably up on last year.
Of course the point CBRE wants to make is that both the procrastination with dealing with the rent review issue and the issue itself are deterring transactions. Obviously not the Google, Ericsson and OPW transactions, but the complaint is merited. Minister Shatter has had his feet under the desk in St Stephen’s Green for over three weeks and given the strong commitment to this matter in the manifestoes, the Fine Gael manifesto in particular which said that reviews would take place in 2011, it is disappointing that no opinion has yet been sought from the government’s adviser, the AG.
The position on here was neutral but is now leaning towards the swift implementation of reform, on the basis that a more competitively priced factor of production – property – will benefit society more than the damage caused which will be widespread and not limited to stereotyped money-grabbing landlords. With respect to the constitutionality issue, I would be surprised if implementing upward-downward reviews in upward-only leases was judged unconstitutional. The reason for this view is that our laws closely mirror those in the UK where property rights are frequently interfered with, including those enshrined in contracts. A good example might be the reforms to residential leases in the 1970s and 80s which lead to the Duke of Westminster, who owns the freehold in much of central London, fighting the then Conservative government all the way to the European Court of Justice which ultimately held that society’s needs were greater than property rights. And that is why today in the UK, residential leaseholders can generally extend their leases or buy the freehold in their buildings. I would guess that the change now contemplated with our commercial leases would touch on similar points.
But regardless, could the Minister get a move on, one way or the other.
NAMA Wine Lake 
Hi NWL, I would refer you to Neil Callanan’s article in the Irish Times yesterday:
Nama ‘very concerned’ at any changes to rent law
NEIL CALLANAN
THE NATIONAL Asset Management Agency (Nama) has warned that proposed changes to rent legislation would “significantly impact” on its ability to repay the debt it has issued.
The agency is “very concerned” about the impact any move to allow retrospective rent reviews could have on the value of its assets. Any such legislation would have a “dramatic reduction in the value of the income-producing assets transferred to Nama” because investment properties are valued on a multiple of their annual rent.
In a letter to the Department of Finance, Nama chief executive Brendan McDonagh and head of portfolio management John Mulcahy point out that the loans being transferred to Nama are done so on the basis of their valuation in November 2009, and the loans were “assessed and valued on the assumption that existing contractual lease terms prevail”.
Any change in the law “would mean that Nama would have effectively overpaid and would of necessity be required to continue overpay (sic) the various participating institutions for bank assets that Nama acquired and will acquire from them”.
The letter says it is important to consider the beneficiaries of the changed law.
“This would comprise tenants across all commercial property sectors, including retail, office and industrial property.
“It is widely accepted that the effect of rent on business viability in the latter sectors is nominal.
“We would suggest that the majority of large tenants (some international high street names) are in a position to bear the burden of the contractual rent due to the existence of other profitable stores located both within and outside the Irish jurisdiction,” it said.
“Consequently, such arbitrary action would disproportionately benefit a majority of tenants not requiring such support at significant cost to the Irish taxpayer and fail to direct efforts at the minority of perhaps domestic retail tenants requiring genuine support.”
The letter was sent last May to then minister for finance Brian Lenihan.
It was released to The Irish Times under the Freedom of Information Act.
It added that its review of retail portfolios being transferred to Nama showed landlords had given “widespread support” to tenants, via rent reductions, where the contracted rent jeopardised their clients’ business.
It said that a move to allow retrospective rent decreases would damage Ireland’s perception abroad, in turn damaging the prospects of any future external investment in the Irish market and also damaging the wider investment market.
“The direct implication of this will be to restrict Nama’s future ability to refinance or dispose of their property portfolio to non-domestic investors.
“Such non-domestic investment will be an essential ingredient to the success of the Nama project,” it said.
It also warned that any changes would also affect Irish pension funds and insurance companies. This would erode the value of pension funds, and could result in increased insurance payments by individuals and businesses.
Nama also pointed out that previous interference in “freely-negotiated landlord and tenant arrangements has led to unforeseen and usually unhelpful results”.
It cited the rent freeze in the 1970s in Britain which “led directly to the secondary banking crisis which almost took down the UK financial system”.
It also said that at about the same time in Ireland the minister for finance had directed that all State leases were to have upward and downward reviews.
“We understand that this measure was subsequently rescinded by the OPW after a few years due to its unhelpful and unintended consequences,” it said.
@WSTT, many thanks, it was picked up as an update this morning and added to the rent review thread
https://namawinelake.wordpress.com/2011/02/15/upward-only-rent-reviews-under-threat-with-fg-and-labour-policies-yipeee-say-commercial-tenants-boo-hoo-says-the-property-industry/
This letter from NAMA in May 2010 (a year ago), I think merely confirms the position that a change to the commercial rent legislation to allow downward reviews in upward-only leases would be harmful to NAMA and would increase its potential to make losses.
@NWL. It does more than that. It confirms that Ireland would be treated as a pariah (or a “banana republic”, if you prefer) in the international property investment community.
Can I please point out that the total numbers for Investment spend in the piece above are incorrect. The clare street property was signed before Christmas so is included in 2010 data. The Google acquisition of Montevetro is NOT an investment transaction as it is a vacant building so is not included. The other Google acquisitions amount to approximately 115 million euro and the other office building signed in Q1 amounted to just over 9 million euro bringing the total investment spend in the first three months of 2011 to just over 124 million. The issue is not the value of these transactions but rather the NUMBER of transactions which is without doubt impacted by investor uncertainty.
Marie Hunt
Executive Director – Head of Research – CBRE
Many thanks for the clarification Marie. I think some readers of this blog might be confused by the exclusion of the Montevetro building, might CBRE be releasing data on total market transactions? And in addressing you directly at CBRE, my apologies for having had a little fun at your expense in emphasising the *value* of the transactions which even at €124m in Q1, 2011 would be 50% of all of 2010. Clearly though the *volume* of transactions has fallen off a cliff based on your numbers and it is becoming self-evident that fear and confusion over rent reviews is a prominent factor.
In analysing the market, investment sales are classed as buildings with leases in place whose income stream is purchased by an investor. The sale of vacant premises is not included as an investment sale as the building is vacant and not subject to a lease contract. For instance, there was a sale of a vacant building in Cork City reported in the Irish Examiner last Thursday for approximately €500,000. This too was a vacant property so while the transaction is listed in our statistics as a property sale, it is not counted as an investment purchase on the basis that it is not income-producing. Hope this makes sense.
Marie
The proposed retrospective legislation is equivalent to removing a leg, when all that is required is to lance a boil.
The personal guarantees of retail tenants should be declared invalid under the law. Companies should then be allowed to enter Administration as per Neil Callanan’s suggestion under another link. Leases should be rebased under the process if the accounts show the tenant is unable to pay.
A similar process will also have to take place with residential mortgages before this is over. The sooner the better.
@WSTT, you may have missed the RTE Frontline programme last night (link below) in which the subject of UORRs – Upward Only Rent Reviews – was debated. The panel included the Minister for Justice Equality and Defence, Alan Shatter. The upshot is that the Minister stated that legislation to allow downward reviews would be drafted before the summer recess of the Dail or shortly afterwards and he expected the legislation to be enacted “before the end of the year”. Even if the Minister fails to deliver, one of the key objections to this legislative move – it will deter investors – should now have been lanced. Because even if this Minister does not introduce the change, you can bet your bottom dollar that a more left-wing government that may well follow this one, will. The natural position is that rents should reflect the market, just like labour and raw materials and other factors of production. That is the position throughout Europe and only Ireland and the UK stand as idiosyncrasies. If investors now price their investment offers at market rents then their investments will be as protected here as they are in Germany or France. Although the intrusion into private contracts by government may be uncomfortable, this is hardly wholesale appropriation by the state of private assets – the reason for it, delivering competitive factors of production – is hardly the act of a rogue state. Next year the government is likely to interfere in private residences by imposing a property tax which will make property investment less attractive, governments tinker with property rights all the time.
Of course certain retailers won’t be able to last until the end of this year, but canny landlords, now knowing that legislation is imminent (and that has now been confirmed by the Minister), will negotiate rents now which might offer them some advantage over rents that might be mandated from the “end of this year”.
Another matter to arise last night was the widely-regarded disrepute of the arbitration process which is seen as landlord-biased. I wonder what scheme will be put in place to determine fair market rents under the new legislative arrangements?
The RTE Frontline programme can be viewed here.
http://www.rte.ie/news/av/2011/0404/thefrontline.html#&autoplay=true