In 2009 Section 132 of the Land and Conveyancing Law Reform Act was passed. The legislation banned upward only rent reviews until from February 2010. Commercial rents in Ireland have dramatically fallen in the past 5 years. The Investment Property Databank has indicated retail rents fell by 63%, office by 59% and industrial 68%.
Traditionally commercial leases provided that rent reviews were to be the higher of the passing rent and the market rent. This meant that rents never fell below the initial rent. In a recession this leaves the tenants very exposed. Landlords clearly desire upward only rent reviews so that there is no negative impact on their yield whatever the economic conditions.
The legislation that Ireland introduced was far reaching. Since 2010 all new commercial leases can not contain upward-only rent reviews. In comparison in England, landlords still grant leases with upward-only rent reviews. In the 1990s the British government discussed introducing a similar ban but decided only to encourage the principle when it supported the first Code for Leasing Business Premises in England & Wales.
Now that the February deadline has passed what does this mean for commercial property in Ireland? Without a doubt landlords will be looking at the performance of their portfolios and seeking what opportunities there are to improve rental income. Clearly, it is a great selling point of an investment property if the tenants are operating under old leases with upward-only rent reviews.
There is talk of a two tier system developing over the next 15 -20 years whilst the old pre 28 February 2010 leases continue to operate. However, in practice is this true? With Ireland entering into a more stable economic outlook, will a two tier system really exist? The answer depends very much on the location of the property.
Since 2008 very little or no office space has been created. Office rents are again markedly increasing as demand soars. New retail tenants often now have turnover provisions incorporated into rent provisions so as their trade improves so does their rent. During the last recession many tenants entered into short term leases, with good rent free periods, often with mutual breaks and usually with the security tenure excluded (meaning the tenant had no automatic right to call for a new lease on similar terms at the end of term). In practice, these new post 2010 tenants must accept when their leases are renewed they will have to pay more to remain in their properties.
To summarize, over the coming years, provided the economy continues to improve, the end of the ban of upward only rent review will in practice have little impact in the areas of demand. However we should not forget the tenant that is occupying properties in secondary, less desirable locations. If these tenants are occupying under old leases, the landlord will be in a very strong position as their rental stream is secure. Further a tenant occupying under an old lease will be at marked disadvantage. If he no longer requires the property, he will struggle to assign it if a prospective purchaser can find an alternative property with no upward only review attached to it. This is where a two tier system will be created.
Sarah Keenan advises landlords and tenants in all aspects of asset management. She worked as an English real estate lawyer for many years before re-qualifying in Ireland.
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