Property consultants CB Richard Ellis have denounced the decision by The Minister for Justice, Equality and Law Reform, Mr Dermot Ahern, TD, to sign legislation banning upwardly only rent review clauses in business leases. The Minister signed a banning order on upwardly only rent review clauses under section 132 of the Land and Conveyancing Law Reform Act. The section will come into operation on 28 February 2010.
According to CB Richard Ellis, at a time when occupiers of commercial property around the country are facing huge cost pressures, this amendment at first appears positive. However, the amendment will do absolutely nothing to help existing tenants in the short-to medium-term and is potentially very harmful to the Irish investment market.
According to Marie Hunt, Director of Research at CB Richard Ellis, “This has come as a huge surprise to the industry. We understood that the Government had decided not to implement this measure. While no one is disputing the fact that tenants in many sectors of the property market have come under huge pressure in recent months and many are struggling to meet rent payments, the reality is that this move will do anything to improve the plight of retailers and office occupiers who are currently in such difficulties. This is because the legislation will not be retrospective and will only apply to new leases. Therefore, occupiers in existing leases will not benefit from this change and will have to continue lobbying their landlords to effect temporary rent reductions that will assist them to trade through the current downturn“.
It will also be extremely difficult to obtain funding for investment purchases where new leases apply according to CB Richard Ellis. Banks fund and investors buy property investments on the basis of projected cash flows. Over the last few years, investors have purchased properties in the UK and Ireland on the basis that Landlord and Tenant legislation in both countries required that rents were reviewed every five years and there was security of income over the period of the investment. Rents could remain the same at review and if there was justification for an increase based on inflationary trends and market evidence, this was factored in. However, the UK will now have different Landlord and Tenant legislation to that prevailing here. Retaining their current leasing structures, the UK will have a significant competitive advantage over Ireland in this respect and will therefore attract the lion’s share of investment, from overseas and Irish investors alike. This proposal also puts Ireland at a disadvantage to Continental European markets which have annual indexation of rents (linked to inflation), albeit with negotiated (up or down) rents at Year 5. This comes just as international investors have begun to express an interest in investing in Irish commercial property.
It must also be considered that currently, barring tenant default, there is a floor on rental income for the duration of a lease. Under this new legislation, this will not be possible. In a weak occupational market such as we are in now, landlords will undoubtedly accept leases being signed on this basis. However, there is no doubt but that when conditions in the occupier markets improve and when these new leases are up for review, rents will rise to take account of the potential downside risk now being imposed on landlords. A two tier investment market will now emerge with investors paying a premium for properties on existing leases and having limited appetite for properties let on leases after February 2010.
Commenting on the proposal, Guy Hollis, Managing Director at CB Richard Ellis, Ireland said “The net effect of this legislation will be to reduce the attractiveness of Ireland to investors and banks, which will in turn further undermine property values at a time when stabilisation was just starting to emerge. Pension funds and investors generally, as well as the lending banks, have seen commercial property values fall by as much as 60% since 2007. This proposal will further erode value without any benefit to existing tenants, which this is supposedly the reason it is being introduced in the first place.”
For Further Information please contact;
Director – Research Department
CB Richard Ellis
CB Richard Ellis
Tel: 00 353 1 6185500