Should we ban upwards-only rent reviews?

Tenant's are being hammered by rents across the country. A lot of these leases are backed by personal guarantees.

The idea of an upwars only rent review is false and economically unjustifiable. I suggest these provisions should be made ineffective through legislation.

Zhou_Enlai wrote:

Tenant's are being hammered by rents across the country. A lot of these leases are backed by personal guarantees.

The idea of an upwars only rent review is false and economically unjustifiable. I suggest these provisions should be made ineffective through legislation.

Private sector rental accommodation in Ireland has a very low level of regulation compared with most european countries. This has helped get a big increase in rental accommodation onto the market with a consequent improvement in the average standard. This does not excuse shocking regulation on matters like fire safety, spatial standards and building regulations. Some conditions for asylum seekers and Travellers are beyond belief.

On rental, the worst aspect in my view is that local authority tenants get their rent increased if their earned income improves, thereby locking in them in at the bottom of the pile.

I am more concerned about commercial properties where employers and entrepeneurs are being put to the sword. It is a false economy. If the rent is too hight the business will go bust and theoretically the landlord will lose too. However, the landlord usually gets a personal guarantee so he can go after your famil home too. That is wrong. The landlord should only be entitled to rent which matches the value of the property. I note that english commercial tenants are pressuring english landlords to grant relief. Will we see the same thing happening around Grafton Street soon? Do we need a tenants' union?

Zhou. How can you at this stage start talking about price controls when we can see what happens either in The Bronx or Warsaw. Why do you think that someone is going to build a beautifull house to rent it and lose money.

Firstly, I am not talking about houses which are a different kettle of fish as, odious as they mght be, high house rents are not putting people put of work.

Secondly, I don't know much about the commercial sector in the Bronx or in Warsaw. Maybe you could give me an idea of what happened in those places.

By the way, I am not talking of price controls. I am only saying that if a rent review clause says rent is to be re-set to the market rent every 5 years then that should cut both ways.

I will tell you what the tenants need. A brain. If they are stupid enough to take on a rent that their business can not sustain they deserve it. If the landlords were left with empty space for a while they would readjust their position very quickly. At the end of booms there are always fools willing to pay unsustainable prices, whether it be residental or rental space. The quicker they are bankrupt the better.

What happened in the Bronx is simple. When the rents were so low that the expenses were not being covered the owners just walked away. The entire area became a tax derelict slum and eventually no utilities and boarded up.

youngdan wrote:

I will tell you what the tenants need. A brain. If they are stupid enough to take on a rent that their business can not sustain they deserve it. If the landlords were left with empty space for a while they would readjust their position very quickly. At the end of booms there are always fools willing to pay unsustainable prices, whether it be residental or rental space. The quicker they are bankrupt the better.

That is a bit harsh youngdan. We could be facing into a substantial drop in market value for commercial rental properties in Ireland for the first time ever or at least in a long time. I am open to correction on that but that is my understanding.

Also, the idea that rents won't cover upkeep does not arise as just about all commercial leases are "full rent and insuring" leases (includes tenant being responsible for maintaining and repairing premises) so the rent is generally clear profit (aside from repayment of borrowings).

Bankrupting inefficient companies is not necessarily a bad thing, and I do not think that rents should be below market value, but they should not be above market value either. However, bankrupting shareholders, which is what guarantees do, is not good for the economy especially where bankruptcy is much more serious in Ireland than it is in the USA. When you are put down in Ireland you don't get up again.

High rent reviews based on stupid deals made by other tenants in the vicinity (possibly with the benefit of other inducements such as rent free periods or break options) are causing major headaches in retailing.

Is this only a High Street phenomenon (you know what I mean) - or is it also a feature of shopping centres. I wonder because of the rise in the number of big - and small - shopping centres across the country. For example, people from 'down the country' who might have gone to Dublin for the day now take the car as far as the Kildare Village and Whitewater in Newbridge and don't bother with the city much any more.

Likewise the growth of retail parks in smaller towns like Portlaoise, Carlow and Tullamore is taking shoppers out of the town centre and putting a squeeze on Main Street retailers.

Is this as much of an issue as the rise in rent?

I know what it is like to sign a personnel gaurantee on a commercial venture but fortunately it worked out OK. It is the height of foolishness. People rush in full of confidence and optimism. The building owners have the upper hand at the moment but residential sellers and leasers had the upper hand until recently also. From the few reports that I have heard it seems commercial rents are even more insane than residential. These tenants will get wiped and you should begin to see empty space now. I would go as far as to say that if the situation is so much in favour of the landlord that he can demand gaurantees then it is not the time to rent. When a few months rent free is offered at signing will be the time to rent. A business is at a great disadvantage when paying a rent that is too high when his competitor might be dealing with a much lesser cost.

I agree. I think the market will move against guarantees for new lettings in the coming months. Unfortunately, most tenants are tied into gurantees from 5+ years ago and the landlord will not accept a new tenant taking over the lease unless they give fresh personal guarantees. I saw it in relation to a city centre shop where it was vacant but the Landlord was happy to rely on the guarantee of the poor woman who guaranteed it (for an associate) rather than take a reputable company in without a guarantee. It was very cruel. Perhaps if the Courts were quicker to kick out tenants who didn't pay rent then landlords would be quicker to accept lettings without guarantees.

Kate P wrote:

Is this only a High Street phenomenon (you know what I mean) - or is it also a feature of shopping centres.

Retailers in many shopping centres have suffered in exactly the same way, though guarantees are not as common for recent builds.

Really? I had thought we were looking at the demise of the High Street to the benefit and at the hand of the retail park - and the guarantees and high rents on High Streets were simply another nail in the coffin.

How is this tied in with people's spending power, personal indebtedness and refusal to do anything but shop on Sundays? How interdependent are these things?

The landlords is not worried about rents. He is hoping for the enterprise to fail so that he can make a quick killing. The word cruel should never be used in business dealings. The signers are naieve.

Foot-fall, decline in consumer spending, people switching to different shopping centres, Sunday only shopping and so forth all have a role in setting the yield for a given area which in turn dictates the open market rent of a property. That is all well and good.

The problem is that if all those factors combine to reduce footfall and turn-over in the area generally (ignoring the performance of your own business) and so to make your lease less valuable, then you still keep paying the high rent after your next rent review. This means that the person employing people is exposed to the risk whereas the person making cash off an asset is insulated against the risk.

Zhou_Enlai wrote:

Foot-fall, decline in consumer spending, people switching to different shopping centres, Sunday only shopping and so forth all have a role in setting the yield for a given area which in turn dictates the open market rent of a property. That is all well and good.

The problem is that if all those factors combine to reduce footfall and turn-over in the area generally (ignoring the performance of your own business) and so to make your lease less valuable, then you still keep paying the high rent after your next rent review. This means that the person employing people is exposed to the risk where
as the person making cash off an asset is insulated against the risk.

If I was in a shopping mall situation I would try to get all the tenants together and negotiate jointly - that would be a position of greater power.

I guess a problem for the equation is that quite a few shopping centres were built with tax incentives and that as these are beginning to run out - at the stage when maybe refurbishment is needed both landlord and tenants are being hit with the real costs of running the place, just at a time when spending is falling.

Link: IT: Rent reviews must consider recession

It seems that the Edmund Holohan SC, Master of the High Court and a man not known for suppressing his own opinions, has attacked upwards only rent reviews. It seems he was just spouting off and that his comments are of no legal effect. He did see fit, however, to describe how the courts would act in his opinion.

Holohan's comments have no legal effect. This will be an interesting case when it gets to Court.

He [Holohan] noted that during the first 100 days of Franklin D Roosevelt’s presidency in the US, measures to combat the Depression included the invalidating of clauses in private contracts concerning payment in gold, “clauses which in deflationary times had much the same real effect as the ratchet type commercial rent review clause”.

I don't understand this at all. Surely people enter into leaseholds and rental agreements willingly and they can refuse to sign something that doesn't allow for the rent to be reviewed downwards?

They can, but they will have entered into leasehold agreements for long period of time with periodic rent reviews. On the one hand, these are commercial companies who had ample access to legal advice and thus one should have little sympathy for them. On the otherhand, enforcement of upwards only reviews of rents, which are already sky high, is likely to in the first instance put shops out of business thus resulting in unemployment and in the second instance continuing to make Ireland an unattractive place to open a store.

Alot of the shops on Grafton Street are under sublets so even if say HMV goes out of business and moves out of Grafton Street there is still someone renting that building so it is not as if the lease has actually ended, only the sublease, so you are left with the problem that the rent can still not be reduced. Of course these reviews are only binding on both parties insofar as both parties want to be bound. They could mutually avoid the contract which would in the longrun probably be beneficial because eventually the owner of the leasehold interest will default because he can't get a subtenant and then the owner really is back to square one.

What a mess

Yup, it really is a mess and there are plenty other complicated messes like this which will play out of the next while.

Rents in Dublin are just ridiculously high and they never, even at the height of the Celtic Tiger, deserved to be so high. Quite why shops paid those prices I don't know. I can tell you for a fact that they weren't rolling in the business to the extent that the rents implied. Certainly on on Grafton St anyway.

I think the market conditions will supress upwards - rent reviews. In my case the lease is up for review next month, but the tenants are pretty good, so the rent will stay the same for a third year. The cost of being tenantless is too high compared to a petty rent increase.

There are a number of reasons for upward only rent reviews in commercial leases.

Firstly, they are contained in most stadard forms of commercial lease found in legal texts.

Secondly, banks have been more willing to fund a landlord where he has the benefit of a commerical lease with an upwards only rent review.

Thirdly, estate agents promoted them and got away with it because there was a shortage of properties in some of the best areas 10 to 20 years ago.

Fourthly and most importantly, tenants took the view that rents were unlikely to go down by any significant amount over each five year period due to inflation which tenants had known all their lives. Inflation was expected to guard against any drop in the real value of the rental property.

It is to be noted that market value as defined in rent reviews generally refers to the rent which would be paid by a tenant in an arms length transaction. The effect of this was that a few people agreeing crazy and unsustainable rents drove up the value for all existing tenants as such rents constituted practically binding evidence of market rents in rent reviews.

There is also a suspicion that letting agents were giving incentives to new tenants in side letters which induced them to go for the apparently high rents. Such incentives offered for the new lease of the office next door would not be disclosed or discoverable when that rent was quoted in a rent review.