Joint Press Release from the Minister for Finance and the Minister for Justice and Equality on Rent Reviews and the role of NAMA (6 December 2011)

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Joint Press Release from the Minister for Finance and the Minister for Justice and Equality on Rent Reviews and the role of NAMA (6 December 2011)

In today’s Budget speech the Minister for Finance, Michael Noonan T.D., set out the changes to NAMA policy in relation to upward only rent reviews in relation to tenants experiencing difficulties in paying rents. The Minister said:

I am fully aware of the difficulties that upward only rent reviews are causing for some businesses. Indeed, despite exhaustive work over the past few months by my colleague the Minister for Justice and Equality, including preparation of draft legislation, it has not proved possible to develop a targeted scheme to tackle this issue that would not be vulnerable to legal challenge.

This is a matter of particular interest to NAMA and I consider that NAMA can play a role in dealing with the problems caused by upward only rent reviews which apply to NAMA properties. NAMA advise me that it has policy guidance in place for dealing with tenants experiencing difficulties in paying rents, including where upward only rent reviews might apply. NAMA have agreed to publish their guidance on this and I welcome NAMA’s realistic approach to this difficult issue.

The Minister outlined that the existing position allows for tenants and landlords to mutually agree revised contracts. However, where there is a failure to reach agreement NAMA’s policy guidance will provide an opportunity for tenants of NAMA properties to seek a review of their rent, including through the appointment of an independent valuer. The process would apply to business leases which are the subject of upward only rent reviews where the debtors are landlords of premises where NAMA has acquired the loan on the underlying property. It will have to be shown that rents are in excess of current market levels and the continued viability of the tenant’s business must be threatened from high rents. NAMA has confirmed to the Minister that it will facilitate this evaluation process as much as possible.

The Minister for Justice and Equality, Mr Alan Shatter, T.D., continued by outlining with considerable regret that the Government has decided that it is not possible to proceed with the legislation to abolish upward only rent review clauses in existing business leases.

Commenting on the matter the Minister said: “the proposals which I brought before Government earlier this year had the particular aim of providing relief for tenants whose businesses might otherwise be viable were it not for the adverse impact arising from the fact that the rent they were paying was significantly above prevailing market levels. However, following consultation with the Attorney General, it was clear that this particular approach gave rise to significant constitutional difficulties. It was also clear that any legislative scheme, involving as it would an interference in the contractual relationship of private parties, would find it extremely difficult to survive a Constitutional challenge. Most pertinently, at this difficult time in our economic circumstances, Government was made aware of the fact that any legislative proposal would require the payment of compensation to those whose property rights would be infringed if that proposal were to be compatible with Constitutional and European Court of Human Rights norms.

While noting that the decision not to go ahead with the legislation had been a very difficult one for Government, the Minister observed: “it is simply inconceivable, given the harsh choices that face us in relation to cutbacks in public expenditure, that the State would commit itself to establishing a compensation regime which could involve a very substantial outlay on the part of the State and which could have implications for our ability to sustain funding in a range of economic and social areas.

The Minister acknowledged the inevitable disappointment likely to be felt by those who had campaigned for change in this area and he expressed the hope that landlords would continue to engage with their tenants in order to provide appropriate rent concessions. He also urged those landlords who had yet to engage with their tenants to accept current realities and behave in a socially responsible manner.

Finally, the Minister said: this has also been an uncertain time for those contemplating investment in the commercial property market. I would hope that the clear decision not to proceed with the proposed rent review legislation will remove that uncertainty and pave the way for renewed activity in this sector.

Notes for Editor: Decision not to proceed with Landlord and Tenant (Business Leases Review) Bill

Announcement

The Government has decided not to proceed with the development of the Landlord and Tenant (Business Leases Review) Bill. (This Bill was intended to abolish upwards only rent reviews in existing commercial leases.) Points of conflict with the Constitution were identified during the development of the legislation. To enhance the ability of any legislation in this area to survive a Constitutional challenge, the Government would be liable for the payment of compensation to landlords, without any regard to the financial circumstances of those landlords, and without any guarantee that payment of such compensation would render the legislation in question proof against a challenge. In that context and given the current economic circumstances, the Government was strongly of the view that payment of compensation was not defensible. While difficult to quantify, it is not impossible that the level of compensation required could exceed £1bn per annum.

Additional points

Points of conflict with the Constitution, including the following, had been identified during the development of the proposed legislation – :

1. It involved a retrospective alteration in a contractual right, arising out of a private agreement, which potentially deprives landlords of a significant benefit freely negotiated;
2. The intervention proposed was not an example of an alteration to a market created by statute;
3. The proposal imposed on landlords the burden of solving a particular social problem;
4. There was a disproportionality as between the effect on landlords e.g., possible mortgage default, and the objective of the legislation. The objective itself, of ensuring market efficiency, might not be a sufficient basis to justify the proposed interference with property rights.

Payment of compensation to landlords by the Government would enhance the prospects of any putative legislation surviving a challenge on Constitutional grounds. However, there is no guarantee that payment of such compensation would render any legislation in this area Constitutional. In this regard the Government is conscious of the fact that it would have to take responsibility for funding a compensation scheme, either in the form of State-funded direct compensation or as indirect compensation through, for example, the taxation system. Given the current economic circumstances the Government is strongly of the view that it is not feasible to provide for a State-funded compensation scheme.

On a related matter, the Property Services Regulation Bill, which has almost completed its progression through the Houses of the Oireachtas, will provide for the establishment of a public database containing relevant details of letting arrangements and rent reviews in the commercial property market. This will enhance transparency in the market. Furthermore, the Working Group on Transparency in Commercial Rent Reviews last year recommended the adoption, by landlords and tenants alike, of a rent review arbitration code which was drawn up by the experts who participated in the Group, and which was appended to the report. A particular feature of the code is that it contains detailed provisions dealing with the production of comparative evidence in relation to property transactions and it also places a firm duty on all parties to disclose all relevant information which is in their possession. The code has been endorsed by a number of significant stakeholders in the sector and parties are free to specify that the code should apply in relation to rent review arbitrations.

Background

The Programme for Government contains a commitment to introduce legislation to end upward only rent reviews (UORRs) for existing leases, i.e., those entered into prior to 28 February 2010. (Business leases entered into from that date are covered by the terms of section 132 of the Land and Conveyancing Law Reform Act 2009 which provides that rent review clauses in such leases are to be construed as providing that the rent can go up, down or remain the same by reference to the rent payable immediately prior to the review date).

Background to UORR clauses

The common practice of including UORR clauses in commercial leases has not arisen as a result of any legislative requirement, and parties have always been free to agree that more neutral review clauses be included in their leases. Furthermore, even where UORR clauses are present, the parties have always been able to agree that a flexible approach be taken both as to the amount of rent payable and as to the way in which that rent is to be paid.

Difficulties in the retail sector

It has been suggested that a significant factor in the difficulties faced by the retail sector is the level of rent which is being paid on foot of leases entered into prior to 28 February 2010. The reason for this is that the rent levels associated with such leases reflect levels which reached a peak in the 2000-2007 period. New market entrants can negotiate leases which take account of the fact that rent levels have fallen by around 40% from peak levels. Those already in the market are dependent upon a flexible approach being taken by their landlord to requests for a review. Otherwise, the UORR clause can operate to keep the rent at a level which is higher than market norms would otherwise justify.

Recent information on rent levels

A relatively recent survey undertaken by the Society of Chartered Surveyors Ireland indicates that the most common outcome of rent renegotiations between landlords and tenants is a rent reduction of between 20 and 29% in 2011. A Retail Excellence Ireland survey, the outcome of which was made public late In November, found that rent levels have fallen by considerably less that the SCS survey indicates.

NAMA policy guidance

NAMA have produced a policy guidance note which they will publish today. This policy guidance sets out NAMA’s approach to dealing with its role in the facilitation of rent reductions for leases with upward only rent review clauses.
This will apply in respect of rent reduction applications to a NAMA debtor/receiver where a tenant entered into an arm’s length lease of a business premises prior to 28 February 2010. This is in respect of such tenants who are subject to upward only rent reviews; are financially distressed and where it can be demonstrated that the current level of rent payable poses a real and immediate threat to the viability of their business.

Brian Meenan
Press office
Departments of Finance / Public Expenditure and Reform
Ph: 6045875 Mob: 0872198857