Deirdre Lynch Solicitor in Sweeney McGann explores the topic of rent reviews in commercial Leases.
A HUGE variety of businesses in Ireland, whether retail, industrial or commercial, occupy their premises under what are known as commercial leases.
Many continue to struggle in the current economic downturn to meet their rental payments. These leases will stipulate the rent to be paid by the tenant as well as the manner and frequency of payment to the landlord.
- External Walls: Up to €8,000 Grant
- Attic: Up to €1,500 Grant
- Cavity Walls: Up to €1,700 Grant
- Internal Dry Lining: Up to €4,500 Grant
They will also generally provide for a revision of the rent by what is known as a rent review. This is the mechanism enabling the adjustment of the rent payable on a commercial premises to the current market level at the review date.
Prior to February 28, 2010 a rent review clause normally provided for upwards only rent reviews which stated that the rent would remain the same or increase subject to market conditions.
In December 2009 the Land and Conveyancing Law Reform Act banned upwards only rent review clauses in commercial leases. Section 132 of this Act is the relevant section. This effectively put a ban on upward only rent review clauses in commercial leases. However this Section only applies to leases of property used wholly or partly for the purposes of carrying on a business i.e. a commercial lease and only applies to those entered into after February 28, 2010.
After this date, any new commercial lease with a provision for a review of rent will be a review based on open market rent in which case the rent may rise, fall or remain the same. It is not possible to contract out of this new provision. This move however in banning upward only rent reviews has done nothing to improve the plight of retailers and office occupiers who are currently under huge pressure and are continuing to struggle to meet rent payments, due to the fact that the legislation is retrospective and applies only to new leases granted after February 28, 2010.
The occupiers of existing commercial leases do not benefit from this change and continue to face the task of lobbying their landlords to effect temporary rent reductions to assist them to continue to trade throughout the current economic climate. In fact, in practice we are seeing an increased number of variations of existing lease provisions including rent concessions being granted to current tenants of commercial leases granted prior to February 28, 2010 despite the presence of upward only rent review clauses in these leases. The view adopted by most landlords in the current climate being that it is far better to have a tenant in situ paying a rent, all be it a reduced rent than to have a premises vacant and unoccupied.
In addition to doing very little to help existing tenants of commercial leases granted prior to February 28, 2010, there is a very real concern that this legislation may lead to a two tier investment market with commercial properties with existing leases (pre February 28, 2010) being more attractive than properties with Leases granted after February 28, 2010.
Some of the key questions when considering rent review clauses are as follows:
What is a Rent Review?
A rent review is the mechanism enabling the adjustment of the rent payable on a commercial premises to the current market level at the review date. A landlord’s right to increase the rent and the tenant’s right to challenge an increase are detailed in the lease itself. The frequency of rent reviews is typically every five years. As a tenant you will want reviews to be as far apart as possible. Rent review clauses are often very long and complicated and you should always take professional advice when faced with a rent review. The terms of an individual lease can affect the level of rent payable.
What is the Rent Review Process?
process is usually initiated by a notice served by one party to the lease on the other. In the past typically it was the landlord who initiated the process in order to increase his rental income. This may not be the case going forward as it may be in the interest of a tenant to initiate it where the rent payable on the open market at the time of review is less than the tenant is currently paying. A specific figure will be quoted for the renewal of rent. If this does not seem reasonable the other party must write and say so immediately. The recipient of the notice is entitled to ask for the basis of this value and request comparable evidence in which the figure is based. In some circumstances, there are strict time limits to object and you need to be careful that you do not miss these deadlines. Both parties or their representatives will then proceed to agree the revised rent. This will be based on market evidence generated from transactions and properties that can be compared to the property under review.
What happens if the revised rent cannot be agreed?
If the new rent cannot be agreed, the lease will normally specify a procedure for resolving the disagreement. Usually it will state that the parties should first try to agree on the appointment of an independent third party, for example, a chartered surveyor specialising in valuations, to determine the new rent. If the parties are unable to agree themselves a prospective third party, the lease usually provides for the appointment to be made by the President of the Society of Chartered Surveyors. The independent party will act either as an arbitrator or independent expert to determine the new rent. A person will not be appointed if there is a real danger of bias but it should be realised that the arbitrator or independent expert will probably have had dealings with other properties in the area. Bear in mind that it is in the interest of both the landlord and the tenant that the person appointed has the appropriate expertise.
Can rents go down as well as up?
Prior to February 28, 2010, the majority of commercial leases contained upwards only rent review clauses which stated that the rent would remain the same or increase subject to market conditions. Post February 28, 2010 commercial leases have an open market rent review which means that the rent may rise, fall or remain the same.
In this difficult economic climate it is essential that landlords and tenants of commercial premises are aware of their rights and options.
If you require any Landlord and Tenant advice, contact Deirdre Lynch Solicitor with Sweeney McGann Solicitors, 67, O’Connell Street, Limerick.
Further information on this topic can be received from either David J. Sweeney, (email: [email protected]) or Deirdre Lynch, (email: [email protected]) – Commercial Department, Sweeney McGann.