Rent review clauses and Budget 2012

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Created: Friday, December 21 2012 14:59

A typical commercial lease in operation for commercial property provides that rents will be revised to market value every five years.

An “upward only” rent review means that the rent payable after the review cannot be less than either the rent payable at the start of the lease or before the review.

A ban on “upward only” rent review clauses was introduced in Section 132 of the Land and Conveyancing Law Reform Act 2009. Under this legislation, “upward only” rent review clauses are banned in all new commercial leases entered since 28th February 2010. Existing commercial leases in place prior to that date are not affected by the legislation.

Despite the collapse in the turnover of most businesses and the decline in rental values, commercial tenants in existing commercial leases must continue to pay rents at levels greater than the current open market rental value. Those commercial tenants are locked into unfavourable commercial leases. While those signing new commercial leases have the benefit of the current reduced rental values.

Both Fine Gael and Labour in their election manifestos pledged to consider retrospectively banning “upward only” rent reviews clauses in commercial leases in existence prior to 28th February 2010.

However, in Budget 2012, the Government has abandoned its plans to abolish “upward only” rent review provisions in commercial leases which were entered prior to 28th February 2010. Any retrospective ban on clauses in a private legal contract between two commercial parties would be wide open to legal challenge, goes the thinking.

In its place, the Government has highlighted that NAMA has published a Guidance Note by which it will encourage landlords of properties whose loans are under NAMA control (and also NAMA appointed receivers) to consider a short term reduction in rents on properties that are in excess of the current market rents. To be eligible for consideration, tenants must show that (i) the level of the rent threatens the continued viability of the business and (ii) a rent review is not otherwise due or the rent has not previously been reduced at the request of the tenant.

Any rent reduction approved by NAMA will initially be for a 12 month period and will be subject to annual review.

Unfortunately, the Guidance Note is simply that – guidance. And it only applies to properties whose loans are under NAMA control. For tenants in commercial leases in existence prior to 28th February 2010, “upward only” rent review clauses will remain in place.