Ban on upwards-only reviews leaves industry at a crossroads (Irish Times)

04 November 2011

When businessman John Corcoran became a little irritated two months ago over Canada Life’s refusal to reduce the rent of his small

Grafton Street
shoe shop he launched a campaign to end the principle of upwards-only rent reviews on commercial leases.

Surprisingly, the Minister for Justice Dermot Ahern immediately responded with the announcement that he would introduce legislation to end the practice before the Dáil breaks for the summer recess.

The intervention came within days of the Labour party putting down a private members bill and was in keeping with the Government’s policy of encouraging everybody to take a cut in income in the present economic crisis.

So, what started as an almost irrelevant dispute in a commercial property industry more concerned about plummeting capital values, widespread defaulting by tenants and an ever worsening banking crisis, looks like ending in a crucial turning point for the industry.

The knock-on effect, according to some property experts, may well result in fewer developers, investors and pension funds pumping money into retail, office or industrial property in Ireland because they can no longer be assured of guaranteed returns.

Similarly, the experts argue that banks will inevitably impose more stringent terms when funding new developments once the long-term rental structure is no longer in place.

The Government’s stricture on rent reviews will only affect new leases but the case is also being made for the landlords that, once the new guidelines come into effect, older leases tied to the upwards-only clauses will be in less demand and will inevitably have a lower value.

Much of the attention over the rent review procedures has centred on Dublin’s

Grafton Street
where there is a range of shops over-rented and no longer capable of giving traders a worthwhile return.

It is generally acknowledged that a great many rent reviews over the past five years have pushed rents above a viable level. A new and more realistic headline rent for the street is awaited but will not emerge until a brand new lease is signed, possibly this autumn.

From then on the expectation is that

Grafton Street
will have a two tier rental system – one level of rents for the large, prestigious stores and another one for the small outlets. The street’s rent profile will never be the same again.

John Corcoran, who led the campaign for the reform of the rental system, illustrated quite forcefully what has gone wrong on

Grafton Street
. He originally leased number 47 – it has a trading area of 84sq m (900sq ft) and three floors of storage – 14 years ago for £95,000 (around €120,000) for his Korky’s shoe store. Five years later Canada Life raised the rent to €217,000 and it now stands at €445,000.

Rather than continue to sustain annual losses of €200,000, he put his lease on the market and, despite offering a reverse premium of at least €300,000 to any trader prepared to take over the shop, there were no takers. Canada Life refused to budge and, as they say, the rest is history.

The reality on the ground is that most landlords are now settling for reduced rent levels in the present difficult economic climate. An ever increasing number of tenants in shopping centres are in serious arrears.

A survey of members conducted by the Society of Chartered Surveyors confirmed this position last Friday but, by then, it was too late.

The Government had already signalled its plans to introduce new legislation. Once again the property industry had lost out because it