Budget 2012 - upward only rent reviews retained

Budget 2012 - upward only rent reviews retained

In his Budget 2012 speech the Minister for Finance, Michael Noonan indicated that the Government will not now proceed with proposed legislation to abolish "upward only" rent reviews in existing commercial leases as promised in the Programme for Government. On Tuesday the 6th of December 2012, the Minister stated in his budget speech that: "it has not proved possible to develop a targeted scheme to tackle this issue that would not be vulnerable to legal challenge."

Since first mooted by the Government the proposed legislation has created uncertainty for both commercial landlords and tenants alike and has been accused of preventing any meaningful activity in the investment sector. The decision will give greater certainty to the commercial property market and with the announced reduction in the top rate of stamp duty from 6 to 2% the commercial property and investment markets should benefit from a much needed boost. It is understood that the proposed legislation was abandoned due largely to advices from the Attorney General that the provisions as proposed would be susceptible to constitutional challenge on a number of fronts and the Government was unlikely to be successful in defending same.

The draft legislation is understood to have unduly interfered with the private contractual relationship between landlords and tenants. As one commentator put it: the proposal amounted in ways to tearing up all leases granted before February 2010. By interfering with these contractual rights, the Government exposed itself to a scenario wherein it would be obliged to compensate landlords for the infringement. Acknowledging this weakness of the proposal, the Minister stated in his speech that: "the 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".

It is also possible that the Government would have been obliged to offer some measure of debt forgiveness to landlords who had borrowed monies to fund commercial investments or developments as repayment schedules would traditionally be linked to future yields calculated on the presumption of contractual "upwards only" rent reviews as the proposed legislative change would potentially deny the borrower of the ability to fully meet these financial commitments.
An almost guaranteed Supreme Court challenge and likely defeat, coupled with the possibility of substantial compensation payments and a regime of debt forgiveness for landlords forced the Government to re-think the long promised legislative reform. It is understood that the retail lobby groups had been notified of the u-turn in the weeks leading up to the budget.

While the proposal was designed to offer relief to certain retail tenants, its detrimental impact on the interests of NAMA, pension funds and landlords many of whom were already struggling to comply with their funding arrangement do not seem to have been given due consideration prior to the commitment of the Government to legislate necessitating the reversal of the stated aim of the Programme for Government. 

It is to be expected that landlords and tenants will now reassess their contractual commitments and in some cases restructure existing leases by agreement rather than through Statutory intervention.  It is likely that the State may come under pressure however to seek to reduce other costs perceived to be placing retail business at risk including commercial rates payable to local authorities, utility charges controlled by the State regulator and the minimum wage.

The uncertainty the proposed legislation created has undoubtedly affected activity in the commercial property market and is seen to have caused greatest impact in the investment market where anecdotally it is reported that a number of foreign funds have identified properties and portfolios that they want to acquire but were unwilling to enter the market place until the rent review issue was determined conclusively. It is to be hoped that this decision of the Government will give renewed confidence to the investment market.

Contact

Louise O'Donovan