Thursday, June 3, 2010

Upward-only Rent Reviews, what next?

Rob Kitchin from Ireland after NAMA reports on Upward Only rent reviews. Are their days numbered?
Inside Ireland reports that Retail Excellence Ireland (REI) has published a survey which reveals that 97% of the 187 companies (representing 2,200 stores) they contacted have sought a rent reduction from their landlord. More than 30% have recieved an outright rejection to their request. 25% of retailers claimed they will be forced out of business in the next 12 months if rent is not reduced and almost 80% claim they require a rent reduction of more than 15% in order to break even. REI argues that 35,000 jobs have so far been lost in the retail sector, and many more are under threat given the drop in both the volume and value of sales and the fact that many retailers are unable to renegotiate rental terms to a more favourable rate. Upward only rent review clauses were banned by the Dept of Justice last December, but this did not apply retrospectively, thus doing little to relieve pressure on tenants locked into existing agreements negotiated before the recession. REI have taken a proactive lobbying position on seeking a rent reduction, producing three short videos and bombarding local representatives with postcards asking them to pressure the Minister for Justice to enable retrospective rent review clauses. Upward only rent reviews always seemed a dubious arrangement to me, designed to serve the interests of one group only – the landlords – regardless of market conditions. It’ll be interesting to see what the government do here, as they are caught between two strong vested interests (retail and property/investment companies), and by enabling the reduction of rents they’ll potentially be undermining the rental income base of many properties going into NAMA (by one estimate costing the taxpayer €2.1 to €2.8bn). I suspect the pull of protecting jobs and local economies will be stronger, however, although I can envisage legal challenges to such a change – a working group is deliberating on the issue at the minute.

Personally, I think that it will be held that a contract is a contract, so it will not be possible to change the clause retrospectively. In any case, most landlords have exercised common sense and allowed rent reductions in order to maintain a tenant in their properties.
Larger institutional landlords, such as pension schemes etc. are much slower to allow reductions. This is a difficulty for both landlord and tenant and will lead to litigation as some retailers break leases and are subsequently pursued by landlords.
More money for the legal profession!

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