Impact of the prohibition on commercial lease provisions
This note summarises the changes we have seen in commercial leases as a result of the introduction of legislation in Ireland prohibiting upward only rent review provisions in commercial leases entered into after 28 February 2010. In particular, we set out below some of the mechanisms used to avoid the legislative provisions in certain circumstances. Also, we have made reference to a recent High Court case in Ireland in which the Tenant, Bewleys Café, challenged the wording of the upwards only rent review clause in its commercial lease and the courts ruled in favour of Bewleys i.e. that the rent could in fact be reviewed downwards.
The Current Legislation and its Effects
The legislative reform in this area was driven by public policy and the economic downturn. Commercial tenants found themselves struggling to pay high rents, particularly in prime city centre locations, notwithstanding that open market rents and property valuations generally had fallen substantially.
Section 132 of the Land and Conveyancing Law Reform Act 2009 (the "2009 Act") came into force on 28 February 2010. This Section provides that any rent review clause in a lease created after 28 February 2010 will be construed as meaning that the reviewed rent will be an amount which is less than, greater than or the same as the existing rent. In other words, the rent payable under the lease will be revised upwards or downwards in accordance with open market.
The introduction of the 2009 Act has created a two-tier market comprising: (i) legacy leases entered into prior to 28 February 2010 which will continue to have an upwards only rent review clause for the remainder of the lease term; and (ii) leases entered into since 28 February 2010 which are reviewed upwards or downwards on an open market basis. Landlords and Tenants have adopted alternative methods of calculating rental uplifts to dilute the impact of the legislation, as set out below.
Alternative approaches taken by Landlords to circumvent the legislation
The introduction of the 2009 Act has given rise to uncertainty for Landlords in terms of monitoring the future rental income stream from its commercial lettings. As a result and without contravening the legislation, Landlords have attempted to negotiate alternative rental provisions to minimise the effect of the 2009 Act, or at the very least, to retain certainty as to future rental levels, detailed as follows: