The Government has banned the use of clauses in business leases which provide for 'upward only' rent reviews, in a move that came as a surprise to the industry.
Businesses have complained that they are struggling to pay high rents, particularly in city centre areas, because they are tied to contracts that only allow for rents to be adjusted upwards, even though market rates have nominally fallen.
Minister for Justice Dermot Ahern today signed a banning order on upwardly only rent review clauses under section 132 of the Land and Conveyancing Law Reform Act. He said the section would come into operation on February 28th, 2010.
"The practice of including upward only review clauses in business leases is a deeply entrenched one. The time has come to end this practice. I look forward to more equitable business arrangements being put in place in the future which take account of the reality facing many business owners and retailers," Mr Ahern said.
Mr Ahern said he had always made it clear that a "reasonably lengthy" period of time would be allowed "to facilitate the market in taking on board the proposed change". That time had now come and the ban would take effect from the end of February.
Retail Ireland, the Ibec group representing the sector, said it was looking forward to "more equitable" leases being put in place in the future "to take account of the reality facing many business owners and retailers".
Director of Retail Ireland Torlach Denihan said: "Retailers have suffered an enormous decline in sales because of cross-border shopping and weak consumer demand. It is completely unrealistic for these businesses to be faced with upward increases in rent."
"Landlords now need to review current lease and rental arrangements to reflect the realities of the current commercial rental market. This is necessary to help retailers deliver lower prices to consumers and regain lost competitiveness."
The Irish Auctioneers and Valuers Institute (IAVI) claimed the ban had been imposed without full knowledge of how the market operates.
“There wasn’t really any opportunity for proper dialogue, the Government simply bowed under pressure and I hope we don’t pay a serious price for it down the road,” IAVI chief executive Alan Cooke said. “I think it’s going to lead to more short-term leases, which in itself doesn’t help development or confidence going forward.”
Property consultants CB Richard Ellis said, however, the amendment would "do absolutely nothing to help existing tenants in the short-to medium-term and is potentially very harmful to the Irish investment market".
Director of research Marie Hunt said the announcement had come "as a huge surprise to the industry".
"We understood that the Government had decided not to implement this measure. While no one is disputing the fact that tenants in many sectors of the property market have come under huge pressure in recent months and many are struggling to meet rent payments, the reality is that this move will not do anything to improve the plight of retailers and office occupiers who are currently in such difficulties.
"This is because the legislation will not be retrospective and will only apply to new leases. Therefore, occupiers in existing leases will not benefit from this change and will have to continue lobbying their landlords to effect temporary rent reductions that will assist them to trade through the current downturn."
Andrew Muckian, head of commercial property development at William Fry said: “Today’s announcement has taken the commercial property market by surprise as all the previous signals were that this ban was being deferred indefinitely.
"This move will create a two-tier market for the next several years as the ban will only apply to new leases and not to existing ones. It will also have the added effect of creating valuation headaches for Nama.”
Fine Gael enterprise spokesman Leo Varadkar said such clauses were an "unnecessary and damaging mechanism which prevented commercial rents from falling" and it was "deeply regrettable" the Minister had not acted sooner to end them.
“Upward only rent reviews have imposed enormous damage during this deep recession. It meant that the dramatic fall in property prices was not being reflected in lower rents for many businesses. Coupled with plummeting turnover and high business costs, upward only rent reviews have caused the loss of hundreds of jobs and businesses."
A campaign to end the upwards-only clause connected to commercial rents was mounted during the summer by tenants of shops on Dublin’s Grafton Street where about half the stores are said to be “over rented” by at least 20 per cent.
Staff at the Monica John women's fashion store off Grafton Street were locked out by the landlord in September in a dispute over the €108,000 per annum rent.