Guest post: Irish government must act now to avoid yet more investment stalemate from upward only rent reviews

There are clearly valid arguments on both sides of the debate on this issue. (There is a brief background on the legislation below) And over recent months these have been communicated to the Department of Justice. Detailed papers have been submitted to Government from lobby groups on both sides, outlining all of the potential implications. It is frustrating that consultation has dragged on for over nine months.

Since it was first mooted, industry sources have pointed out that the proposal would likely prove unconstitutional. The property industry pointed out last February that the amendment the Government promised with regard to rent review reform in the Programme for Government was too general and would likely prove unconstitutional.

Nine long months later, it appears that the Government has realised that this is indeed the case. The unfortunate outcome of the uncertainty that has prevailed around this issue since the beginning of 2011 is that investors have as a direct result postponed decisions to invest in the jurisdiction in the interim.

A year has effectively been lost and opportunities missed while we have awaited clarification from Government on this issue. Having been promised draft legislation on numerous occasions over the course of 2011, we are now being told that there is a possibility that the legislation may now not go ahead. We urge Minister Shatter to issue a statement on the issue as a matter of urgency.

No-one was expecting a speedy resolution to this controversial issue but at least the publication of draft legislation would have brought with it some clarity- something that has been clearly lacking since this idea was first mooted.

It now appears that after all this time, the legislation may not happen at all. The unfortunate impact of the uncertainty that has prevailed around this issue since the beginning of the year is that the investment sector of the Irish commercial property market has effectively been put on hold and commercial property values have continued to decline to reflect the uncertainty and the possibility of more conservative future cash flows.

Having shown some signs of stabilising before this potential rent review reform was first mooted earlier this year, Irish capital values have continued to decline, having fallen by almost 65% according to the Investment Property Databank. At the very time that international investors can see a buying opportunity in the Irish market and are actively reviewing the assets that NAMA and others are offering for sale, investment transactions are essentially 'on ice' until Government reveal their intentions.

Less than €180 million was spent on investment assets in the Irish market in the first nine months of the year with only 4 significant transactions signing in the period. This is despite the fact that a number of significant properties have been brought to the market in recent months.

Investors have effectively been holding off until such time as the draft legislation was published to gain more clarity and be in a position to make bids on assets. However, the fear has always been that there would be legal challenges to the draft legislation which would further delay potential trading and postpone any pick-up in transactional activity in the Irish market for an even longer period of time, even after the draft legislation was publicly available. However, it now appears that after all this time, the legislation may not happen.

Background
To give a little background, a ban on 'upward only' rent review clauses was introduced in section 132 of the Land and Conveyancing Law Reform Act of 2010. Under this legislation, upward only review clauses were banned in all new leases signed in Ireland after February 28th 2010. However, the upward only mechanisms in lease contracts signed before this date remained intact, thus creating an anomaly for occupiers who signed such leases at the peak of the economic cycle in Ireland, when rents were at least 50% higher than today. In the run up to the General Election in Ireland last February, there was much political lobbying, particularly from retailers. No-one is denying that relief is needed for tenants who in the current climate find themselves in genuine distress. However, introducing a 'one size fits all solution' that effectively gives all tenants in all sectors, regardless of their trading performance, a right to seek to have their rent rebased to 2011 values is clearly not the answer. Worryingly, there was a desire to legislate on this issue without detailed research being undertaken to justify the need. This needs to be done considering the huge negative consequences for the pension industry not to mention the property and banking industries, particularly if landlords will be in a position to seek compensation as a result.