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Thursday 28 August 2014

Developer Johnny Ronan could have shared in tax saving of €6.2m, court hears

Tim Healy

Published 26/02/2013 | 17:37

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Johnny Ronan
Johnny Ronan

THE Medical Council and a company of developer Johnny Ronan stood to make a tax saving of around €6.2m between them had they been able to complete the sale of the council's new landmark headquarters in Dublin in 2007, the Commercial Court heard.

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However, because of the law at the time, the council had to instead lease the Kingram House building, off Fitzwilliam Square, from Mr Ronan's company at an annual rent of €820,000.

Now the council and Mr Ronan's company, Tanat Ltd, are in a court battle over whether that rent can be reviewed on an upward-only basis or can be cut to as little as €320,000 per annum.

Tanat, whose directors are Mr Ronan and Peter Conlan, say  the council is bound by an agreement it reached in 2007 to lease the building which provided for upward-only rent reviews. Tanat was a part of Mr Ronan's portfolio of companies completely separate from the now liquidated developers, Treasury Holdings, which he founded with Richard Barrett, the court heard.

The council says it has the benefit of a new law introduced in 2009 (Land and Conveyancing Law Reform Act) banning upward-only rent review clauses in leases.

Tenat says that new law is not retrospective and does not apply in this case as it relates to an agreement entered into before the new Act was passed.

It also claims lease arrangement was only entered into to allow the council move into the building until such time as it (council) got new powers from the government to allow it to buy the building for €20m in the most tax efficient way or, alternatively, to rent it under a longer term lease.

Opening Tanat's case, Declan McGrath SC said the Medical Council sought to take over Kingram House, a protected structure, in anticipation of moves by the government in 2008 to expand its statutory role including providing facilities for disciplinary inquiries to be held in public.

Tanat had bought the building in 1989 for €883,000 and carried out a significant redevelopment with a major office extension at the rear.

By mid 2007, Kingram House was fitted out, at a cost of €2.5m, and the the Medical Council moved from its old Rathmines offices to the new builiding in 2008.

Talks had taken place between Mr Ronan and the council about the council acquiring the newly extended building outright for a price of €20m, Mr McGrath said.

The parties agreed the most tax efficient way to do this was by the council buying the shares in Tanat.

Doing it in this way, rather than through a simple sale of the property, meant Tanat would not have to pay €2.7m in capital gains tax while the council would not have to pay €3.45m in stamp duty and VAT, a total saving between both parties of just under €6.2m, the court heard.

However, the council was not allowed, until the introduction of the Medical Practitioners Act 2007, to buy shares in this way by which time a new arrangement to lease the building was agreed with Tanat.

This involved a five-year lease with the council getting the  option to buy the shares in Tanat after three years and by which time the new law empowering the council to do so would be in.

If this purchase option was not exercised within the term of the five year lease, Tanat had the right, after three years, to call on the council to convert the five-year lease to a 20 years subject to five-year rent reviews which, in the market of the time, were all of the upward-only variety, Mr McGrath said.

When the council did not exercise the purchase option, Tanat called on the council to enter into the 20-year lease option.  

In the meantime, the new law banning upward only rent reviews had come in.

Mr McGrath said they wanted the court to rule the new law does not apply to this lease particularly in circumstances where the arrangement was solely for the benefit of the council which had availed of VAT rules under which there is no requirement to pay VAT upfront on leases of less than ten years.

The case before Mr Justice Iarfhlaith O'Neill continues.

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