New laws to slash rents for inviable businesses
Published 09/10/2011 | 05:00
Radical new laws being finalised by the Government will mean small businesses will be able to get their rent slashed if they can prove that they won't be able to survive the recession without a cut, the Sunday Independent has learned.
The long-awaited legislation will tackle the scourge of upward-only rents -- considered the greatest threat to the viability of the retail sector which employs 255,000 people all over the country.
The Landlord and Tenant (Business Leases Rent Review) Bill will change forever the relationship between tenant and landlord and impact on tens of thousands of businesses around the country -- not just shops.
The "game-changer" legislation will effectively give small businesses, crippled by sky-high rents set at the height of the boom, a chance to survive the downturn and rebuild.
It will apply to tenants who are currently paying rents higher than the current market rate.
If tenants can prove that the rent poses a threat to the present or future viability of the business, the rent will be cut to the current market rate.
The new "market rate" rent will apply for five years from the start of the rent cut.
If there is a further deterioration in the economy and the market continues to fall, the tenant will be able to ask for a review to determine the new market rate once during the five-year period.
There will also be safeguards built in for landlords, considered essential if the Irish property market is to remain a viable market for national and international property investors including institutions like pension funds.
The Sunday Independent has learned that if the landlord believes that the new "market rate" rent will significantly hit their ability to service loans, they will be able, with three months notice, to then terminate the lease within six months and try and find another tenant willing to pay more.
But if the lease is terminated by the landlord, the tenant will be able to claim compensation for any improvements they made to the premises while they were renting it.
A mediation scheme is also on the way to help settle disputes.
Initially, if a tenant wants to make a case to have their rent cut to the current market rate, they must supply the landlord, on request, with details of company ownership, employee numbers, financial information, most recent accounts and information supporting the claim that their business is vulnerable without a rent cut.
If no agreement is reached, the case will go to mediation with a hearing taking place within 28 days.
If that process fails, the tenant will have 12 months from the original request to apply to the circuit court for a decision. The courts will be able to fix the rent to be paid or could dismiss the proceedings if they believe the tenant does not qualify under the viability clause.
Changes to the upward-only rent reviews is a controversial issue. Even the Central Bank sent out a mixed message during its bulletin last week saying that new legislation to allow tenants to seek cuts in rents "may intensify" the weakness in the property market.
However, they also included an important caveat suggesting that "increased flexibility in commercial rent contracts would further enhance the competitiveness of the Irish economy".
Some complex issues also have to be finalised, including the issue regarding foreign businesses in Ireland who employ 45,000 people in the retail sector alone.
They want their Irish operations "ringfenced" so that they will be be able to apply for current market rents based solely on the viability of their businesses here and not based on the company's international performance.
The recent decision by the Dixon Retail Group, which includes PC World and Currys, to withdraw from the Spanish market shows that large international retailers will pull the plug if they see no prospect of a return to profitability in the medium term.
Typical among the international companies operating here is Australia-based multinational Harvey Norman which currently employs 750 people in Ireland and which expanded very rapidly here during the boom. As a result, Harvey Norman signed rent agreements here which would appear to be unsustainable in the current market where spending on household, electronics and white goods has fallen off a cliff.
The company's Irish chief, Blaine Callard, told the Sunday Independent: "Indigenous and foreign retailers operating in Ireland all have the same concerns; that there is now a two-tier rental system at the moment because new entrants to the marketplace can already avail of market rate rents which gives them an advantage over those who signed long-term leases during the boom.
"We are having all the same difficulties as local retailers. We are operating in a depressed market in all the same categories. What we are concerned about is that the new legislation doesn't discriminate again foreign investors and international retailers in terms of what is a qualifying tenant.
"The legislation has to be very careful to send the message to foreign investors that if your retail operation in Ireland is losing a significant amount of money, then you are not going to be treated any differently to an indigenous retailer.
"We need to see light at the end of the tunnel. If the legislation sends out the wrong message, we are not going to be able to avail of this law. I think Ireland Inc needs to send out the right message. This is actually going to be a jobs bill."
Dave Fitzsimons of Retail Excellence Ireland, which has led the campaign against upward-only rents, told the Sunday Independent: "According to our sources, a number of significant international retailers are actively considering withdrawal from the Irish market. Their decision will be made based on the content and expedience of the Government-proposed legislation to allow tenants to re-negotiate rent.
"If the legislation does not allow renegotiation of untenable rents, we will witness the most significant market withdrawal ever. Such a withdrawal will deliver job losses."