Rent reviews to take centre stage
Rent Review activity increased during 2015 primarily but not just as a result of the 5 year anniversary of the government legislation banning upwards only rent review ie. Section 132 of the Land and Conveyancing Law Reform Act 2009, which took effect in March 2010.
The outcome of these rent reviews has been highly sector and location specific as is to be expected. Where premises are held under the traditional lease structure containing upwards only rent review clauses, the office sector has had more basis to implement reviews than the retail sector where recovery has been slower. New market rental evidence, which is the prime source for establishing market rent, has been more readily available within the office sector and has to date been largely Dublin centric.
The economic recovery has boosted demand within Dublin city centre and suburban office market, resulting in over 260,000 sq m take-up in 2015 and a third year of office rental growth. While new supply in the office sector is emerging, within the order of 278,000 sq m under construction, pre-lets are already reducing availability. Prime developments such as the 'LXV' block on St Stephens Green, One Molesworth Street and 10 Molesworth Street are securing premium rents and applying the available evidence from a high in the order of €645 per sq m is essential when seeking to establish open market rental value. Factors impacting on rental value at rent review include the building size and specification, the lease terms under which the property is held, the exact location and the market at the specific date of the rent review.
Where new letting evidence is limited, particularly within the retail sector, interpretation and application of rental evidence becomes more specialised. Due to the extent of the decline in retail rents during the recession, which has been well documented by the Investment Property Databank Index, the retail market has been operating on a more marked two tier rental system.
Rental levels, length of lease term and the frequency of break options in leases which date from post March 2010, reflect the economic circumstances at the time of letting. Many other retailers have been legally obliged to maintain rental payments on over rented premises during the recession due to upwards only rent review lease provisions. As the retail recovery gains momentum, the number of occupiers looking at entering the Irish market has moved beyond purely discount retailers. As competition for prime pitches starts to increase rental levels in these locations are also increasing from previously rebased levels. Lease renewals as well as new lettings are providing evidence for establishing current market rental levels. The hierarchy of evidence at any rent review is firstly open market lettings between unconnected parties, secondly evidence from lease renewal negotiations, thirdly is rent review settlements, with court, arbitrator and independent expert awards considered further down the hierarchy again. As activity in this sector increases a greater volume of transactions will provide a more substantial body of evidence as a foundation for establishing market rent at rent review. While this evidence is developing.assessment of rent where evidence is scant or not comparable is proving contentious. Referrals to arbitration or independent experts to settle disputes is growing.
Both landlords and tenants generally have to work with the outcome of a rent review process for up to five years following the review date. The rent review process is a significant business event which impacts directly on operational profits and on property values.
Rosemary Casey is a director at TWM