Time to abolish unfair retailer rent agreements
THE ruling by the Supreme Court last week to uphold an upward-only rent contract in the case of Bewley's cafe in Grafton Street, Dublin has re-opened a lot of barely concealed wounds for retailers and small businesses.
The ruling overturned a previous decision in the High Court which, based on a particular clause in that rent agreement, said the Bewley's rent could go up or down. In the case of the cafe, it meant an annual rent of €1.46m could be reduced to the market rate of €728,000. The Supreme Court decision means the rent can now go back up to €1.46m.
The difference is about €14,000 per week. That is a lot of extra muffins for Bewley's to sell. The Supreme Court ruling appears to apply directly and specifically to the terms of this lease. Inevitably, it sets a legal benchmark that may well affect other cases.
It is a major setback for retailers, some of whom have been caught with enormous boom-time rents. If a business was making a modest profit, then slashing the rent by bringing it into line with current market rates, would see a sizeable profit going straight to the retailer's bottom line.
For that reason, some people might think this is not a real problem. However, many retailers are struggling desperately to make a profit at all.
Getting a rent reduction based on the current market, and not 2005 or 2006, could be the difference between staying in business at all.
The extraordinary upward-only rent agreements also act as a deterrent to people who might want to expand their business by employing more staff.
Since February 2010, new leases can see rents go up or down in accordance with the market. However, many small businesses are trapped in pre-2010 upward-only rent contracts.
A few points should be borne in mind here. Firstly, landlords are free to cut the rent if they wish. This oppressive regime only applies where landlords either choose not to do that or are struggling themselves.
Some landlords have applied forbearance with tenants who cannot meet their repayments, including Nama, which took the Bewley's case to the Supreme Court.
Secondly, the Bewley's appeal was taken by a state body trying to get the highest return possible for all of the citizens of the state. Nama is in sell-off mode and the abolition of upward-only rents could seriously undermine the value of what it is trying to sell. It is difficult to put a figure on the financial hit Nama would take. It depends on the current value of its portfolio where upward-only rents apply. It has around €10bn worth of loan and property assets left in Ireland. Some of those assets are development land or commercial buildings that have no tenants, so the lease agreements might not even apply at all. The portfolio also includes residential property where it is not an issue. Nevertheless, it is very difficult to estimate the number of Nama assets that could be affected and the loss of value that might arise from such a change to legislation on upward-only rent reviews.
Also in the Bewley's case just because the rent might get cut in half, doesn't mean the value of the building would halve. The price a buyer might pay would have to take into account their ability to put up rents in the future through rent reviews, as the market value of the property rises.
Nevertheless, it seems likely that Nama would take a sizeable hit. This is a legitimate concern, but one that has to be seen on the context of a wider good that takes job creation, the survival of SMEs and the development of enterprise into account. Thirdly, it is a fact that landlords could lose their tenants when they cannot pay exorbitant rents. Examinership is one option and it has been used very effectively by larger businesses in Ireland to get better deals. Ironically, the Irish operations of large multinationals have used the examinership process to get out of existing rental deals.
Small businesses worst effected by upward-only rents could not avail of this option. They are simply too small.
It would be wrong to think that a campaign to abolish upward-only rent reviews would simply add to the profits of small retailers, restaurateurs, hoteliers and others.
After seven years of recession, many of these businesses are just about holding on, or in some cases are being held back, by an outdated and highly destructive legal anomaly. It doesn't even belong to a different era, it just doesn't belong in a business landscape at all.
Landlords will insist on their full boom-time rent where they believe the tenant can pay. Some landlords might be large pension funds, whose clients expect a particular rent on the property and they will say their hands are tied when it comes to applying forbearance.
But take the case of a small retailer who can pay the full rent, but only if he lets some staff go, or finds that he isn't making a decent living for himself. There are small retailers up and down the country in exactly that kind of situation who cannot get a deal that will bring their rent back to some kind of reality.
Upward-only rent clauses are utterly irrational in that they penalise one participant in the contract.
Senator Feargal Quinn has championed this issue and produced a Bill that he says fixes the problem. It was passed in the Seanad and should go before the Dail.
The Government has reneged on pre-election promise to change the law. It said the Attorney General has provided a legal opinion which said that abolishing upward-only rents would be unconstitutional.
Quinn believes otherwise. A loose umbrella group of interested parties, including ISME, SFA, Irish Hotels Federation and others, says it has legal advice to the contrary.
The Government is trying to put forward a "kinder"face and a more listening ear after the ear bashing it got in the recent elections. One way of taking that further would be to deliver on its commitment.
On the other hand, it is very tricky to go ahead with a legal change when you have received legal advice from the Attorney General that something would be unconstitutional. The question is whether an alternative way forward can be found.
Undoubtedly there are big financial issues at play here. The value of the Nama portfolio is one. At a time when Nama is pressing ahead with a rapid sales process and on track to finish up early, it would be very hard to argue against taking any course of action that might undermine the value or attractiveness of what it has to sell.
Equally, the Government must try to focus on job creation and the fact that some small business owners are utterly despondent about this.
One way the Government could finally put this issue to bed would be to let Quinn's Bill through the Dail. The Bill could be referred by President Higgins to the Supreme Court for a full and final ruling.
If it was unsuccessful, then at least everybody involved would have a real sense of how difficult it is to change this appalling situation.
If successful, it would mark the end of a ridiculous legal anomaly.
Sunday Indo Business