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Time to rescue retailers from the rents rip-off

EVER since the economic bubble burst more than five years ago, retailers have been complaining loudly about the excessive rents they are still being forced to pay.

This is because most of them are trapped in leases with upward-only rent reviews. Many of these upward-only leases run for as long as 35 years.

What this means in practice is that many retailers still find themselves paying the now-excessive rents which they signed up to during the noughties – despite the value of retail sales having fallen by almost a quarter since 2008.

The result has been carnage on the main streets and in the shopping malls, with a slew of retailers, including Superquinn, Xtra-vision, Golden Discs, O'Brien's Sandwich Bars, Atlantic Homecare, HMV, Hughes & Hughes and, most recently, Monsoon, having to either close their doors completely or else seek protection from their creditors.

In almost all of these cases, the main creditors were landlords with upward-only leases who refused to reduce the rents to more realistic levels.

The creation of new upward-only leases was outlawed by the previous government in 2010 in what was, rightly, criticised at the time by the then Opposition as an empty gesture. However, despite the two government parties promising to abolish existing upward-only leases in both their election manifestos and the programme for government, Finance Minister Michael Noonan backtracked in his December 2011 Budget speech citing "constitutional difficulties".

 

Losses

So why not change the constitution? The reality is that, like its predecessor, this Government has been captured by the property lobby, i.e, the banks and NAMA.

The abolition of existing upward-only leases would force the banks and NAMA to value their commercial property loans realistically and recognise huge losses.

Far better, it seems, to stick with the current non-policy of 'extend and pretend'.

This is despite the fact that, out there in the real world, retail property values and rents have long since been marked down. Last month, German fund manager GLL Real Estate paid €40m for two adjoining shops on Grafton Street – a 65pc reduction on the price that their previous owner paid for them in 2007.

Also on Grafton Street, fast-food chain McDonald's demanded a 50pc reduction in its rent when its 35-year lease expired last year.

So, will the High Court judgment of Mr Justice Peter Charleton be of assistance to tenants who have been so lamentably failed by the Government?

Before becoming a High Court judge in 2006, Peter Charleton was one of the outstanding commercial barristers of his generation. As such, he would have needed no reminding of the damage being wrought by upward-only leases on the retail sector.

In his judgment in the Bewley's case, which was published yesterday, he will have given hope to many, but not all, retail tenants.

Basically, Mr Justice Charleton, after parsing the wording of the Bewley's lease, concluded that the landlord, the Johnny Ronan-owned company Ickendel, was only entitled to an increase on the original 1987 rent of €213,000 and not from the 2007 rent of €1.46m.

So who stands to benefit from yesterday's ruling? Depending on the wording, tenants who agreed to upward-only leases before 2000 could be the big winners.

If they can base future rent reviews on the rents which they originally agreed back in the 1980s and 1990s, then their rents could be halved or more.

 

Lifeline

However, if the landlord had sufficient foresight to insert into the lease a clause that any future rent reviews would be based on the most recent rent, rather than the original rent, then they are still trapped.

Tenants who signed up for leases after about 2000 don't even have the hope of that get-out-of-jail card as their most recent rent would be either the same or close to their starting rent.

Mr Justice Charleton has thrown a lifeline to many desperate retailers.

It is now up to the Government to finish the job and abolish existing upward-only leases once and for all.


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