A New Deal for Tenants - Bernie Coleman
With the global recession at its height and domestic spending at an all time low, many of the country’s retailers have suffered hugely difficult trading positions over the past two years.
Market rents remained artificially high due to the upward only rent review clause (UORRC), standard in commercial leases, while turnover fell. After extensive and effective lobbying by ISME and Retail Excellence Ireland to name but two organisations, the UORRC was abolished in February 2010.
Many business tenants believe that the rent review procedure and arbitration process were inherently biased in favour of landlords. This was due partly to the absence of accurate and accessible information as to the true level of letting transactions and partly to the professional background of arbitrators who were perceived to be in league with landlords. These perceptions, allied with the absence of reasoned arbitration awards, generated substantial tenant dissatisfaction with the process.
The Minister for Justice. Dermot Ahern TD set up the Working Group on Transparency in Commercial Rent Reviews in March 2010 to address the concerns of the retail sector. This Working Group has recently published their report.
Accurate Information
The Working Group recognised that access to accurate information was crucial to the ascertainment of true market rent and that the current process of gathering information was not systematic. The information was based on the market knowledge of individual valuers, surveyors and auctioneers and the use of personal contacts to discover the relevant facts underlying a particular letting.
In addition, the widespread use of side agreements with confidentiality clauses has made compiling comparative evidence more difficult and unreliable. This has given rise to the situation where the headline rent (the rent disclosed on the face of the lease), does not always reflect the rent being paid. Furthermore as these side agreements often dealt with matters other than rent (for example rent free periods, contributions to fit out costs, early break clauses etc), the non-disclosure of their existence and content totally undermined the rent review process.
Recommendations
The Working Group has recommended that:
- An independent and accessible public database should be established to address the present information deficit. This database is to have statutory backing.
- A mechanism should be found to ensure that the basic information currently available only to the Revenue Commissioners for the purpose of stamp duty returns be transferred to the new database.
- In future, all parties to the rent review process have to make full disclosure of all relevant information to avoid distortion of the market.
- An obligation will be imposed on landlords and their solicitors/agents to supply additional information to include the net floor area per floor, frequency of rent reviews, rent free periods, break clauses, fitting out time, fit out allowances or capital contributions, liability for rates/insurance/service charge/repairs, and any new rents agreed and/or variations to leases.
It suggests that the new Property Services Regulatory Authority (PRSA) might be given a role in relation to the database. Legislation is currently been debated in the Houses of the Oireachtas for the establishment of the PRSA.
Knowledge of the process
The Working Group highlighted the lack of awareness among many participants about the extent to which they might control the rent review process as a serious obstacle to a satisfactory outcome. While the statutory regime for arbitration offers a general framework, it is not focused particularly on the specifics of commercial rent review arbitrations.
Recommendations
The Working Group developed as part of their report a code of best practice called the Rent Review Arbitration Code 2010 (‘the Code’). It was recommended that the Code should apply in the arbitration process and should be adopted on an industry wide basis.
A further recommendation was the issue of reasoned awards following any arbitration. They should include as a minimum, the following information:
- The evidence including comparative evidence considered during the course of the arbitration;
- The weight given to such evidence; and
- The basis for the weight which was given to such evidence.
Rent reviews should take place as close to the review date as possible and both parties to the lease should have a shared responsibility in relation to this review. The parties to a commercial lease should, unless there is particularly strong reason otherwise, ensure that rent review clauses are drafted in a neutral way which will facilitate either party in instituting the rent review process. The Code is intended as an addition to the Arbitration Act 2010 (‘the Act’). It is not intended and cannot override the mandatory provisions of the Act nor can it not override any specific provisions in a lease.
The Code sets out the particular processes and procedures for commercial rent reviews which are not specified in the Act. It emphasises the pre-eminent duty of the arbitrator to deal fairly with the parties and the overriding duty of the parties to provide honestly all relevant information to the arbitrator. The Code provides a limited right to apply to the arbitrator to revisit the arbitration where the duty of the parties to make full and honest disclosure has been breached. Such application must be made within 50 days of the proposed award, otherwise it becomes final.
Click here to read the Code