OPINION:The intention of the main political parties to abolish upward-only rent reviews will benefit tenant and landlord alike, writes DAVID FITZSIMONS

THE RETAIL industry has seen sales fall by over 30 per cent over the past three years. In spite of this many landlords, in particular the large private property companies and institutional investors, have refused to grant rent reductions, with some currently seeking increases and others being aggressively litigious.

It is often assumed that many tenants are looking to reduce headline rents that they agreed to pay, but this is often not the case. What the majority of tenants are seeking is that the proportion of the inequitable rent increases awarded to landlords through the rent review process during the boom years are reversed.

Considering the fact that rents increased by 240 per cent between 2000 and 2007 – while the consumer price index increased by only 30 per cent in the same period – there is considerable scope for rental reductions while still paying landlords a fair rent and allowing a reasonable return on their investment.

The majority of leases in existence today were not created during the boom years; the average lease in Ireland today is approximately 15 years old, but the rental levels that tenants paid were increased to boom market rents by the rent review process. This is best shown by a typical example known to the author – a 70sq m (750sq ft) shop in a Dublin suburban shopping centre built around 1996. The headline rent in the lease was €40,500 (IR£32,000). At review in 2001 this was increased by a chartered surveyor acting as an arbitrator in the rent review process to €88,000, an increase of 114 per cent. At a further review in 2007 this was increased during the rent review process to €181,000, a further increase of 105 per cent.

Under existing law a tenant has no right of appeal against a rent review award by an arbitrator (arbitrators are generally chartered surveyors drawn from the various property firms), so in a 10-year period the rent on this shop increased by 358 per cent.

Recent commentary suggests that legislating on the matter is unfair and that the only solution is for landlords to work with their tenants. If the last three years has proven anything, it is that a significant number of landlords have refused to engage with their tenants, proving that the partnership- based approach to resolving untenable rents has not worked.

Untenable rents have left many retailers under significant pressure to trade and have directly contributed to 44,000 retail industry job losses in the past 30 months. Retailers such as Celtic Bookmakers, Hughes Hughes, Sasha, Four Star Pizza, Toni Guy and Chartbusters have all cited extortionate rents as the fundamental reason for their failure.

According to economist Colm McCarthy the matter of Upward Only Rent Reviews (UORR) must be addressed for the commercial property market to function. The legislative intervention of the outgoing Government to ban upward only rent review clauses from March 1st, 2010 has created a two-tiered market where legacy leases (prior to March 1st, 2010) suffer from untenable rent, while new leases enjoy the ban on UORRs.

Globally the Consumer Price Index and derivative indices influence upward and downward commercial rent movements. The Republic of Ireland and the UK are the only EU states that allow upward-only rent reviews. However, in the UK, the combination of a floating exchange rate and the pre-pack administration process that is available to the UK retailer have meant that commercial rents have increased far more gradually than in Ireland.

The immediate abolition of upward-only rent review clauses so that market rent can prevail will provide retailers with breathing space to trade.

It will also protect over 30,000 retail jobs currently under threat and will foster a retail industry environment conducive to the creation of a further 20,000 jobs over the next three years.

Recent comments claiming changes to UORRs will lead to a reduction in the value of NAMA’s Irish loan book by as much as 20 per cent (or between €2 billion-€4 billion) fail to take into account either the €600 million annual cost to the exchequer of an additional 30,000 unemployed retail workers or the benefits to the state, as Ireland’s largest tenant, of lower rents.

REI’s legal advice from eminent senior counsel is that a change is constitutional, as Government intervention in private contracts is a common occurrence. A recent example is the decision by Government to force residential property developers to implement social housing provision.

Much of the recent commentary on the negative affect a market rent might have on the investor community has been hyperbole. The facts are clear: pension funds must allow commercial rents to fall in line with commercial property values. Investment returns in commercial property will reduce through business failure, but rents will stabilise in the medium term and more businesses will survive and be able to pay rent.

As most Irish pension funds have an exposure of less than three per cent to the Irish commercial property market, a ban on UORR clauses would have a very minimal affect on pension fund returns.

The so-called “market” is not transparent and recent lettings have been subject to confidentiality agreements. One has to ask, why?

It could be speculated that this is because the stated lease value is being underpinned by back-door concessions, once again presenting a false picture of market health and providing manipulated market evidence for other tenants to endure at rent review.

Landlords who have worked with their tenants have nothing to fear from the legislation. The legislation will simply ensure that all landlords share the responsibility, not just a progressive minority.

There has been no significant inward investment in the commercial property market in the past eight years, and by dealing with this matter now, Ireland will become more appealing to international retail and services organisations looking to trade in Ireland.

Our rent levels are now more than double that of other jurisdictions, causing business failure and significant job losses. Landlords have had the last three years to resolve the matter with their tenants and in most cases have failed to do so. It is now time for legislative intervention.

David Fitzsimons is chief executive officer of Retail Excellence Ireland, Ireland’s largest retail representative group with a membership of over 650 retail companies who operate over 8,500 stores in the Irish market. retailexcellence.ie