Rent reviews must consider recession

THE MASTER of the High Court has said the economic downturn should be considered when “upward only” clauses governing rent reviews for commercial buildings are being interpreted.

Edmund Holohan SC made the comments when he delivered his “written reasoned decision” in a case involving the Apollo Gallery, 51C Dawson Street, Dublin. The decision is an expression of his views on the law. A legal decision on the actual case is a matter for the courts.

He said the interpretation of rent agreements by the courts in the context of the recession will be “informed by public policy”.

“Even in a case in which the drafted meaning is clear and unambiguous, the device of severance of an offending clause will be employed by the court where performance would be contrary to public policy.

“In Ireland, fair rents have been a public policy objective since the days of the Land League.”

He noted that during the first 100 days of Franklin D Roosevelt’s presidency in the US, measures to combat the Depression included the invalidating of clauses in private contracts concerning payment in gold, “clauses which in deflationary times had much the same real effect as the ratchet type commercial rent review clause”.

The plaintiffs, Anthony Kidney and Ronan McNamee, want an arbitrator to conduct a rent review in relation to the Dawson Street premises. The 35-year lease on the building dated October 30th, 1986, provides for a rent review every five years “on the basis of an upward only clause”, he said.

The defendants, Julian Charlton and Edward Charlton, are asking the courts to clarify the legality of the upward only clause, prior to the appointment of an arbitrator. Neither the plaintiffs nor the defendants are the original parties to the lease.

Mr Holohan noted that there tend to be two types of upward only review clauses. Threshold clauses state the rent may fluctuate according to changes in market value, but never fall below the rent agreed at the outset. Ratchet clauses state the rent must never fall below the rent that applies at the time of the review.

The clause in the case before the court referred to the “rent previously payable” as the base line, but this may not refer only to the rent payable immediately prior to review, Mr Holohan said.

“As a general principle, the bargain between lessor and lessee is one of long-term mutuality, and rent review clauses must be viewed in that light. There is no presumption in favour of constructing a clause so as to make it upwards only.”

Mr Holohan said it was a “common mistake by valuers to read an upward only clause as precluding any reduction in rent”.

“A court will not be easily persuaded to accept an interpretation which will give the lessor a windfall in a time of recession. And the courts will surely never rubber-stamp any interpretation which clearly has the effect of unjustly enriching either party.”

Mr Holohan said the courts will look to see which interpretation of the clause is most reasonable.

He said arbitration must be carried out fairly. “A system in which rent reviews are apparently adjudicated by estate agents whose day job is the marketing of like property usually by reference to selling points such as ‘strong rental growth potential’ is prima facie a system which gives rise to significant and legitimate misgivings.”

He said arbitrators should attend carefully to the clarification which the case, when heard, would bring to the area. The case was forwarded to the courts for hearing.