Despite huge media attention on Upward-Only Rent Reviews (UORR) clauses in leases, big corporate retailers, such as Homebase and HMV, are continuing to exit the market of Ireland blaming rising commercial rents for their decision to pull out. B&Q and Pamela Scott are another two multinationals that almost left the country because of escalating rent caused by antiquated UORR lease clauses – yet another hangover from the years of the Celtic Tiger. Clearly, the high rents imposed by the terms of these leases are affecting earnings both for the companies and for investors.
A legacy still to be undone in Ireland
Upward-only rent reviews were an issue that the government of Ireland promised to tackle in its pre-election manifesto when it said it would abolish UORR terms for leases that were created pre-2010, but this commitment was abandoned in 2011 on the ground that it would be ‘unconstitutional’.
Today, new market entrants can expect rents of 50% of what landlords asked for in the boom years, but for those on pre-2010 leases, it’s a very different story. There have been no reductions for these hard-pressed retailers. On the contrary, landlords have pressed rents higher. Retail insolvencies are rising month-on-month and, in most cases, the main reason has been upward-only rent reviews.
Ken Fennell, a partner with Kavanagh Fennell, is a specialist in corporate recovery and insolvency services:
‘The retail sector over the past couple of years has been hit by the perfect storm of low consumer sentiment, upward-only rent reviews, intense competition from large multinational multiples and a surge in online retailing.’
Landlords remain intransigent
Low sales have meant that retailers are struggling to meet the terms of the long-term rental agreements that they are locked into.
‘Upward-only reviews are hampering the whole sector with some companies being forced out of business or into examinership as a direct result.’
And when the examiner does come in, their primary goal is to exit Upward-Only Rent Reviews lease agreements or renegotiate upward-only rent reviews – not an easy mission.
Mr Fennell said: ‘There isn’t a simple solution as landlords, who in many instances are now in NAMA [The National Asset Management Agency is an organisation established by the Irish government in to attempt to attain the best financial outcome for ‘bad’ assets acquired by the banks], and are trying to protect rental income generated by retail assets and retailers are trying to reduce rental payments to survive.’
Ireland: Is change in the air?
A potential precedent was set in March when Judge Peter Charleton ruled in a rent dispute over the iconic Bewleys Café in Grafton Street, Dublin. With property situated in one of the most expensive areas of commercial real estate in Europe, landlord, Johnny Ronan, failed to have the Upward-Only Rent Reviews term in the lease enforced and the judge ordered the rent to fall to current market levels, some 50% lower than their peak in 2006-2008. The rent of the premises initially was €213,000 in 1987 but rose to just under €1,464,000 in 2007.
However, this may have been a one-off. Later in the year, the same landlord succeeded in a legal challenge to ensure that the rent on the Medical Council’s headquarters in Dublin, Ireland didn’t fall.
As things stand, nearly one in eight of all of Ireland’s commercial properties remain empty. Unless there is government intervention, more businesses will go. For investors in retailers with above-market rental costs, there could be further trouble in store.