March 25, 2013 10:18 pm

Tenant wins Irish test case on rent

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A Dublin court has ordered a landlord owing money to Ireland’s National Asset Management Agency to reduce the rent it charges a commercial tenant in a ruling that could have vital implications for the country’s property sector.

The test case involves “upward-only rent reviews”, which are contentious clauses in leases that became popular during Ireland’s property boom and are now blamed for putting many companies out of business.

The Irish government initially pledged to outlaw upward-only rent review clauses when it assumed power. But it performed a U-turn over concerns this could undermine Nama, which bought loans with a face value of €74bn from the balance sheets of Irish banks in 2009.

The case pitted Bewley’s café, a landmark on Dublin’s main shopping street, against Ickendel Limited, a company controlled by developer Johnny Ronan which had its loans transferred to Nama, the bad bank set up to clear toxic loans from Irish lenders.

Bewley’s argued the 35-year lease it signed with Ickendel in 1987 should allow rents to fall in line with market values, as well as rise. It said securing a reduction in the €1.46m annual rent was of vital importance to its financial survival. The original rent was set at €213,000 in 1987 and had been subject to five-year reviews.

Ickendel said the lease meant rent should normally be ratcheted up every five years. But it accepted that in a situation where rents fell between reviews – by as much as 52 per cent for properties on Grafton Street – there should be no increase in the rent.

Dublin’s High Court ruled that to proceed with ever-increasing sums in rent every five years, while market rents were falling, would substitute an unreal figure for the rent.

It said the lease between Bewley’s and Ickendel stipulated that the rent was never to fall below the initial agreement of 1987. But the court ruled that an ambiguity in the wording of the lease allowed the rent to fall.

Property experts said the ruling would prompt thousands of commercial tenants struggling with upward-only rent review clauses to study their leases carefully to see if they could take advantage of the ruling. But they said it was unlikely to lead to wholesale abandonment of such leases.

“Where wording is not very clear there may be opportunities for tenants to secure reductions to the initial threshold rent but this would be on a case-by-case and only where the drafting of the lease is ambiguous,” said Rosemary Casey of the Sherry Fitzgerald group.

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