Upwards-only rent reviews

W

wings

Registered User
Messages
6
I am seeking an understanding of why upwards-only rent reviews are, the phenomenon that they seem to be in today's Ireland.

Surely if a landlord leases out a building to a tenant, then they agree on a price and all happy. If the landlord keeps upping the rent, the tenant will either move or go out of business. Not in anybody's interest, I would have though. So, why are landlords moving to put their clients out of business by only reviewing the rent upwards? Surely in any agreement between two parties, they can agree to tear it up and start a new agreement? So that if the old one was too onerous, they can work something out.

Here's what I think it might be, but please correct me if I'm wrong! The leases are signed with a clause saying that the rent will be revised upwards every x years by x amount. The tenant does not agree to tear up the lease as they would then have no garauntee that they'd be allowed stay. So they're stuck having to agree to an upwards rate spiral. If this were the case though, it would be in a landlord's interest not to write the lease that way as they are ending up with empty properties all over the country.

If anybody could help me understand the issue I'd be most grateful.
 
Often tenants sign long leases - 20, 25, 30 years with upwards only reviews every 5 or 10 years and with a break clause after 12 years for example.

So, if tenant leaves, he can be sued for balance of lease rent
 
The lease is a legal document, for which the tenant has matters to conform to, as does the landlord. In most cases, where the tenant is suffering trading problems and an approach is made to the landlord, a deal is hammered out. But to answer your query, and is common practice in these times, is that the rent is left where it was before the review, and no rent increase is apportioned.
 
As I understand it, under Irish law if a tenant signs a lease for 5 years or more, he has the right to renew that lease forever. At the end of the 5 years, the tenant has the option to stay or leave as he sees fit. To compensate for this the landlord usually requires a 21 year lease.

Not sure why the practice of upward only came in.

It would be much better if the government just scrapped a tenant's auotmatic right of renewal after 5 years.
 
Hi guys and thanks for the replies. I am still bewildered on (at least!) two points.

1. Why would a landlord hand-cuff themselves is this way by writing a one-directional lease review mechanism into the lease?
2. Why are the government saying that it would take a constitutional change in order to outlaw such leases? Thought this may be because the leases are already written and thus protected by the law/constitution.

No. 1, I really don't understand!
 
You do know that an upward only rent review lease can be reduced at the discretion of the landlord. So a €50,000 per annun rent can be reduced to €40,000 pa in the current economic conditions.
 
It's worth bearing in mind that several tenants can, almost without exception, afford UORRs. These include the OPW (who rent commercial properties on behalf of the government and some Quangos), multi national companies and large shops who trade in Ireland but are HQd elsewhere. If they go out of business, the lease usually stipulates that the parent company are still liable for the rent for the rest of the lease.

For smaller companies, the landlords will require one or more of the directors to assume personal liability for the rent if the company closes down. How successfully they'd be at collecting that is questionable.

Lastly, the increase in rent isn't usually stipulated in the lease - it's negotiated every five years based on the rent of other similar properties in the area. If the landlord and tenant disagree on the market rates, a third party (usually an estate agent) is asked to mediate. Of course if everyone has signed up to UORRs, there wont be much difficulty pointing to other increases in the area and using them to justify an increase.


Brendan, I heard that the reason for UORRs is to make it easier for landlords to get mortgages for commercial properties. If there was a risk that the rent roll might be reduced during the lifetime of the building, the landlord might be unable to service the mortgage repayments and put the lending bank at risk. How true that is, I'm not sure.
 
1. Any landlord and tenant can agree any type of rental /lease agrement that they wish.
There is no nor never has been any obligation for the parties to sign any agreement that contains upward only rents.

2. However, it is a fact that most leases until recently were a standard agreement that did contain the clause that rents would increase every xyz (usually five, sometimes 3,4, and very rarely 6,7) years.

3. In these contracts it was NOT usually possible for a tenant to escape from the agreement, except if a "break-clause" was inserted, meaning that after a numbr of years -usually 5 or 10 ,sometimes unspecified with reasonable notice, the tenant could leave.
This type of break clause was insisted on by bigger,well-known tenants that the landlord was eager to have.

4. Today in new agreements the upward -only rent clause is a thing of the past. No landlord is insisting on ,nor any sane tenant agreeing to sign such a condition.
I think -but am not sure -that the law has changed so that such a condition cannot be enforced in new contracts.But I mmay be wrong on that. In any case no tenant would ever sign such a contract nowadays.

5. However, on all contracts existing prior to the change in the law the condition is still legally binding. A landlord can insist that the rent can increase - though I've heard cases where this can be as little as one cent in view of the real situation on the ground today.
I've also heard that many wise landlords are ignoring this condition and coming to sensible agreements with the tenant.
Bluntly, most landlords are seeing what is happening and not insisting on rent increases and ,indeed, reducing the rent, regardless of what is says in the contract.

6. The problem is mainly confined to those landlords that are not human beings but corporations,pensions trusts ,whatever. They have a contract signed in, say, 1990 and in this legally binding contract the landlord expects an increase of XYZ and certainly no decrease.
It's the whole basis of the investment- as far as they are concerned it was a steady good investment for their clients.
These blind pension funds and other corporate landlords do not understand that sticking to the letter of the contract results in bankrupt tenants and thus , eventually, no rent.

7. So why did tenants agree to sign such contracts thus binding themselves for 35 years with ever upward rents ?

Well, I rented a dozen premises between 1980- 2009. Some were,at the time, very desireable locations like the Square Tallaght. Tenants would have agreed to forgo a pound of flesh every rent review to stay in the best centres.
We thought -at the time rightly - that we could easily sell the lease onwards if our business failed. (such sale of leases are and were always allowable in the contracts with some restrictions). Indeed, many of sold the elases at a profit. to those eager to move in to such-and-such a location.

There was no internet, retail was a sure and steady living. Why not sign to get a good location? Upward only rents ? No problem!

Unfortunately, the big landlords have not copped on to the fact that everything has changed. Retail outlets are closing everywhere,regardless of the size and reputation of the retailer. And yet those big landlords are still sticking to enforcing contracts that have no relationship to today's reality.

(on a personal note,besides our own premises, my wife and I were made directors of a large tour operating firm that opened thirty retail outlets in the late 1990s and thus we had great experience of such leases from small rural towns to big centres in bigger cities.
My knwoledge of the law since 2009 is hazy.The above was just a background of how/why such things happened in commercial contracts).
 
Last edited:
OP, these are extraordinary difficult times. It really is not that long ago when retailers were battling for position on the main High Streets. They had little problem in paying then, but the downturn has caused much default. The question you ask as to why landlords tie themselves up for which the answer is that's the market. In other continental countries, they use absurd lease practices. If the law concerning leases was hanged the market would plummet to state of non recovery which would have massive knock on effects, to Pension funds, persons savings and Investments.
 
mercman -I'm unsure what you mean when you say if the law concerning leases was hanged the market would plummet...

I believe that if those pre-2009 leases containing upward only leases were scrapped it would actually benefit the big investor-landlords. Better to have a tenant paying 50% of the original lease agreed rent than an empty shop.

The attitude of the bigger investor landlords is matched only by local authorities that are constantly raising rates in the false belief that retail business will continue forever.

Anyway, landlords -even the bigger ones - are, for new contracts today, no longer insisting on conditions that they forced on tenants some years ago.
 
oldnick said:
Anyway, landlords -even the bigger ones - are, for new contracts today, no longer insisting on conditions that they forced on tenants some years ago.
Click to expand...

I'm not sure would I agree with this. Retailers are very quick at blaming high rents for the demise of their business. They fail to realise in many cases, that on-line selling has created a massive deluge of their trade. Landlords are always been asked to reduce rents !! They don't have to accede to these requests or demands. I know of instances where Banks have requested a reduction in rents, but they didn't receive their request.

Property owning was always a big boys game until about a dozen/fifteen years ago, when lending in massive proportions was given to persons with small deposits, no other security. and who took on massive lending. And now this entire debacle has blown up in all parties faces. Reason being, the availability of surplus cash coupled with Banks greed and breaking their own rules.
 
Most bricks-and-mortar retailers know full well that the internet is the main cause of their inevitable decline. (Obviously, economic factors count towards shorter-term ups-and-downs).

It is beyond belief that property investors seem not to take this into account and act as if there'll always be a demand for their premises.
Certainly, banks may have asked for reductions in rent and been refused. Maybe if the owners had acceded to the request for lower rents there wouldn't be so few bank outlets today -though certainly it's technology that is mainly responsible for their closure.

Retail outlets of all types are disappearing, and will continue to do so whether or not landlords reduce rents. But reducing rents may ensure that many outlets will last a bit longer than otherwise. For landlords to refuse reductions ensures that their tenants will vanish quicker than otherwise.

Just as the retail trade is changing so is -must- the commercial property business. Anyone with a commercial property portfolio with the mindset of the 1980s will be in as big a trouble as many of the retail outlets.
Retailers know this. The landlords appear not to.
 
It might sound like I'm defending commercial landlords with this post but I'm not really...

It might seem to make sense that a reduced rent is better than no rent but its not always. There are three reasons:

* as I said before, the company going out of business does not necessarily mean that rent will not be paid if they have a guarantee from someone else.
* a reduced rent for one tenant will make it easier for other tenants to bargain for a reduced rent which could cause a ripple effect.
* a reduced rent will reduce the calculated value for a property which could cause the landlord to be in breach of the loan covenants with the mortgage provider. This will have various impacts from an increased interest rate on the repayments to forfeiture of the property.

It might not be easy for a landlord to reduce the rent, even if it's necessary.
 
To a certain extent the case for or against "old" leases (i.e. decades long contracts with only upward rents) will not be germane in a few years for 3 reasons:-

1) Many retail businesses will die (mainly because of technology,but hastened by high rents) even in the busiest retail centres/streets.
If they are replaced by new retailers they won't sign those type of leases-and,indeed, this has been the case for the last couple of years in even in 2top" areas.

2) In secondary retail centres and streets nobody is signing 35 year leases with upward only contracts. They are a thing of the past.
Indeed, retail outlets in secondary areas are increasingly a thing of the past as is evident by the number of closed premisies.
Most landlords now agree to almost any conditions to get a tenant in those streets.

3) But what about succesful retailers who still have those leases and want to continue in business?
- Many of the top ones have a break clause and are/will take advanatge of it to renegotiate.
- Many of them, even without break clauses, are succesfully negotiating with the landlords who see the writing on the wall.
- Those landlords who are still stubborn and are sticking to upward-onlys are finding more of their tenants being placed under examinership- a ploy that is used to force landlords to decrease rents (It's more complicated than that and is worth a seperate thread one day).

So, overall, my guess is that there'll be few tenants around in a few years time that will still have the burden of those wretched lease conditions.
 
Thank you all for the very interesting and informative discussion.

I'm tempted to start another thread on what the future is for the 'high street' shop! Maybe another day though. I have some ideas that I might make a post out of. Watch this space.
 
markpb said:
It might seem to make sense that a reduced rent is better than no rent but its not always. There are three reasons:

* as I said before, the company going out of business does not necessarily mean that rent will not be paid if they have a guarantee from someone else.
* a reduced rent for one tenant will make it easier for other tenants to bargain for a reduced rent which could cause a ripple effect.
* a reduced rent will reduce the calculated value for a property which could cause the landlord to be in breach of the loan covenants with the mortgage provider. This will have various impacts from an increased interest rate on the repayments to forfeiture of the property.

It might not be easy for a landlord to reduce the rent, even if it's necessary.
Click to expand...

This is a very important post and its content should be noted. Very factual and to the point. In reality and again the Banks are the cause of many landlords been forced to take the high road. Being a landlord no longer is easy. There have been massive erosions of families wealth in this country -- and for what reason ? In many cases the Banks have foreclosed on many without offering a chance, but there are many LLs who have taken the Mick.

As my late father always used to say 'Son if you can't afford it, don't buy it'. The Golden rule -- never fall into the hands of a Bank.
 
You must log in or register to reply here.
Back
Top