Upward only rents may be a thing of the past

antoobrien

Today Bewleys won a High Court case preventing their landlords from putting up their rents, despite the fact that they are roughly twice the market rates of neighbouring properties.

The building is subject to an "upward only" lease, meaning that the rent has not changed since it was last set in 2007.

Mr Justice Peter Charleton ruled that the rent must be allowed to drop to a level to reflect the state of the market.

It is estimated to be half of what it was set at five years ago.

He then gave the terms of the lease a "commercial construction" and found it would "not be in accordance with business sense that a rent appropriate to five years previously, should govern a hospitality market markedly changed for the worse".

I think this is a good thing and regardless of the scope for the application of this ruling (e.g. it might not help Harvey Norman) we need some sort of mechanism to get the rents of these leases back to market values.

SeanW

So the landlord had rent at twice market rates and was looking for an INCREASE? Obviously a chancer, glad it backfired.

Manach

I reckon it will be appealed to the Supreme Court, as it does seem to be interferring with the landlord's constitutional property rights. And given the exposed position the Government/NAMA has on similar properties they own, they would be paying attention to this case.

Bullseye1

Great news.

Scofflaw

Depressingly, I'm not sure that the point here is that Bewleys' lease doesn't contain an upward-only rent clause in the first place.

cordially,
Scofflaw

Godge

Scofflaw wrote: »

Depressingly, I'm not sure that the point here is that Bewleys' lease doesn't contain an upward-only rent clause in the first place.

cordially,
Scofflaw

Yes, there seems to have been a flaw in the lease (from the landlord's point of view). It seems that the lease said the rent couldn't go below the original rent (1987 or something) but it didn't say that it couldn't be decreased.

So if the original rent was 100, rose to 200 within ten years, the clause meant it couldn't go below 100 but that didn't mean it couldn't go to 180. That is my understanding of the judgment. I expect there are a lot of solicitors out there pouring over leases but not all of the leases will be flawed like the Bewleys one. There will be some lucky ones though so it is good news for some tenants.

Scofflaw

Godge wrote: »

Yes, there seems to have been a flaw in the lease (from the landlord's point of view). It seems that the lease said the rent couldn't go below the original rent (1987 or something) but it didn't say that it couldn't be decreased.

So if the original rent was 100, rose to 200 within ten years, the clause meant it couldn't go below 100 but that didn't mean it couldn't go to 180. That is my understanding of the judgment. I expect there are a lot of solicitors out there pouring over leases but not all of the leases will be flawed like the Bewleys one. There will be some lucky ones though so it is good news for some tenants.

Sadly, it all reminds me of the Eighties, when the city centre was pretty much hollowed out by the same constant demands for rent increases, and the end result was a lot of empty properties. It seems insane to me that if you have a good tenant, you simply screw them for more, and more, and more, until finally they leave. But it seems to be what happens.

cordially,
Scofflaw

PRAF

antoobrien wrote: »

Today Bewleys won a High Court case preventing their landlords from putting up their rents, despite the fact that they are roughly twice the market rates of neighbouring properties.

The building is subject to an "upward only" lease, meaning that the rent has not changed since it was last set in 2007.



I think this is a good thing and regardless of the scope for the application of this ruling (e.g. it might not help Harvey Norman) we need some sort of mechanism to get the rents of these leases back to market values.

Great news for Bewleys but sadly I'm not sure it has any immediate implications for the thousands of other businesses facing unsustainable Celtic Tiger rents.

Two causes for mild optimism though:

1. Upward only rent reviews have already been abolished for any new commercial leases. Hopefully that means we've learned the lessons of the past and won't be repeating this particular mistake again

2. I have heard anecdotally that many businesses have been able to enter into negotiations with their landlords in order to reduce their rents to more sustainable levels.

Unfortunately for a great many businesses, particularly those faced with obdurate landlords, their only solution is to go bust and start again in a different location with lower rents (or at the very least threaten to do so in order to secure the lower rents)

cson

Scofflaw wrote: »

Sadly, it all reminds me of the Eighties, when the city centre was pretty much hollowed out by the same constant demands for rent increases, and the end result was a lot of empty properties. It seems insane to me that if you have a good tenant, you simply screw them for more, and more, and more, until finally they leave. But it seems to be what happens.

cordially,
Scofflaw

Not directed at you personally but a lot of people would have this perception of retail landlords as being an actual person who you should be able to reason with. In reality a lot of real estate is held by pension funds who would have strict guidelines on required returns hence the lack of flexibility.

Leaving aside upward only reviews, I know a lot of businesses are being strangled by high rents (Korkys being a rather public example of a store closing because of it) but an alternative perspective is that it is capitalism at work - you signed a contract for x number of years at x amount in the belief that it offered value. If the economy had continued to grow strongly you'd be laughing now, quids in because you had the foresight to 'hedge' your contract when you did. Unfortunately we're at the other end of the spectrum now so you lose out. You could have said no, moved your store and not locked yourself into such an agreement.

I don't necessarily agree with the above viewpoint but you can see the argument from the Landlords point of view. It's a loose example but if you look at fuel hedging in the airline industry the fundamentals are not wholly dissimilar; you anticipate oil prices rising and lock yourself into a contract for x price for x months. Prices do rise and you look clever, prices fall and you're stuck paying higher prices for something that is available cheaper off the shelf. There aren't any bailouts there in that instance. You gambled; you lost; you pay the price.

Its oversimplifying it, but I do think the raw fundamentals of that example hold true here.

That being said; I do think its better to keep the tenant (and at a macro level the jobs the tenant provides) than to squeeze them for short term gains.

PRAF

cson wrote: »

Not directed at you personally but a lot of people would have this perception of retail landlords as being an actual person who you should be able to reason with. In reality a lot of real estate is held by pension funds who would have strict guidelines on required returns hence the lack of flexibility.

Leaving aside upward only reviews, I know a lot of businesses are being strangled by high rents (Korkys being a rather public example of a store closing because of it) but an alternative perspective is that it is capitalism at work - you signed a contract for x number of years at x amount in the belief that it offered value. If the economy had continued to grow strongly you'd be laughing now, quids in because you had the foresight to 'hedge' your contract when you did. Unfortunately we're at the other end of the spectrum now so you lose out. You could have said no, moved your store and not locked yourself into such an agreement.

I don't necessarily agree with the above viewpoint but you can see the argument from the Landlords point of view. It's a loose example but if you look at fuel hedging in the airline industry the fundamentals are not wholly dissimilar; you anticipate oil prices rising and lock yourself into a contract for x price for x months. Prices do rise and you look clever, prices fall and you're stuck paying higher prices for something that is available cheaper off the shelf. There aren't any bailouts there in that instance. You gambled; you lost; you pay the price.

Its oversimplifying it, but I do think the raw fundamentals of that example hold true here.

That being said; I do think its better to keep the tenant (and at a macro level the jobs the tenant provides) than to squeeze them for short term gains.

There is a difference though. If you are an exporter or importer who is looking to 'hedge' risk, you'll often have the option of whether to fulfil the contact or not. For example, if a utility is looking to buy fuel they might take out an option to but it at price X at some future point. They'll incur a cost for buying that 'option to buy'. However, if the price of fuel subsequently falls, they will quite simply not take up the option to buy and will just buy the fuel at the spot price which is lower than price X

With these old 'upward only' rents, it seems that the tenant is locked into an unfair 1 way bet. The price only goes up. They have zero chance of getting out of the contact unless they (a) break the contact and subject themselves to potentially catastrophic legal costs or (b) go bust.

The unfairness of the situation is reflected in the fact that the previous govt decided to ban any more of these unfair contacts. Unfortunatley, legal opinion is that they cannot retrospectively change any of the old contacts

Scofflaw

cson wrote: »

Not directed at you personally but a lot of people would have this perception of retail landlords as being an actual person who you should be able to reason with. In reality a lot of real estate is held by pension funds who would have strict guidelines on required returns hence the lack of flexibility.

I have to say I don't think of them as being an actual person - in my experience, even when there has been an "actual person" who was the landlord, one dealt nevertheless with a business.

On the other hand, I don't know that a lot of landlords would be pension funds - on the contrary, this FT article suggests that pension funds getting into property is relatively new even in the biggest global cities:

Direct investment in real estate markets by pension funds and property sovereign wealth funds is set to double over the next decade, according to Jones Lang LaSalle, the property consultancy.

The findings follow a recent JPMorgan Asset Management study which found that 43 per cent of institutional investors were experimenting with real assets. The study, conducted last year, surveyed 2,500 institutional investors with assets of $7.8tn.

David Green-Morgan, global capital markets research director for JLL, says it is aware of a growing number of pension funds and SWFs that are considering making allocations to real estate for the first time.

Investment flows thus far have been concentrated in three cities, London, New York and Hong Kong, prompting concerns that a pricing bubble is forming in the “super prime” office and retail properties that are widely desired by pension funds and SWFs as a match for their long-term liabilities.

http://www.ft.com/intl/cms/s/0/75cbbffe-454f-11e2-8ccc-00144feabdc0.html#axzz2Ok9iFvSj

cson wrote: »

Leaving aside upward only reviews, I know a lot of businesses are being strangled by high rents (Korkys being a rather public example of a store closing because of it) but an alternative perspective is that it is capitalism at work - you signed a contract for x number of years at x amount in the belief that it offered value. If the economy had continued to grow strongly you'd be laughing now, quids in because you had the foresight to 'hedge' your contract when you did. Unfortunately we're at the other end of the spectrum now so you lose out. You could have said no, moved your store and not locked yourself into such an agreement.

I don't necessarily agree with the above viewpoint but you can see the argument from the Landlords point of view. It's a loose example but if you look at fuel hedging in the airline industry the fundamentals are not wholly dissimilar; you anticipate oil prices rising and lock yourself into a contract for x price for x months. Prices do rise and you look clever, prices fall and you're stuck paying higher prices for something that is available cheaper off the shelf. There aren't any bailouts there in that instance. You gambled; you lost; you pay the price.

Its oversimplifying it, but I do think the raw fundamentals of that example hold true here.

That being said; I do think its better to keep the tenant (and at a macro level the jobs the tenant provides) than to squeeze them for short term gains.

Like PRAF, I can't really see how this is 'hedging' - the risk is completely on the side of the tenant where there is an upward-only rent review clause. It seems to me that it's a straightforward outcome of a monopolistic (actually oligopolistic) hold on desirable retail locations. The landlords could force the tenant to assume all the market risk, and did so.

cordially,
Scofflaw

antoobrien

Scofflaw wrote: »

I have to say I don't think of them as being an actual person - in my experience, even when there has been an "actual person" who was the landlord, one dealt nevertheless with a business.

On the other hand, I don't know that a lot of landlords would be pension funds - on the contrary, this FT article suggests that pension funds getting into property is relatively new even in the biggest global cities:

That doesn't seem to be the case in Dublin, Canada Life owns the lease for the building Korky's used to operate from on Grafton street.

cson

Scofflaw wrote: »

Like PRAF, I can't really see how this is 'hedging' - the risk is completely on the side of the tenant where there is an upward-only rent review clause. It seems to me that it's a straightforward outcome of a monopolistic (actually oligopolistic) hold on desirable retail locations. The landlords could force the tenant to assume all the market risk, and did so.

cordially,
Scofflaw

My example wasn't aimed at upward only to be fair; I was moreso aiming for the tenant that signed a 10 year lease for x per annum; obviously if market prices shift to x+1 in the intervening 10 years then the tenant wins per se.

antoobrien

cson wrote: »

My example wasn't aimed at upward only to be fair; I was moreso aiming for the tenant that signed a 10 year lease for x per annum; obviously if market prices shift to x+1 in the intervening 10 years then the tenant wins per se.

Indeed there are plenty of long term (10+ year) leases that were set at low levels that have not gone up with market rates.

Scofflaw

antoobrien wrote: »

That doesn't seem to be the case in Dublin, Canada Life owns the lease for the building Korky's used to operate from on Grafton street.

Sure - I'm hardly claiming it doesn't happen, only that it's not very likely as a general explanation for high rents.

cson wrote:

My example wasn't aimed at upward only to be fair; I was moreso aiming for the tenant that signed a 10 year lease for x per annum; obviously if market prices shift to x+1 in the intervening 10 years then the tenant wins per se.

That makes more sense, although it's still not really an example of hedging, but of risk-sharing in a fixed-rent lease - the tenant is obviously gambling that such a lease will protect them from market rises, the landlord that it will protect them from market falls.

An upward-only review clause, on the other hand, means the landlord bears no risk, since they can raise the rent in the event of a market rise, but the rent doesn't fall if there's a market fall. That's clearly an asymmetric result, and suggests a corresponding market asymmetry - in this case, control over the few prime retail locations.

cordially,
Scofflaw

Godge

Scofflaw wrote: »

Sure - I'm hardly claiming it doesn't happen, only that it's not very likely as a general explanation for high rents.



That makes more sense, although it's still not really an example of hedging, but of risk-sharing in a fixed-rent lease - the tenant is obviously gambling that such a lease will protect them from market rises, the landlord that it will protect them from market falls.

An upward-only review clause, on the other hand, means the landlord bears no risk, since they can raise the rent in the event of a market rise, but the rent doesn't fall if there's a market fall. That's clearly an asymmetric result, and suggests a corresponding market asymmetry - in this case, control over the few prime retail locations.

cordially,
Scofflaw

cordially,
Scofflaw

an exceptionally cordial Scofflaw today:D

Farmer Pudsey

cson wrote: »

My example wasn't aimed at upward only to be fair; I was moreso aiming for the tenant that signed a 10 year lease for x per annum; obviously if market prices shift to x+1 in the intervening 10 years then the tenant wins per se.

In reality very few longterm rental agreements are this way. Most are for 20+ yaers and have rent reviews ever 5 years. Upward only reviews are skewed in favour of the landlord in that in a situtation like we have had from 2000-2008 where rents climbed expodentially the now bear no realit to factors on the ground

Hedging or forward buying/selling is toatlly different at leas the purchasser/seller knows the final price and can make and take finciancal position re this.

However with upward only rents it was never envisaged that there would be a situtation where the rent increased 100%+ in one 5 year period.

You also had landlords doing contracts with new tenants and then refunding them a % of the lease in a side agreement. However the excessive lease was then used to increase other rents above commercial rents.

antoobrien

Scofflaw wrote: »

Sure - I'm hardly claiming it doesn't happen, only that it's not very likely as a general explanation for high rents.

The point being that the market in question is neither as new or as small as people appreciate, and it's often only cases like this that the wider public get to hear who the owners are.

Norwesterner

According to todays press, Johnny Ronan offered 6 million to Bewleys lasy year, if they would vacate the premise (to allow Zara move in).
Isn't this guy in NAMA with huge debts?
How is he able to offer 6 million if his debts are still outstanding?

Peanut

Norwesterner wrote: »

According to todays press, Johnny Ronan offered 6 million to Bewleys lasy year, if they would vacate the premise (to allow Zara move in).
Isn't this guy in NAMA with huge debts?
How is he able to offer 6 million if his debts are still outstanding?

That offer "ended up in court at the peak of the property market" according to the Irish Times.

Must have been before this:

"22 JUNE 2005...The application for change of use of existing ground floor serving area at Westmoreland Street from use as a cafe to retail shop was thrown out. The board said the cafe was in an architectural conservation area with special provision for protected structures."

At least someone wasn't asleep at the wheel around that time..