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Financial stress placed on retail sector by upward rent requires immediate and urgent response

Issued : Tuesday 9 March, 2010

The purpose of this Bill is to recognise the serious burden placed upon businesses throughout the State, arising from the current decline in the economy, when faced with 'upwards only' commercial rent reviews. Right across Ireland shops are going out of business in virtually every village, town and city in the country.

Last year this issue was only partially addressed in the Land and Conveyancing Law Reform Act. However, changes with regard to the abolishment of upward only rent reviews only applied to leases which have only been agreed in the last week and has no application to existing business leases.

At that time during the Dáil debate last year, the Minister said 'it is important the house sends out a strong signal to the market, and particularly those ranked in commercial premises, that it better to get some rent than no rent at all. Putting people out on the street is in no one's interest.......I believed it was right for the Oireachtas to send a signal to exhort landlords to be as reasonable as possible in cases where traders were locked into, for example, a 35 year lease with upwards rent reviews. I wrote to all professional bodies in the property sector to exhort their members to deal reasonably and rationally in such cases...'

That signal, clearly, was not heard and rents have continued to increase..... quote rental figures.

It is now clear that this issue must be dealt with on a legislative basis given the emergency of the situation we now find ourselves in.

What the Bill will do

The Bill I bring before the House this evening recognises the crisis we are in and the need for emergency measures. The Bill empowers the Government, in the Public Interest, by order to grant temporary relief from the operation of existing upwards only rent reviews.

In summary, the Bill will establish an emergency period during which it will effectively prohibit the application of 'upward only' rent review clauses in business leases which will apply to both existing as well as new leases.

The retail sector

The Irish retail sector is the largest private industry in Ireland, representing over 24,000 stores and employing almost 280,000 people. In 2009, there were 30,000 job losses at a cost of €600 million to the state. In January and February of this year, there have been 38 insolvencies and additionally, 120 unlimited retailers have failed in the same period. Retail sale values were down by over 18% in 2009 and by most recent measurements are down by over 30% since 2007. Crucially, rent as a percentage of operating costs has increased beyond 20% for many shopping centre tenants while sales implode.

Yet in this collapsing market, landlords protected by an upward only rent review measure are looking for increases in rent in shopping centres such as Dundrum by 60%, the Pavilion Shopping centre in Swords by 100%, Monahan Shopping Centre by 46%, and in my own constituency of Cork South Central the landlord of the Wilton Shopping Centre is looking for increases of between 36% and 58% from hard pressed tenants.

This small sample represents an unrealistic world view in which landlords are actually ignoring economic realities and seeking extraordinary increases in rents. It is also becoming evident that the most exorbitant increases are being sought by property owners who are headed towards the NAMA process, perhaps hoping that an increase in rental yields will increase their NAMA valuation.

It is now beyond argument that the commercial property 'market' is not a 'market'. In a real market, demand meets supply and a price is derived. However, in the Irish commercial property market there is an oversupply of retail property and an under demand for it, yet rent prices continue to increase (reference IMF report).

A more appropriate description is that the Irish retail market is in fact a rental bubble just like its near relative, the property bubble.

Sustaining this rent bubble means that the single greatest cost facing businesses in the retail sector -- greater than energy costs, supplier costs, and most importantly employment costs, is meeting an unsustainable rent.

Emails
I would like to a moment to acknowledge the emails I have received over the last week in support of this evenings Bill and mention some of them.
(Cited in speech and found below at end of press release)

The question presented in each of these emails is, do we invest in creating a sustainable labour and business market, or do we instead invest in an unsustainable property rental bubble?

Legal Opinion & the Working Group

Any adaptations or changes with regard to property law must of course stand up to legal scrutiny. In preparing the Bill that I present before the house tonight, the Labour Party sought such examination and it is our legal advice that the Bill is robust and will pass the legal challenge. Whether it be in relation to constitutional matters or private property rights. What the Bill seeks to address is the emergency that has arisen in relation to upward only rent reviews and the substantial economic havoc that such provisions are causing, particularly to small and medium sized enterprises where rent reviews, normally occurring every 5 years are resulting in many companies having to be wound up, liquidators exercising special statutory powers to disclaim erroneous leases, and businesses effectively being abandoned creating a substantial loss of employment.

The government's response to this crisis has been two-fold. One has been to set up a working group and the other is to claim that there are legal obstacles prohibiting them from finding a solution.

It would appear that this government is always one working group or committee away from doing something. I understand that this working group is to make its first report on the 30th of June just before the Dáil goes in to summer recess which coincidently is almost a year to the day since the Minister first announced he was going to do something about the problem.

It is the view of the Labour Party that the financial stress being placed upon the retail sector by upward only rent reviews requires an immediate and urgent response and struggling businesses cannot wait that long.

The second matter regarding legal difficulties is one which was restated by the Taoiseach this afternoon. I would now like to re-echo the call made by my party leader Eamon Gilmore that the Minister lay before the house the legal advice he has from the Attorney General on this matter. Precedent has already been set on previous occasion whereby in a matter of such national importance a previous Attorney General placed his opinion into the public domain in the national interest. Any Attorney General whether then or now is ultimately a servant of government but their legal view is not one that should be held to be infallible.

As I have stated, it is the view of the Labour Party that our Bill is legally and constitutionally sound and any concerns that the Attorney General has with it should be placed before this house in the national interest given the seriousness of the matter we are debating this evening. Should the Minister accommodate this request, I in return would have no difficulty in responding by providing him with our own legal advice on the matter.

However, in the absence of the Attorney General's advice not being provided one can only assume as to the governments resistance to support this Bill this evening. One conclusion that could be drawn from a recent letter published by Professor David Gwyne Morgan of University College Cork in the National newspapers last week, when he said, 'No doubt, it is a happy coincidence that the establishment view of things coincides with the interests of banks, which have advanced money to landlords to acquire premises on the basis of existing rent levels: the banks' interests would be damaged by a change which would reduce rents.'

Further to this point by Professor Gwyne Morgan, and in relation to the working group set up by the Minister, is it also just a convenience or a coincidence that the timing of their report will be after the valuation of the NAMA portfolios have commenced?

Call on Government to support the Bill

This Bill will be debated over the next two evenings. It is my hope that the government will not oppose it. Concerns with regard to any legislation can be dealt with by amendment as is the norm, and I would request that the government would approach the legislation I bring before the house in this fashion.

Conclusion

As we debate the Bill this evening, jobs are haemorrhaging in the retail sector due to overpriced and inflexible commercial rents. This evening the government has an opportunity to show that it will put people and jobs first and make a real effort in reducing the live register.

The wholesale and retail sector was the largest employment sector of the Irish economy in 2009 when it employed just over 307,000. One year later, with nearly 30,000 jobs being lost in this sector alone, the situation is getting worse day by day. We have recently seen significant job losses in Arnotts, Debenhams, Superquinn, and Hughes and Hughes, all reputable companies, amongst many other major retail employers in jeopardy due to unsustainable upward rent reviews. We are also witnessing a situation where employees are having their working week reduced in order to compensate for the costs of an over valued rental bubble. This government needs to wake up to the fact that high rents are costing jobs, reducing both businesses and workers incomes, and contributing to the stagnation of this economy. A commercial property market which has an upwards only rent clause for existing business is unfair, unrealistic, and ultimately uncompetitive.

Emails

We are all aware of the very serious situation facing many progressive indigenous businesses, particularly retailers and their staff, who have been caught in a upward only rental system that clearly does not work. Throughout the Tiger years, this community was not one that accumulated wealth, but one that spread it to the far corners of society. The last time we had such a crisis led to the formation of the Land League and the many reforms that ensued.
PJ Timmins, Chief Executive
Clery & Co.
O'Connell Street, Dublin

The application of an upward-only lease clause of my lease has just resulted in me closing my shop with the loss of 6 jobs. We are now working hard to try and re-locate our business to an alternate premise so we can continue to honour our financial commitments. I will probably lose my house as my landlord has now instigated litigation to recover the lease interest.
Kathryn Lynch, Sage &Stone
Navan, Co. Meath

We are an Irish manufacturing and retailing company based in North Dublin and employing 250 people. We operate 14 shops throughout the country. Throughout 2009 our management and staff have accepted a wage freeze and many of our suppliers have reduced their prices. The only cost that we have not been able to contain is rent. Rising rents amid falling sales threaten to undo all the good work we have done in growing this business from less than 20 employees to 250 over the last 10 years. Surely something can be done on an emergency basis to suspend unreasonable increases being sought by landlords availing of the patently flawed (and biased towards landlord) review mechanism?
Colm Sorensen, Managing Director
Butlers Chocolate Cafes, Dublin

We have been selling shoes in Ireland since 1916, we currently employ over one hundred people. We are making huge efforts to make our business survive through this current downward period but find that current rents and the upward only clause in our leases is the single biggest threat to our business.
Keith Rogers
ECCO Shoes
Blarney, Co. Cork

I employ 62 people in 8 coffee shops in shopping centres in Ireland, and have been in business sine 1983. The current economic downturn is the worst I have ever experienced and I fear that my company many not survive it. While some of my landlords have given rent reductions others have refused, and in one case in a large shopping centre in north Co. Dublin the landlord refused to negotiate on the rent review, the case went to arbitration and a rent of 72,000 for an 800sq. foot coffee shop was doubled to 144,000 by the arbitrator. I am now unable to pay this excessive rent or dispose of a lease with another 19 years left to run.
Brian Goff , Executive Inns Ltd.
La Croissanterie, Dublin

My wife and I run a small retail operation of ten units across Ireland. We are currently in the position where one rent review due to be conduction in March 2010 in which we have an upwards only clause in our lease, and the landlord despite the current economic climate is seeking a 50 to 60% increase in the existing rent. The effect of this increase could literally be the difference between survival and failure to our business in which we currently employ seventy people.
Colin and Siobhan Scully, Directors.
Loccitane Ireland
Dublin

I own a tile company that has 24 stores nationwide. We currently employ approximately 120 staff. We are currently being crippled by falling sales and increasing rents. We are facing situations where our sales have dropped by 50% and our landlords are looking for rent increases even though the market rents are falling. To keep doors open we need rent reductions not increases. We are currently looking at closing some of our other stores which unfortunately will lead to job losses but we will still be liable to pay these rents that are far in excess of current market rents. This could mean the whole company could close down if sales keep declining.
Chris Dineen
Right Price Tiles, Cork