The Ireland Chapter fourth edition of the Real Estate Law Review published by Law Business Research Ltd in February 2015 was written by Kevin Hoy, partner and head of our Real Estate team. To view the chapter as it originally appeared, click the document link to the right.
To download an eBook or PDF version of the entire Real Estate Law Review, please click here.
Introduction to the Legal Framework
The Republic of Ireland is a unitary state with a common law legal system, a written constitution and a parliamentary democracy. Primary legislation is in the form of acts of the Oireachtas (the Irish parliament) and secondary legislation is by statutory instruments, which may be issued by authorised bodies such as government ministers, and various other entities, such as the Property Registration Authority and the Law Society of Ireland.
i Ownership of real estate
The two most common forms of title are freehold (perpetual) and leasehold (for a specific term of years). The investment market is characterised by the landlord owning the freehold and the tenant having the occupier’s interest under a lease. Some properties, particularly in urban areas, have very long leasehold titles (e.g., 900 years). While not strictly speaking freehold, the investment market regards these as similar to freehold. Leases were used as well in certain commercial contexts (e.g., tax-based financings), and also because of concerns about whether positive covenants would bind subsequent freehold owners. The latter has been confirmed as being effective by the Land and Conveyancing Law Reform Act 2009 (2009 Act).
Previously, the most common form of structure in an office or commercial development was a lease of at least 25 years with an upward-only rent review every five years. Since 28 February 2010, new leases may not have upward-only rent reviews. Residential tenancies tend to be for far shorter periods (usually a year). The residential rental sector is subject to more regulation than the commercial sector, with the statutory Private Residential Tenancies Board operating a national tenancy registration system and resolving disputes.
ii System of registration
Ireland has two systems: Registry of Deeds and Land Registry. While both are operated by the Property Registration Authority, the consequence of the registration in each is quite different. The Registry of Deeds dates back to the 18th century and amounts to a mere register of documents. In other words, registration does not give any indication as to the effect of the documents and the quality of one’s title. The Land Registry was set up in the 19th century to enable the government of the day to acquire the often-complicated titles of indebted landlords and redistribute the property among mainly agrarian tenants.
The Land Registry record enabled everyone to start again, with the tenant getting a clear state-guaranteed title. The Land Registry record includes a map, the name of the legal owner and information about certain third-party rights. Some interests, such as leases with fewer than 20 years to run, cannot be registered in the Land Registry, and some matters (e.g., pipelines) can affect title without being registered. The policy of successive governments has been to have as much land registered in the Land Registry as possible, with a view, in part, to enabling e-conveyancing. Since June 2011, all transactions for value result in the purchaser applying for registration of the title in the Land Registry, even if up to then the title has been Registry of Deeds. If the disposition is voluntary in nature (e.g., a gift or a conveyance on the appointment of new trustees), there is no obligation to register a Registry of Deeds title in the Land Registry. The government hopes that, over time, all property in the state will consist of Land Registry title.
In 2012 the Property Services Regulatory Authority (PSRA) commenced its work, and in 2013 it started the Commercial Leases Database and the Residential Property Price Register. Local property tax (LPT) was introduced in May 2013, and includes a valuation register compiled by the Revenue Commissioners (but this is unlikely to be published). Water charges will come in for the residential sector in 2015. The commercial sector (indeed, all non-residential properties) has been paying for water for many years, as have some residential occupiers in rural areas.
iii Choice of law
The private international law principles that Ireland uses are influenced to a large degree by the law applicable in England and Wales and international treaties. The usual approach to property matters is that the lex situs applies (the law of the place where the real estate is located). There is no prohibition on endeavouring to deal with Irish real estate matters in a document governed by the law of another jurisdiction, but to avoid any issues on registration or enforcement it is advisable to have an Irish law document to govern Irish real estate matters.
Overview of Real Estate Activity
2014 has seen a huge increase in activity, as well as increases in rents and capital values. The rating agencies continue to be more positive, and Ireland has successfully re-entered the international bond markets, as well as renegotiated its bailout terms so that it can now refinance the most expensive bailout loans without having to pay down the other elements of the rescue package. The National Asset Management Agency (NAMA) is continuing to release Irish assets into the market and to provide stapled finance in some cases. In a new departure, NAMA is to spearhead the drive for new residential properties, as well as providing development opportunities in Dublin’s ‘Silicon Docks’ area.
Stamp duty on commercial property at a rate of 2 per cent has encouraged transactional activity. The window for qualifying for the seven-year capital gains tax holiday closed on 31 December 2014, but structures such as qualifying investor alternative investment funds mean that there are still opportunities for tax planning. While Ireland’s primary deficit still needs work, the major risk now seems to be external, and particularly what happens in the rest of the eurozone. Most Irish people aspire to own their own home, but although the residential rented market constitutes a minority of the overall housing stock, its market share is growing. Foreign investors are becoming substantial owners of residential assets. For example, the Canadian firm CAPREIT bought four apartment blocks in various parts of Dublin in 2013 and successfully launched the first REIT in Ireland (or the UK) that concentrates on residential assets, iRES, in 2014.
There are positive economic indicators, and international commentators have noted that Ireland is performing well.
Irish banks were heavily exposed to property loans. One of the main government responses to the crisis was the establishment of NAMA, which took over most land loans, development loans and related loans extended by Irish banks. This transfer took place regardless of the location of the asset, although the legislation cannot override any relevant law in the jurisdiction where the property is located.
Some foreign banks (such as RBS, Lloyds Bank and Rabobank) operated in Ireland. As a result, some Irish assets are funded by foreign banks and are not within NAMA’s ambit, while some foreign assets are funded by Irish banks and therefore are in effect controlled by NAMA. NAMA has been encouraging borrowers to sell assets to try to rebalance the property funding situation. Irish banks are shrinking their balance sheets; this means they have less money to lend, and what money they do have may be tied up in refinancing existing commitments. RBS has indicated that it is committed to continuing its mainstream banking operations through its subsidiary Ulster Bank, Rabobank has in effect exited real estate finance except for some niche areas and Lloyds is continuing to wind down the Bank of Scotland (Ireland) loan book.
Development debt funding is starting, albeit at low loan-to-value ratios. Bank of Ireland has been particularly active in the commercial property sector. Office activity has increased as well, with interest from home and abroad. Banks (both Irish and foreign) and NAMA continue to sell portfolios of Irish property loans and Irish real estate. A new development in 2014 has been the sale of portfolios of residential properties by banks that had repossessed or enforced against the owners. Deutsche Bank acquired one such portfolio from Danske Bank, and Bank of Ireland is progressing another portfolio sale at the time of writing.
Ireland imposes no bar on foreign investment (other than any restrictions that may be required from time to time by UN sanctions). In fact, foreign direct investment is one of the country’s success stories. As a member of the European Union, Ireland cannot discriminate between its own citizens and those from other Member States exercising rights of establishment or free movement. Restrictions that had existed pre-EU membership have been repealed, although one may still see (and can safely ignore) references to these provisions in title documents. Foreign direct investment is a major part of the Irish economy, with many US multinationals basing their European headquarters in Ireland. Ireland was ranked as the best country in the world in which to do business by Forbes Magazine in December 2013.
Structuring the Investment
The use of various tax structures will include close scrutiny of applicable double-taxation agreements if the transaction is international. Property-based tax incentives played a role in fuelling asset price increases over many years. These reliefs will expire over time. The real estate investment trust (REIT) structure was introduced in 2013 as part of an overall review of what Ireland needs to do to encourage foreign investment. To date, three Irish REITs have been formed.
Ireland operates a system of 12.5 per cent corporation tax on trading income. Passive investment income is charged at a rate of 25 per cent. Capital gains tax applies (subject to an inflation protector) at a rate of 33 per cent. There is also a transaction tax known as stamp duty. The rate of stamp duty for commercial property has been reduced to 2 per cent.
Investors take different approaches to which legal structure to use depending on their particular circumstances. One may decide to hold the property directly in one’s own name or through a corporate entity such as a limited liability company. If more than one person is an owner then one may either have co-ownership, a partnership in which property ownership is the business or a limited partnership in which the limited partners are not allowed to participate in the management of the partnership business. More sophisticated investors may wish to avail of property unit trusts, regulated property funds and unregulated property funds. While an Irish REIT is a corporate entity (it must be a plc quoted on the main exchange in an EU country) it has the benefit of particular tax treatment, unlike most corporate vehicles. Sometimes a joint venture arrangement will be documented as a matter of contract rather than setting up a separate joint venture vehicle. As with any legal arrangement, appropriate articulation of the parameters of the agreement is very important, as the document should reflect each party’s understanding of what the arrangement will be and how any disagreements will be resolved.
Real Estate Ownership
Any development (which includes physical work as well as change of use) requires planning permission from the local planning authority. A fast-track process with An Bórd Pleanála (the Planning Board) applies in the case of strategic infrastructure. Development must also comply with building control and fire regulations and disability access requirements. If dissatisfied with a local planning authority decision, one may appeal to An Bórd Pleanála. In 2015, the Docklands area of Dublin should benefit from a strategic development zone (SDZ) authorisation, which will result in speedy planning decisions by Dublin City Council and no possibility of appeal to An Bórd Pleanála. NAMA has applied for permission for a major mixed-use development under the SDZ.
The Environmental Protection Agency deals with environmental activities and operates a licensing and enforcement system. Contaminated land that is not being used is not subject to any specific legislation, although general EU law applies and local authorities may serve notices under the Derelict Sites Act if buildings are in a bad state of repair. This may result in the owner having to repair the property or having it taken over by the local authority. To develop land that has been contaminated, substantial remediation works may be needed, and this is often dealt with in the conditions imposed by the planning permission.
VAT on real estate is a complicated area made more difficult by the proliferation of enforcement sales where the receiver and the bank do not know the VAT history of the property. The VAT rate is 23 per cent, but a rate of 13.5 per cent may apply in limited circumstances.
Stamp duty applies at a rate of 1 per cent (if the property is residential) on market value of up to €1 million and at 2 per cent above that amount. The rate is 2 per cent on commercial property. Stamp duty also arises in relation to commercial leases (1 per cent of the rent). The system has been substantially simplified and the rates lowered in recent years.
Local government is funded through a combination of central funds, local property tax (see below) and commercial rates. The local authority strikes a rate each year that when multiplied by the rateable valuation gives the rates bill. There are some reliefs for vacant property. Rates apply to commercial property.
As previously mentioned, LPT was introduced in Ireland in 2013 and is in reality a residential property tax, affecting all residential property in the state. Landlords are liable to pay the tax on rented property (unless the lease is for more than 20 years). LPT is an annual tax and charge on property. The tax rate is 0.18 per cent up to €1 million and 0.25 per cent thereafter.
The first valuation date of 1 May 2013 resulted in a valuation that applies to the end of 2016. Therefore, if there is an uplift in the property market generally or if improvements are made to the property, the impact of such on the value of the property will not flow through to the LPT bill until 2017. As there have been substantial increases in value in some parts of the country, it will be interesting to see if the basis for charging the tax becomes an issue in the general election, which must be held by April 2016 at the latest.
The household charge was abolished as of 1 January 2013, but any arrears will continue to be a charge on the property. Non-principal private residence (NPPR) has also been abolished. Unpaid NPPR will continue to be a charge on the property.
iv Finance and security
A charge can be created on land and buildings; this gives priority (once registered) against claims by any other party. An Irish incorporated company may also create floating security over general assets (which may include real property). This has a lower priority than fixed charges and also may require extra steps (such as registration in the Land Registry on crystallisation) to be fully effective in an enforcement situation. Individuals may create floating security in limited circumstances.
Leases of Business Premises
Because of the huge differences between the business context now and even seven years ago, the nature and content of commercial leases has been changing. Short-term leases (for up to five years) tend to provide that the tenant is responsible for the interior of the premises and the landlord is responsible for everything else, including the structure; the tenant supposedly pays a higher rent for this level of comfort. Longer-term leases usually provide that the tenant is responsible for everything.
The term of long-term commercial leases was 35 years, then became 25 years, then reduced to 20 years, and now can be anything between 10 and 20 years. Break clauses, which may enable a tenant to cancel a lease before the end of the term, and rent-free periods of between six and 12 months, have become more common. However, as demand has been increasing, the market is becoming more competitive and landlords need not be as generous in their terms. Leases usually include many restrictions on what the tenant can do, such as specifying the permitted use and obliging the tenant to contribute towards the ongoing operational costs in the case of any multi-occupancy development (such as an office block or shopping centre).
How rent is reviewed will be determined in accordance with the lease provisions. Leases created before March 2010 may have upward-only rent review clauses so that even if market rates fall, the previous rent will continue to apply. While there has been a ban on upward-only rent review clauses since 28 February 2010, clever drafting means that in some cases only the landlord may trigger a review; it remains to be seen whether the courts will give effect to such clauses.
Turnover rents and consumer price index (CPI) rent clauses are gaining in popularity. The legislation that outlawed upward-only review clauses did not carve out CPI provisions, therefore there is a risk that CPI clauses are not effective.
Multi-occupancy developments tend to have a management company to maintain common areas and provide common services, for which tenants pay a service charge. The government’s legislative programme includes a new Landlord and Tenant Bill, which will consolidate and update all existing legislation (although this had been scheduled for publication in previous years, so the priority the measure is getting is unclear).
Developments in Practice
The past few years have been traumatic for the Irish property market. Values fell by 60 per cent in general and by as much as 90 per cent for land with future development potential. Various indices indicate that prices are rising, particularly in Dublin. Volume is dramatically up. There is now a shortage of high-end office space, as well as houses and apartments. Increasing supply will be a key challenge in the coming year.
NAMA owns the loans of Irish banks for property and related matters but is not the owner of the underlying assets (although it can trigger a statutory process to become the owner in specific circumstances). The relevant legislation fixed the acquisition price based on the market value of the underlying assets in November 2009. Because property values continued to fall, NAMA has since faced substantial paper losses (comparing asset value with acquisition price). It has, however, announced plans to be in profit by 2020, when its mandate expires. The recent increases in real estate prices in parts of the country will facilitate this.
One of the basic principles of establishing NAMA was that it would be in a position to hold property in the longer term, thereby allowing for a recovery in market value. NAMA has been working with borrowers to ascertain whether they have viable business plans, what the framework might be for orderly disposal and whether anytransactions previously undertaken should be unwound. While NAMA has placed numerous entities into receivership, some business plans have been agreed. An element of its work has been to investigate transactions with connected persons. Some borrowers have been encouraged to unwind transactions with their spouses and children to make more assets available to NAMA for enforcement or repayment.
NAMA has recruited a substantial number of expert personnel to enable it to deal with the myriad matters that require its attention as the effective controller of shopping centres, housing estates, apartment complexes, office blocks, retail parks, warehouses, derelict sites, half-completed developments and fields. Substantial asset disposals in Ireland are expected to continue during 2015. NAMA has also funded some developers to complete projects and has a new mandate from the government to facilitate residential developments.
ii Lease market
Consider the example of a lease that started in 2006 with rent reviewed in 2011. If the 2011 market rent was higher than the 2006 contractual rent, the 2011 market rent would apply until the next review in 2016. However, if the 2011 market rent was less than the 2006 contractual rent, the 2006 contractual rent would continue to apply until 2016. Upward-only rent reviews had become a standard part of Irish commercial property life.
Upward-only rent reviews in new leases were abolished from 1 March 2010. A two-tier market emerged with older upward-only rent review leases being worth more to an investor (and less to a tenant) than a newer lease of the same property on the same terms without an upward-only rent review. Landlords have employed various methods to overcome the prohibition, such as having the landlord – rather than the tenant – trigger the review, so that if the market value were to fall, the landlord would not activate the review and the rent would stay the same.
In December 2011, the current government announced that, because of constitutional difficulties, it would not retrospectively abolish upward-only rent reviews. Substantial activity recommenced in the investment market in 2012, and this strengthened in 2013. While it might be unsettling for investors that retrospective legislation could have been contemplated, ultimately this must be a reassuring demonstration that the constitutional protection of private property is effective in Ireland.
There has been a substantial amount of litigation regarding banks’ powers of enforcement. The conveyancing legislation was updated in the 2009 Act. Because of a drafting oversight, the old law was not effectively continued for security granted before the new law came into effect, but the government has remedied this. The court protection system, known as examinership (see Section VII.iv, infra), has generated interesting case law on the circumstances in which an examiner can seek to disclaim an onerous lease. In December 2013, examinership became available in a less expensive format, and some use was made of this change in 2014. On enforcement generally, the courts have adopted a straightforward approach: the borrower owes the money and a defence must be substantial to delay summary judgment.
Allsop, the UK-based auction house, has organised a number of auctions, initially for Lloyds and then for others. The use of online tracking of bids and the disclosure of maximum reserved prices combined with a very effective publicity campaign have resulted in very successful auctions in terms of properties sold. Market observers were pleasantly surprised at the level of interest, the number of cash buyers and the sustained nature of that interest. One might have thought that after a successful first auction there might be difficulties, as the ‘mattress money’ would be used up, but instead each auction has been a success, and further auctions will take place in 2015. These auctions are also being increasingly used by other vendors.
One fundamental constraint in the market is the shortage of bank finance. NAMA and some banks occasionally provide, in effect, vendor financing whereby purchasers are facilitated in acquiring assets by the provision of loans by the enforcing institution.
For corporates, liquidation, receivership and examinership (a form of standstill that has some similarities with the US Chapter 11 process) exist. Personal bankruptcy rules had been little used because the term of bankruptcy has been at least 12 years. This resulted in some high-profile cases of borrowers emigrating to the UK (which has a one-year period), being declared bankrupt there, and then seeking to assert that bankruptcy scheme for their business dealings in Ireland.
Many expressed the view that Irish bankruptcy law was too onerous because of the length of the term (12 years), and that this was a serious impediment to commercial risk-taking. The discussion revolved around how to treat the honest person whose business fails. The government implemented the Personal Insolvency Act in 2013. The legislation introduced new concepts such as the debt relief notice, the debt settlement arrangement and the personal insolvency arrangement. Bankruptcy will end after three years, and the government has set up an Insolvency Service.
Multi-unit and individually owned living accommodation is a relatively new phenomenon in Ireland. Legislation came into force in 2011 (Multi-Unit Developments Act 2011) to try to better regulate this important sector of the residential accommodation market. The statute seeks to address difficulties that arose regarding transfer by the developer of common areas to a management company, ongoing control by the developer of the management company and the provision of services by the developer to a management company. Some developers had retained an apartment and thereby continued to retain control of the common areas. While elements of the new law will take time to implement in terms of developing a common approach among practitioners, the thrust of the legislation is to be welcomed and should help modernise the law relating to apartment owning in Ireland.
The government has implemented legislation that requires the publication of relevant information. Details of residential sales are available from the Residential Property Price Register produced by the PSRA, but at the moment there is no register of the value of commercial property transactions, so ascertaining market value can be difficult. The commercial register has lease details, but not sales information. The PSRA is also the new regulatory authority for estate agents (another innovation) and has the task of operating this register as well as taking over the functions of the Private Residential Tenancies oard. Better statistical information should enable vendors and purchasers to make more informed and accurate decisions on property investment.
Outlooks and Conclusions
In 2014, the property market in Ireland showed signs of growth and the beginnings of normal activity (e.g., house building). International investors have become important participants. A normal market is still some way off, but hopefully 2015 will see modest (in other words more sustainable) growth in capital values, more new homes and a balance of cash purchasers and debt-funded buyers.