It can now be confirmed that the Land and Conveyancing Law Reform Bill 2006 was passed by the Dáil last night and will, when it is enacted, include the controversial Section 131 amendment rendering ineffective "upwards only" rent reviews. The only amendment of significance made to the original wording of the Section was the inclusion of a provision which exempts leases granted pursuant to agreements for lease which are in place prior to the coming into force of the Section. There is no provision for "contracting out" of the Section which many industry stakeholders had called for. The Bill now goes to the Seanad before being signed into law by the President. There is no definite timetable as to when the Minister for Justice intends to bring the Act and the Section into force. However, we believe that a January 2010 date is the most likely (with the exception of certain provisions dealing with enforcement of mortgages which may be brought in sooner). We will provide an update as soon as the Minister's intentions are clarified.
It is difficult to establish all of the implications of the Section at this stage but here are some preliminary observations:
- The Section does not operate retrospectively so the position of tenants under existing leases will not change. Industry observers have commented that the position of these tenants may in fact have deteriorated as the Section will now effectively create a "two tier market" for occupational leases with existing leases trading at a disadvantage.
- The Section introduces an uncertainty on the maintenance of the level of rental income streams in the future. This is likely to have an adverse impact on the valuation of properties and in particular investment properties with knock-on effects for the values of pension funds and "property backed" bank loans.
- In the absence of any provision to "contract out", free market negotiation on tenant concessions will be constrained. What effect the change will have on lettings which are currently under negotiation remains to be seen.
- Greater analysis of what is meant by a provision "which provides for the review of the rent payable" under a lease (which is not defined by the Section) will be required as the market already operates different models to allow for alterations of rent over the life of a lease and new ones may now be developed.
- Property owners with vacant space to let or contemplating sale and leasebacks may want to consider alternative strategies in light of the Section.
- Parties to "pre-fund" agreements may need to consider the impact of this Section on their respective obligations.
We are developing our own ideas on the issues that are likely to arise from the Section and if you feel that you may be affected by any of these please feel free to contact any of the Partners as we would be happy to discuss the options with you.
For ease we attach a link to the relevant amendment at Section 131.