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Upward Only Rent Rebuttal

Published on Apr 22 2013 9:57 AM in Food

Upward Only Rent Rebuttal

Last month, a High Court judge ruled that the rent payable by Bewley’s Oriental Café in Grafton Street, Dublin, to its landlord - which was previously perceived to be an upward-only agreement – must be allowed to fall in line with the currently depressed open-market rate. Gordon Hunt looks at the potentially huge implications for our industry.

Bewley’s Grafton Street landlord, Ickendel Limited, had claimed that it was entitled to five-yearly upward-only rent reviews on the historic site when its case with the famous cafe went before the courts, but now the landmark decision of Mr Justice Peter Charleton may prove significant for other hospitality businesses in Ireland. Yet, it is not as clear as a judge ripping up one Ireland’s most infamous contractual agreements. Not quite. Bewley’s argued that the lease – first entered into on 22 September 1987 with a term of 35 years (when rent was set at the equivalent of €213,000) – allows rents to fall in line with market values, as well as rise. It argued that the case was of “vital importance” to the financial survival of Bewley’s Grafton Street. Under the lease, rent was to be reviewed every five years, with the last review, in 2007, fixing a rent of roughly €1.5 million on the premises.

Bewley’s contended that the lease was a so-called ‘threshold lease’, that the initial rent was a base, and no subsequent review could lead to a rent below that level. The landlord felt that this was not the case, and that the rent could not fall below the immediate preceding rate – therefore, it could never fall, but it could hold. As recently as February, the Government ruled out holding a referendum to get rid of upward-only rent reviews. The Coalition abandoned its promise to deal with the problem of tenants being unable to reduce their rents after being warned that compensation would have to be paid to landlords. Attorney General Máire Whelan told the Cabinet that a change in the existing law would result in taxpayers having to pay compensation to landlords.

Dealing with these rental agreements was a core principle that both Labour and Fine Gael vowed to tackle, but after months of investigation, it was deemed an impossible task, much to the dismay of renters throughout Ireland. In the Bewley’s case, Charleton said, “Ickendel, as landlord, claims that the structure of the rent-review clause is that it is ratcheted up, step by step, for each review. The landlord accepts that should there be deflation, the rent fixed on one rent review to the next would not be increased. Bewley’s, as tenant, construes the clause in question in the context of the entire lease as being a threshold clause, whereby the first rent fixed in 1987 is the baseline below which a rent cannot go.”

Given two opposing interpretations of the same contract, Charleton stated that the proper approach would be to glean a response directly from the wording used, however, this didn’t lead to a particularly clear and defining victor. He placed emphasis on the interpretation of the word ‘preceding’, used to describe the comparative time for rent to be reviewed. From the landlord’s stance, Charleton argued, the word ‘immediately’ should be put before ‘preceding’ to clarify an exact time. From the tenant’s point of view, ‘original rent’ should be included to refer to a constant base point. Neither of these were done. Thus, a ruling could be argued for both sides, but Charleton found that a commercial view was needed to determine the dispute. “It is not in accordance with business sense that a rent appropriate to five years previously should govern a hospitality market markedly changed for the worse.” Essentially, Bewley’s is within its rights to seek a reduction not falling below the original 1987 figure. This won’t be the end of it, though.

A leading legal firm that represents commercial tenants in Dublin spoke to Hospitality Ireland immediately following the finding, wary of committing to too much until every ounce of the case could be gone through. Namawinelake, a blog that has quickly become an excellent source of news and opinion on all things Nama, is wary of this case, too. There will be, no doubt, appeals from the landlord. There is simply too much money at stake for either side to lie down just yet. Also, it seems to be a very specific case. The ambiguity garnered byCharleton from the original contract may be a very rare instance. Without access to all the contracts in Ireland, it is simply impossible to predict who else could make a similar case to Bewley’s. However, what is clear is that publicans and restaurateurs up and down the country tied in to suffocating deals that we blanketly call ‘upward only’, will no doubt be going through their agreements with a fine-tooth comb to establish what footing can be ensured.

Three retail businesses have so far benefited from the legal ruling set in the case, according to Retail Excellence Ireland’s David Fitzsimons, who has said that it has encouraged many businesses to assess their own rent agreements as to whether the word ‘immediate’ appears before the phrase ‘preceding rent’.

“In the case of Bewley’s,” Fitzsimons explained, “it didn’t have that word, and the judge said that the phrase ‘preceding rent’ could indeed be interpreted as the rent at the commencement of the lease, rather than that of the last five years. “It’s something that wouldn’t really stick out like a sore thumb, and many rent reviews with that wording have been and gone, and nobody has ever challenged it. This is obviously unique in that Bewley’s has stood up and decided to challenge it.” Fitzsimons said that it was unlikely that the decision would lead to a slew of follow-up cases coming before the courts, however, businesses that have a case are within their rights to not only demand a lower rent, but also to potentially seek recompense for periods in which they were overcharged.

The matter also came up during Dáil questions last month, with Minister for Justice Alan Shatter saying that while the Bewley’s judgement was “very interesting”, it did not shed “any further light” on resolving upward-only rent matters “in the context of constitutional issues”. The finding, in essence, represents limited hope. However, given the arduous task of dealing with such technical, legal and bureaucratic matters, hesitation on playing your hand is understandable. Initial reports called it a victory for struggling tenants, however, we have yet to be convinced.

This is a wait-and-see story.

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