On behalf of the Minister for Justice and Equality, who is unable to be here today, I would like to thank the Chairman for the opportunity to contribute to this debate. I would also like to thank Senator Quinn for the publication and tabling of this Bill and I would note in passing his exemplary record in terms of advancing Private Members’ Bills on a variety of useful and topical subjects.
While welcoming the opportunity to speak about the position in relation to upward only rent review clauses in commercial leases, I should say at the outset that the Government is opposing this Bill. Senators will be aware that the Government announced in December 2011 that it had decided not to proceed with legislation to abolish upward only rent reviews. It will be recalled that the proposals which were brought before Government at that time had the particular aim of providing relief for tenants whose businesses might otherwise be viable were it not for the adverse impact arising from the fact that the rent they were paying was significantly above prevailing market levels. However, points of conflict with the Constitution were identified during the development of that legislation and on the advice of the Attorney General it was not possible to proceed with it.
In particular, it was clear that in order to strengthen the ability of any retrospective legislation to survive a Constitutional challenge, provision would have to be made for a scheme of compensation to landlords. Payment of compensation is a factor which is also relevant under the European Convention on Human Rights. The rationale for such payment arises because in certain circumstances it would render lawful a restriction on property which would otherwise be unlawful. Given the current economic circumstances, the Government was strongly of the view that the payment of compensation to a particular sector of society could simply not be justified. In any event, it should also be noted that the existence of a compensation scheme would not, in itself, have guaranteed that the proposed legislation would be proof against a Constitutional challenge.
It is appreciated that the decision which the Government made was, and continues to be, very disappointing for those who have campaigned for change in this area. I know it was also a particular disappointment to the Minister for Justice and Equality who devoted a substantial portion of time to attempt to address the issue. However, legislation could not be brought to the Oireachtas which the Attorney General indicated would not withstand a Constitutional challenge. More generally, the major constitutional complication with any model for legislative intervention in this area is that it interferes with leasehold relationships already entered into and it is a well established principle of constitutional law that legislative restrictions which affect property rights retrospectively are prima facie unjust. Of course, it is also the case that constitutional property rights are not absolute. However, there are a number of tests which must be applied if legislation is to be constitutionally compliant and this is where matters such as proportionality and non-discrimination come into play.
While it is accepted that in introducing this Bill Senator Quinn is motivated solely by good intentions and that he has been inspired by his own extensive experience in the retail sector, the Bill does not offer a workable solution which can actually be implemented. Compassion and a desire to help cannot change the reality of the legal constraints within which we must operate. We are all aware of the difficulties which confront the retail sector and small and medium enterprises at this time, but we have to be realistic in terms of acknowledging what we can and cannot do.
One of the key objectives of the Upward Only Rent (Clauses and Reviews) Bill 2013 is to bring about a change in the amount of rent which has been agreed as a result of a contractual arrangement which was freely entered into by the relevant parties. In this context, rent from commercial premises is undeniably property for the purposes of the relevant provisions of the Constitution. At its core, therefore, the Bill is an attempt to impose a restriction on the right to receive rent and inevitably necessitates a restriction on private property rights. It does not envisage a compensation scheme and takes no account of individual circumstances, be those the circumstances of the parties to the lease, or the circumstances in terms of character and profitability of the properties to which those leases relate.
Modern commercial leases are legal contracts which are freely negotiated by two willing parties, the landlord and the tenant. Those contracts impose considerable obligations on both parties and, in essence, reflect the legal bargain that both parties find acceptable. The Bill before the House takes a very broad-brush approach. We can all agree that some tenants in the retail sector are in difficulties and that those difficulties may be exacerbated by the fact that they are locked into legacy leases where there is a significant rental overhang. However, it is also the case that not all tenants are in financial or trading difficulties and, notwithstanding some of the baggage that may arise out of our history, regard must be had to the fact that some landlords have their own financial difficulties, for example, a landlord may be dependent on receipt of the contractually agreed rental income in order to discharge a mortgage obligation on the leased property. In purporting to treat all tenants equally by giving them the benefit of the Bill’s provisions there is a risk that some will be given a benefit which they do not need and that some landlords may suffer disproportionate disadvantage. Furthermore, the complexity of the financial arrangements which sometime underpin commercial lease arrangements is completely ignored in the Bill.
I should say a few words about the analogy which Senator Quinn attempts to draw in the Explanatory Memorandum to the Bill between this Bill and the various Financial Emergency Measures in the Public Interest Acts which have been introduced. It is indeed the case that these Acts represented an invasion of property rights. However, what was involved here was a regularisation of public funds as opposed to an intervention in private arrangements involving private individuals. Reference is also made to the Credit Institutions (Stabilisation) Act 2010 and to the Anglo Irish Bank Corporation Act 2009, but those pieces of legislation must be viewed in their own specific contexts and do not in themselves suggest a model which can be applied in relation to Upward Only Rent Review clauses.
Leaving legal considerations to one side, it is difficult to see how the Bill could work in practical terms. It focuses on rent review clauses and on the rent review process. However, rent review clauses vary in form and content. Typically, they specify who should initiate the review, the frequency of review, a procedure for determining the revised rent and a timetable for the taking of the necessary steps in the procedure. The parties may agree the reviewed rent to be paid. Absent agreement, the matter is usually referred to arbitration where the standard clause will mandate the arbitrator to determine the market rent for the premises. Separately, it may be provided that the revised rent cannot operate to allow the rent to fall below the rent originally agreed or that paid before the revision takes place. A rent review clause is unlikely to state that the rent should be at a level greater than the amount of the prevailing market rent although, in practice, that may be the effect of the clause. Thus, at a technical level, the construct upon which the Bill is based is flawed.
However, leaving technical matters to one side, and presupposing that the intention behind the Bill is that market rent should apply in the case of all leases entered into before 28 February 2010, there is no attempt made to address the consequences attendant upon the proposed legislative intervention. The impact of Section 2 of the Bill seems to mean that whenever it could be demonstrated that the current rent being paid on a property was above the market level, even if that was during the term of the contracted rent period, the collection of rent at levels above the market level would be rendered unenforceable. This is a recipe for uncertainty and chaos in the market.
Section 132 of the Land and Conveyancing Law Reform Act 2009, which applies to leases entered into on or after 28 February 2010, specifies that a lease which provides for the review of the rent payable under that lease shall be construed as providing that the rent payable following such review may be fixed at an amount which is less than, greater than or the same as the amount of rent payable immediately prior to the date on which the rent falls to be reviewed. That provision was framed in very neutral terms and, while prohibiting the use of Upward Only Rent Review Clauses, it did not dictate the level of rent payable by the parties. This is in contrast with the ethos which informs this Bill and which does not do justice to the realities of the commercial property market. In that context, the comparison which has been advanced with the private residential tenancy sector is not a valid one as the realities which underpin the commercial property market are somewhat different in kind.
There are other practical problems which the Bill would give rise to in that, having rendered the review mechanism unenforceable for a large number of leases, no new mechanism is proposed to settle how
market rent is to be determined and when such settlement is to take place. On one reading, it seems to allow those who are of the view that the rent they are paying is above market level to set their own tariff. This is simply not tenable.
There are also broader economic considerations which need to be borne in mind if the Bill, in its current form, were to be accepted. The investment climate has improved significantly within the last year. There is no doubt but that this is in part a response to the general air of certainty and stability which the Government has fostered. The proposals advanced by this Bill have the potential to reverse the gains which have been made and to create negative ripple effects in the wider economy which will not do anything to promote confidence and recovery in the retail sector. Acceptance of them would give rise to the very real possibility of long term reputational damage arising out of wholesale and disproportionate intervention in private contractual arrangements. It would also guarantee that the State would be mired in litigation for many years to come, with no certainty of a successful outcome.
We can all accept that this is a difficult time for the retail sector and there are many factors at play here, not least the broader global economy. At the end of the day, a revived economy is the best support that Government can offer to businesses and. Ministers, across a range of Departments, are working tirelessly to create a business-focused environment which is essential to the overall well-being of our commercial sector. Since coming into office, the Government has taken a series of actions to help enterprises to create jobs, and job creation continues to be a priority. Considerable work has been done by the Government to reverse the damage to our international reputation caused by the banking crisis and to improve our economic situation. The recent CSO employment statistics bear out the view that we are now moving in the right direction.
I would draw the attention of Senators to the Action Plan for Jobs which lies within the remit of the Minister for Jobs, Enterprise and Innovation. In recognising the importance of the retail sector to the economy, the 2013 Action Plan for Jobs contains a number of measures aimed at supporting that sector. These include an initiative to increase the number of small businesses trading on-line and an initiative to streamline business licence application procedures. The retail sector has been chosen to pilot a licensing initiative where an integrated licensing application system, incorporating up to 25 licences in the retail sector, will be developed. Employers in the retail sector can also avail of the JobsPlus initiative which provides financial assistance to employers who recruit people who have been out of work for 12 months or more. While retail growth is intrinsically linked to consumer demand and general economic performance, given the importance of the sector for generating employment in Ireland the Government has also established an Interdepartmental Group to consider further possible measures to assist the retail sector, which could potentially be included in the 2014 Action Plan for Jobs.
Attention is also drawn to the continuing action which is being taken to reduce the costs of doing business for all businesses, and which is intended to have a positive impact on areas such as energy, local authority rates, and the administrative burden involved in companies complying with Government regulations and tax systems.
Ultimately, the jobs which are essential to the economy will be created and maintained by successful businesses and the Government is restructuring the various supports for enterprise to help them grow and create jobs. The Government is committed to maintaining low business taxes and a favourable regulatory environment and will ensure that our policies keep pace with the way business is changing. Like many other countries around the world, Ireland has gone through a difficult time as a result of the global recession. However, we have acted responsibly in recognizing these difficulties and in putting in place a series of policies to build on our strengths and regain our position as an important hub for companies doing business in Europe.
It is also necessary to address the position of businesses which are in trouble, and in this regard Senators will be aware that the Companies Bill, 2012 amends the current law in order to facilitate access by small private companies to the examinership process which can be a valuable tool in terms of restoring viability to a company. The proposed amendment would allow such companies to apply directly to the Circuit Court to have an examiner appointed, rather than being required to apply to the High Court first, as is currently the case. It is hoped that the immediate impact of this change will be to lower the costs of an application and to provide greater accessibility for smaller private companies.
During the course of this speech I have dealt specifically with aspects of the Private Members’ Bill which is before us. I have also outlined, in general terms, some of the measures which the Government is taking to address the broad range of economic problems which confront the commercial sector.
I would now like to focus on one or two matters which are particular to the commercial property market. Senators will be aware that the Property Services (Regulation) Act 2011 provides for the establishment and maintenance of a Commercial Leases Database by the Property Services Regulatory Authority. This Database will assist in providing readily accessible, accurate information in order to determine the true level of rent payable in respect of comparable commercial properties. I understand that the Database will be operational shortly.
Finally, it will be recalled that, in tandem with the Government Decision not to proceed with legislation abolishing upward only rent reviews, NAMA issued a Guidance Note on Upward Only Commercial Leases which is intended to deal with situations where tenants of NAMA debtors could show that the rents they were paying were in excess of current market levels and, as a result, the viability of their business was threatened. In such circumstances, tenants were given an opportunity to seek NAMA’s approval for rent reductions. The most up to date figures which are available show that NAMA has received 312 applications for rent abatement of which 267 have been approved, 10 have been refused and the remaining 35 are under review. The aggregate annual value of these abatements is €17 million.
I would reiterate the importance which the Government attaches to a thriving retail sector and I would stress that the Government is committed to supporting that sector in all areas where such support is feasible. In relation to the rent review issue in historic leases, the Government has repeatedly urged that maximum flexibility be shown during the course of rent negotiations and has called upon all parties to act responsibly and in a way which takes full account of the broader national interest.
In conclusion, the Minister has asked that I acknowledge and thank Senator Quinn for the work undertaken on this Bill and for his engagement with the Minister. The Minister acknowledges Senator Quinn’s genuine interest and concerns relating to this difficult area. The Minister shares Senator Quinn’s view that, where possible, obstacles which stand in the way of an existing business remaining viable and employment being maintained should be removed and welcomes the fact that many landlords of commercial tenancies have voluntarily and constructively engaged with their commercial tenants and voluntary agreements have resulted in reduced rental payment to the benefit of landlords who retained good tenants and to the benefit of tenants who have remained in business. There are, of course, some who have failed to so constructively engage, businesses have closed and premises have remained empty for lengthy periods of time. In some instances, when eventually re-let at a substantially reduced rent, the sum payable, if agreed with the original tenant, would have facilitated him or her or a particular company continuing in business and enable the landlord receive a continuing stream of income. When genuine difficulties exist landlords should adopt a constructive approach and enter into dialogue with tenants. We have seen too many instances where rental reductions have only resulted when companies have gone into examinership, an event that could have been avoided by better and constructive engagement.
The Minister regrets that for the reasons given, he must oppose this Bill.