Upwards only rent: original justification?

Rebelheart

Does anybody know the original justification behind the upwards only rent legislation? Some weeks ago, Seán O'Rourke on RTÉ was asking John Corcoran of Korkys about the original justification for such a law being passed but Corcoran didn't answer it.

It seems, in 2010, a really weird bit of legislation.

Anybody know the background to it?

baalthor

Rebelheart wrote: »

Does anybody know the original justification behind the upwards only rent legislation? Some weeks ago, Seán O'Rourke on RTÉ was asking John Corcoran
<SNIP>
It seems, in 2010, a really weird bit of legislation.

Anybody know the background to it?

I didn't think it was legislation;
just a condition of a private contract.
It probably has the same rationale as supermarket 'hello money'

Victor

Many of these properties are owned by insurance and pension companies as investments. As property is variable enough and fickle enough, a number of standard lease types predominate. These are primarily 35 year IRI (internally repairing and insuring) or FRI (fully repairing and insuring) leases. IRI is more suited to buildings in multiple occupation, e.g. a shopping centre with multiple tenants whereas FRI is more suited to standalone buildings, e.g. an office block in single occupancy.

These leases were made upwards only, because it was perceived that the market for these properties wouldn't be interested in properties that had fully floating rents.

The leases themselves aren't the whole problem, but rather the hoarding of the currently vacant properties with landlords refusing to let the properties at "modest" rents.

Also, many leases have break terms built in, e.g. there might be a term that the tenant can walk away after say 10 years, but that if they stay, the same lease continues.

There is room for reform, but I'm not sure if the retailers will get it all their own way.

Of course when things were going well, retailers were perfectly happy to pay exorbitant rents, so they could exclude their competitors.

dromdrom

It originally came about as a response to the high inflation in the U.K and Ireland, by granting upwards only rent reviews in a much more volatile inflationary environment it encouraged institutional investment in commercial property which was one of the stated development aims in the U.K post war. While upward only provision can seem archaic at times is does actually compare quite favorably with something like the French system (rent linked to a construction price inflation index and leases generally 7 years in duration) as it provides certainty for both sides and the rent will usually remain the same for each 5 year review period, most of the leases written in Ireland in the last few years contain break clauses in the lease at either the 1st or second review period so the upward only provision is not as big a factor any more.

ei.sdraob

well this whole "upward only rent review" is an example of how price controls/constraints are doomed to failure

and how they negatively affect businesses

baalthor

ei.sdraob wrote: »

well this whole "upward only rent review" is an example of how price controls/constraints are doomed to failure

and how they negatively affect businesses

Isn't that government price controls?
The rent agreements are a feature of private contracts and people are looking for government action to over-rule them.

ei.sdraob

baalthor wrote: »

Isn't that government price controls?
The rent agreements are a feature of private contracts and people are looking for government action to over-rule them.

government or private, both are bad ideas

price controls, price fixing call it whatever you want, never ends well

since someone will end-up paying the price one way or another

Victor

ei.sdraob wrote: »

price controls, price fixing

You do realise that these are two almost opposing, but fundamentally different concepts that just happen to share the word "price".

ei.sdraob

Victor wrote: »

You do realise that these are two almost opposing, but fundamentally different concepts that just happen to share the word "price".

its all the same concept of

interference in the market

dromdrom

ei.sdraob wrote: »

its all the same concept of

interference in the market

no
Not at all really, what it means is that you have you rent set for 5 years at the same level and the cost you pay for this is an upwards only rent review at the end of that 5 year period, nobody is interfering in the market and it is a contract between 2 consenting parties, it is just a mechanism for reducing transactional costs and providing business's with a level of certainty in the short to medium term allowing them to say with certainty what rental costs will be. So smiley faces aside how about actually having an informed opinion before contributing to the discussion.

brianwalshcork

dromdrom wrote: »

no
Not at all really, what it means is that you have you rent set for 5 years at the same level and the cost you pay for this is an upwards only rent review at the end of that 5 year period, nobody is interfering in the market and it is a contract between 2 consenting parties, it is just a mechanism for reducing transactional costs and providing business's with a level of certainty in the short to medium term allowing them to say with certainty what rental costs will be. So smiley faces aside how about actually having an informed opinion before contributing to the discussion.

Of course it's interfering in the market - it's setting a non negotiable minimum for the rent based on the previous five years.
In a free market why should the rent only go upwards or at best stay flat? (although that is effectively a rent decrease in real terms due to inflation).

dromdrom

brianwalshcork wrote: »

Of course it's interfering in the market - it's setting a non negotiable minimum for the rent based on the previous five years.
In a free market why should the rent only go upwards or at best stay flat? (although that is effectively a rent decrease in real terms due to inflation).

This is not a regulatory dictat, this is a contract negotiated between two consenting parties, if you do not want an upwards only rent review then you try to negotiate a break clause at review period but you in general you will pay a higher rent to reflect this or you can use a different type of contract (for example turnover lease ) , how is it a price control if there is no third party?

SkepticOne

dromdrom wrote: »

This is not a regulatory dictat, this is a contract negotiated between two consenting parties, if you do not want an upwards only rent review then you try to negotiate a break clause at review period but you in general you will pay a higher rent to reflect this or you can use a different type of contract (for example turnover lease ) , how is it a price control if there is no third party?

This is why I think recent announcements to ban upwards only rent reviews are fairly meaningless. If both parties decide it is not appropriate to have upwards only reviews then they can renegotiate the contract. The reason they do not do so is probably due to denial on the part of one of the parties as to the state of the market, in which case banning upwards only reviews will have no effect.

brianwalshcork

dromdrom wrote: »

This is not a regulatory dictat, this is a contract negotiated between two consenting parties, if you do not want an upwards only rent review then you try to negotiate a break clause at review period but you in general you will pay a higher rent to reflect this or you can use a different type of contract (for example turnover lease ) , how is it a price control if there is no third party?

I didn't say that it was price control , I said it was interefering with a free market. It was the norm (in my limited experience)- and that it puts an articificial floor under the rental prices.


I don't agree that if I don't want an upwards only rent review means that I should pay higher rental prices needs to change. Upwards only rent reviews favour the landlord not the tenant, so the landlord should offer below market rental initially, with the intention of making up the short term loss over the life of the lease.


I would consider upward only rent reviews to be sharp practice, and the new legislation, although useless to tenants with current leases, will prevent it in future.

dromdrom

brianwalshcork wrote: »

I didn't say that it was price control , I said it was interefering with a free market. It was the norm (in my limited experience)- and that it puts an articificial floor under the rental prices.


I don't agree that if I don't want an upwards only rent review means that I should pay higher rental prices needs to change. Upwards only rent reviews favour the landlord not the tenant, so the landlord should offer below market rental initially, with the intention of making up the short term loss over the life of the lease.


I would consider upward only rent reviews to be sharp practice, and the new legislation, although useless to tenants with current leases, will prevent it in future.

Sharp practice indicates that one of the parties is ill informed or naive, this is not the case , this is a contract between two willing and informed parties, just because circumstances change in the mean time to the detriment of one side does not mean that it is unfair, just poor luck, essentially if you don't like the idea of upward only rent reviews don't enter into a contract which stipulates this is how is to be set! there are alternatives its just that these are more expensive to operate and monitor