I would like to commend the Minister and his draftsmen for the way in which section 7 has been approached, in other words, re-enacting section 17 of the original 1978 Bill with amendments. The section as it stands is quite a complicated one, and certainly would have been very complicated indeed if section 17 of the original Bill had been amended by this one, which would necessitate looking back at the original section and trying to incorporate the amendments into it. This approach to sections of this kind is the proper one to adopt, and it should be done far more often. I am very glad indeed that this approach was adopted by the Minister.
Landlord and Tenant (Amendment) Bill, 1983: Committee and Final Stages.
I would like to add my welcome to that. It certainly improves the quality of legislation that this is done. I have a number of questions to ask the Minister on this section. As Senators will appreciate there are a lot of different subsections but I understand that under our Standing Orders we must take all section 7 together. Section 7 (3) (b) lists the things which should be taken into account by the arbitrator in determining what the purchase price would be in the event of section 7 coming into operation.
Section 7 (3) (b) should not be confused, in my opinion, with sections 8 and 9 which deal with a situation where a lease is about to expire. In this case we are talking about a situation where the lease is not about to expire but where there will be a rent review within 15 years. Section 7 (3) (b) says: "where at the relevent date the land is held under a lease which provides for an increased rent payeable within 15 years after that date". It appears to me that that would limit the arbitrator to a consideration under the section to cases where the rent review specifically provides for an increased rent which is written into the lease. It does not say "where at the relevant date the land is held under a lease which provides for the possibility of a rent increase or a review of the rent payable within 15 years". It speaks specifically about increased rent. In my opinion, in those circumstances, it will be confined to cases where the lease specifies that there will be a review of the rent and it will be increased to a particular amount, and that this section will not enable the arbitrator to consider the situation where there is a rent review coming up. That rent review might, for example, lead to a reduction in rent or it might lead to a confirmation of the rent, unlikely as that might be. In point of fact, if I was representing someone before an arbitrator, that point could be made. We seem to be limiting it only to cases where there is an increased rent limiting the ability of the arbitrator to take into account the enhanced value which arises as a result of a predetermined increased rent. It appears to me that this section needs an amendment to make clear what should be taken into account. It is quite obvious from the rest of the Bill what the Minister means to take into account is where at the relevant date the land is held under a lease which provides for a rent review within 15 years after that date rather than provides for an increased rent payable within 15 years after that date.
Limerick East): First, I would like to thank Senator Ryan for complimenting the draftsman for incorporating the full section from previous legislation. Senator O'Leary is right in his interpretation of the section. It is a rewrite of section 5 of the Landlord and Tenant Act, 1978 which says that subsection (3) shall not apply in the case of the lease which provides for an increased rent payable at any time within 15 years. It is a rewrite for drafting purposes of the same concept which is already contained in the 1978 Act.
Under that earlier Act the possibility of there being rent reviews was not a live issue. Here we are building in a situation where there are going to be rent reviews. Supposing there is a rent review schedule agreed in respect of a particular reversionary lease, and during the course of that reversionary lease an application is made to purchase the property, will the arbitrator be in a position to take into account when the next rent review is due? I appreciate that it might have been taken somewhere else, but in the context of what we are doing, which is providing for rent reviews, I think it fails to take that into account and it should be amended.
(Limerick East): My advice is that it is simply a redrafting of provisions that exist already and the difficulties the Senator envisages would not arise.
Is section 7 agreed.
I have a number of other points to make on this section which is the kernel of the Bill. I am grateful to the Minister for his statement of the position under subsection (3) (b). I would like to refer to subsection (4) (b) which sets out the amount of money which would be payable in respect of an expired lease, which is one-eighth of the value of the property which stands on the land. Then it goes on to say that a deduction from that should be made for an amount equal to the value of goodwill, if any, in the premises of the person acquiring the fee simple. This is a considerable change in landlord and tenant legislation. We are asking the arbitrator to value goodwill. Surely the valuation of goodwill which would be necessary in order to make that deduction is precisely the kind of imponderable which the Supreme Court were talking about when they said that they were not satisfied that the last enactment was workable. I would like to ask the Minister whether the imponderable contained in subsection (4) (b) might be so vague as to render the Bill not capable of being operated in the correct fashion.
(Limerick East): The original fraction in the thirties was one-quarter, in the fifties it became one-sixth, and in the 1967 Act it became one-eighth. The Minister has power to vary that fraction, but there is no intention to vary it at the moment. On the question of goodwill, the existing legislation has regard for that “without having regard to any goodwill which might exist in respect of the land”. It is a maintenance of that——
There is a very big difference. If you tell a person to value the interest in land and discard goodwill, you do not actually have to value the goodwill to arrive at the price. Here you are doing a different thing. You are valuing it by a mechanical means, saying the value of the property is divided by eight, and you deduct the goodwill from it. In order to do that you must arrive at what the goodwill is. In other words, we were telling people previously to ignore the goodwill, the valuation was done as if there was no goodwill whatsoever on the premises. Now we are doing a different thing, we are valuing it according to a mechanical method, saying the value of the property divided by one-eighth, and then we do a separate calculation to arrive at what the goodwill is so that we can deduct it from that amount. I know the intention is the same, but the Minister is attacking it from a different point of view. In the first case, he is valuing the property as if there was no goodwill whatsoever attached to the business, as if it was a new letting, but here he is going at it in a different way. He is valuing the property and then deducting the goodwill. Therefore it will be necessary in these cases to value the goodwill where it was not necessary under the old formula. That is precisely the point I am making. The arbitrator in arriving at a figure will now be under an obligation to value the goodwill where previously he was under the obligation to discard the possibility of the goodwill. This is the fundamental difference which exists in respect of the method included here. I say this not because I have any fear of arbitrators, but somebody might feel that an arbitrator had not done the job properly and it would ultimately go to court and we might have an unfortunate lacuna in the law on another occasion.
(Limerick East): Senator O'Leary's objection seems to be on the ground that the provision would be unworkable. The main problem which the Supreme Court addressed in the Gilsenan case was that it would be unworkable because you would not get a willing lessor to grant a lease for 99 years. On the question of goodwill, I presume goodwill is measurable but whether one would agree with the valuation put on it is another question. All I can do to help the Senator is to say that we have had representations from professional bodies involved in this area and they have not made any representations on this matter. One would expect that goodwill would have to be valued and one would have to measure goodwill under the 1980 Act but one might not agree with the findings of the arbitrator. It might end up in court and one might not necessarily agree with the findings of the court, but that does not mean it is not workable. It is a workable procedure. In working out the value and then applying the fraction of one-eighth, it would be necessary to allow for goodwill, and this is the mechanism being chosen to allow for it.
I take the point the Minister makes that it is not quite the same thing as saying that the possibilities are unworkable for different reasons. I accept that there is some validity in what he is saying. I would like to refer to subsection (4) (d) which pursues the matter further. The valuation of the property, divided by one-eighth, gives the valuation for the purposes of this section which says that in determining the amount referred to in paragraph 8, any addition to the value deriving from the contemplation of substantial rebuilding or a scheme of development shall be disregarded. Has the Minister considered whether it is possible to have an additional value which would not be disregarded, because it is not apparently included in this definition which would derive not from the contemplation of substantial rebuilding or from a scheme of development within the particular Act, but, for example, from a change of use? In the event of there being a change of use applied for and approved by the local authorities, that would be an addition to the value which would arrive as a result of a change of use, but according to the strict interpretation of subparagraph (4) (d) it would not be excluded because it would not be goodwill; it would just be an enhanced value from a property which arises as a result of a change of use. It would not arise as a result of goodwill; it would not arise as a result of the contemplation of substantial rebuilding because that may not arise. It may be a simple question of change of use or a scheme of development, but a simple change of use would not be a scheme of development under section 33 (1) (b), and subsections (1) and (2) of the 1980 Act.
In these circumstances, I would like to ask the Minister whether he is aware that the enhanced value which arises as a result of a change of use for example, or some other scheme of development which is not a scheme of development mentioned in section 33, will give rise to an increased value, which in turn will give rise to an increased cost in respect of the purchase of the fee simple.
(Limerick East): The ground landlord may not charge rent on foot of the tenant's own improvements to the property under section 35 (2) of the 1980 Act, and section 7 (4) (c) of the Bill proposed has a parallel provision. The rent under a reversionary lease excludes any element of development value under section 36 (1) of the 1980 Act. The new formula again reflects this in section 7 (4) (d) of the Bill, which is the one the Senator has in mind. The rent under a reversionary lease excludes any rental element attributable to the tenant's goodwill. This exclusion has been provided, as I mentioned already. On the question of development and the future costs of purchase of fee simple, this is dealing with particular cases of leases with less than 15 years to run. If there are rent reviews every five years, and if one of the determining factors in decided what the purchase price of the fee simple is to be is the rent, and consequently if the rent reviews change the rent, there will be a change in the purchase of the fee simple once the one-eighth is applied. While prospective development would not change it, retrospectively after the next review I presume it would.
It is unfortunate that section 7 is so long but I will deal with subsections (8) and (9) together. I have two different points to make. I am very grateful to the Minister for explaining why the different system is used. Of course, some consideration should be given in the future as to whether this differentiation of business purposes and non-business purposes is a valid distinction. I wonder, is it? For the moment, we will accept that it is. I would like to refer to subsection (8) (c) which says:
the purchase price shall not exceed the amount which would be determined under subsection (5) if the land were land to which the subsection applied, together with, in respect of each year by which the unexpired term (reckoned from that date) and of the lease falls short of fifteen years, one fifteenth of the difference between that price and the price that would be determined under subsection (4) if the lease had expired.
That really means that in the case of a lease which would have seven years to run, the price would be an amalgamation of the seven-fifteenths of the existing purchase price on the basis of the existing rent, and eight-fifteenths of the purchase price as calculated under the revised rent. It appears that in those circumstances we are giving an additional benefit to the landlord in that we do not appear to be discounting the value of the one-fifteenth.
(Limerick East): It is a sliding scale provision. The nearer you go to the next revision, the bigger the increase in the rent and the purchase price will be. Since the main factor in determining purchase price is the actual rent, the bigger the rent will be. The determining factor will be the size of the rent as against the purchasing price. It is better to take the date of application rather than the date of determination. It is fairer to both landlord and tenant if that is the fixed date because there is a greater variation if we take a later date.
I thank the Minister for that, but he is confirming what I thought would be the case, this is a sliding scale and the further back you go from the rent review the less the purchase price is going to be and the nearer to it you are the more it is going to be. With seven years to run to the rent review, the increased purchase price will reflect the fact that in seven years time there will be a rent review.
(Limerick East): Five years.
No. It deals with leases which will expire within 15 years.
(Limerick East): Existing leases would have 15 years to run.
What I am maintaining is that to give the landlord the benefit of the full value of his renewal with five, six or seven years to run is to discount inflation and the fact that the landlord would have the use of the money during those five or six years. You are giving him the full value and you are not discounting the fact that he would have possession of that money for five or six years. That is a point I would like to make to the Minister, although he may not agree with me.
(Limerick East): The formula is a maximum which will not be exceeded. It is up to the arbitrator to make that kind of variation if he sees it that way.
That helps me considerably. I think that is excellent. It is valuable to have it on the record of the House that it is open to the arbitrator to make that adjustment if that is the case.
There is one other point I would like to make on section 7, subsection (9) (a). The Minister has already dealt with why the formula is not repeated as exists in subsection (8). Subsection (9) (a) reads:
the length of time to run from that date to the expiration of the lease or to the earliest date from which the rent as so reviewed may be payable, as the case may be.
Will that give rise to difficulty on the basis of it being uncertain? There does not appear to be any instructions to the arbitrator as distinct from subsection (8).
(Limerick East): We do not think such uncertainties would be the first gale day after the five years from which the rent would run. It would be the operable date.
I would like to commend the Minister for this section which is particularly welcome.