The Landlord and Tenant (Ground Rents) Bill 2005 is a short but vital Bill which proposes to protect the State's interests in property that has been acquired for industrial development purposes by IDA Ireland, Shannon Development and Údarás na Gaeltachta by including these bodies among the State authorities that are not bound by the Landlord and Tenant (Ground Rents)(No. 2) Act 1978.
Section 16 of the Industrial Development Act 1986 empowers IDA Ireland to purchase, lease and dispose of property for the establishment, development or maintenance of an industrial undertaking but for no other purpose. This was amended by the Industrial Development Act 1995 to permit IDA Ireland to dispose of properties for other purposes but only with the express consent of the Minister for Enterprise, Trade and Employment.
To comply with the requirement of the 1986 Act and for good estate management reasons, IDA Ireland adopted the practice of selling property by way of long lease, usually for a term of 999 years, with a covenant restricting the use of the land to manufacturing or the supply of internationally-traded services. The leases also contain provision for rent review which removes them from the scope of the provisions of the Landlord and Tenant Acts that entitle a leaseholder to acquire the fee simple. Acquisition of the fee simple under the Acts would result in the covenant restricting the use of the land being extinguished. IDA Ireland estimates that it has entered into over 700 such leases.
In December 1981, IDA Ireland granted a lease of a unit in one of its industrial estates to a client company which subsequently erected industrial premises on the land. The original client assigned its interest to a second company in 2000 which, in turn, granted a sub-lease to a third company in November 2004. The following day a notice of intention to acquire the fee simple interest was served on IDA Ireland by the third company. It transpired that the sub-lease had been structured in such a manner — entailing a term of 50 years plus one day, the payment of a fee and no provision for rent review — as to comply with the conditions in the Landlord and Tenant Acts entitling a lessee to acquire the fee simple. The second and third companies are connected companies.
IDA Ireland contested the application when it was heard before the county registrar on 7 April 2005 and the hearing was first adjourned to 18 April and subsequently to 17 May. However, senior counsel advised IDA Ireland that the sub-lease conferred a statutory entitlement to acquire the freehold interest. This was confirmed by advice provided to the Attorney General. On the basis of this advice, the IDA decided to negotiate a settlement and agreed a price for the conveyance of the fee simple. Having been advised by the Attorney General, I decided to grant my consent to this settlement to secure the best return to the Exchequer in the circumstances. The county registrar was informed of the proposed settlement at the resumed hearing on Tuesday, 17 May.
This case, which was first brought to my Department's attention on 2 March 2005, highlights that a legitimate scheme can be devised whereby sub-leases created by lessees can establish an entitlement for the sub-lessee to acquire the fee simple, thus extinguishing restrictive covenants in the head lease. This anomalous situation, whereby a sub-lessee can extinguish an agreement between the lessee and a third party, was noted by the Law Reform Commission in 1989 and again in 1992. This has serious implications for IDA Ireland both in the execution of its statutory functions and also in the possible loss of value to the State in any sale of its land assets. In addition, inquiries by my Department have shown that there are also similar implications for Shannon Free Airport Development Company and Údarás na Gaeltachta in the operation of their property functions related to their industrial development roles.
On learning of this issue, my Department immediately examined the matter, including initial examination of the legal and practical implications both in the specific case cited above and the general implications in respect of the impact on the role and effectiveness of the State's industrial development agencies and the assets they hold on behalf of the State. When these became clearer, the matter was brought to my attention on 13 April and a process was put in place to remedy the situation. This has led to the Bill which I am presenting to the Houses of the Oireachtas today.
High standard property solutions, both business parks and buildings, for both inward investment and indigenous enterprises are crucial for regional industrial development in Ireland. To provide attractive locations for such inward investment and indigenous enterprise, elaborate master plans have been drawn up for such estates. If individual tenants are entitled to purchase the fee simple, thereby circumventing the covenants in the original head leases, then the agencies concerned will not be able to ensure that such property continues to be used for the legislative purposes for which it was provided. In effect, the agencies' ability to control activities on their industrial estates will be undermined.
As well as giving rise to a situation whereby State assets are not being used for the purposes of each of the agencies' industrial development mandate, the agencies will also be faced with estate management issues in that they will not be able to enforce covenants such as "quiet enjoyment" on their estates. It is also unlikely that a tenant will continue to pay service charges if another occupier is not paying similar charges. There will also be a loss in the value of State assets. Using the sub-lease mechanism, the private sector may be put in a position to make substantial gains from property which was originally provided by Exchequer funding. There is a substantial difference in value between a freehold title and a leasehold title subject to covenants and it is clear that the valuation mechanism set out in the landlord and tenant legislation, which is based on a multiple of the ground rent, will not yield that value to the head lessor, in this case, the three named agencies.
The selling price sought by the agencies is determined by valuation, which is based on the existence of the restrictive user covenants. If the covenants cannot be enforced, the selling price of the land should be higher to reflect the freedom of the purchaser to use the land as he or she pleases. This may make the selling price unattractive to potential purchasers, including inward investment concerns, who intend to use the property for qualifying activities, and will consequently adversely affect the agencies' ability to carry out their industrial development functions.
The advice of the Attorney General was sought regarding the legislative action necessary to prevent the widespread use of the device employed in the case mentioned. The Attorney General has advised that an amendment be made to section 4 of the Landlord and Tenant (Ground Rents)(No. 2) Act 1978, which states, "This Act shall not bind a Minister of the Government, the Commissioners of Public Works in Ireland or the Irish Land Commission". The purpose of the amendment would be to include IDA Ireland, Shannon Development and Údarás na Gaeltachta among the "State authorities" that are not bound by the legislation.
IDA Ireland, Shannon Development and Údarás na Gaeltachta enter into leasehold arrangements in respect of their properties in the context of their industrial development functions. IDA Ireland has estimated its ownership of State property is at risk in regard to more than 700 leases. While the current application has been settled out of court, there is no guarantee that it will not act as a catalyst for similar cases. The Attorney General has advised that the proposed legislative amendment could not apply retrospectively where a notice of intention to acquire the fee simple in land leased from one of the agencies has been served.
Accordingly, considerable urgency attaches to securing early passage of the amending provision. I, therefore, urge all Members to support the Bill, the objective of which is to protect the interests of taxpayers and the State. The Bill was introduced with a view to its passage through both Houses of the Oireachtas in one day, and Presidential signature without delay. In view of the circumstances outlined, this is considered to be of the utmost urgency and necessity.
The Bill is short, containing only four sections. Section 1 defines the relevant Acts. Section 2 provides for the amendment of section 4 of the Landlord and Tenant (Ground Rents) (No. 2) Act 1978 by adding the Industrial Development Agency (Ireland), the Shannon Free Airport Development Company and Údarás na Gaeltachta to the list cited. The opportunity has also been taken to remove the reference to the Irish Land Commission, as it no longer exists. Section 3 provides the appropriate savers in respect of notice of intention or an application made regarding the acquisition of the fee simple before the passing of the Bill or any arbitration or appeal to the Circuit Court in respect of such a notice or application. Section 4 sets out the Short Title and the collective citation. I commend the Bill to the House and I thank the House for facilitating the presentation of the Bill.
