Limerick East): I move: “That the Bill be now read a Second Time.”
The main purpose of this Bill is to bring about certain changes in the law that are made necessary by a judgment of the Supreme Court given in November 1980. The case involved was Gilsenan V. Foundry House Investments Limited and Rathmines Properties Limited and so far it has not been reported. Deputies may have heard the judgment referred to as the “Gilsenan” judgment.
The judgment bears on the determination of the rent that is payable under a "reversionary" lease, that is to say a renewal of a ground rent lease. The court found in effect that the existing statutory provisions for determining such a rent are unworkable. It will, I think, be helpful if I outline the background.
Ground rent tenants have, in general, the right either to buy out the ground landlord and acquire the fee simple, or to renew their leases for 99-year terms. Where the lease is renewed the rent payable remains a ground rent. However, it is related to the current open-market rent of the property in question and is usually very different from the rent payable under the previous lease, granted perhaps a century ago or even longer. The legislation provides a formula which relates the new rent to the rent which, in the opinion of the court, a willing lessee not already in occupation would give and a willing lessor would take for the land comprised in the reversionary lease. The new lease is, as I have said, for a 99-year term. The Supreme court, in arriving at the judgment I have mentioned, had had evidence that freely-negotiated leases of that kind are no longer entered into, that is to say, that a lessor would not now willingly grant a lease for a term as long as 99 years at a fixed rent. Without provision for rent reviews, no such willing lessor is to be found nor can any such rent be determined and on that basis the court found that the formula was inoperable.
There are two main consequences of that judgment. The first and obvious one is that — following "Gilsenan"— the courts are unable to determine the terms of the renewed or "reversionary" lease. Of course, the parties themselves can agree these terms but in a case where that agreement is not forthcoming, the tenant cannot exercise his statutory right to obtain the "reversionary" lease.
The other consequence is that — again in the absence of agreement between the parties — a ground rent tenant who wants to buy out the fee simple rather than get a "reversionary" lease cannot implement his right of purchase unless his lease has more than 15 years to run. The reason for this is that, where the lease has less than 15 years to run or where it has already expired, one of the considerations — perhaps the most important consideration — that bears on determination of the purchase price is the rent that would be reserved under a "reversionary" lease. Since as matters now stand that rent cannot be determined except by agreement between the parties, the purchase price of the fee simple likewise cannot be determined except by agreement in the cases I have mentioned.
It will be clear from what I have just said that the essential weakness in the system which was struck down by the Supreme Court was its lack of relevance to current market conditions. The obvious change that is necessary in order to permit the rent under a "reversionary" lease to be related to current market conditions is, of course, to introduce provision for reviews of the rent payable under such a lease. Consultation has established that there is fairly general agreement among those professionally concerned with the matter that the review period should be five years, that is to say, that the rent payable under a reversionary lease should be open to review, at the instance of either lessor or lessee, at intervals of not less than five years. Section 3 of the Bill proposes a change of this kind for future reversionary leases. The review of five years is the same as the review period that already applies to the rent payable under a renewed occupational tenancy.
The House will note that section 5 of the Bill proposes a similar change in respect of any sporting leases that are granted in the future. The law as it stands — in section 5 of the Landlord and Tennant (Amendment) Act, 1971 — already contains limited provision for reviews of the rent payable under sporting leases which, like reversionary leases, run for terms of 99 years. Where the terms of a sporting lease are fixed by the court the rent is subject to review, at the option of the lessor, after 24 years and thereafter at intervals of not less than 25 years and the rent itself is a "fair rent" that is determined in the light of a number of considerations.
The judgment of the Supreme Court with which we are concerned was not directly concerned with determination of rents under sporting leases. However, it is a possible inference from that judgment that no rent could be fair that could not be altered over such a lengthy period. Indeed, since a sporting lease may in certain circumstances be obtained up to 15 years before it commences to run, the rent initially fixed might stand for as long as 39 years from the time it was determined and the possibility arises that the rent-fixing provisions of the legislation could be held to be inoperable in relation to sporting leases also. Accordingly section 5 of the Bill provides for rent review periods of five years, at the instance of either lessor or lessee, in any future sporting leases whose rents fall to be fixed by the court. Existing sporting leases do not come within the scope of these proposals. It is reasonable to take the view that interference with existing leases is not warranted in the absence of a definite indication that the terms of such leases cannot be operated.
It may well be asked — indeed it has been asked — if determination of the rent under a reversionary lease has to become so cumbersome an affair, why the right to a reversionary lease should not simply be abolished. Why not leave ground rent tenants with the single remedy, that is to buy out the fee simple which, of course, they would have to do if the right to a renewed lease was abolished? The landlord and tenant code would be simplified; a step would be taken towards simplifying titles to land, and the persons concerned would be saved the worry and expense of frequent rent reviews.
This question has been considered carefully and full weight has been given to representations that have been made for that abolition. The conclusion that I have reached and that has been accepted by the Government is that, on balance, the right to a reversionary lease should be preserved. This is a right which certain tenants may find preferable to purchase of the fee simple and such a freedom of choice must be given some value.
Provision for the grant of reversionary leases would in any event continue to be necessary in special cases for example, ground rent leases made by harbour authorities where the right of purchase does not apply. However, the most important reason for preserving the right to a reversionary lease is the objection in principle that arises to the abolition of an existing legal right, with the consequence that the alternative right to buy out would become less a right than a matter of practical necessity.
I have referred to the bearing that the relevant judgment of the Supreme Court has on determination of the price of the fee simple where ground rent lessees are buying out and where their leases are expiring or have already expired. On this account, it was necessary to settle completely new provisions in the law. As I have said, the rent that would be reserved in a reversionary lease has hitherto been the most important consideration in determining purchase price in such cases. The introduction of five-year rent reviews under future reversionary leases raises an immediate problem as to how purchase price can be related to the rents in any objective manner. In fact this was quite impossible and a practical alternative had to be found.
Perhaps I might give an example as to how this difficulty would arise. Take a case where a tenant exercises his right to get a reversionary lease before termination of his present lease and where that lease would not commence to run for more than five years, that is, where the ground rent purchaser's existing lease has more than five years to run. In such a case no one can say what the commencing rent would be under that reversionary lease. A further difficulty, amounting almost to impossibility, is that of providing an objective basis for determining the present capital value, for the purpose of purchase, of a rent that is subject to unknowable variations every five years.
Because of these difficulties it was necessary to find some new basis for determining purchase price in these cases. The solution that is proposed is set out in section 7 of the Bill, specifically in subsection (4). This proposes that, where the purchaser's lease has expired or where a rent review is already due, the purchase price will normally be one-eighth of the current fee simple market value of the property in question, subject to the making of adjustments and allowances of the same kind as are made in determining the rent to be reserved in a reversionary lease. This closely parallels the existing law under which reversionary rents fall to be determined by the courts on the basis that they be one-eight of the open market rent of the property. In other words the proposed new formula provides, in terms of a purchase price, the same division of the property as between landlord and tenant as the old formula provides in terms of a rent.
At present the actual rent payable under a reversionary lease excludes any rental element arising from the value of the lessee's goodwill or from the lessee's own improvements. Similar exclusions are provided in the new formula in relation to purchase price. Furthermore, the rent under a reversionary lease is based on the rent of the property in its present use and with its existing buildings. In other words, that rent excludes any element attributable to development value and this is again reflected in the formula. One or two other technical provisions are also being included which we can explore, as appropriate, on Committee Stage and which are likewise designed faithfully to reflect, in terms of purchase price, the provisions of the law as it stands that bear on the matter.
I noted earlier that, under the law as it stands, the rent that would be reserved in a reversionary lease is the most important consideration that bears on purchase price where a ground rent lessee is buying out and where his lease is expiring, or has already expired. However, it is not the only consideration: there is quite a list of matters to which regard has to be had in determining price and these matters are again being listed in the Bill. However, as a drafting matter it was simpler to provide for the repeal and the re-enactment with amendments of the existing price provisions as contained in section 17 of the Landlord and Tenant (Ground Rents) (No. 2) Act, 1978, than to seek to amend section 17 and that is what the Bill proposes.
Certain other changes in section 17 are proposed, some of which I should mention now. It is proposed that the purchase price of the fee simple should in all cases be determined by reference to circumstances obtaining at the date the purchase application is made rather than being left to depend — at least in some cases — on the date of a final judicial determination where price is in dispute.
The new price formula that I have described is being applied not only to cases where the relevant lease is expiring or has expired but also to cases where a rent review is due within the 15 years. The reason is, of course, that where a rent review is due the price of the fee simple is influenced in the same way as if the lease were expiring. Finally, it is proposed that in the determination of purchase price in cases where the new formula will apply but where there is yet some time to run to the expiration of the relevant lease or to the rent review, as the case may be, that length of time should specifically be taken into account. This provision is in subsection (9) of section 7.
Deputies who are not altogether familiar with the landlord and tenant code may have some difficulty in relating the proposal I have just mentioned — in subsection (9) — to the sliding scale that is provided in the preceding subsection — subsection (8) — and a word of explanation may be in order. Subsection (8) represents mainly the re-enactment of provisions in section. 17 of the 1978 No. 2 Act, the provisions that provide for the determination of price according to a sliding scale. That price depends on the length of time to run under the lease at the existing rent and the scale goes from the lowest point — where the lease has more than 15 years to run and where the provisions for the formula maximum price apply — to the highest point, where the lease has run out or, as may be the case from now on, where a rent review is due. Subsection (9) on the other hand, while it also concerns cases where there is yet some time to run to expiration of the lease or to a rent review, yet concerns cases of a different kind, that is cases— business properties, for example— where the formula maximum price in subsection (5) does not apply. In such cases, therefore, we still have the high point of the scale, the point where a lease has run out or the time for a rent review has arrived, but we have no low point. In other words, no matter how many years there are to run on the lease of a business property, there is no formula for purchase price at the lower end of the scale. Accordingly, subsection (9) simply provides that where the lease has run to within 15 years of expiration or of a rent review the length of time still to run is to be taken into account in determining purchase price.
The proposals in the Bill that I have so far discussed are essentially contained in sections 3, 5 and 7. These sections comprise what I may call the heart of the Bill, that is, the proposals for rent reviews in reversionary leases and the proposals for a new price formula in certain cases of purchase of the fee simple.
The Bill also proposes, in sections 4, 8 and 13, a number of provisions ancillary to those proposals of which the most important — in sections 4 and 13— are designed to cater for cases where leasehold renewal or purchase of the fee simple has been held up in consequence of the Supreme Court judgment on foot of which the legislation arises. In some such cases at least it is possible that rights of renewal or of purchase could have been carried away by the passage of time alone and without default on the part of the party concerned. The Bill provides a further period of 12 months within which such rights may still be exercised following the coming into operation of the legislation and the removal of the difficulties that have imposed the delays.
In particular, section 13 of the Bill caters for any cases where a ground rent lessee, who would have preferred to buy out the fee simple, may have felt himself constrained to apply instead for a reversionary lease rather than see his lease run out and with it, perhaps, his right of purchase. Where such proceedings have not actually been concluded the lessee is being given the option of buying out instead, subject to recoupment of the other parties' costs. A 12-month limit is again being proposed in respect of this relief.
The Bill affords an opportunity to propose a number of miscellaneous improvements in the landlord and tenant code that have come to notice. Most of these are of a rather minor nature and since they would arise for discussion more appropriately at Committee Stage I think I need not go into them now. However, there are three such proposals of sufficient importance to warrant mention at this stage and perhaps I should refer to them at least briefly before I close. One — in section 9 — amounts to the recognition of a new class of ground rent tenant, or perhaps a better name would be a new sub-class, for the change that is proposed is not a great one. What section 9 proposes in effect is that where a yearly tenant can prove that the building on his property were erected by himself or his predecessors, and where otherwise he satisfies the necessary conditions, he will be recognised as a ground rent tenant, a recognition that carries with it the right to buy out the fee simple even though his yearly rent is not less than the rateable valuation of the property.
The second change is in section 14 which proposes an amendment of section 4 of the 1980 Landlord and Tenant Act. Section 4 of the 1980 Act while declaring the State to be exempt from the legislation nevertheless extends limited rights under the Act to persons to whom rights had already accrued before the State authority concerned became landlord. Such persons retain their right to a renewed tenancy, on one occasion only, and their right to compensation for any improvements already carried out.
It has come to notice that an anomaly could arise in applying the provisions of section 4 of the 1980 Act in a case where one State authority took over as landlord from another State authority. In such a case a tenant who had rights previously could acquire them, contrary to the intentions of section 4 of the 1980 Act. Section 14 of the Bill proposes, accordingly, that the rights I have mentioned will be preserved only in a case where a State authority becomes landlord of a tenanted property in which no State authority had any previous interest as landlord.
The last change is in section 15. It is proposed that section 15 will replace section 24 of the Landlord and Tenant (Amendment) Act, 1980. Section 24 of the 1980 Act provides for rent reviews under renewed occupational tenancies and the new proposals mean that following such a rent review the reviewed rent will run, not from the date the reviewed rent is fixed but from the date the rent review proceedings are commenced, provided the previous rent has run for the necessary minimum of five years. The change is being introduced in the interest of fairness. It could happen, for example, if protracted negotiations for a rent review were followed by protracted litigation, that a considerable time could elapse between the initiation of a rent review and the final determination of that rent of review.
As the law stands in section 24 of the Act of 1980, the reviewed rent could in such a case commence to run only from the date of the determination, even though that date is outside the control of either party to the tenancy. Under the proposals in section 15 of the Bill five years will continue to be the minimum period for which a rent will run before any alternation upon review. Likewise, if there is delay in initiating a review, the operation of the reviewed rent may be delayed for that reason as under the present law. However, that operation will no longer be subject to delay because of procedural delays. In principle the reviewed rent will run from the date of the review notice rather than from the date the rent is finally determined and the time for service of the review notice is being regulated accordingly. These amended provisions are also being provided in relation to the proposed rent reviews under future reversionary leases and sporting leases that I have described.
One thing that I ought, perhaps, to make clear is that, while certain amendments of the landlord and tenant code are being proposed over and above the changes that are made necessary by the judgement in the Gilsenan case, the Bill does not deal with ground rent purchase in any general way. In particular, the abolition of ground rents in any sense approaching that of confiscating the property of ground landlords is a matter that is outside the scope of this Bill.
This concludes my account of the main proposals in the Bill and I ask that it be given a Second Reading.
