JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht

Commercial Rents: Discussion.

Chairman

I welcome the following: Mr. John Corcoran, managing director of Korky's shoe shop; Mr. Colm Sorensen, managing director, Butler's Chocolates; Mr. Rory Benville, solicitor; and Mr. Nick Crawford, property consultant, representing the Grafton Street Tenants Association. I also welcome the following: Mr. David Fitzsimons, chief executive officer of Retail Excellence Ireland; Mr. Brian Goff of La Croissanterie; Mr. Frank O'Dwyer, chief executive officer of the Irish Association of Investment Managers; Mr. Peter Stapleton, managing director of Lisney and senior vice president of the Society of Chartered Surveyors, SCS; and Mr. Tom Dunne, chairman of the SCS working group and head of the school of real estate and construction economics at DIT.

Before we begin, I draw witnesses' attention to the fact that members of this committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I thank witnesses for appearing before the committee. Two other organisations were invited but declined to attend. They are Bank of Ireland Asset Management Limited and AIB Investment Managers Limited. The Irish Association of Investment Managers, which is present, represents a number of investment companies, including the two banks mentioned. However, BIAM and AIB Investment Managers Limited were specifically invited. It is their right to decline but I find it strange that they did so. The committee normally expects people who have been invited to attend, even if they may be constrained in what they can say. Mr. O'Dwyer will represent them and will clarify the position. The two banks have received significant funding from the Irish Exchequer and there is more to come. If I was being helped out in that way I would beat a path to the door of those helping me. I will write to the managers of the two subsidiary companies to express our disappointment that they have not attended. We will forward copies of the correspondence to the Minister for Finance, for his information, and to the chief executives of Bank of Ireland and AIB. I accept that they may not be able to comment. I also accept that the subsidiaries are totally divorced from the banks themselves but I would have liked them to attend.

I call on Mr. Corcoran to make his presentation.

Mr. John Corcoran

The Grafton Street Tenants Association, GSTA, is deeply honoured to have the opportunity to put our case to the committee. In 2008 Grafton Street became the fifth highest-rented street in the world. This extraordinary event, combined with 2% investment yields, which equates to 50 times rent, for Grafton Street freeholds was evidence of a major bubble both in rents and commercial property prices that subsequently burst with devastating consequences. The meteoric rise in Grafton Street rents sent a signal to the Irish investment market that there were supernormal profits to be made developing additional retail capacity and a major misallocation of capital resources was under way. This created a large oversupply of retail capacity throughout Ireland, much of which is now in NAMA.

As an example, the rent in Korky's, 47 Grafton Street, which has a ground floor area of 900 sq. ft., increased from €140,000 to €445,000 per annum during the period 1995-2005, an increase of 318%. Inflation during that period was 35% . Sales turnover for that period grew in line with inflation and not in line with rents. We estimate, conservatively, that the current rent is twice the real open market rent.

The upward-only rent review clause ensured that these rents could not fall. The landlord of this property, Canada Life-Great West Life, manages funds of $450 billion. The turnover of Korky's group is €6 million and it has lost in excess of €1 million in this shop. This is not sustainable and is typical of other shops on the street.

The upward-only rent review was the only lease offered to all tenants in at least the past 30 years. There was a stampede to escape from the street but there is no demand for these onerous leases. The landlords, who are mainly institutional landlords, refused to reduce rents even though they knew at all times that they were never sustainable in a small country with a population similar to Birmingham.

On 1 March 2010 the Government implemented a ban on upward-only rent review clauses in all future commercial leases. It is now accepted by Government that these clauses are contrary to public policy and they are no longer allowed by law. GSTA supported this reform and now we call on the Government to address the issue of the legacy upward-only rent review leases.

The Government's first priority is the maintenance and creation of jobs. Upward-only rent reviews have inflicted serious damage on the retail industry and businesses generally. The retail sector is the largest private sector employer in the economy. It represents over 24,000 stores and employs 280,000 people. In 2009 there were 30,000 job losses in the retail sector. Upward-only rent reviews have created an uncompetitive retail industry which has aided the flow of shoppers to Northern Ireland with a loss of jobs and State revenues. Small indigenous retailers are the most vulnerable. Vacant shops now blight the main streets in cities, towns and shopping centres throughout Ireland. The tourism industry is a major employer and the failure of many restaurants, gift shops and other tourism outlets because of upward-only rent reviews is damaging the infrastructure of this industry.

The ability of a business to adapt to changing circumstances is essential to its success. Upward-only rent leases have harmed the efficiency of the Irish economy by incentivising over-renting and restricting the mobility of companies and the natural filtering processes within markets. Many well regarded businesses failed in recent times, with a substantial loss of jobs, all citing excessive rents and the inflexibility of landlords as the main cause. These included Habitat, O'Briens Sandwich Bars, 3G, Vera Moda and Hughes and Hughes. Remaining tenants are paying rents that are clearly above their economic equilibrium. Tens of thousands of jobs are at risk.

The reform of the current system will bring Ireland into line with the rest of Europe and will result in a vibrant and sustainable retail sector which will maintain current jobs and create new ones. This will make our economy more competitive, help our ailing tourism industry and stimulate job creation. This reform will also increase the quantum of local authority rates and Government VAT and other tax receipts. Commercial property should be a service to trade and jobs, rather than dominating and devastating them. High street landlords are usually passive investors and do not create jobs or stimulate economic activity. Investment in Irish property represented 4% of Irish pension funds for the year 2009-10.

The disadvantages of upward-only rent reviews are as follows. They are out of step with the rest of Europe — no other country in mainland Europe would tolerate these nonsensical leases. They allocate macro-economic risk to the party least able to bear it with the big €450 billion outlet pushing the risk onto the €6 million outlet. They represent a barrier to entry for small businesses and inhibit their growth. They inflate rents and property prices — the property bubble was a direct consequence of their malign effect. They are anti-competitive and in effect price fixing where the price could not fall to the actual market rent. They interfere with the price mechanism. It is a fundamental rule of economics that prices can rise, fall or stay the same, but these leases unfortunately have their own special rules. They also distort investment choice and result in property investment being favoured over more productive assets.

Investors see upward-only rent review leases as a form of conventional bond where they are guaranteed a fixed income whereas in Europe investors see property leases as equities where the dividends can rise or fall. Upward-only rent reviews, particularly when tied to a long lease, mean that the landlord has little incentive to invest in the building structure to reduce depreciation and obsolescence, thus under-investing in the capital stock of the country. Retail tenants cannot adjust this cost and without this flexibility cannot compete in a modern dynamic environment. As a result, good businesses are closing and there are many more to come. In a falling or deflationary market, upward-only rent reviews discriminate against the incumbent firm in favour of new market entrants and create a two-tier rental system. If a landlord under-prices the rent at a rent review, then at the next review the landlord can recoup, whereas if a tenant is over-rented, as is now the case on Grafton Street, it could stay over-rented for the remainder of the lease which could be 25 years.

Chairman

Mr. Corcoran has just four more minutes. I must adhere rigidly to the time allocations and be fair to everybody.

Mr. John Corcoran

I have no problem with that.

I shall say just one thing about the rent review system. The definition of "market rent" should be the real and sustainable rent that the majority of tenants can pay. The current definition of market rent is a distortion of what an economist means by market rent. It has nothing to do with market rent.

We would make the following recommendations. There should be an exit or conversion strategy for tenants who are trapped in over-rented premises by payment of a premium to the landlord. Emergency legislation should be introduced for a period of two years to allow rents to float to their realistic level. There should be a directive that the landlords be obliged, on a mandatory basis, to grant upward-only rent review tenants an immediate rent review to open market rents or a mandatory break clause within six months.

The Oireachtas can act where it is in the "exigencies of the common good" and where required "by the principle of social justice" as set out in Articles 43.2.1° and 43.2.2° of the Constitution. The existing regime is clearly unfair as it locks tenants into a ratchet lease where rents have become exorbitant and bear no relationship to market rents. In a recent case involving the pharmacists — we used to have the highest drug costs in Europe — the High Court upheld the interference with contracts, with the judge stating "There is an exceptional threat to the economic well being of the state and its people".

The existing upward-only rent review leases allow the landlord to block or veto the orderly adjustment of the market. This should not be tolerated by this Government or any government in the world. We urge the Oireachtas to act quickly to resolve this problem and thereby protect employment and preserve State revenues.

Chairman

I thank Mr. Corcoran. I call Mr. Fitzsimons and remind him about the time restrictions.

Mr. David Fitzsimons

I understand and will be brief. I was previously invited to appear before the committee to speak about consumer pricing and supplier pricing into the Irish market. On the day, I mentioned that a number of large indigenous businesses would fail because of rent, which has indeed played out. We still find ourselves in the same position where rents are not reducing and indeed are increasing. Mr. Corcoran made the direct link between unemployment and rent, which is factual. Retailers are currently investing more than 20% of their turnover in rent, which is unheard of in Europe and the wider world. At the moment we invest 12% in labour. We could invest more in labour, but unfortunately it is the only lever available to the industry in order to reduce costs. Thus 30,000 people are on the dole with rents still increasing.

There are two fundamental issues. We have untenable rents in the Irish market and there is a lack of transparency at the time of rent review. It is quite easy for the landlord of a big shopping centre with 20 stores to pull aside one tenant, agree a new headline rent and rebate that increase back to the tenant in a private confidential side letter, thus allowing everybody else in that scheme to pay the new increased rent. That can be borne out with the following rent increases being sought: 110% in Dundrum Shopping Centre; 25% in Fairgreen Shopping Centre, Carlow; 46% in Monaghan Shopping Centre; 100% in the Pavilions Shopping Centre, Swords, owned by Chartered Land; and 58% in Wilton Shopping Centre, Cork. Thankfully Deputy Ciarán Lynch intervened personally in that case. It was supposed to be somewhat more — I believe 424% was quoted in the media, but some sanity was brought to bear.

There are a number of major issues in the market, primarily led by institutional landlords and big private property companies, including AIB Investment Managers, Alvonway Investments, Aviva, Ballymore Properties, Canada Life Assurance, Chartered Land, Clancourt Management, Eircom Superannuation Fund, GVR Estates Management Service, Harcourt Developments, Howard Euroscape, Irish Life Assurance, Lexeme Retail Property Group, Shipton Group in Cork and Treasury Holdings. We would like to see those 15 landlords working in better partnership with their tenants. Some of the aforementioned refuse to meet their tenants. As an industry we would like to go back to a full-serve industry where a customer walking into a pharmacy can be served by people and where a driver can go into a forecourt and find somebody to fill the car. At the moment we are moving towards a self-serve environment owing to rent. We want to invest in people and not property.

We earlier heard the term "commercial property market". We do not have a commercial property market. My colleague, Colm McCarthy, an economist, will bear this out. His fundamental understanding of a market is one where supply and demand meet at a point and a price is derived. At the moment we have over-supply and under-demand of property, and yet the price is going up. To call it a property market is a fallacy.

Some of the property interest groups will make the point about inward investment into the commercial property market and that interference may affect that negatively. There has not been inward investment into the commercial property market in Ireland in the past seven years, with the exception of the unfortunate pension fund which purchased the Tommy Hilfiger store on Grafton Street. The international property market and investors globally understand that we have an unsustainable and ridiculous property market.

Mr. Brian Goff

Thank you for the opportunity to address the committee. I have been a businessman since 1983 and have eight cafés operating in different shopping centres. I employ 65 people and my business has been profitable and sustainable for many years. However, current rent levels are strangling that business. Last month I had to close a store in one of the shopping centres and, for the first time, lay off six people. The rent in this centre equated to half my turnover which was obviously unsustainable. I had no choice but to buy my way out of the lease and let go the six members of staff.

Before this meeting I had a quick look at my accounts from ten years ago. In 2000, in the pre-Celtic tiger days, my rent as a percentage of turnover was 12%, that is, 12 cent out of every euro went on rent. Last year it equated to 21 cent. In a situation where normal profit levels would be 5% to 6% one can see where my business is going and it is not onward and upward. Unless something is done about current rental levels and the system of upward-only reviews in legacy leases, I and many others will go out of business. Our high streets will be depopulated, there will be more boarded up stores and the only operators who will be able to live with the rent levels are the large multinational businesses which can be found in any high street in Europe. Do we want our streets to become exactly like those in Britain and throughout Europe without any indigenous retailers or small businesses the likes of which all towns have had for many years? Unless something is done about the current rental levels and the legacy leases, this is what we will be left with.

I took time out of my day to attend this meeting because unless something is done, there will be more unemployment, more Irish companies going out of business and our economy will be left in an even sorrier state than it is currently in. I implore members to help us to achieve our objectives.

Mr. Frank O’Dwyer

I thank members for the opportunity to address them. At the beginning of the first quarter of this year members of the Irish Association of Investment Managers, IAIM, had invested more than €23 billion, on behalf of clients, in the Irish economy. This includes investments in Irish listed companies, Government bonds, cash deposits providing liquidity to Irish banks, investments in venture capital, in forestry and other alternative assets, and property. Every economist would place a different value, in employment terms and in terms of importance to the economy, on this level of investment, but it is unquestionably significant. It is also to a significant degree mobile, as other eurozone economies would provide suitable investment locations. This stake in Ireland makes the performance of the economy, consumer confidence and employment growth vital to the interests of many of our member firms.

The term "institutional investor" has connotations of nameless, faceless bodies focused on profit to the exclusion of the broader public interest. In reality, members of the IAIM do not invest a single penny on their own account or for their own book. The funds member firms manage on behalf of Irish residents are the retirement savings of the almost 1 million people who are members of occupational pension schemes, individual pension assets of self-employed people and the savings people make in education policies and other investment products. The funds we manage are not the private wealth of high net worth individuals. They belong to ordinary people.

It should not be surprising then that a cornerstone of the regulatory environment in which IAIM members, and similar institutions, operate is an absolute duty to act in the best interests of their clients. In most cases the institution acts in accordance with a specific investment mandate from its pension fund or life company client and it cannot breach that mandate by making decisions that would be detrimental to those interests. A pension fund's obligation is to make regular payments to pensioners and to do this it invests in a range of assets that will produce income. Rental income is a significant component of that cashflow. In addition, investment managers, on behalf of their clients, invest in a range of other asserts depending on the liability profile of the scheme.

Any transfer of benefit from a tenant who has contractually agreed to pay a certain level of rent cannot be undertaken lightly. The benefit is ultimately provided by pensioners, savers and pension scheme members. That said, there is a misconception that landlords set rental levels. Landlords can ask for exorbitant rents if they wish but, in practice, it is the tenant who decides what level of rent is offered given the use to which the building can be put. It is competition between tenants that pushes rents up and it is a lack of competition between tenants that causes rents to fall. Individual landlords cannot control the supply of space but individual tenants can decide the level of rent they wish to pay. They are not compelled to take space in a particular centre or street.

There is currently an over-supply of accommodation and tenant demand is generally weak, with the result that rents have fallen. Tenants have been able to negotiate more tenant-friendly leases and, even before the recent change in legislation which banned upward-only rent reviews in new leases, landlords were forced into agreeing to new types of arrangements, such as turnover rents, in response to market forces. In this way it can be seen that the rental market was beginning to self-correct.

We are concerned that perceptions are growing that Ireland is a country where there could be persistent legislative intervention in the market. This can impact on the capital market perception of Ireland by scaring off potential investors. Any new investor will examine the stability of the regulatory regime before proceeding. Rather than viewing international investors as competitors, local institutions consider it important for the recovery of our property market and economy that foreign investors enter the market as they will provide a new source of capital in a country where capital is in very short supply.

There is a strong perception that landlords are not engaging with retail tenants in the current difficult climate. That is untrue. In preparation for this meeting IAIM conducted, for the first time, an analysis of institutional investor portfolios. This was not a selective survey but rather an analysis of the full portfolios of seven of the larger institutional investors. These portfolios have a combined value of €5 billion and are estimated to account for 25% of the investment property market. Before I turn to this analysis it should be remembered that the key issue is that tenants' turnover has decreased as a result of the severe recession. CSO figures indicate that annual retail sales excluding motor trade decreased by 2.9% in 2008 and by a further 6.7% in 2009. As institutional investment in Ireland does not include motor show rooms or petrol stations, it is the appropriate measure to use. A recovery in retail sales would eliminate much of the problem facing some retailers. Given the likelihood of stabilisation of the economy in the later part of 2010 and a return to growth in 2011, it is anticipated that consumer spending will not recover until 2011. Retailers need to review their business model for 2010.

Retail sales in Ireland increased by more than 30% between 2001 and 2007. It is generally acknowledged that retail margins in the Irish market were extremely high during this period and that retailers, in general, should have entered the current downturn in a relatively good financial position. Trading difficulties have not been experienced across the board in institutional investment properties. However, applications for rent concessions are no longer unusual. The analysis of institutional portfolios I referred to covered 1,132 tenancies across the country. Of these, 619 were retail and the remainder office and industrial. Some 33% of tenants — or 207 — have sought concessions. This is obviously a concern particularly as pension schemes have already suffered a loss of 60% in the value of their property assets. These losses have forced businesses and workers to increase their contributions to fund pension schemes at a time when the best interests of the economy would be served by an increase in productive spending.

In recognition of the limited demand from new occupiers, and faced with the prospect of vacant properties, institutional investment managers have, on behalf of their clients, agreed to rent concessions to keep income flowing from their property assets. To grant a rent concession to a tenant, an investment manager needs to ensure that it is justified given that the income foregone will need to be made up by additional contributions by the schemes sponsors and members.

In evaluating a tenant's application for a rent concession, firms need to ensure they have the necessary financial information on which to base their decision. Of those who applied for a rent concession, 74% provided the information and engaged in an open and transparent manner, but for the 26% who did not, we could not progress their application. The asset manager will review the trading, profit and loss and balance sheet and other financial statements and notes including movements in capital and reserves and working capital, together with management accounts and cashflow statements.

The issues in assessing a tenant's application for a rent concession are complex. Turnover in some businesses may be subject to shrinking margins due to increased competition or due to a collapse in the demand for luxury goods. A decrease in turnover may be in line with similar businesses or a company may be suffering particularly because its buying missed new consumer trends. A reduction in turnover may also be the result of a decrease in footfall in a particular shopping centre; the landlord's response in that instance may be to improve turnover through a contribution to advertising or to improve the physical environment rather than a rent concession. Some retailer's business models may not suit the unit they are in.

Within a shopping centre some retailers may be able to move to smaller units that would reduce fixed costs without a significant impact on turnover. On prime high streets, some uses cannot sustain high level of rent. On Grafton Street 30 years ago there was furniture retailing in Cavendish's and fish in McConnell's, very different to the global retailers like River Island and Boots, which have the retailing model to sustain prime rents.

Retailing evolves and some uses end up off the prime high streets replaced by more profitable formats. In terms of employment, it does not matter whether the businesses are international or local, they both employ, they both reinvest in their businesses.

Retailers who expanded late in the economic cycle may be vulnerable; particularly those who paid large capital sums to purchase their leases from other tenants who wished to take advantage of the high demand for retail units in prime locations. In some locations on Grafton Street, for example, virtually all of the lettings in recent years were not on a vacant basis, new tenants approached existing tenants, often paying significant key money, reportedly up to €2 million, and the landlords saw none of that money. People who acquired such tenancies did so after advice and due consideration.

Tenants' balance sheets may not be strong enough to withstand two years' poor trading and reserves may be under pressure. In considering an application for a rent concession, reserves that have reduced as a result of further investment in the business will be viewed very differently to the situation where a reduction in reserves arises as a result of the payment of drawings to directors. In this later situation, a recapitalisation programme may be more appropriate response than a rent concession.

In this way it can be seen that the issue of reduced turnover is multi-factorial; rent which is a fixed cost usually accounting for 8% to 15% of turnover is one factor but there may other responses that are appropriate.

Institutional landlords are playing their part in sustaining retail enterprises and employment. Having engaged with the retail tenants who supplied the necessary financial information, member firms have been able to justify to their clients that rent concessions which should bridge this difficult period be granted in 77% of cases where financial information was provided.

The IAIM supports the Department of Justice, Equality and Law Reform working group and we will contribute in a full and open way to developing the transparency and openness necessary in the rental process.

Mr. Peter Stapleton

Our members in the Society of Chartered Surveyors act for landlords and tenants. We have no interest in the market other than wanting to see an active and properly functioning market.

The society has welcomed the Minister for Justice and Law Reform's announcement in recent weeks establishing a working group comprising all stakeholders to consider the rent review process. In April 2009, the society recommended this approach to the Minister. At that stage it was clear that we needed to develop greater cooperation and understanding between all stakeholders to identify solutions. These solutions must recognise all issues arising for rent reviews and difficulties encountered by landlords and tenants alike.

Rent reviews and rents generally have received enormous media commentary over the past year, with particular emphasis on the tenant perspective. Clearly, the current recession has affected the retail sector most seriously of all the commercial property sectors, which all have difficulties at this time. While there are issues for all commercial tenants, there are also issues for landlords, who are under pressure from their banks, policy-holders and pension fund trustees as appropriate.

It is incumbent on chartered surveyors, who are often the primary professional advisers to landlords and tenants, to assist Government when the market is facing a new reality. We are deeply involved in the marketplace and can advise how the current system for determining revised rents is operating, including the arbitration process. Moreover, we can advise how the process deals or otherwise with the inadequacy of information available to all parties involved.

The Society of Chartered Surveyors acknowledges the issues. Given the issues that have arisen, the society has set up a working party under Mr. Tom Dunne, a past SCS president and head of the school of real estate and construction economics at DIT to explore the matter. The working party includes the senior vice president of the society, two senior arbitrators, two surveyors who predominantly act for tenants, and two landlord surveyors.

Transparency is required for any market to work efficiently and the property market is no different. Businesses would be better able to plan if there was a national property database which recorded all transactions, sales, lettings, surrenders, assignments, rent reviews and lease variations. However, there may be an impediment to the establishment of such a database arising under data protection legislation affecting personal rather than company property. Removal of such an impediment, if one exists, should be dealt with urgently.

The society advocates total transparency in the property market and establishment of a national database to include comprehensive and complete information on all transactions including all the terms and conditions pertaining to a lease, and subsequent rent reviews, so that this information can be properly analysed and presented completely.

The Minister for Justice, Equality and Law Reform introduced legislation prohibiting upward only rent review clauses in leases signed after 28 February 2010. However, this does not address the more substantial problem of high rents fixed or negotiated under older leases. A two tier market has now been created comprising new leases from February 2010 and less flexible older leases at higher rents incorporating upward only rent reviews. The Minister has repeatedly stated that the Attorney General's advice that the retrospective application of a ban on upward only rent review clauses in older leases is not possible.

It is difficult to legislate for rents agreed or reviewed at a peak in the market cycle. A survey conducted by the Society of Chartered Surveyors in October 2009 confirmed that in the majority of cases where a tenant was able to demonstrate inability to adhere to the terms of the lease and where the future of their operation was viable with a more affordable rent, landlords had been willing to agree concessions in genuine cases. In cases where landlords and tenants have engaged professional advice, it has aided the process of due diligence to arrive at a mutually acceptable agreement.

The commercial property market is undergoing significant change and will eventually adapt to the new economic circumstances. However, the adoption of a measure that implies Government intervention could also give rise to a negative sentiment from investors. The Irish commercial property market competes on a global platform with all other countries. Implementation of a ban on upward-only rent reviews has already made Ireland a less attractive place to invest vis-à-vis the UK, where upward-only rent review clauses remain a feature of that market.

The process for resolving rent review disputes has been long established. Arbitration has been the primary mechanism through which the parties can have such disputes resolved. At its simplest, the role of the arbitrator is to hear the evidence of both sides and make an award purely on the basis of the evidence adduced. The arbitration process is governed by statute, hitherto the Arbitration Acts 1954-1998. The Arbitration Act 2010 will apply to those arbitrations commenced after 8 June 2010. The new legislation has been welcomed by the society as it provides for improvements to the process on two fronts. First, the new Act provides for "reasoned awards" which will show the parties how and why the decision was reached and the award made. Second, there is a provision for either party to challenge the appointment of an arbitrator, in advance of the commencement of the arbitration, if there is concern in regard to a perceived conflict or bias.

The Society of Chartered Surveyors provides an important service to the resolution of commercial rent review disputes by maintaining a panel of highly qualified chartered surveyors who are trained arbitrators and-or independent experts and can be appointed to resolve these disputes. These arbitrators and independent experts have the requisite relevant skills and experience to perform their functions to the highest standards. A minimum threshold of demonstrable and appropriate continuing professional development over a five year period is necessary to maintain membership of the panel.

The dispute resolution process has recently received some negative comment mainly arising from the lack of transparent market information available to all parties during the process. It is essential that confidence in the arbitration system as an efficient mechanism for resolution of commercial rent disputes is restored. It is understood that one of the focuses of the working group recently established by the Department of Justice, Equality and Law Reform will address this issue and the Society of Chartered Surveyors welcomes the opportunity to engage with all stakeholders on this matter.

Regarding VAT, landlords who attempt to rearrange lease agreements can find significant issues arising in terms of VAT legislation where, for example, the landlord is agreeable to reducing the rent in exchange for an extension of the lease term. Property professionals would welcome simplification of the VAT legislation, which was expected at the last review of the legislation.

It appears that many tenants are negotiating rental concessions but many are not. As leases are contractual and have been entered into by willing parties, the remedy must be negotiated by the same parties. The market has undergone major changes and new leases have become more flexible reflecting the changed circumstances in which stakeholders find themselves. Clearly we need more transparency in leases for all and the society recommends a national property database which would be for the greater good of all.

Chairman

I thank all the contributors and ask for members' questions.

Deputy Chris Andrews

I thank all the delegates for their presentations which were very interesting. It is a difficult time for everybody involved. I must give credit to Mr. O'Dwyer. He did a brave job in coming here because I cannot imagine him telling too many people in the pub exactly whom he represents. It is a difficult position for him to be in and I acknowledge that.

I refer to a point made by Mr. Fitzsimons of Retail Excellence Ireland who said pension funds have not invested in the commercial sector during the past seven years, apart from the Hilfiger store investment. He also asked whether it mattered who invests in businesses in Ireland or who the retailers are because, after all, they are investing and creating employment. It is very important to consider who makes investments. This is something which we, as a society, must consider because it reflects our identity, how we like to portray ourselves and how we feel about ourselves. This is not about cold hard figures but is still a very important aspect and should be borne in mind. Clearly, investment managers do not think like that but this is something about which we must be aware, as a society and as a political institution.

It was said also that landlords are willing to negotiate and that it was not true to say otherwise. I spoke to tenants who say landlords are not willing to speak to them. This concerns not only Retail Excellence Ireland, which has said that people do not talk to its members. That organisation mentioned some of the bigger shopping centres but even in the smaller ones, such as Donaghmede, the tenants are not being dealt with. The Society of Chartered Surveyors acknowledged that not all landlords are doing business. I cannot reconcile how Mr. O'Dwyer can say landlords are doing business when all evidence from every other sector shows clearly that not all of them are so doing. I mention Harcourt Developments in this regard.

It has got to the stage where perhaps we should look to naming and shaming landlords who do not deal with tenants and are not even willing to meet them. In the past we had a name and shame policy for people who were found guilty of littering. This is a much more serious offence. It might be useful to consider naming and shaming landlords who are not willing to talk.

Would landlords and tenants be willing to look at Labour Court intervention? That court's industrial relations system has worked well in employer-employee difficulties and disputes that arise and has served the country well. Would tenants and landlords support or see any merit in a similar system that would allow landlords and tenants to negotiate? This would help those caught in upward-only rent situations.

As somebody who has no association with the high finance people of the world, I cannot understand this. Looking at the presentation from the Grafton Street traders, I see that almost 20 shops in the Stephen's Green Shopping Centre are closed. For the life of me I cannot see how it would not be better for a landlord to say, "We will reduce the rent to half and we will have the half-loaf which is better than no loaf". Then 20 shops would be open and, at minimum, 20 people would work, even if only one person worked all day in each shop.

What would be the impact on pension funds if the Government were to introduce an exit mechanism for tenants? I realise this was touched upon. Do pension funds have loan obligations which might be affected adversely by Government involvement?

The presentation by the Society of Chartered Surveyors was very interesting. I welcome the working group which shows a willingness to be more open. There is a lack of openness and there has been a lack of transparency in respect of leases and the entire arbitration process. As Retail Excellence Ireland noted, there is a lack of comparable information. Mr. Fitzsimons spoke about a national database which is a welcome idea and should be considered. That would help in every way, perhaps even in residential cases, although that matter is not for today.

There are several questions in respect of arbitration. The delegates have an enormous amount of experience. What are Mr. Corcoran's views concerning contracting out provisions for leaseholders that would ensure that upward-only rent reviews would become optional instead of mandatory? Perhaps he might touch on those topics. That would ensure upward-only rent reviews would become optional instead of mandatory.

Chairman

Was there a question for everybody in the audience?

Mr. Frank O’Dwyer

I got around ten.

Chairman

It shows that Mr. O'Dwyer is the most popular man before the committee. We will begin with the questions relevant to him and go along the line. The rest of the witnesses should sharpen up in order to deal with the questions.

Mr. Frank O’Dwyer

I will go through the points in the order in which they were raised rather than those which may be the more important. A point was mentioned that institutional investors were not investing in Ireland. I do not believe, for example, a local institution has bought property on Grafton Street in the past decade. Some of the representatives from the Grafton Street body might know better. People were diversifying out of Ireland and investing in the UK, and there was a sense that property prices on Grafton Street were heating up too much.

Considering the role of institutional investors, some 30 years ago the common lease was 21 years and bank interest rates were 17%. The development of a 35-year lease with upward-only reviews facilitated the initial building of much of our office and shopping infrastructure in the 1970s. There is a role for the institutional investor.

The issue was raised as to whether it matters if the retailer is domestic or from overseas, and in this context it is not that institutional investors do not care. It is a question of whether it is practical to say that consumers will not allow themselves to avail of the latest brand name coming from London or Paris, or these large global brand names can be kept from the prime retail spaces, particularly in the capital city.

On the issue of institutions not talking to tenants and reconciling my statements with the anecdotal evidence from the Deputy, I mentioned that there are no figures available on the total pool of value in investment properties in Ireland. We believe we represent approximately 25% of it. No pension fund has loan obligations. The property investments of pension funds through investment managers are 100% equity-owned. Other property owners may have different pressures in that they may have high gearing and their attitude towards tenants may be motivated by different pressures. The institutional investor I represent invests on behalf of pension funds and savers in life companies with a particular focus.

With regard to the numbers I quoted on each of the seven large property-owning institutions and their total portfolios, we were in no doubt about the seriousness and care required in preparing the data because the results of the analysis were being presented to this committee. A third of retail tenants have made an approach and three quarters of those provided financial information. Of those, a further 75% got concessions.

Deputy Andrews mentioned a Labour Court type of arrangement between landlords and tenants. I suggest that this is the same broad pitch that the Minister for Justice, Equality and Law Reform is looking at evolving currently. There is an arbitration process and the working group is to look at how information from all sides can be available to facilitate a conclusion. That seems to be a very worthwhile exercise.

Deputy Chris Andrews

With regard to Grafton Street, what is the view on an index-linked rent review system rather than it being upward-only? Given that leases are becoming shorter, perhaps it would be more workable.

Mr. Frank O’Dwyer

That leads to a point made by the Deputy which I did not answer relating to the impact if we abolished the system or if there was an intervention. If an intervention occurred, there would be a significant reduction in pension fund investment in property in Ireland. The people in those funds seek a long-term commitment. It is difficult to say whether the index-linked system would work.

Deputy Chris Andrews

It is in other countries.

Mr. Frank O’Dwyer

In the UK they have something similar to Ireland with an opt-out clause. It is upward-only but properly advised tenants have the ability to opt in or out to an upward-only environment, which brings about certain flexibilities. In good times, when a rent is struck and there are four or five years of economic growth, the landlord is at a loss over four or five years and the tenant has gained. When the market is turning down, the position is reversed. My contention is that landlords are talking.

With regard to an index-only system, commitments have been made and pension funds have been planned in anticipation of future cashflows coming from tenancies. The take-up of such a system would probably depend on individual pension funds, the investors and the impact on the pension fund. I suspect there would be a view that it would be better to invest in Germany, France or somewhere else if an index-only system was pursued.

Mr. David Fitzsimons

There was an incorrect claim that the CSO produced data stating that the market was down 3% in retail sales value, excluding the motor trade. That is clearly way off the mark as the figure was 18.6% last year. The Irish Times believes we are now in a depression. Figures of 3% and 2% did not happen over the past couple of years.

Deputy Chris Andrews asked about rent reductions, specifically in the St. Stephen's Green Shopping Centre. There is actually a reward in seeing a tenant fail. There were a number of members in that shopping centre such as Tierney's, Sam McCauley's, Golden Discs and others. Our ex-board member Derek Hughes also had a business there. For a business seeking to exit a lease, a penalty must be paid which is most commonly two to two and a half years of rent. A member has closed the business in the centre but is still paying the rent and desperately trying to negotiate two years of rent. For certain landlords there is temporary reward in seeing a tenant fail, which is ridiculous.

We are in Dublin so I will provide an outline of what is happening with rent reductions. Going around the M50, one can start at Dundrum, move to the Square, Liffey Valley, Blanchardstown, the Pavilion in Swords, as well as the Jervis and Ilac shopping centres on the north side of Dublin and St. Stephen's Green on the south. I can categorically state that only one of those landlords — the eight primary shopping centre schemes in our capital city — has constructively sat down and looked at tenant numbers, reducing rent when a problem was noted.

Within that scheme our members are still failing. One member is paying €1.1 million for a box half the size of this committee room. In fairness to the landlord the rent was reduced to €780,000 but this was not enough and the gentleman in question has lost his life's work. At least that landlord is constructively meeting tenants. There may be meetings and production of data from other landlords but there is no constructive evidence of reductions being offered. The same applies to Cork, Limerick and around the country. We did not make up these names. The landlords must work in co-operation with their tenants but they are not doing so.

Mr. Peter Stapleton

There were a few questions addressed to me. Deputy Chris Andrews asked whether a process in the Labour Court would be appropriate in the case of rents. Some years ago an attempt was made to introduce that type of process in the United Kingdom through the Royal Institution of Chartered Surveyors. It was a recommended process but it never took off. We already have an established arbitration process, the entire structure is in place——

Deputy Chris Andrews

That process is clearly not working given that shops like these are closing down.

Mr. Peter Stapleton

The only reason it does not work is that there is a lack of transparency. That is where it begins and ends. The arbitrators are confined to dealing with the evidence put before them. They cannot simply decide what the rent will be but rather must be governed by the information before them. Arbitrators face a significant challenge given the proliferation of confidentiality clauses, side agreements and so on and the fact that the information is so fettered. They cannot obtain the information they need other than where there is a case for mandatory disclosure.

Deputy Andrews asked about indexation. A degree of indexation has become apparent in the current market. Many of the developments that have occurred in the market have done so without being forced by any particular legislative provision. There are now many turnover rent agreements and we are looking at indexation. The Deputy referred to the European model but the reality is that there are several models, including what are commonly known as 369 leases. The latter are common in France where, typically, the rent at the outset is a market rent, it is indexed up every three and six years as against our five and ten years and, at the end of the lease — after nine years — it goes back to the market rent. That is not a bad system. However, one must have one system or the other, one cannot pick and choose. Ultimately one must let the market decide.

Deputy Andrews also referred to various surveys that have been done in this area. We have carried out two surveys, one at the beginning of the summer and one just before Christmas. For these surveys we polled some 860 surveyors who were active in the marketplace and received a response from approximately 23%. In the summer poll some 85% of respondents indicated that their clients were getting a positive response to claims for a reduction in rents. In the later survey between 80% and 95% of respondents confirmed that variations were being granted.

There has been a significant focus at today's meeting on the problems in retail. There is clearly a problem there, but we have found that the area of commercial property dealing in which our members are involved stretches across the board to include industrial, office, retail, shopping centres and so on — the whole spectrum. There are problems in particular areas, including Grafton Street and in shopping centres. The difficulty with shopping centres is that there is a definite and controlled group of tenants. If the owner of the centre finds that one of the rents is reduced, it soon becomes like a pack of cards, with the whole centre collapsing.

There are many variations in the rents agreed on a confidential basis. The confidentiality of those agreements means the information is not available to the committee or other interested parties. Again, it is a question of lack of transparency. If we had full transparency there might be a different discussion today.

Mr. Brian Goff

Deputy Andrews referred to anecdotal evidence that the landlord of Donaghmede Shopping Centre is refusing to meet tenants at the centre. In my own case, I have requested rent concessions from all seven of my landlords. It was granted in two cases, in three cases there was an outright refusal and in the remaining two cases no decision is forthcoming, a situation that could drag on forever. Many of the surveys that have been done will indicate that a variation has been granted, but that variation could be as simple as specifying that the tenant, instead of paying rent quarterly in advance, may now pay it monthly in arrears. That qualifies as a variation in the lease but the tenant must pay the same amount of rent, albeit on a monthly rather than a quarterly basis.

There is a greater problem in the arbitration process than mere transparency. From tenants' point of view the process is deeply flawed. They have lost confidence in a process where the perception is that the odds are stacked in favour of the landlord against the tenant. It is more than a transparency problem. In shopping centres, for example, before making a decision that is seen as favourable to a tenant, arbitrators must think about their own position and about how that decision may affect the capital value of the centre. That puts the arbitrator in a difficult position and ensures the odds are stacked in favour of the landlord.

Mr. Frank O’Dwyer

Under the Competition Act, I am not in a position to tell the committee what the concessions are that were identified in our surveys. If I asked member firms about that I would be accused of facilitating a cartel. However, I was able to ask members that any concessions they gave should not include trivial elements such as changing rent from quarterly in advance to monthly in arrears. My advice was that concessions should predominantly reflect rent reductions. However, I accept there are many surveys.

Deputy Damien English

I may have to leave early for another meeting but I have several questions for the delegates. Mr. O'Dwyer said his members have a duty to operate in the best interests of their clients. If a tenant decides to leave there may be a penalty clause which covers two years or so but thereafter there may be difficulty in reletting the property or rents may generally reduce. As such, is there not a cut-off point at which it is clearly in the landlord's best interests to give the tenant a break, or is it the case that the majority of tenants have given guarantees that extend beyond two years? Is it commonplace for such guarantees to be given? I am aware of several cases where people have offered their homes as security against their rent. Will the delegates comment on that?

Mr. O'Dwyer indicated that some 20% of the 207 clients surveyed obtained a rent reduction of some type.

Mr. Frank O’Dwyer

No, I said that one third of tenants sought concessions. Of those, three quarters provided information——

Deputy Damien English

That equates to 20%.

Mr. Frank O’Dwyer

——and of those three quarters, a further 75% obtained concessions. To be fair, these figures are based only on those who applied for a concession.

Deputy Damien English

I accept that but the figure is difficult to accept because it suggests there are many tenants who are very comfortable with the rents they are currently paying. That seems doubtful. One might come to the conclusion that if they are not seeking rent reductions, then they are not good business people. Of the 67% of tenants that have apparently not sought a rent reduction, is it the case that they feel blocked from doing so or were they perhaps offered a rent reduction without having to ask? It is very strange that the percentage of those who have not sought a reduction is so high.

We are focusing on the retail sector today but there are 500 or more landlords with tenants in the office and commercial sectors. Are they getting reductions in office and industrial agreements? The cost of business is a major issue across the board rather than just the retail sector. Property is a serious cost as it relates to turnover, particularly if we consider the figures provided today, and we must address the matter.

What are the clients' feelings on a code of practice, which was referred to in Mr. Fitzsimons's presentation? Are Mr. O'Dwyer's clients against the idea of a code of practice? What are the feelings on having a register of lease information? I do not see anything wrong with that. The practices that forced rent up in the past were mentioned and this could be ended once and for all. What are the concerns of investors in that respect?

In the case where guarantees have been given or there is a penalty of two or three years of rent, have such clauses been enforced? How are they standing up legally and has there been any test? Have any of the personal guarantees been enforced and where do they stand legally?

Mr. Stapleton mentioned the national property database. Is that a common practice across Europe? It could be similar to a register of lease interests. What was stated with regard to the survey does not tally with what we are hearing. Did the survey find that a landlord would back down if a person was going to go out of business or if a guarantee or penalty clause is in place, is it worthwhile for the landlord to move the person on and have a guaranteed income for a couple of years while the landlord finds a new tenant?

On the logic of upward-only rent, did it come about because of demand? Some of the rents on Grafton Street went from €100,000 to €400,000 in a couple of years, which was lunacy. I do not see how any business could sustain it. I suppose we are where we are.

Could specific details on the VAT be provided along with what needs to be done? That would be a benefit to everybody bar the Government coffers and we can consider it. We are serious about addressing the issue. I have other questions but they have been covered, more or less, so I will leave it at that.

Mr. Frank O’Dwyer

The code of practice is not an issue. There is an expectation on any member of the Irish Association of Investment Managers to adopt best practice. On the register of leases or the database in general, that is coming up at the working group and my information is that the institutional members I represent are fully supportive of considering the arrangement to see if it can work.

The Deputy mentioned offices and commercial property. In the survey I mentioned 619 retail spaces, with 430 office tenancies, with 7% seeking concessions. There were 83% industrial spaces, with 18% seeking concessions. We asked the seven institutional investors what percentage of their tenants either commenced the tenancy or had their rents reviewed in the peak period. This would have seen rent set in 2006 to 2008. For retail, the percentage was 25%; for shopping centres it was approximately 16%; and for office space, the figure was approximately 17%. One would assume that with five-year rent reviews, approximately 20% would have been renewed at peak. I cannot say that there is a correlation but the point is interesting.

The Deputy mentioned issues such as guarantees and I have inquired about that. As I understand it, the policy being adopted is one of forbearance, particularly with institutional investors representing pension fund clients and policyholders in life companies. There is an understanding that people have spent years building up businesses. The point has been made correctly that it is not in the interest of a pension fund, or one of my clients, to have a unit empty long term as an alternative to a business tenant. One finds as an alternative 12-month and 24-month licences or other choices.

Deputy Damien English

Is rent being deferred? I have heard some people indicating they have been offered an option of taking a cheaper rent now and paying the difference in five years. That is not really a rent reduction but it solves a cash problem.

Mr. Frank O’Dwyer

I do not know but that may be the case. There is no point in me saying it is not.

Deputy Damien English

That gives the impression of a rent reduction but it is not real.

Mr. John Corcoran

We should look at the reality. If the Government does not intervene within the next 12 months, 50,000 jobs will be gone by this time next year. The committee can listen to the gentlemen who have rigged the market for the past 40 years and believe what they say. Their main clients come from the construction industry, developers, builders and landlords. They make a substantial amount of income managing these centres for landlords rather than tenants. They have continuously lobbied against a removal of the upward-only rent review, which no other civilised country in Europe would tolerate.

When the committee listens to them, it should note what they say. They have argued that landlords have been very kind to tenants and 90% of all landlords have given very serious consideration to all these difficulties. That has not been our experience. The most our members are getting is an allowance to pay by the month and that only happens when a confidentiality agreement is signed. That can be withdrawn at a moment's notice. Our members may get a deferral, which has no effect on a profit and loss account. Rent may be reduced by 25% this year but the difference will be paid back next year with interest. There is no impact.

I will quote from an article in the Irish Independent from October 2002 which indicated that Ireland’s commercial rents were among the world’s most expensive. It states, “Commercial rents in Ireland appear to be the most overvalued in the world, to judge from calculations in the latest World Economic Outlook from the International Monetary Fund.” This is not from the Grafton Street tenants.

In this very small country with a population of 4 million, we are paying some of the highest rents in the world. There is a rigged market, capably orchestrated by the men on the right of this room. That has been very damaging for the country and has helped to destroy it. There is news today that the Quinn Group is in trouble and the banks have more than €20 billion in bad loans going to NAMA. Much of that is a function of the rigged market that is upward-only rents. It is anti-tenant, anti-job and very destructive. The committee should know there are another 50,000 jobs going down the river.

Those involved in the pension funds seem to be incapable of or unable to make the decision on rents because it is not their money. They cannot give it away. The State must intervene as these people cannot make a decision and unless the State tells them what to do, nothing will change. Statistics will be produced indicating that landlords are being kind to all tenants but this is totally untrue. It is a bogus comment. The surveyors make most of their income from landlord clients, the construction industry, developers and builders. They follow the money and their wallet will dictate the views. It is economic determinism.

The committee can listen to them all day long but when we made our first submission over a year ago we said that unless the State intervened, there would be serious problems. These have come to pass. We must try to unrig a rigged market. The State will not interfere with the market but it should try to go back to a real market.

Mr. Tom Dunne

The questions from Deputies Chris Andrews and English are worthwhile. It is worth looking at the history of this but I will not dwell on it and should Deputy English so wish, he can contact us and we will supply the history to him. There is no mandatory requirement for a tenant to take an upwards-only rent review. It is a practice that evolved in the marketplace because the balance of advantage for years has been with landlords just as they have been with house sellers and other people who supply the marketplace. It is a free market. No landlord would give willy-nilly to a tenant a lease with an upward and downward rent review clause, which is perfectly possible. If one looks at the Royal Institute of Chartered Surveyors documentation, there are many forms of rent review, one of which was only used in Ireland in the recent past because that was what the market dictated. No landlord would give a lease to a tenant with an upward and downward rent review when he would get a tenant right beside him paying the same rent who was willing to take an upwards-only rent review. That was a market practice that was driven by——

Deputy Damien English

It was to take advantage of the property boom.

Mr. Tom Dunne

It was to the advantage of the property owner, for sure. One could argue that if the State had intervened many years ago and said there could not be upwards-only rent reviews, that might have been a good thing but we would not be out of the problem Mr. Corcoran identified as easily as one might think. Inevitably there would still be leases agreed in 2006 and 2007 at market rents that were inordinately high, as anybody would agree, and they would still have five years to run before they would come up for review. It is not the upward and downward rent review clause that is at the heart of the problem, it is the fact that rents went way up. The upwards-only rent review clause is a market practice and there is no requirement in law to have an upwards-only rent review. It was an agreement between landlords and tenants in the market. One might say the market was rigged against tenants. That was the way the market was at that time and certainly landlords took advantage of it.

People may argue for market fundamentals, but I always find that when they come to land they change their characters completely. One of the fundamental things one needs to make a market work is price transparency. We do not have it in the property market, neither in the residential nor commercial markets. Many of the problems are there because we do not have price transparency. If one brought price transparency into the marketplace, one would solve many of these problems. We would find out what is actually going on and we would not rely on assertions.

Mr. Colm Sorensen

I am facing a couple of upwards-only rent reviews and one landlord in Henry Street recently got an award by an arbitrator against me for a 60% increase. The rent review date was 2007, it is now 2010. The landlord let it run, hoping that things would regularise but, now I am stuck with a 60% increase backdated from 2007. The comparisons at the time were three phone shops and a bank and I have a chocolate company, selling chocolate and coffee. We manufacture most of our product and we have 250 people working in our organisation, a 60% increase means that we will not open any more shops and we are facing more increases in other shops. We have been successful in the past ten years. Everybody knows that trade has stopped growing as of 2008 and yet the system has the flaw that a review goes back to the review date. I do not know why it cannot take into consideration the negative changes in the meantime.

We have a successful shop in Dundrum and there is talk of an increase of between 60% and 100%. That is fine if all things are good but we face a great deal of uncertainty. We would be stuck with a headline rent now and if our trade falls off we would have to look for concessions. Mr. O'Dwyer talks about the low percentages of people asking for concessions. I have not asked for concessions, except in one case, because I know all the other tenants are not getting them. I have a case where some shops are successful. The landlord will look at the successful shops and figure my turnover will cover the unsuccessful shops. In another case where I sought a reduced rent, I gave all my figures, which were terrible for a particular shop, and I was basically told: "No." Upwards-only rent reviews are a problem. There should be a trend of downwards rent review as well. If they were downwards, the rent would relate to the trade as it goes forward.

This will have an impact not only in threatening the jobs of the 250 people working for us, but on reinvestment. We will not reinvest in other shops because trade is static. What we are faced with are closures and falling footfall all around us. At one time, our big sources of trade were tourists and visitors to the country. What tourist wants to walk down a street where there are seven or eight empty shops?

Mr. Rory Benville

I wish to make a number of point and in particular I want to respond to Mr. Dunne's submission. There is a presumption in the submission that there is some sort of equality between a tenant and a landlord, which there is not. I invite the committee to look at the presentation by the Grafton Street traders. For example in Mr. Corcoran's shop, he has a turnover of in or around €6 million and he is dealing with an entity that has a value of $450 billion under its care and control. There is no equality between the parties. As a solicitor practising for 25 years for both landlords and tenants, I can tell the committee that the form of lease is imposed on the tenant and it provides for upward-only rent review.

Historically, it originated from England, came into practice in Ireland in the 1960s and was legislated for later on by the Dáil when it had been established by the big English property owners who were leasing property in Dublin city centre. Ireland and England were unique in having this system. Ireland has now outlawed it and has to deal with the legacy issues. We cannot depend on the landlords to deal with this matter themselves. It is like the banks. They will say everything in hunky dory and not to worry about it and then they will knock at the door at 1 a.m. or 2 a.m. saying "Here is the bill, will you please write the cheque?" The pips are squeaking and tenants are saying there is a major problem. We are very near Grafton Street and I invite members to take a stroll down Grafton Street, Duke Street and South Anne Street. The evidence is there. Those buildings were not built in the 1970s, but 150 years ago. Infrastructure was created by tax breaks not out of the largesse of the pension funds. If the Government does not act, it will pick up the pieces. I invite the committee to consider the statistics, the schedules, the list of businesses, good businesses, household names and Irish generated businesses that have closed, all of which have cited rents as the issue.

Deputy Ciarán Lynch

I went to see "Alice in Wonderland" during the week with my daughter. There is a line from "Alice in Wonderland" which is that I can make words mean whatever I want them to mean. To some extent, this afternoon, is a bit like that. I read a paragraph from Mr. O'Dwyer's presentation two or three times which reads:

There is a misconception that landlords set rental levels. Landlords can ask for exorbitant rents if they wish but, actually, it is the tenant who decides what level of rent it can offer given the use to which the building can be put. It is competition between tenants that pushes rents up and it is a lack of competition between tenants that causes rents to fall. Individual landlords cannot control the supply of space but individual tenants can decide what level of rent they wish to pay. They are not compelled to take space in a particular centre or street.

I find that incredible. Of all the things he has said this afternoon, that is the most outrageous.

Perhaps I can make a correction to Mr. Corcoran's presentation. The IMF report to which he referred is not a 2002 report but actually of Tuesday, 2 March 2010. It refers to commercial rents in Ireland appearing to be among the most over-valued in the world. That is an IMF report, not some local street chartered surveyor report. It states that Dublin had the third highest rent increase in vacant office and space in 2008. What has been happening? Between 2001 and 2007 a property bubble and a rental bubble were created in Ireland. The property bubble is collapsing but the rental bubble is being sustained by upward-only rent reviews. A false economy is in operation that is causing real damage to real businesses and real jobs and something has to give. Either we protect people's pensions for the future or we protect their jobs now, through which they are contributing to their pensions. Something has to give in that arena.

There is a two-tier market out there but I am not sure if people know what that is. Nobody is coming into the retail business? The only traders in it are those who were in it before 29 February 2010. I stand corrected if people have signed new leases on 1 March or whatever. The economy is in a state of stagnation so the only people affected are those who has been in business before 29 February 2010. It has been said that the State should not intervene. One of those on the list of properties is Anglo Irish Bank's investment managers. I am heading into the Dáil later this afternoon to hear that everyone in this room is pumping billions of euro into Anglo Irish Bank. To say that the State has no role——

Mr. Tom Dunne

Perhaps I did not make myself clear.

Deputy Ciarán Lynch

Mr. Dunne can clarify it later. In case people get a wrong interpretation, every day of the week the State intervenes in every aspect of the State whether it is business, community or whatever. That is the function of the State. To say that the State has no role in intervening is a nonsense — that is what it is there to do.

I wish to refer to a few specific matters. It appears the arbitration process is a self-fulfilling prophesy because of the upward-only rent review. I came across an article dated 28 January 2010 which states that an arbitrator has awarded an 18% increase in the rent of the Bus Stop newsagency at the top of Dublin's Grafton Street, even though rents for many other small shops on the street have fallen by up to 50%. I cannot get my head around how an arbitration process increased the rent in that area. I note that in Wilton, even with the dispute in my own constituency, the arbitration will push the rents up there, even though these were rents that were set at the height of the property bubble. Besides this being a self-fulfilling prophesy is it self-rewarding for some sectoral interests as well because the arbitration process comes with a cost?

If a surveyor values the rent of one agency and the tenant objects, another valuer has to come in to do the arbitration. Is there a certain circulation being created in all of this process whereby a certain sectoral interest is making a certain level of money because of a particular dynamic that exists in the lease market?

It has been reported to me that even with the change in the legislation there cannot be upward-only rent reviews any more but clauses are now being written into new leases which provide that it is only the landlord who can trigger the rent review. The business has got in and manipulated the new legislation and is distorting it. I agree 100% with Mr. John Corcoran that it is a rigged and distorted market. I would be interested to hear from the three different groups if the new legislation is being manipulated or if it has been reported to them that it is being manipulated in a way that is biased in favour of landlords and that landlords are writing up new lease agreements stating that only the landlord can instigate the rent review. If that is the case, it means the legislation passed a few months ago was a complete waste of time.

Mr. Frank O'Dwyer referred to rent concessions. How many businesses requested rent concessions and how many were granted because that information is absent from his presentation? I do not mean concessions where rents were post-dated instead of predated. I am referring to meaningful concessions. In the third last paragraph of his presentation he mentioned recapitalisation. He stated, "In this later situation a recapitalisation programme may be a more appropriate response than a rent concession." Perhaps Mr. O'Dwyer would explain.

The Irish private rental sector is not only a bubble but a unique phenomenon that only the British and Irish share. Every other country operates in an open market. There are two difficulties here, the legacy of a property bubble and maintaining a property bubble, and a legislative difficulty that ultimately the Government does not want to challenge because it seeks to protect the valuation of the NAMA portfolios, as we will see this afternoon. I would like to be hopeful leaving this meeting but I am not hopeful because in looking at this issue for the past 12 months, I do not see an urgency in Government to deal with it. The Government is prepared to let the jobs go from the sector. I appreciate the Minister set up a committee a number of weeks ago but that committee will be very limited in terms of what it can resolve over a period. For people like Mr. Sorensen, Mr. Corcoran and other traders out there I hope something positive comes out of this meeting but I am not optimistic. I am not sure what they will take away this evening. If it is going to more of the same, it was interesting to hear what they had to say because unfortunately nothing is going to be done.

Mr. Tom Dunne

I was obviously not articulate enough in what I said because Deputy Lynch picked up the wrong point. That was probably my fault. I was trying to make the point that what is proposed now is to interfere in the marketplace. I am not arguing against interfering in the marketplace. I am arguing that is what it is proposed to do because there is no legislation specifying that there must be an upward-only rent review. The Landlord and Tenant Act allows for upward and downward rent reviews. It provides that a review shall be to the market rent. It is private contractual arrangements that are practised in the market and are the tradition in the market that have resulted in the present position. That is an important point.

The other point I was making is that if one is going to interfere in the market, I am not saying one should not, the platform for that interference should be that one understands the problem very thoroughly. Deputy Lynch's contribution showed an appreciation of that point. The existing arrangements do not solve the problem because they contain a lacuna. They allow for a rent review to be triggered by a landlord but not by a tenant and this nullifies the intent of the legislation. If the Government intends to create a landlord-tenant code it should understand the market in which it operates, to avoid unintended consequences which will be adverse for the market and for tenants.

Mr. Frank O’Dwyer

Deputy Ciarán Lynch asked for the numbers. Some 258 tenants sought concessions, 207 of which were retail while the others were office and industrial tenants. A total of 184 tenants provided financial information, of which 153 were retail. Of those, concessions were offered to 143, of which 118 were retail.

Deputy Lynch took exception to a point in my statement about recapitalisation. An investment manager would have a different attitude towards a tenant who took all the reserves out of a business in the good years, leaving it unable to weather a downturn, than he or she would to a tenant who built up the reserves in the good years and used them to improve the business and make it more robust.

The Deputy also took exception to my statement that tenants set rents. To our knowledge, virtually none of the tenancies taken in Grafton Street between 2002 and 2007 were in respect of vacant properties. The tenants took advice and made a decision to come to Grafton Street. They saw the leases which they wanted to buy out and reportedly paid seven-figure sums for them. This key money went to the previous tenants and not to landlords or pension fund clients.

Deputy Ciarán Lynch

There is a knock-on effect. Carluccio's set up in business with an unsustainable model and went to the wall in a short period. However, the companies represented by Mr. O'Dwyer used the rent model of the time as part of the arbitration process. The company has now gone but people in the Grafton Street area are living with the legacy issues, which are to the benefit of the people represented by Mr. O'Dwyer. A distorted rent, such as that applying to Carluccio's, sets a benchmark at a exorbitant level which is used in any review coming up at the time. Carluccio's goes to the wall because its rent is unsustainable but other companies in the area have the same unsustainable rents and cannot appeal against the rates set by the benchmark. Companies represented by Mr. O'Dwyer benefit from the madness of that mechanism.

Mr. Tom Dunne

It is the way the market works.

Deputy Ciarán Lynch

The market allows for downward rent reviews but some tenants are locked into a situation they cannot get out of.

Chairman

At this rate all the businesses will go to the wall in a domino effect and investment managers and pension companies will eventually realise they will have nothing.

Mr. Nick Crawford

Deputy Ciarán Lynch has an excellent grasp of the issues. I am present as a property consultant. I am not on anybody's payroll but am an independent person. I agree wholeheartedly with the views expressed by the Grafton Street Tenants Association.

The commercial property market in Ireland has been a one-way bet on behalf of the landlord. That has come about by default design as the landlord has written the rules. We have inherited this state of affairs but it is now ridiculous. I draw members' attention to appendix 8 of the submission of the Grafton Street Tenants Association.

Chairman

I wish to make it clear that Mr. Crawford is with the Grafton Street Tenants Association. We must have transparency on all sides.

Mr. Nick Crawford

Of the 36 countries listed, Ireland and England are the only two which do not have a system which is adjusted annually by reference to an inflation or Government index. France and Germany are cited as places to invest other than Ireland and both have break clauses. France has nine-year break clauses and rents are annually indexed not to exceed the French construction index. Germany has five-year average lease terms, with a ten-year option if improvements are made for the tenant, and they are annually linked to an inflation index according to a fixed schedule. People invest in that country and get returns from it.

The SCS has admitted that the system under which it works is flawed because there is no information. There are a number of reasons rents have risen by 300% in ten years while inflation in the same period has been just 35%. First, the rent review system uses the highest rent in a given area as a comparison. If a new entrant comes in and signs up to a high rent it acts as a stick to be used against every other tenant in the area, whether the new tenant fails within six months or not. Having worked in an agency I have rented shops at an unsustainable level for my client, knowing that the business will probably not last but that it can be used as a stick with which to beat every other tenant in the street. There is no allowance for the use within the guidelines in most leases. That means that if one industry at one time is doing better than another industry, there is also a bias towards the most profitable industry use. So if the mobile phone shops are doing very well, the rent paid by a mobile phone retailer coming in is put against a shoe retailer, etc. The comparables are shared by word of mouth between surveyors, generally speaking. They are not evidenced in writing. I have found surveyors to be very honourable people. There is room for error because it is passed by word of mouth.

In addition, a landlord who may own five or six shops in a street will use the confidentiality agreements to keep the headline rent high. They can do deals and drop the rent. Confidentiality agreements are written and as the statement has pointed out, that information does not come into the public domain. Therefore, Mr. Corcoran in Grafton Street might be hit for a higher rent than the other tenant is not paying because of a confidentiality agreement that is not written. Long leases which are used in Ireland and Britain are a great advantage to landlords because new entrants into the market do not have a choice. They are asked if they want to take a particular shop and if they do that is the lease with five years gone and they can take it or leave it, warts and all. A shorter system would be better.

Those of us represented here today, the Irish Association of Investment Managers, the SCS and the Grafton Street Tenants Association are all in the same boat. If this boat goes forward everybody benefits, including the investors and the SCS. While we may be somewhat at loggerheads here, people forget that without the end user, the retailer and indeed the shopper on the street, there is no value in any property and there would be no trade, jobs or investment. There would be no jobs for surveyors or anybody.

We did an exercise which would highlight the situation in Europe compared with Ireland. If John Corcoran's shop started in 1995 in Düsseldorf or Madrid, paying €140,000 and if we use the Irish inflation index compounded, he would now be paying €193,000. However, he is now paying €445,000, in other words 280% more than he would if he were in Düsseldorf or Madrid. Before we came in here I asked the representatives of Butlers Chocolates and Korky's how a reasonable rent with CPI-based adjustments would change their business. John Corcoran told me that he would invest €300,000 in his shop this year and would employ four more full-time people in that shop in Grafton Street. Colm Sorensen from Butlers Chocolates said he would open ten more shops in the next five years which would equate to 100 new jobs. That is the situation we are in by default.

If 34 out of 36 other countries find that an inflation index works, they get investment coming in and have stable strong economies, it is incumbent on the Oireachtas to change the system, even if not to keep us within the EU guidelines then within our inflation rate for the entire economy. This needs to be done. We need to jump off this track because if we do not we will just go back into this system of high inflation in rents because the system is geared to that. As the SCS has admitted here, it does not have the open and transparent information to allow its members to do their job. It has taken this situation to evolve, in fairness, to allow them to put up their hands and say they are working without the information they need, which creates problems.

Mr. Peter Stapleton

I would like to reply to some of the issues raised by Deputy Ciarán Lynch. The arbitration process has been a tried and tested process over many years. This is not a recent phenomenon we have come across. It has considerable history to it. The evidence put forward in cases for the arbitrator to work on includes low, medium and high rents. All evidence is produced. It is misleading to talk about high rents being the benchmark as they are not the benchmark. The benchmark is the average of the rents.

This is one of the building blocks for the other problem that destroyed the Irish economy. It did not make sense for a small country like this to end up with the fifth highest rents. Representatives of a responsible company like Canada Life with $450 billion worth of funds should have been phoning the Taoiseach, pointing out that he had a problem with crazy rents and recommending that he check the market which appeared to be a major bubble.

The banning of the upward-only rent review in Ireland received very favourable overseas comment. Many serious journals in Britain, including RetailWeek, commended the Government on doing it. If the Government were to ban the current ones, it would also receive very favourable comment and overseas investors would see that the Government is serious about making this economy more competitive. If we continue to allow the destruction of jobs because of paying these people on my right twice or three times the market rents we will not get much favourable comment in international journals, including the Financial Times and others. It is a joke. Rents have been caught up in a major bubble for a long time. It has invited much commentary that in a country of only 4 million people we were paying some of the highest rents on the planet. Surveyors must be challenged on why they did not warn the Government that there was a major problem in the market and something quite crazy going on. An IMF report pointed to the dangers in this regard. Instead of these people putting their nose in the trough and driving prices ever higher, they should have behaved responsibly by alerting the Government to the problems created by rent levels that can only be described as crazy. They should have issued a warning that the house was on fire. By ignoring that, they now have to deal with the problem in the next room.

Deputy Chris Andrews

Before we finish, I take the opportunity to support the comments made by the Chairman at the start of the meeting regarding the absence from today's meeting of representatives from Bank of Ireland and AIB. It is ironic and unacceptable that they should show such a disregard for the committee on the very day provision is made for them to be bailed out by the State.

Chairman

I am somewhat flabbergasted at their absence. I acknowledge that they would not have been able to answer questions because they are part of the asset management group. I spoke to Mr. O'Dwyer about that and I accept the point he made. However, their behaviour is unacceptable and I will convey my view in this regard to the Minister for Finance.

Deputy Chris Andrews

I will also raise this matter with the Minister.

Chairman

I thank Mr. Benville, Mr. Corcoran, Mr. Crawford, Mr. Dunne, Mr. Fitzsimons, Mr. Goff, Mr. O'Dwyer, Mr. Sorensen and Mr. Stapleton for giving more than two hours of their time to assist us in our deliberations today. I spoke in the Dáil on this issue for ten or 20 minutes recently. Having read an article by Mr. Desmond O'Malley, a former Minister of State, I am coming slowly to the conclusion that it is the Constitution which is preventing the Legislature and the Executive from acting in the interests of the common good and in accordance with the principle of social justice. Nevertheless, I argued trenchantly that recent case law indicates the Government may be in a position to act. A Supreme Court decision in this regard is awaited.

As a barrister for 20 years or more, like Mr. Benville, I could never understand why there was an upward-only reference or why, in some cases, custom should take precedence over literal interpretations. The notion that any interference with upward-only provisions would send the whole place sinking down around us does not make sense. A five year old child in junior infants could point out the absurdity of what is happening. It is fundamentally a question of supply and demand in the marketplace and the equilibrium that is reached in this regard. This was hammered into us when I was studying for an economics masters under Brendan Dowling in UCD.

I have acted as a legal arbitrator, as I am sure Mr. Benville has done. One is certainly constrained in that function by the 1954 and 1980 Acts and subsequent amendments and now by the 2010 Act. Arbitrators must act in accordance with the evidence before them. To do otherwise is to act outside their jurisdiction which could see them being brought before the High Court for acting in excess or without jurisdiction. It is important that evidence is produced to support both sides of a case. A problem arises if there is evidence available only on one side. Mr. O'Dwyer has argued for transparency. It is important that all aspects of the market are transparent and that people can make value judgments based on the evidential component of that market. I hope that will be done, otherwise people are working with one hand tied behind their back and the end result is distorted. That is what is happening.

I thank Mr. O'Dwyer for his contribution. He is a professional and has probably been in tougher fora than this. We must respect all parties who come before the committee and make their case. However, I must support those members who argued that it is surely better for a landlord to get 40% or 50% of what was originally agreed, if that will ensure the sustainability of the business in question, than nothing. Half a loaf is better than no bread, as Deputy Andrews said. That was the driving force when I was growing up. Some day one may get back to three quarters of a loaf if tenant businesses are allowed to survive and thrive. Mr. Goff , Mr. Sorensen and Mr. Corcoran should be given the opportunity to expand and develop their businesses. When we hear that people who have the potential to create 30 or 40 jobs — or even four or five — are being precluded from doing so, it is a stark warning to this committee for which the principal job of work is to support people in enterprise and in employment generation. We are running into many roadblocks in this regard. We should not forget that we are an island nation with a population, at 4.5 million, on a par with that of Manchester. We must seize every opportunity that presents.

Mr. O'Dwyer made his case strongly. However, none of the funds and so on to which he referred would come here unless there is and continues to be significant advantages and gains to be accrued. Our taxation system continues to offer significant advantages in this regard. The whole system will not collapse if the Government intervenes to make sense of it. If this can be done in a voluntary way it will be so much the better because that will allow it be done more quickly. Mr. O'Dwyer has presented his figures and has done his job more than adequately on behalf of investment managers. The point was made that one could have ten stores, two doing quite well with no dramatic decline in footfall but six, seven or eight of the others teetering on the brink. Mr. O'Dwyer is correct that there is no benefit in allowing people to dissipate their assets and to run down the reserves needed to cope with rainy days. However, if I recall correctly, Mr. Corcoran said he would reinvest €300,000. Goods and services will be bought in for that reinvestment there will be another area of the shop to provide jobs. I do not like going too much into this area because I am in the presence of Senator Quinn who created a large number of jobs in the 1960s, 1970s and 1980s. He knows more than I about this but, ultimately, every job is important. Each job secured saves the State some €20,000 per year in welfare payments, never mind the tax revenue generated.

I hope everything is done to ensure landlords engage constructively and positively with their tenants. There is no need to get stuck into confidential forms of agreements. If I am about to close my shop and suddenly I am back in business in a vigorous way, it will be obvious to everybody that something has happened and that there has been a kick-in. A 280% increase in rents was never sustainable and could never be sustainable. As somebody who has only a peripheral view of business activity, I appeal to everybody concerned to make this a red letter day. All the interests involved are here and we heard the issue argued by both sides. Things may have got heated at times but everyone argued from a logical position. I am not passing comment on the bona fides of anyone who made their case today, it was an interesting discussion and I hope it will achieve some good, leading to the necessary degree of flexibility in the setting of commercial rents to ensure businesses can continue.

Walking down any high street, we can see the shops. There is no rent for the owners if they are closed, there are no profits for shopkeepers, no wages for employees and no goods and services for consumers; it is a zero sum game for all concerned. We must pursue whatever measures are necessary to reverse this decline. I remind landlords of the saying that half a loaf is better than none. Some might say that is not applicable in renting properties but that indicates a glaring need to adjust their expectations in recognition of current economic realities.

I hope the landlords will take cognisance of what we have said and act accordingly. If not, it behoves the Government to pursue the legislative route. If the Constitution means anything, it should be read in accordance with current circumstances. It should not be constrained by legal precedent where circumstances pertain today that were unheard of when it was written in 1937. Some legislative interventions have been made by Government on behalf of the citizens over the years and while no one likes to go down that route, I see a role for the Government and the people to ensure people can continue to run their businesses.

I thank all the delegates for attending and giving of their time, experience and expertise. We will keep a close eye on this issue and pursue it. It is not the first time we have addressed it and it will not be the last.

The joint committee adjourned at 4.25 p.m. until 2 p.m. on Tuesday, 13 April 2010.

JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht - Tuesday, 30 Mar 2010

Commercial Rents: Discussion.

Mr. John Corcoran

Mr. John Corcoran

Mr. David Fitzsimons

Mr. Brian Goff

Mr. Frank O’Dwyer

Mr. Peter Stapleton

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. David Fitzsimons

Mr. Peter Stapleton

Mr. Peter Stapleton

Mr. Brian Goff

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. John Corcoran

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Colm Sorensen

Mr. Rory Benville

Mr. Tom Dunne

Mr. Tom Dunne

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Frank O’Dwyer

Mr. Tom Dunne

Mr. Nick Crawford

Mr. Nick Crawford

Mr. Peter Stapleton

Mr. Peter Stapleton

Mr. Peter Stapleton

Mr. Peter Stapleton

Mr. Peter Stapleton

Mr. Tom Dunne

Mr. Tom Dunne

Mr. John Corcoran

JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht -
Tuesday, 30 Mar 2010