Commercial Property

Commercial Property Leases

Commercial leases in Ireland are at their core contracts for the occupation by a business of property at a specific location or locations. The form of contract can vary depending on the length of the lease. Parties can enter into a short term Business Letting Agreement or a longer term lease.

Common Forms of Lease

Historically in Ireland there were, and still are to a large extent, two forms of commercial leases:

• a short term lease, for a term of no more than four years and nine months
• a longer term lease, for a term of more than five years and up to thirty years

The reasoning behind this division is to do with an important element of law concerning commercial lease rights for tenants. Since 1978 the law in Ireland for commercial leases has specified that any tenant whom has occupied a commercial property in Ireland for more than five years without interruption can accrue the right at law to a “business equity lease”. This is the right to demand of the Landlord a further lease at the property for up to twenty five years. Within this legal framework then leases and letting agreements were granted mostly for four years and nine months to prevent the grant of rights to tenants by long occupation. This was not a perfect solution however as tenants were often left to remain in properties after the term ended and as a consequence were in a position to insist on their right to remain.

The Business Equity Lease and Renunciation of Tenant Rights

In 2008 the law for commercial leases in Ireland then changed to allow tenant to enter a lease for a term of more than five years and at the same time to renounce their rights to a business equity lease. It introduced the now commonplace Deed of Renunciation. This Deed, when executed alongside a lease, confirms the renunciation by the tenant of its right to a further business equity lease at the end of the term of the particular lease in question. This enabled Landlords to issue leases for a term longer than five years with the comfort of not granting rights to tenants. It is now standard practice for Landlords to seek the execution of a Deed of Renunciation alongside any commercial lease, whatever the term.

The removal of “Upwards Only” rent reviews

The second consequence of the change in the law in 2008 was the removal of “upwards only” rent reviews in Ireland. The common commercial framework for a lease of over five years is for the rent to be fixed or agreed to the end of year five and then reviewed in year six for the next fixed period or remainder of the term. The provisions provide that the parties agree the revised rent and if not a third party arbitrator, usually a chartered surveyor, is appointed to settle the rent to be paid. Prior to 2008 and in high demand locations a practice developed of creating upwards only rent reviews. These provisions provided that the rent on review at the review date, usually five years, would be the higher sum of the existing rent or a revised higher rent. If rent levels in the market dropped this was immaterial as the Landlord could then insist on the existing rent continuing. In the 2008 the law provided that the creation of “upwards only” rent reviews was no longer permissible at law and that any such provisions would be interpreted as meaning the rent would be reviewed to the then applicable open market rent. Since this time all rent reviews in Ireland for commercial leases are deemed to apply the then applicable open market rent regardless of whether this figure is lower or higher than the rent paid by the tenant prior to the rent review. Long leases for e.g. twenty five years with upwards only rent reviews and which were created prior to the change in the law are still valid and tenants of these leases may be faced with rents that do not reflect the market rents in other locations. In practice however parties negotiate amendments to the terms of such leases before taking up occupation.

No Lease Agreement is Signed

An issue that our practitioners often come across is parties in dispute where no lease or letting has been signed. This is a classic case of parties presuming that doing business without the advice of solicitor is saving them money. This is a costly and incorrect assumption in all cases, especially for landlords. So what is the position of a tenant in a commercial property with no written lease signed? Commercial leases and tenancies can be created legally without any written document being signed. If the relationship meets the criteria of letting arrangement the law will presume a “tenancy at will”. The terms of that tenancy are dictated by the actions of the parties on either side. The most significant of these terms of the notice period required to terminate a tenancy in the event of a dispute. This is dictated in nearly all cases by the frequency with which the rent is paid. If rent is paid monthly, either party can terminate the lease on one month’s notice to the other. If the rent is paid weekly, it is one week’s notice etc. The problems caused by oral tenancies arise mostly for landlords. None of the protections that are contained in a properly drafted legal lease or business letting agreement are available to the landlord, for example:

• A landlord will have great difficulty in preventing amendments or alterations to his/her property
• The tenant may “assign” the lease to another business or party without the Landlord’s knowledge or consent.
• A Landlord is powerless to compel the tenant to maintain public liability insurance and the landlord may end up becoming a party to claims for compensation from the public.
• A tenant may easily claim an “agreement” to a variation or reduction on rent that is hard to refute
• The costs of removing a non-paying tenant are potentially a multiple of those where a lease is signed as the necessary rights of enforcement and termination are not available.

Considerations

When entering negotiations for commercial leases in Ireland, both parties have a number of considerations. Tenants for example must assess rental costs, costs of rates, insurance and utilities and measure this against footfall and potential business at this location. Tenants of licensed premises such as restaurants and bars have additional important investigations such as fire safety, planning and licences that may attach to the property. A useful guide to tenants seeking to consider market rent is to consult the Commercial Lease Register of the Property Services Regulatory Authority. This is public record of completed commercial Leases and their rents in all areas in Ireland.

Landlords on the other hand must consider the “strength of covenant” i.e. the financial strength of the party or entity proposing to come in as tenant. Landlords’ must consider the security for default in the form of a deposit (a sum in the value of one to three months’ rent held by the Landlord) and guarantees, whether granted by a parent company or personally from directors of the tenant company. The remaining provisions in the lease will create the necessary rights and obligations for the tenant’s occupation of the property for the agreed term and at the agreed rent.

Choose a Property Expert

As can be seen from the above, the costs of properly executing a Lease or Business Letting Agreement are more cost effective by comparison to the costs in dealing with issues of a dispute and potentially expensive litigation. Any serious and properly considered business plan must include the legal advices on start-up and the considerable commitment that can come with a business lease in Ireland. The experience of all our property solicitors has been multiple examples of cost heavy disputes between parties dealing with issues of either landlords or tenants who have not protected themselves properly from the outset.

At the Abacus Legal Network our members are some of the leading commercial property solicitors in their field. They have collectively helped numerous businesses around Ireland with their advices and experience. Their expertise in identifying the important points to accept and negotiate are critical to any business looking to set up or expand. Send us your details and location of the property and we will set up contact with our specialist property solicitor in your area.