Monday, 14 December 2009

Reducing the Irish cost base

An Saoi: Almost all of the focus to date in terms of reducing costs has been on reducing labour costs. This has been done by reducing the numbers in employment in both the Public & Private sector, and through the Public Sector pay cuts.

I want to propose a simple effective change in landlord law, which would enable all commercial tenancies to be renegotiated in line with current economic conditions. The Government has recognised that the previously normal upward only rent reviews were oppressive, and has moved to make them illegal in the case of any new leases. However, this has no effect on existing tenants, who must struggle on paying existing exorbitant rents.

I propose that all commercial tenants be granted a legally binding break in their existing lease. Such an amendment would adjust all existing leases to provide for this right. It would not, of itself, remove the upward only rent review provisions, but would rather give the tenant the right to walk away without penalty. This would enable them to sit down and negotiate with their landlords on an equal footing. If the tenant and landlord were happy with the existing terms, then there would be no need to amend the existing terms. If, however, the tenant was not happy with the current rent levels, then the landlord would have the option of reducing the rent. If no agreement was forthcoming, the tenant would have the right to surrender the lease with no right to a premium, or of course, no penalty. Game theory, I am sure, would play a serious part in these negotiations, and there might even be work for some unemployed economists.

Rents account for perhaps 15-20% of the turnover of many service activities. A decline of 50% in rents would enable businesses not only to survive and prosper, but to do so and cut prices.

Residential leases are normally for very short periods, rarely more than a year, and follow market trends much more quickly. Advertised rents on residential property have fallen by some 36% since May 2008, and it is likely that many commercial rents would have fallen by much more. Residential rent supports from the Department of Social and Family Affairs have effectively put an artificial floor under rents. Market levels in much of Dublin have already fallen below the DSFA rates set in June 2009, and perhaps need to be adjusted substantially downwards again.

It would also give the State a chance to walk away from considerable amounts of unwanted office space around Dublin and the rest of the country, and substantially reduce the rents on the rest, providing a substantial saving in costs.

There is perhaps just one problem – NAMA. It would show up the whole NAMA proposals for the farce they are, and would demonstrate that the assets underpinning the proposals are worth just a fraction of the nominal value given. However, perhaps the choice we have is between an active economy and continuing to continue to fool ourselves about the value of worthless land & buildings, trying to save landlords from their own greed.


Anonymous said...

It would also devastate pension funds

An Saoi said...

Rents are going to have to fall anyway, the choice is between it going on for a very long time in a piecemeal fashion or in a much more concentrated timeframe. The recent court case in the Irish Linen examinership gives one way out, which may make many landlords more willing to talk.

It is also in the landlords' interests to have premises occupied rather than having substantial numbers vacant. Any pension fund which would be devastated is too heavily in Irish property anyway and needs to change their fund managers asap

But I go back to my core point, do you want viable businesses or empty properties with unsustainable rents and price tags?

Anonymous said...

Unfortunately given constitutional protection for property rights it is not possible to do what Sli eile would like. Once a lease is created it becomes a property right born of a contract. Rents are coming down and many landlords are willing to meet the reasonable requests of tenants willing and able to demonstrate trading difficulties. Although reduced rents would make a contribution to the viability of many businesses it is not a panacea. In the retail sector we have many SMEs who basically are middlemen putting up costs. there is a need for much research into the true reasons for higher retail prices here compared to the UK and other EU countries.

Mack said...

Surely, there are other ways around this?

E.g. A firm has an expensive lease, with 10 years remaining and no breaks that allow renegotiation of the terms. Could that firm restructure itself such that the lease is held by a different entity than the entity that owns the core business? If not, could the law be changed to facilitate this?

Then, could the entity holding the lease declare (or threaten) bankruptcy, which would allow it to either move or negotiate better terms with the landlord?

By the way, could the government use it's influence on the banks to force commercial property agencies to rent out commercial property they are currently keeping empty (perhaps to maintain notional rent levels)?

An Saoi said...

Anonymous - The Government are in the process of tearing up the written contracts of employment of many HSE & local authority workers at this moment by way of a simple short bill. The courts might be dragged in but they would have to decide whose rights take precedent. Though it might be hard to find a High Court Judge who is not compromised in some manner as a landlord. I accept that there are also other reasons for Irish prices, but this is clearly the main one. Irish rents are very high when compared to similar sized cities in Europe.

Mack, In general the ability to assign a lease without the permission of the landlord is quite hard. In many cases this is for very sensible reasons such as ensuring a proper mix of businesses in a particular location. Some businesses may separate assets from the trading entity - easy to do at the start, but not after the business has been trading. There are Stamp Duty issues, restructuring, clawbacks and a variety of other issues to keep your solicitors and accounts happily issuing fee notes........ The aim surely should be viable businesses with the least amount of red tape? Also personal guarantees may be in place.

Your last point - well guess who stuck many people in property syndicates & investments? Yes, the private banking arms of the banks. It is in the interest of the current Government to perpetuate the lie around property values. Remember they said it only takes a 10% increase in property prices for NAMA to be OK! Have a look at the following story from the 1960s & 70s.

Why not follow the logic of my idea and Keep it Simple?

An Saoi said...

Apologies the above link shoud be

Mack said...

An Saoi -

Why not follow the logic of my idea and Keep it Simple?

If it's legal, definetely. I was primarily responding to Anonymous who suggested it wasn't (i.e. surely ways and means could be found) rather than taking issue with your idea.