Bewley’s decision will harm high street retailers

On 1 July, the Supreme Court overturned last year’s High Court decision cutting the Grafton Street café’s rent
On 1 July, the Supreme Court overturned last year’s High Court decision cutting the Grafton Street café’s rent

The Supreme Court decision in the Bewley’s case, which reversed a previous High Court decision cutting the iconic Dublin café’s rent, will increase the financial pressure on many retailers leading to even more high-profile failures. Dan White reports

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11 July 2014 | 0

July is proving to be a wicked month for Bewley’s. On 1 July, the Supreme Court overturned last year’s High Court decision cutting the Grafton Street café’s rent to reflect the fall in market rents since 2007 and reinstated the previous upward-only lease instead. The implications of the Supreme Court decision are potentially very serious for Bewley’s, whose rent will rise from €728,000 to €1.46m. That’s an awful lot of cups of coffee. However, the fallout from the Supreme Court decision will almost certainly extend far beyond Bewley’s. Although the previous government banned the creation of new upward-only leases in 2010, it did nothing about existing upward-only leases. Both this government and its predecessor have cited “constitutional difficulties” as their excuse for not scrapping existing upward-only leases. This is at best only part of the story. While m’learned friends represent an obstacle to scrapping existing upward-only leases, NAMA and the property lobby almost certainly constitute a far more formidable barrier to getting rid of them.

The failure to reduce retail rents to reflect the fall in the value of sales has led to carnage on the country’s main streets and shopping centres

NAMA preventing rents finding proper market value NAMA paid the Irish-owned banks €31bn for their larger property-backed loans. While NAMA’s disposal programme is running ahead of schedule, this has been largely achieved by selling UK assets, mainly in London, rather than those in Ireland. In the five years from its foundation to the end of 2013, 75% of the €12.4bn which NAMA has raised from asset sales came from Britain, with a mere 16% being generated in the Republic of Ireland. If NAMA is to meet the government’s target of winding up its activities by 2020 then it is vital that it starts selling down more of its Irish assets. Which, is of course, where upward-only leases come in. If the “constitutional difficulties” were to be overcome and existing upward-only leases were to be scrapped then all rents would almost immediately fall to market levels. Not an isolated case As can be seen from the Bewley’s case these rent reductions could be dramatic. Bewley’s had been paying an annual rent of €1.46m after its most recent rent review in 2007. Following the High Court decision this had been cut to €728,000, a reduction of almost 50%. This was not an isolated case. When the lease on the Burger King fast-food restaurant on Grafton Street expired in 2010, the tenant and landlord were unable to agree a new rent and the dispute went to the Circuit Court for arbitration. The Circuit Court cut the annual rent paid by Burger King by 53% from €436,000 to €205,000. That’s a whopper of a rent reduction by any yardstick! Quite clearly rent reductions of this order of magnitude across its entire portfolio would make the job of selling off NAMA’s Irish assets even more difficult than it is already. Unfortunately, while the Supreme Court decision in the Bewley’s case may be good news, at least for now, for NAMA, it is dreadful news for the country’s hard-pressed retailers. Boom town rents During the boom years retail rents, ratcheted up by upward-only rent reviews, soared. According to figures compiled by Retail Excellence Ireland, retail rents rose by a staggering 240% between 2000 and 2007 while the retail price index increased by just 30% over the same period. The only logical explanation is that the rent review process, under which the rents to be paid by tenants under upward-only leases were determined, was totally skewed in favour of landlords. For a brief period, Dublin’s Grafton Street had the fifth most expensive retail rents in the world and was up there rubbing shoulders with the likes of New York’s Fifth Avenue, London’s Bond Street, the Champs Elysees in Paris and Tokyo’s Ginza. It is probable that, even if the boom had continued, such excessive retail rent increases would have triggered a crisis for Irish retailers sooner or later. But of course the boom didn’t continue. The bubble burst in 2008 and reality reared its ugly head. Rent increases being sought Since peaking in early 2008 the value of Irish retail sales has fallen by 23% and an estimated 40,000 jobs have been lost in the retail sector. Under normal circumstances this should have translated into at least a comparable fall in rents. Unfortunately the Irish retail property market isn’t normal, far from it. The prevalence of pre-2008, upward-only leases means that retail rents have not been able to adjust downwards to reflect the collapse in the value of retail sales. In fact the opposite has been the case. Heavily-borrowed landlords and NAMA, which now owns most of their debts, have in many cases been insisting on rent increases as they desperately seek to service unsustainable loans. With entirely predictable results. The failure to reduce retail rents to reflect the fall in the value of sales has led to carnage on the country’s main streets and shopping centres. A slew of household names, among them Superquinn, Xtra-Vision, A-Wear, HMV, Elvery’s and O’Brien’s Irish Sandwich Bars have either disappeared completely or been drastically restructured as they sought to extricate themselves from onerous boomtime leases. Indeed even solvent retailers, or at least those with solvent parent companies, have been getting in on the act. DIY chains Atlantic Homecare, Homebase and B&Q were all placed in examinership by their parent companies as a means of renegotiating their leases. Rents have to fall Even if, and that could prove to be a very big “if” indeed, retail spending recovers, much of the recovery is likely to be captured by online retailers such as Amazon. This almost certainly means that the volume of sales experienced by the off-line retailers in 2007 and early 2008 will never be seen again. So, regardless of what the strict letter of the law might say, retail rents have got to fall. The refusal of the government to address the issue of existing upward-only leases will not make this problem go away. While the Supreme Court judgement will no doubt allow the government to kick to touch on upward-only leases for a little while longer, economic reality will eventually prevail. By delaying the inevitable the government is merely increasing the damage that will be inflicted on the retail sector until that happens.

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