End of an era for short term commercial leases?
The introduction of the Civil Law (Miscellaneous Provisions) Act 2008 in July 2008 brought with it some welcome change for both landlords and tenants of commercial premises and a much needed boost for the commercial property market. Previously, under Irish Law, the trend was for landlords of commercial premises to restrict short term lettings to a period of less than five years, usually 4 years and 9 months, to avoid the tenant acquiring a statutory right of renewal of the lease. The statutory right of renewal entitled a tenant to renew their lease for a period of up to twenty years or less, at the option of the tenant. The law provided a method for office tenants only to contract out of this statutory right of renewal. This right to “contract out” was not available to industrial and retail tenants. Whilst the 4 year 9 month lease provided the landlord with some comfort that they would recover possession at the end of that period, it left some tenants reluctant to invest in expensive fit outs of a premises which they might only occupy for less than five years. The end result was an inflexible letting which did not cater fully for either party’s commercial needs.
Section 47 of the new Act now provides the right for tenants of all commercial premises to contract out of their statutory right of renewal. This entitlement is subject to the same criteria as previously applied to office tenants namely:-
- The tenant must execute a valid written Deed of Renunciation, renouncing its right to a renewal of the lease at the end of the term of the lease;
- The tenant must have received independent legal advice in respect of the implications of the renunciation.
Perhaps one of the main differences between this new renunciation and that which applied previously to office tenants only, is that the renunciation does not have to be executed prior to the commencement of the lease. This means that a tenant can agree to renounce its rights during the term of the lease and as part of negotiating a renewal of its existing lease. This should be of benefit to landlords and tenants of existing leases if the parties wish to renew their lease.
The new form of renunciation should have a positive effect in particular in the retail sector of the commercial property market. It will allow department stores enter more freely into the granting of concessions without running the risk of the concession being deemed a tenancy with consequent rights of renewal. It will also facilitate sub lettings for longer periods, giving the head landlord peace of mind that they will be able to recover possession at the end of the term of the head lease without problem.
Overall this new law represents a welcome change to the property market and should bring a greater degree of flexibility for both landlords and tenants in securing a letting which best reflects their commercial needs.
For further information, please contact Gráinne Macdougald of our Property and Private Client Department on gmacdougald@hayes-solicitors.ie or 01 6624747.