In our previous article, we outlined the differences between the most commonly used rent review mechanisms. Of the three discussed, review clauses linked to economic indicators like Consumer Price Index (CPI) or Harmonised Index of Consumer Prices (HICP) were generally considered a neutral option as the rate of rent would follow the rate of inflation. Inflation rates have recently seen an unprecedented rise in recent times. However, as significant changes in inflation occur, previously negotiated review clauses can result in material increases in rents.
With the recent focus on rent reviews linked to increases in specific indices combined with recent changes in legislation we review the law and how it relates to residential and commercial leases.
Until this year, rent review clauses in residential leases in Rent Pressure Zones were subject to an approximate 4% cap on annual increases. A significant change has been brought about by the Residential Tenancies (No. 2) Act 2021. The law removes the rent cap and instead provides that rent can only rise in line with the HICP – otherwise known as the rate of inflation.
The new provision is similar to CPI-linked review clauses. HICP is another economic index which measures the change in the average level of prices paid for consumer goods and services. HICP is the index used by the European Central Bank in relation to housing. HICP differs from CPI because it does not measure owner-occupied housing. Local Property Tax is also not measured by the HICP. A list of HICP values is published by the Residential Tenancies Board here.
The change in the law was brought about to reduce the cap on annual increases in rent. Residential leases outside of Rent Pressure Zones are unaffected by this change. However, landlords are not permitted to charge more than the open market in rent under section 19 of the Residential Tenancies Act 2004.
By comparison, the only restriction which commercial lease rent review clauses are subject to is the prohibition against “upwards only” rent review clauses in leases entered into after 2009. This was brought into effect by section 132 of the Land and Conveyancing Law Reform Act 2009 (the 2009 Act). The law provided that commercial rents must be capable of both upward and downward rent review.
In an effort to provide some certainty, many tenants, in particular those of trading assets like nursing homes, chose to link rent reviews to CPI. Such a decision is often made during times when inflation remained low or steady. As a further protection against potential hikes in inflation, some leases also contained a cap and collar provision linked to CPI. The provision includes set maximum and minimum rates of rent increase and decrease. Landlords and tenants should proceed with caution when wording such rent review clauses. A challenge on the basis of Section 132 of the 2009 Act, including in relation to cap and collar, has yet to come before the Irish Courts. It is therefore difficult to predict whether a particular clause may be interpreted as excluding the possibility that rent could decrease on review. If a review clause is challenged and held to be void as a result of violating the law, both parties run the risk of losing control of the type of review clause that would replace it and thus would lose certainty. When considering CPI linked reviews, this could mean that a cap and collar approach is found to be illegal and the review would be reviewed in line with the full increase in the CPI.
With the recent volatility in inflation, both residential and commercial tenants would be well advised to check their leases for the type of rent review clause that is in place. Tenants should also consider the rise in inflation and note the date of the next rent review. For those tenants currently entering into new leases, it is worth considering the other options.
For more information, contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.