Ireland: Proposal To End Upwards Only Rent Review In Existing Leases

Introduction

The inclusion of the following statement in the Government's programme for government (Government for National Recovery 2011-2016):

has brought the issue of upwards only rent reviews ("UORR") in respect of existing leases back onto the public policy agenda. Heightened media campaigns by both supporters and opponents of this proposal can be expected to reach fever-pitch in the coming months with the Minister for Justice, Equality and Defence, Alan Shatter, confirming his intention to present legislation to the Dail before the summer recess, or shortly afterwards, with a view to it being enacted before the end of the year. It is widely accepted that any such legislation will have to pass constitutional muster.

Section 132 Land and Conveyancing Law Reform Act 2009 ("s 132")

UORR have been a feature of the Irish commercial property market for decades. However the tide, and public policy toward UORR, began to turn with the advent of the global economic crisis in 2008. A sustained campaign from the domestic retail sector resulted in the late inclusion in the Land and Conveyancing Law Reform Act 2009 of s 132, providing that rent review clauses in leases entered into from 28 February 2010 would be deemed to allow for upward and downward review. S 132 did not apply to leases or agreements for lease entered into prior to 28 February 2010. In the Spring 2010 Edition of the Arthur Cox Property Group Newsletter we considered the impact of the introduction of s 132 and the fact that it had created a two tier system of commercial leases. The Government's current proposal is intended to correct the imbalance.

Constitutional considerations

Constitutional review of the Government's proposal may come in the form of an Article 26 reference to the Supreme Court by the President or a challenge by a party directly and adversely affected by the proposal.

Two Articles of the Constitution are of particular relevance in the context of the current proposal. Article 40.3.2 provides that 'The State shall...protect as best it may from unjust attack and ...vindicate the ... property rights of every citizen' . Article 43 acknowledges the right to private ownership of external goods and includes a guarantee by the State not to legislate to abolish the right of private ownership or the general right to transfer, bequeath or inherit property. It further recognises however that 'the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice' (Article 43.2.1) and that 'The State, accordingly may, as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good' (Article 43.2.2).

Opponents of the proposal, are likely to frame their case for constitutional challenge principally on the basis that legislation to end UORR in existing leases amounts to an 'unjust attack' on their property rights. Supporters will no doubt argue that legislative intervention is justified by 'the principles of social justice' and 'the exigencies of common good'. It is difficult to anticipate the outcome of any constitutional referral or challenge in the absence of draft legislation but also given that judicial interpretation of the relationship between Articles 40.3.2 and 43 has fluctuated considerably over the years. In fact one leading academic commentator, Professor James Casey, suggests that 'in hardly any branch of constitutional law has judicial opinion shown so much fluctuation'. That said there are some inferences and principles that may be drawn from case-law on the matter, which should have a bearing on any constitutional review.

• No absolute guarantee/curtailment of rights: Case-law on the matter confirms that there is no absolute guarantee of personal property rights by the Constitution and these rights can be curtailed or regulated by the principles of social justice and in order to reconcile their exercise with the exigencies of the common good.
• Relationship between Articles 40.3.2 and 43: It is generally accepted that the two Articles mutually inform each other and in the vast majority of cases the Courts have looked to both when considering constitutional protection of property rights. From the 1980's onwards the Courts have invoked the concepts of social justice and the exigencies of the common good when considering whether restrictions on specific property rights constitute an unjust attack for the purposes of Article 40.3.2. More recent case-law would suggest that if an interference with property rights is authorised under Article 43 it cannot be found to be vulnerable under Article 40.3.2.
• Rent restrictions: The case of Blake –v- Attorney-General [1982], while not entirely analogous to the current proposal, may be of some relevance. In this case the Supreme Court considered the constitutionality of the Rent Restrictions Acts, which sought to control rents in certain dwellings by imposing artificially low rent levels, based on rents reserved in 1966 but in some cases referable back to rents payable in 1941 or 1914. In this particular case, O'Higgins C.J. stated that "... the provisions of ... the Act of 1960 (as amended) restrict the property rights of one group of citizens for the benefit of another group. This is done without compensation and without regard to the financial capacity or the financial needs of either group in the legislation which provides no limitation on the period of restriction, gives no opportunity of review and allows no modification of the operation of the restriction. It is therefore both unfair and arbitrary."

Opponents of the Government's current proposal have placed significant emphasis on the impact it might have on some landlords in the context of putting them in de fault of their loan covenants and that the chief proponents for change are a limited group, the domestic retail sector. No doubt those opponents will argue that a universal ban on UORR, without regard for financial capacity or needs, might also be considered unfair and arbitrary as in the Blake case.

• Proportionality: Over the years the Courts have developed the Doctrine of Proportionality when considering the validity of restrictions on property rights, by focusing on whether the means used to implement a justifiable policy can be said to be proportionate. The objective of the legislation must be of sufficient importance to override a constitutionally protected right and must relate to pressing and substantial concerns. The means chosen to implement the objective must be rationally connected to that objective and not be arbitrary, unfair or based on irrational considerations. They must impair the right as little as possible and be such that their effects on rights are proportional to the objective.

• Compensation: While there is no definitive and consistent approach on the issue of compensation for interference with constitutionally protected rights, case-law indicates that where deprivation of property rights is compensatable, this helps the constitutionality of the provision, but the availability of compensation is not an absolute necessity in every case to render a provision constitutional.
• Retrospection: Opponents of the Government's proposal may argue that any retrospective interference with private agreements is contrary to Article 15.5 of the Constitution which states that 'the Oireachtas shall not declare acts to be infringements of the law which were not so at the date of their commission'. However, it has been suggested that the reference to 'acts' in Article 15.5 confines its application to crimes and torts, which do not apply to the current proposal, and furthermore, the Supreme Court has also confirmed, in the case of Magee v Culligan [1992], that Article 15.5 cannot be regarded as 'any general prohibition on retrospection of legislation' and there are examples of retrospective legislation being upheld by the Courts.

Notwithstanding the perhaps limited application of Article 15.5, the Courts tend to lean against injurious retrospection and the Supreme Court has previously stated, in the case of Hamilton v Hamilton [1982], that retrospective legislation, since it necessarily affects vested rights, has always been regarded as being prima facie unjust.

The absence of draft legislation for the current proposal makes it difficult to assess the extent to which landlords will suffer by injurious retrospection. For example will it enable tenants to revisit reviews that have already been carried out on an upward only basis or alternatively enable a downward review upon enactment or at the next review provided for in an existing lease? Certainly the former would be difficult to reconcile with, if not Article 15.5, certainly the tendency of the Courts to lean against injurious retrospection.

Conclusion

It seems prudent that the Government might consult with key stakeholders in the drafting process and, if legislation is passed by the Oireachtas, an Article 26 reference (which is entirely the President's prerogative, having consulted with the Council of State) would appear preferable, rather than waiting for an independent challenge to its constitutionality. Although if an act is passed following such a reference, it may never be challenged again on the grounds that it infringes the Constitution.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.