Paul McNeive: Bewley’s Cafe case shows high stakes of a ‘court lease’ if sides can’t agree terms
The Circuit Court decision last week to halve the rent for Bewley’s Café on Grafton Street, Dublin 2, raised a few eyebrows in property circles. The decision certainly comes down on the tenant’s side of the argument, and aspects of the case are indicators of a change in Irish retail markets.
Firstly, it’s a reminder that on expiry of a lease, a tenant, in possession for five years, can go to the courts to set the terms of a new lease, instead of negotiating with the landlord. Notably, in this process, the tenant can dictate the length of the new lease – anything from one year to 25 years – and after one year they can go back to the courts and repeat the process.
The former would present a major headache for any landlord in managing their asset, and reduces the value of their investment. That’s why the threat of a “court lease” is a powerful one in concluding negotiations. It’s not surprising that court leases are often seen where there is a difficult relationship between landlord and tenant.
The tenant can dictate the length of the new lease and after one year they can go back to the courts and repeat the process
In a newly awarded court lease, all of the terms from the previous lease – for example repairing covenants – will be the same, with the exception of the term (dictated by the tenant), the upward-only rent reviews (now banished) and the new rent.
There is a risk for both tenants and landlords in going to the courts as, while judges will listen to both sides of the argument, they are not property experts and decisions can be surprising.
It’s interesting that Bewley’s Café opted for a short five-year term, and that’s a symptom of the changing market. For decades, leasehold interests on Grafton Street could be sold to other tenants for substantial premiums, or “key money”.
However, the introduction of upwards and downwards rent reviews means the days when long leases became valuable are gone.
Indeed, it is this flexibility which is now becoming key in Irish retailing. While Bewley’s Café will hopefully be trading for another hundred years, there is an acceptance among retailers, particularly in the fashion sector, that they may not be in vogue in 10 years, and so they are choosing shorter leases.
I spoke with retail property expert Neil Bannon, chairman at Bannon, and he confirmed that new leases are now typically for seven years. This usually involves the tenant repudiating their rights to renew the lease on expiry, which also improves flexibility for the landlord.
This flexibility is of increasing importance for landlords too
Mr Bannon sees this flexibility as a positive move and said that “we are moving closer to the European model”.
This flexibility is of increasing importance for landlords too, he told me.
“Consumers demand excitement and change, so landlords need the ability to actively manage their portfolios.”
This increasing flexibility has improved Grafton Street, too, he said, with a greater variety of smaller European retailers, rather than a copy of a typical UK High Street.
This era of shorter leases increases the likelihood of rents rising, Mr Bannon said. “There is less emphasis in the market on the rent review cycle, and more on new lettings and change.”
He also pointed out that rents quoted in the market now are “net effective rents”, which take account of any rent-free period granted. There has been an ”artificial softening” in rents, since pre-Covid, when “headline rents” ignored tenant incentives. The rents quoted now are “more honest”, he concluded.
