Reducing the Irish cost base

An Saoi: Almost all of the focus to date in terms of reducing costs has been on reducing labour costs. This has been done by reducing the numbers in employment in both the Public & Private sector, and through the Public Sector pay cuts.

I want to propose a simple effective change in landlord law, which would enable all commercial tenancies to be renegotiated in line with current economic conditions. The Government has recognised that the previously normal upward only rent reviews were oppressive, and has moved to make them illegal in the case of any new leases. However, this has no effect on existing tenants, who must struggle on paying existing exorbitant rents.

I propose that all commercial tenants be granted a legally binding break in their existing lease. Such an amendment would adjust all existing leases to provide for this right. It would not, of itself, remove the upward only rent review provisions, but would rather give the tenant the right to walk away without penalty. This would enable them to sit down and negotiate with their landlords on an equal footing. If the tenant and landlord were happy with the existing terms, then there would be no need to amend the existing terms. If, however, the tenant was not happy with the current rent levels, then the landlord would have the option of reducing the rent. If no agreement was forthcoming, the tenant would have the right to surrender the lease with no right to a premium, or of course, no penalty. Game theory, I am sure, would play a serious part in these negotiations, and there might even be work for some unemployed economists.

Rents account for perhaps 15-20% of the turnover of many service activities. A decline of 50% in rents would enable businesses not only to survive and prosper, but to do so and cut prices.

Residential leases are normally for very short periods, rarely more than a year, and follow market trends much more quickly. Advertised rents on residential property have fallen by some 36% since May 2008, and it is likely that many commercial rents would have fallen by much more. Residential rent supports from the Department of Social and Family Affairs have effectively put an artificial floor under rents. Market levels in much of Dublin have already fallen below the DSFA rates set in June 2009, and perhaps need to be adjusted substantially downwards again.

It would also give the State a chance to walk away from considerable amounts of unwanted office space around Dublin and the rest of the country, and substantially reduce the rents on the rest, providing a substantial saving in costs.

There is perhaps just one problem – NAMA. It would show up the whole NAMA proposals for the farce they are, and would demonstrate that the assets underpinning the proposals are worth just a fraction of the nominal value given. However, perhaps the choice we have is between an active economy and continuing to continue to fool ourselves about the value of worthless land & buildings, trying to save landlords from their own greed.

Posted in: Economics • Economics

Tagged with: costs • commercial rents