New NAMA guidelines on rent reductions

Thursday, 8 December 2011

NAMA has published a Guidance Note which is designed in certain limited circumstances "to encourage debtors (or receivers who act as agent of the debtor) who are landlords of business premises to consider reducing rents on Irish properties..... where tenants prove that the level of rent threatens the continued viability of the business".

The Guidance Note sets out the criteria to be applied by NAMA when in receipt of an application from a debtor/receiver of a debtor (or possibly a tenant) to reduce the rent payable by an occupational tenant and is stated to relate to "NAMA's internal credit assessment".

To be eligible for NAMA credit assessment the following criteria must be met:

  1. The lease must have been negotiated as an arm's length transaction, relate to  a business premises, commence prior to 28 February 2010 and be subject to upward only rent reviews;
  2. The tenant, due to economic conditions and through no fault of his own (emphasis added) be financially distressed;
  3. The current rent payable under the lease must pose a real and immediate threat to the viability of the business (emphasis added);
  4. The tenant and the landlord\receiver are to be of the view that a temporary rent reduction is likely to be the major factor (emphasis added) in determining whether the tenants business survives; and;
  5. The tenant must agree to provide all reasonable evidence to demonstrate the business case that a rent reduction will ensure the survival of the business and the maintenance of full or part time jobs (emphasis added).

Any rent reduction approved by Nama will be for an initial period of 12 months commencing in 2012. It is expressly stated that the provisions are not intended to benefit tenants who trade profitably in other jurisdictions who are accordingly expected to be in a position to bear the burden of their Irish contractual commitments.

As detailed above the Guidance Note places a significant burden of proof on a tenant claiming distress with NAMA requiring monthly cash flow projections, management accounts, audited accounts for the previous three years, details of tax obligations and returns for the previous six years, financial statements of all guarantors either corporate or personal and accounts and cash flows for other trading locations. It remains to be seen how many tenants will be in a position to discharge this burden and clearly establish that the rent reduction is justified on the strict criterion laid down by NAMA. These disclosure obligations are intended to continue for the duration of the rent reduction. It would appear from practice that many tenants have been reluctant to divulge this level of information to their landlords; so whether they are prepared to share same with NAMA remains to be seen.

While no commitment given in the Guidance Note, Minister Noonan was quoted this week as stating that: “Nama have also advised me that where a tenant is not getting satisfaction in negotiations with his Nama landlord he can contact Nama directly and they assure us that any queries will be dealt with speedily by them.” This is likely to be welcomed by tenants who are in a position to satisfy the onerous conditions and disclosure requirements of the NAMA assessment process.

The Guidance Note lists "Other Considerations" which indicate a role for NAMA where a landlord and tenant cannot reach agreement which include:

  1. The new rent approved by NAMA should be the greater of, the rent negotiated between the parties, or the now current market rent.
  2. Independent valuation should be sought to ascertain the current market rent. The debtor’s\receiver’s valuation or the tenant’s valuation should not be accepted without independent verification.
  3. The valuer should be from the NAMA valuation panel and have knowledge of the property type and location.

It is interesting to note that where the landlord and tenant agree to a rental level lower than what NAMA assesses to be open market rent that the higher sum will apply. 

Contact

Louise O'Donovan