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In a decision delivered on 25 October 2024, the Circuit Court (the Court) (O’ Brien J) determined the rent for Bewley’s Café Grafton Street Limited (Bewley’s) renewed lease of its iconic flagship store on Grafton Street.
Having heard extensive and varied expert evidence from both experts as to the appropriate rent for a new lease in the unique premises over a two day hearing, the rent determined was effectively midway between both experts’ recommendations and ultimately halved the rent currently being discharged by Bewley’s under its expired lease.
A&L Goodbody acted for Bewley’s in this matter. In this article, we consider the decision and explore the relevant legal principles.
Background
Bewley’s 1987 Lease expired on 5 August 2022 and on 3 August 2022, it notified its landlord and the defendant, RGRE Grafton Limited (RGRE) that it intended to make an application for a new lease pursuant to Section 20 of the Landlord and Tenant (Amendment) Act 1980 (the 1980 Act). It later issued its Civil Bill in November 2022.
RGRE originally entered a full defence to Bewley’s claim for a new lease, only conceding in June 2024 that Bewley’s was entitled to a new tenancy in the premises, having continuously occupied the premises for the whole of five years ending at the expiry of the lease, and bona fide used the premises for the purpose of carrying out its business during that time.
Bewley’s elected to take a five year term for its new lease and so the issue left before the Court at the time of the hearing in this matter was to determine the level of rent for Bewley’s new lease, commencing from August 2022.
Legal principles
Section 23(5) of the 1980 Act provides that “the gross rent shall be the rent which in the opinion of the Court a willing lessee not already in occupation would give and a willing lessor would take for the tenement, in each case on the basis of vacant possession being given, and having regard to the other terms of the tenancy and to the letting values of tenements of a similar character to the tenement and situate in a comparable area but without regard to any goodwill which may exist in respect of the tenement.”
Section 23(6) of the 1980 Act provides that “the allowance for improvements shall be such proportion of the gross rent as is, in the opinion of the Court, attributable to improvements made by the tenant or his predecessors in title and in respect of which the tenant would have been entitled to compensation for improvements if (as the case may be) this Part did not apply to the tenement or the new tenancy had not been created.”
Expert rental valuation evidence
At the outset of its judgment, the Court outlined the difficulty in setting the rent for such a unique premises commenting “Bewleys is in the words of James Joyce, ‘a legendary, lofty, clattery café’, a place imbued with conversation and memories – a unique premises with an exquisite interior and an Egyptian shop front, in the heart of Dublin’s Grafton Street. How do you put a price on that?” The Court outlined that the difficulty it faced was that there were, in reality, no truly comparable restaurant lettings on Grafton Street which it could rely on in making its determination.
The decision, as is so often the case in these matters, ultimately turned on the expert evidence of two very experienced valuers; Mr Fergus Crosse for Bewleys and Mr Potter for RGRE. Their evidence differed enormously, both in approach to valuation and in terms of the recommended amount, with Mr Potter putting the gross annual rent at a figure of roughly double the figure proffered by Mr Crosse. As the Court is required under the 1980 Act to take into account letting values of tenements of a similar character in a comparable area, both parties proffered a number of comparable lettings on Grafton Street and its surrounds which they contended should be relied upon for the purposes of assessing the new rent.
Zoning Approach
Bewley’s expert submitted that a ‘zoning’ valuation approach should be adopted in reaching a rent valuation, as is common on Grafton Street, with the front ‘zone’ of the ground floor of the premises attracting the most rent, and this rent depreciating as you go deeper into the back of the premises, which is considered less attractive to retailers.
He further submitted that the Court should place greater weight on more recent open market letting comparable evidence, rather than any comparable evidence based on closed rent reviews. He also submitted that the Court should take into account the fact that there were special planning controls in place in relation to the premises and that it was a protected structure, as this would affect what a willing tenant might pay for a new lease in the premises. Finally, he submitted that the evidence demonstrated an overall trend in rents decreasing on Grafton Street.
Overall PSF approach for restaurants
As against this, RGRE’s expert, Mr Potter, submitted that a ‘zoning’ approach was inappropriate for a restaurant premises (as opposed to a retail premises), as restaurants did not consider the back of premises to be less valuable in this manner, and sought instead to apply an ‘overall zoning per square foot (PSF)’ method and to value the premises on a restaurant basis. He gave evidence that the rear space in Bewley’s, including the Harry Clarke room, was ‘a fantastic restaurant space’ and would attract a higher rent than the rent proposed using the ‘zoning’ method. He also sought to rely on nearby restaurant comparable evidence and then applied an uplift based on what he described as the extraordinary, prime location of the premises on Grafton Street.
Finally, he gave further evidence that a restaurant taking the space would usually take a longer term than five years due to the cost of fitting out the restaurant space. He argued that in this case where the tenant was electing to take five years, it would be the norm for a landlord to seek a loaded rent to reflect that.
Decision
The Court held that the zoning method of valuation put forward by Bewley’s expert was the industry standard when assessing the valuation of a commercial premises at this location in Grafton Street. It held that while Bewley’s is a restaurant, given its location, the valuation of the building was heavily influenced by the surrounding retail environment.
However, it also accepted the propositions submitted on behalf of RGRE that a valuation based on zoning should be checked against the overall position on a price per square foot basis and that when considering the large dining area to the rear of Bewley’s, it was useful to have regard to the rents paid by tenants for city centre restaurants.
Importantly, the Court determined that it would place greater weight on new open market lettings (as opposed to closed rent reviews on the street). It determined that these were a more likely indication of where a willing tenant and willing landlord might meet in terms of rental values and on this basis accepted the base figure put forward by Bewley’s in terms of PSF.
However, the Court then went on to apply an increased rent PSF to the rear of the premises (although not at the level contended for by RGRE), as it was of the opinion that a willing tenant and a willing landlord would not treat the rear part of the ground floor, a very special dining space surrounded by beautiful stained glass windows, as though same merely comprised storage or utility space.
In effect therefore, the Court took an approach to valuing on a zoned basis, with an uplift for the large restaurant area to the rear of the ground floor at the premises.
Finally, the Court agreed with the proposition put forward by RGRE that an uplift was in order given the short duration of the lease sought. As such the Court applied a 5% uplift to that per annum, reflecting a roughly 50% decrease in Bewley’s rent per annum under the expired lease.
Key takeaways
This case brings welcome clarification to landlord and tenants regarding the various factors a court will take into account regarding rent determinations and probative evidence of rent value on lease renewal.
For further information, please contact Tom Casey, Hannah Shaw or Caroline Murphy, or your usual ALG Disputes team contact.
Date published: 25 October 2024
