Are you a small business owner with a leased premises? Have you had difficulties paying rent as a result of Covid 19? Are you entitled to stop, even temporarily, paying rent?
The High Court addressed this question recently in a case involving the Klaw restaurant in Temple Bar.
The landlord had demanded vacant possession of the premises on the grounds of non-payment of rent during the Covid 19 pandemic, the fact that the lease had expired and the Klaw restaurant was overholding. The Klaw restaurant had obtained an interim injunction preventing the repossession.
At the full hearing of the substantive action the Klaw had claimed to be entitled to stay in the premises on the basis that the lease they relied on had not expired. Nevertheless, the Klaw had ceased paying rent during the pandemic.
The High Court clarified the issues it will look at when deciding an application for an injunction where the tenant is in breach of its obligation to pay rent.
Firstly, is there a fair issue to be tried. In this case the High Court held there was.
Secondly, are damages an adequate remedy? The landlord argued that the High Court could not grant an injunction to the Klaw when it had ceased paying rent.
The High Court referred to previous case law where there is a general unwillingness on the part of the court to grant an injunction where the tenant has ceased paying rent. The court went on to point out that this is not a rule that is cast in stone but it is a “major factor” weighing against its decision to grant one.
The Klaw had not put forward any proposals to address arrears of rent and was unable to firm up its undertaking as to damages.
Even though the courts are sympathetic to tenants and their difficulties arising from Covid 19 the court will not grant an injunction to a defaulting tenant where it would effectively be a subsidy to the future trading prospects of the tenant and would deprive the landlord of possession of the premises.
This is a question I am frequently asked and it is the wrong question to be asking. Let me explain.
Timing your entry into any market with confidence and certainty is impossible.
Because it relies on you being able to accurately predict the property market, or indeed any other market such as the stock exchange and shares investment.
And trying to predicting the market-any market-is a fool’s game that is bound to end in failure. Because there are too many variables.
Factors such as the performance of the economy, political events, global (or local) pandemics such as Covid-19, interest rates, the taxation environment, buyer sentiment, seller sentiment, supply and demand, inflation, availability of credit, etc.
The variables are endless.
The question you need to ask yourself instead is not when but whether you should buy a property, or invest in shares.
Because if you decided to buy a house or invest in shares your decision should be based on holding your asset(s) for the medium to long term, let’s say 10 to 25 years.
If you do buy a house or invest in shares and hold them for the long term it is almost certain that you will get a superb return on your investment. And whether you timed your purchaser or entry into the market with laser like precision will not matter in the overall scheme to things and given the rises and falls in any market over a period of time.
But you can be sure the value of your investment will rise inexorably over time.
Whether you buy a house, or invest in shares, will depend on your own individual circumstances.
For example, do you need a house? Have you a growing family? Are you settled in your career or are you likely to be obliged to relocate in the near future? Have you secure employment? Are there any other factors you ought to consider?
As for investing in shares, on the other hand, have you the mental fortitude to live with the daily rises and falls of the stock market? Would this send you into a spin of panic and alarm or would you be able to take the rough with the smooth secure in the knowledge that you are in the market for the long term and you are confident that you have invested in fundamentally sound companies.
When to invest in a market is the wrong question to be asking, you will never get your timing perfect. Whether you should invest is the key question, and only you can answer this.
Before looking at the question of which asset class-property or shares-offer the better returns over time we need to look at a few important differences between property and shares.
Firstly, you can easily borrow to purchase residential property whereas borrowing to purchase shares is likely to be met with a refusal by your friendly bank manager. And this ability to borrow means the return on your money is multiplied or ratcheted up in a rising market because you can buy a residential property with only 10% down.
It’s a different story in a falling market, however, because you face the prospect of negative equity or at least a wiping out of any gains you may have seen in the value of your property.
You also have the problem of liquidity and not being able to easily sell the property and cut your losses in a hurry. Shares on the other hand allow you to be more nimble and to enter and exit the market quickly thereby releasing liquidity when you are most likely to be in need of scarce cash.
Secondly, you can live in your residential property and rear a family, maybe work from home, run a business, and so forth. You cannot do this with shares. Being able to enjoy your property and have a roof over your head regardless of how the stock or property markets are performing generally is a reassuring comfort that gives peace of mind.
Thirdly, you can easily invest in shares in foreign markets such as the UK, the United States, Europe. This is not a practical prospect if investing in property unless you invest in some type of property fund or REIT.
Fourthly, buying shares in Ireland by comparison with property offers lower transaction costs-for example the avoidance of legal fees which you will incur buying property. Stamp duty on residential property is only 1% in Ireland but it is 7.5% regarding commercial property.
Other variables that need to be considered include interest rates and taxation and how much of a write off you get against your tax bill when you invest in property as opposed to shares.
Having made these initial observations let’s see how these asset classes have performed over time.
When considering the best returns over time and trying to make a sound judgement as to which is the best asset class you need to consider one factor: timing of the investment.
If you buy into either property or shares at the top or bottom of a boom or bust cycle you may get a distorted view of the market and its performance over the long term.
You need to look at investing as being for the medium to long haul, and preferably the long haul-that is a term of 20 or 30 years.
But if we take a look at what has happened in Ireland over the last 30 years or so we can get some guidance.
Between 1990 and 2018 €10,000 invested in Irish residential property your investment would have been worth €39,000 in 2018. That is a return of 290%.
€10,000 in global shares would have returned €51,290, a return of 413%, while €10,000 in Irish shares would have ended up at €36,785, a return of 268%.
If you invested your €10,000 in 1995 your returns would have been as follows:
Irish residential property: 347%
Global shares: 315%
Irish shares: 256%
If you invested your €10,000 in 2000 you would have these returns:
Irish residential property 117%
Global shares: 70%
Irish shares: 51%
If you invested in 2005 you would have seen the following outcome:
Irish residential property: -7.5%
Global shares: 150%
Irish shares: -10%
Over the long haul the best returns come from global shares. From 1990 to 2018 global shares gave a return of over 400%.
The difficulty in coming to a definitive conclusion as to the best asset class over time arises because of the difficulties in comparing them.
It is not unlike comparing apples and oranges because you need to decide over what period of time you will compare, what type of property (residential or commercial) is being compared, what type of shares, how big a basket of shares, the tax treatment of both investment types in different parts of the world, and so on.
Then, how do you factor in the power of being able to leverage property much more easily than shares and offset this with the illiquid nature of property investment as opposed to the more liquid share investment.
Another important consideration is your personality and your psychological make up. Investing in shares and seeing the daily fluctuations in share prices, corrections, and occasional crashes can be upsetting and distressing for the individual who has a young family and is not able to withstand the emotional rollercoaster that may be involved in shares investing.
This individual may be better off in property because at least he can live in it and enjoy it with his family and is not subject to a daily update on the value of his private residence.
Property investment, especially in residential property, is probably less likely to play with your nerves, notwithstanding our experience with the property crash from 2007 to 2010.
One thing we can safely conclude, however, regardless of which asset class: buy property or shares and hold them for 15 to 30 years and you will almost certainly see an excellent return on your investment.
If you are you can avoid a mistake I see every week with property owners who are selling.
They come to me and tell me they have just gone sale agreed, after the property has been on the market for perhaps months, and now want contracts issued to the buyer’s solicitor as soon as possible.
This is understandable and sensible because if you are selling you want to avoid a delay between going sale agreed and issuing contracts just in case the purchaser suffers from buyer’s remorse.
Or has developed a habit of house hunting and continues to feed the habit.
The big problem, however, is that this is the first I am hearing of the proposed sale. Now I am going to have to take up the title documents from the lender who is holding them as security for the mortgage.
Consider for a minute that I must prepare an authority to allow me take up the title deeds, get my clients to sign it, send it in to the lender, and then wait for the lender to take the documents out of archival storage and send them out to me.
You could be looking at a wait of up to two weeks from start to finish.
Meanwhile your buyer may be having second thoughts and teetering on buyer’s remorse. There is a genuine risk that the sale will fall through if the seller cannot strike when the iron is hot and get contracts issued and signed.
This risk is entirely avoidable because all the seller has to do when placing the property on the market with the estate agent is to tell his solicitor that the property is going on the market.
At this point the solicitor can take up the title deeds and be ready to issue contracts as soon as a buyer goes sale agreed. He could have 6 to 8 weeks, perhaps longer, to get the title deeds and draw up contracts.
Then when the parties go ‘sale agreed’, contracts go out, no friction. No buyer’s remorse. No wondering what’s going on or what the delay is. No worrying that the bank will respond quickly and send the deeds out.
This mistake requires one simple step: tell your solicitor of your intention to sell at the same time you are negotiating terms with the estate agent.
Then, things can move seamlessly to a successful sale.
Buying your first property and unsure of what to expect? Let’s take a look at the various steps in buying your property.
Two things you will need to do from the outset are:
a) arrange finance with a lender,
b) find the right property.
Assuming you have succeeded in doing this you will have to pay a booking deposit to the estate agent when you go ‘sale agreed’ on the property you have chosen.
This booking deposit is fully refundable and is held by the estate agent in his client account pending completion of the transaction. If for some reason it does not complete and the sale/purchase falls through you will have no difficulty with the return of the deposit to you.
Once the estate agent has received a booking deposit you will have to tell the auctioneer who is your solicitor in the transaction. She will then issue a sales advice note to the solicitors acting for both you and the vendor.
The vendor’s solicitor will then issue contracts and copy title documents to your solicitor.
Your solicitor will review the contract and documents furnished and raise queries which arise from the documents.
These queries may include issues about planning permission, building regulations, access to services such as water and sewerage, taxes such as LPT and NPPR tax etc.
Meanwhile you will need to ensure you have secured finance from the lender. Once you have a firm loan offer a loan pack will be sent to your solicitor.
Your solicitor, if satisfied with replies to any queries he has raised, will ask you to attend his office to sign the loan offer and bank documents together with the contract for the sale of the property.
It is at this point that you will pay the balance of the contract deposit.
The contract deposit is 10% of the purchase price but you will be able to deduct the booking deposit you have paid from this sum and that is what you will pay when you sign the contracts.
By way of an example, let’s say the purchase price of the property is €250,000 and you have paid €5,000 as a booking deposit when you went sale agreed.
10% of €250,000 is €25,000. Subtract the €5,000 booking deposit and you will be paying the balance of €20,000 when signing the contracts.
The contracts are then returned to the vendor’s solicitor and the acceptance of the loan offer is returned to the bank.
Things will then progress towards completion of the transaction with an agreed closing date. The vendor’s solicitor will get the vendor in to sign all necessary documents, including the transfer of the property to you, and will send all title documents to your solicitor just prior to closing day.
Meanwhile, you will have been attending to the requirements of the lender which will include signing a direct debit mandate and the putting in place of life assurance and home insurance.
Completion of the purchase
Prior to completion your solicitor will ask you to put him in funds to complete the transaction.
He will take into account the loan you will be receiving and will have to account for funds for stamp duty, Property Registration Authority fees, your solicitor’s professional legal fee, and any other outlays.
On closing day it is advisable for you to carry out a pre closing inspection.
Once everything is in order and your solicitor has received all documents of title your solicitor will transfer the balance of the purchase price to the vendor’s solicitor and will requisition legal searches.
On closing day your solicitor will ask the vendor’s solicitor to certify the searches and once this is done and the vendor’s solicitor has received the balance of the purchase monies the sale will be complete and you will be able to pick up the keys of the property from the estate agent’s office.
After completing the transaction your solicitor will pay the stamp duty on your behalf and register the transfer and mortgage with the Property Registration Authority.
Once the transfer is registered all title documents will be sent to the lender who will hold them as security for the mortgage on the property.