People's eyes tend to glaze over when the subject of Nama and its property portfolio is broached. Throw a possible retrospective adjustment to landlord and tenant legislation into the mix and you will have lost most of your audience. However, the interaction of these two issues has the potential to cost the state over €2.8bn in one fell swoop – almost three times the proposed public-sector pay cuts or a bill of €1,905 for every household in the country.

Following the recent abolition of upward-only rent reviews by the minister for justice, the same lobby group which sought this legislative move (the Grafton Street Traders and Retail Excellence) is pushing the minister to extend this change in law to retrospectively adjust review clauses in existing leases. Such a proposal would have dire consequences for the Nama process and holders of existing investment property. It would also probably be subject to constitutional challenge.

The proposal would dramatically reduce the value of almost all income-producing Irish property assets, including those transferred to Nama. Due to the fixed valuation date of 30 November 2009 all these transfer values will have been assessed on the assumption that leases contained valid upward-only rent reviews. Consequently if the lobby group were to be successful it would mean that Nama would effectively be overpaying the various banking institutions.

The principle reason for this value reduction is as follows.

Given the significant downward adjustment in rental values over the past two years the majority of income-producing property assets are what is termed 'over-rented' (rented above current market rental levels).

In these instances when such property assets are valued, the valuers will approach the valuation by determining first the true market rental value of the property and then effectively splitting the valuation into two elements, namely:

● That value attributable to the likely income flow from the property based on its true market rental value (hardcore element).

● That value attributable to the likely income flow from the property from the over-rented element (froth element).

Depending on the degree of over-rentedness, the duration the specific tenant is contractually obliged to pay this 'froth rent' and the strength of the specific tenants covenant, this froth element could contribute as much as 50% of the overall value of a property. This portion of all income-producing property assets' value would be immediately eliminated should upward-only rent reviews be retrospectively abolished, having a catastrophic effect on Nama and the projections of the minister of finance as to its likely performance.

Nama will pay about €14bn for domestic income-producing assets. Of this I would estimate the overall froth element would represent 15%-20% of this value. Consequently, the retrospective removal of the upward-only provision could result in the immediate elimination of this portion of the value which would represent a loss to Nama and ultimately the taxpayer of between €2.1 and €2.8bn.

This small matter aside it's important to consider the beneficiaries of such action. It would comprise tenants across all commercial property sectors including retail, office and industrial property. It is widely accepted that the effect of rent on business viability in the latter sectors is nominal. In addition it is clear that the majority of retail tenants are in a position to bear the burden of the froth rent due to the existence of other profitable stores. Consequently, such arbitrary action would benefit those tenants who do not require any support, but at significant cost to the Irish taxpayer. In addition, there is already widespread support from landlords, by way of rent reductions, for retailers where the rent level is jeopardising the retailer's business.

It is worth noting that interference with freely negotiated landlord and tenant arrangements has led to unforeseen and usually unhelpful results. For example, the rent freeze introduced in the 1970s in the UK led directly to a secondary banking crisis. Around the same time in Ireland Richie Ryan introduced a directive to the OPW that all state leases (of property) were to have upward and downward reviews. This measure was subsequently rescinded after a few years due to its unhelpful consequences.

The negative implications of such retrospective action on the international investment community's perception of Ireland are of greater concern. This could damage the prospects of any future external investment in the Irish property market. The direct incontrovertible implications of this will be to restrict Nama's future ability to refinance or dispose of its property portfolio to non-domestic investors.

Finally, it is important to note that the financial impact of retrospective action on the citizens of the state is not limited to its impact on Nama. After Nama, the single-largest collective beneficiary of income-producing property assets in the state would be pension funds and insurance companies. The impact of such retrospective action will be to further erode citizens' pension funds and to increase the cost of all forms of insurance to both business and private individuals.

It all sounds too ridiculous to gain any traction. But so did the abolition of upward-only rent reviews which, as predicted, proved to be of absolutely no assistance to our ailing retailing sector or of any relevance to the existing real market which had long since removed the clause from new leases. The prospect of the introduction of a retrospective proposal will have a detrimental impact on the recovery of a long-floundering commercial property market. For this reason alone the proposal needs to be quashed as a matter of urgency.

I am sure there are law firms throughout the country licking their lips at the prospect of taking an action against such a government move.

Roderick Nowlan is investment director with property consultants Bannon