In our latest APC article, Jen Lemen explores why candidates declaring a level 3 competency in landlord and tenant advice need to get to grips with Calderbank offers – an area of advice arising from a divorce case.
What does divorce have to do with commercial property? The short answer is: a lot.
The long answer is explored here, specifically in relation to the technical landlord and tenant competency. The landlord and tenant competency relates to the management of the landlord and tenant relationship, covering all aspects of lease negotiations. Candidates need to understand the issues from the perspective of both parties.
Ideally, candidates will have experience of both rent reviews and lease renewals, with a variety of examples written up in their summary of experience.
At level 3, candidates should have experience of providing strategic advice on landlord and tenant matters, alternative dispute resolution options in the event of a breakdown in negotiations and any necessary action to protect the client’s position.
In relation to rent reviews in particular, candidates will need to have advised clients on how to protect their position on costs, given the prospect of third party proceedings, either by expert determination or arbitration (depending on the wording of the lease). This will be by serving a Calderbank offer (or a series of Calderbank offers), on a “without prejudice save as to costs” basis. Not only does this help to protect clients from a cost perspective, but it can also help to reach a negotiated settlement.
Calderbank v Calderbank
The Court of Appeal decision Calderbank v Calderbank [1976] 2 All ER 333 provides the legal basis behind the service of Calderbank offers. This was a divorce case involving John and Jacqueline Calderbank, who had difficulty in dividing up their matrimonial assets.
The judgment stated: “I have reached the conclusion that that was an offer which in the circumstances of this case the husband ought to have accepted and that, as he persisted in these proceedings and recovered a lump sum of a smaller amount than the value of that house, the right order would be that he should have the costs up to 14 days after 14 August and thereafter that the wife should have her costs of the proceedings in the court below.”
Application to landlord and tenant
What does this mean for surveyors dealing with contentious rent reviews?
In the normal course of a rent review instruction, a surveyor will follow a process such as:
- Pre-instruction checks;
- Agree written terms of engagement;
- Due diligence, including reading the lease and summarising the rent review clause, eg hypothetical term, assumptions, disregards and third party process;
- Inspection and measurement;
- Report to the client on market rent and negotiation strategy;
- Negotiation;
- If negotiations become contentious, report to the client on any Calderbank offers before submitting a DRS 1 application for the appointment of an expert or arbitrator (as per the terms of the lease);
- Either reach agreement documented by way of formal memoranda, or move to third party proceedings.
Calderbank offers are a highly effective tool to manage risk and help to reach a negotiated settlement. They are made on a “without prejudice save as to costs basis”, meaning that they can only be drawn to the attention of the third party on the matter of costs. They are, therefore, served in a genuine attempt to reach a settlement without moving to third party proceedings.
How does the process work?
Surveyors must ensure that they check the third party provisions in the rent review clause. Under the Arbitration Act 1996, arbitrators always have power over all costs – both their costs and the parties’ costs – irrespective of the wording of the lease.
However, the power of an expert on costs will depend on the wording of the lease. For example, a lease may provide that the parties will bear their own costs but that the expert has power over the expert’s own costs. This will affect the wording on costs contained within the Calderbank offer. If an expert has no power over any costs, for instance, if they are simply to be split between the parties equally, then a Calderbank offer will have no effect, unless the parties have agreed in advance that costs will be at issue.
Costs begin to be accrued at the point at which the application for an appointment is made as a fee is payable to RICS to make the appointment (via a DRS 1 form). Therefore, a Calderbank offer should be served before any costs are incurred so these are placed at risk and protected by the service of the Calderbank offer. It is rare for the parties to agree on the identity of the third party, as it is usually deemed fairer to hand over the selection process to RICS.
Acceptance of a Calderbank offer is legally binding, so it is essential that a surveyor has their client’s written consent to serve the offer and at the level of settlement proposed.
Either party can serve a Calderbank offer and multiple offers can be served throughout a rent review dispute, usually narrowing the dispute with the offers coming closer together. Equally, a Calderbank offer can be withdrawn by either party if it has not been accepted.
If a Calderbank offer is accepted it is legally binding and the rent review is settled. However, it is still best practice to document agreement via formal memoranda which can be appended to the lease.
If the parties’ final Calderbank offer is not accepted and the dispute runs its full course at third party proceedings, after the award or determination is made, the parties will either need to agree the costs position or the third party will need to award or determine the costs position. This is when the Calderbank offers will be brought to the third party’s attention through separate written representations from the parties on the matter of costs.
Each party will put forward its case for the apportionment of costs. Generally, the rule is that costs should follow the event – so the winner should recover all of its costs (including their surveyor’s costs and the third party’s full costs).
For example:
- Landlord’s valuation at £250,000 pa
- Landlord Calderbank at £220,000 pa
- Rent awarded at £200,000 pa
- Tenant’s Calderbank at £205,000 pa
- Tenant’s valuation at £175,000 pa.
In this scenario, the principle above dictates that the landlord would have done better by accepting the tenant’s Calderbank than they did by progressing to third party proceedings. The costs of the matter were then a result of the landlord not accepting the tenant’s Calderbank offer, so the tenant “wins” and can recover all costs. However, cases are not often so clear cut.
The parties should consider whether a near miss counts and agree this in the third party’s directions at the start of the dispute. A near miss is essentially where a Calderbank offer almost wins, although there is no set percentage for what this is defined as.
In the above example, this could be a tenant’s Calderbank offer at £199,000 pa.
Where a case is not clear cut, such as where the award or determination falls between the parties’ Calderbank offers or one party did not make a Calderbank offer at all, the parties will submit written representations on costs (including details of any Calderbank offers).
The third party will then award or determine costs, taking into account each party’s valuation in their written representations and their respective Calderbank positions. The third party will also consider the conduct of each party in the matter.
Calderbank offers are a complex area of landlord and tenant advice but a must when it comes to demonstrating competency at level 3. Candidates cannot divorce themselves from advising clients on an appropriate and tactical strategy on costs for contentious rent reviews.
Key terms to be set out in a Calderbank offer
- Property address
- Identity of both parties (although the offer can be served on the other party’s agent)
- Rent review date
- Proposed settlement figure (numerically and in writing for clarity)
- Cost position before and after expiry of the offer. While the offer is open for acceptance, usually each party bears its own costs and 50% of the third party’s costs. After expiry, all costs fall to the other side
- How long the offer remains open (usually 21-28 days), but this can be shorter if the circumstances dictate that this is appropriate, such as if an arbitrator’s award was being released imminently
- A statement that the offer is an offer to settle and not a valuation
- Confirmation of the without prejudice save as to costs position, so the offer will only be presented to the third party on the matter of costs (not before this)
Jen Lemen BSc (Hons) FRICS is a co-founder and partner of Property Elite
