Hywel Hughes
There has been significant correspondence during recent months concerning the appointment of arbitrators/independent experts to determine rents. My impression is that this is viewed as an unfortunate trend: it implies that rent reviews are not being settled amicably, and that using the threat of third party proceedings is not the thing to do. With the significant rental growth of the past few years, it is surely not surprising that agreements cannot easily be reached. Often it is in the tenant’s interest not to settle speedily, as delay in paying an increase in rent is effectively a method of borrowing money cheaply.
In this practice we currently handle over 300 rent reviews pa and more of these are proceeding to third party determinations. I believe the reasons for this are:
(a) with the decline in the level of activity in the national economy tenants need to minimise their rents;
(b) with the increase in property yields landlords need to maximise their rental income; and
(c) with the slowdown in rental growth the rent agreed will remain close to the full market rental value for longer.
Both landlords and tenants therefore need to see the third party surveyor system working properly. However, in my view, with few exceptions, correct results are, unfortunately, not obtained. This is not because there is anything inherently wrong with the system but because of the way in which the third party surveyors conduct themselves. I am not making this accusation in any sense of “sour grapes”: in several instances the independent surveyors have determined rent at levels far better than I could reasonably have expected.
Third party surveyors are appointed either as arbitrators or as independent experts. The capacity in which the independent surveyor stands is normally set out in the lease. It is generally held that in a bull market an independent expert is better for the landlord and an arbitrator is better for the tenant: the converse is true in a bear market. This is because arbitrators will generally have regard to historical evidence, whereas independent experts will, and must, have regard to all evidence.
Standards of information
From the viewpoint of surveyors representing both parties, arbitration is more cumbersome and time-consuming because of the necessity of agreeing facts with the other party and the obligation (except in the case of agreement) for evidence to be strictly proven. Our policy, however, is that a submission to an independent expert should be of a similar standard to a submission to an arbitrator, and we always seek to prove our evidence.
In arbitrations there is the possibility of attending preliminary and formal hearings, but once submissions have been made to the arbitrator the award should, in theory, be produced more speedily than an independent expert’s determination because the arbitrator does not have to do anything other than consider the submissions and inspect the property and the comparables.
An independent expert must inspect the property and take site measurements, carefully consider the comparables brought to his attention by the parties (including checking all the relevant facts with the agents or principals involved) and calculate the floor areas — even where the parties have submitted agreed areas. This will be time-consuming, but essential.
Fees
The fees of the independent surveyor are, largely, at his discretion although my experience is that representations made by the parties (especially if they are made jointly) do result in lower fees. Theoretically, an arbitrator’s fees should be substantially less than an independent expert’s fees although in practice this does not always apply. An arbitrator should charge lower fees because the amount of work he will carry out will be substantially less than the independent expert’s and he has considerably less liability to the parties.
However, in view of the strict proof that is necessary in arbitrations it is likely that the parties’ surveyors’ fees will be greater. Of course, in arbitration (and in independent expert’s determinations where the lease allows) the costs can be ameliorated by the careful making of Calderbank offers.
Matters of information
In arbitration strict proof is required. The arbitrator’s award can only be as good as the evidence placed before him. Unless the parties were personally involved with the comparable transactions the best evidence would be a copy of the lease and other relevant documentation, together with a floor plan and details of the areas. In practice this does not happen: the parties seek to obtain confirmation from the agents involved by way of a letter or the completion of a pro forma. Unfortunately these letters and pro formas are often lacking in information but are nevertheless accepted by the arbitrators as they are not objected to by the other party.
As a minimum, the information supplied should include the detailed floor area (including the basis upon which it is calculated and whether it was agreed with the other party), a detailed description of the premises, the name of the landlord and its agent, the name of the tenant and its agent, the term and commencement date of the lease, the rent review pattern, the rent agreed, the date of the transaction (including, in the case of a new letting, the date when the terms were agreed and solicitors instructed), the precise user clause, the precise alienation clause, the repairing liability, the rent review basis, whether a rent-free or any other inducement was granted, together with all other relevant details.
Although I am not wholly in favour of pro formas, as they tend to limit information, it would be worth while considering the production of a standard and generally accepted pro forma as this will lead to uniformity in the presentation of the comparables.
The results
In theory an independent expert should produce a more accurate result than an arbitrator. The expert has the ability to look into the facts behind the comparables, can have regard to hearsay evidence and must have regard to comparables not brought to his attention by the landlord and tenant. An arbitrator’s award can only be as good as the evidence placed before him, and therefore it is the surveyors’ duty to ensure that their submissions are first class — research must be thorough to ensure that no relevant comparables are missed. As an advocate the surveyor must highlight the relevant provisions in the lease and the relevant case law: above all, the presentation of the submission must be such that the information is presented to the arbitrator in a clear and logical manner. My experience is that the quality of many surveyors’ submissions is poor: they may indeed be a positive disservice to their clients, especially in view of the potentially large amounts of money involved.
Once the award or determination is published there is a possibility that one or other party will feel dissatisfied with the result. With an arbitration, except in exceptional circumstances, an appeal can be made only on a point of law, but with independent experts an appeal will be successful if it can be shown that the independent surveyor was negligent. In practice, however, this is difficult to prove, and in any case is hardly desirable in the interests of the system as a whole. If improvements are made and landlords and tenants see that the system is working fairly then appeals are less likely.
Appointments
Both parties are likely to be dissatisfied if it can be shown that the independent surveyor is not truly independent. If a surveyor is an “expert” within a certain locality then he is likely to be acting on behalf of both landlords and tenants of relatively comparable properties in the vicinity. In some instances — and I have experience of this — surveyors are accepting appointments where a potential conflict of interest exists. With arbitrations it is probably best for the president of the RICS to appoint surveyors from outside the locality, or surveyors from within the locality who deal exclusively with arbitrations. An independent expert must by definition be an expert in the locality. I see this as a problem — but unfortunately I can suggest no solutions.
Some independent surveyors are accepting appointments where they should not do so because of the likely levels of fees that they can charge. This is particularly relevant in today’s market conditions because fee income from other activities has declined. A view widely held by clients is that independent surveyors’ fees are extraordinarily high, bearing in mind the amount of work that they have to undertake. But landlords and tenants do not realise that for every case which results in a full fee being received by the independent surveyor there are four or five other cases that result in only a nominal amount being paid.
Indeed, in some instances, especially in the City of London, independent surveyors do not charge abortive fees on the basis that fees obtained for the matters which do proceed more than compensate. I do not believe this to be right, as in many instances the appointment of an independent surveyor is no more than a negotiating tactic. The independent surveyor should charge a proper fee for his abortive work and not expect those cases which proceed to subsidise the abortive work.
Most arbitrators and experts set out directions at some length. Generally the directions are helpful, but in some instances only basic directions are provided: though acceptable to an experienced rent review surveyor they give little assistance to an inexperienced surveyor or an unrepresented party.
Publication of findings
Both arbitrators and experts should give an indication as to the expected date of the publication of the award/determination. All too often they take far too long in publishing the results of their deliberations, and this is especially relevant where there is no interest recoverable on late settlement of the review or if the interest rate is penal. Perhaps this is because the independent surveyors decide that other matters with which they are dealing are more pressing because they have a direct responsibility to their clients. The general impression which I obtain is that independent experts treat the references as little more than arbitrations. Unless the lease states otherwise, experts have no obligation to receive submissions, but are well advised to do so. I am firmly of the view that the independent surveyor should discuss the various comparable transactions brought to his attention directly with the parties involved and also carry out further research.
I am aware of instances where, although I specifically advised an independent expert to discuss particular comparables with the agents involved because it was difficult to convey all the facts in writing, I know that the expert did not make any contact. Likewise, I provide comparable evidence to surveyors making submissions to independent experts regularly — yet it is very rarely that I am contacted by an expert asking for further details. In view of the risk of the independent expert being sued, I believe that by not carrying out proper research he is putting himself at risk. The duty of the expert is to arrive at the correct figure and he is more likely to come to this if he has carried out thorough research.
Reasoned awards
I believe that experts, like arbitrators, should issue reasoned awards. If I approach a client asking for instructions to settle a rent review at a certain level then my client will expect me to supply reasons. The expert is, effectively, in the same position: he has a duty to both the landlord and the tenant. Furthermore the expert’s determination will, no doubt, be used as a comparable in other negotiations and, from the market’s point of view, that an unambiguous analysis is published. One reason that has been given by independent experts for not giving reasoned awards is the risk of being sued. However, I am certain that if the expert carried out his task properly and carried out proper researches there should be no risk to him. If a surveyor will not stand by his rental valuation then he has no right to call himself an expert.
Finally, an improvement to the system would be for the appointment of a third type of independent surveyor — an arbitrator (ie having powers conferred upon him by the Arbitration Acts) but with the ability and obligation to carry out further research. Unfortunately current legislation and leases do not allow this.
