For surveyors and solicitors, one of the most striking consequences of the 2008 economic downturn has been the disappearance of the rent review market. While the property market seems to have recovered in recent years, the rent review market has stagnated. However, there are now signs of revival, which raises a number of issues for property professionals.
The lost generation
The sluggish market in this area has meant that the rent review gene pool has become depleted. The pool of qualified arbitrators has not expanded and there is now a generation of surveyors and lawyers that has not had extensive exposure to rent reviews.
The rent review clause in a modern lease will often specify that the arbitrator must have a minimum number of so many years’ experience in lettings in a particular field – such as major City of London lettings. The small pool of arbitrators can make it difficult to find someone who meets the requirements in the lease, who is not acting for one of the parties or who is not excluded from the rent review owing to a conflict of interest. In any event, it limits the chances of having a healthy choice.
The problem of comparables
The rent review date in a lease tends to be the valuation date. The quiet property market has led to a lack of open-market transactions that could be used as direct comparables for certain types of properties. This creates problems for valuers, who have to find evidence in order to make open-market rent review clauses workable. This has resulted in valuers resorting to post-valuation comparables or to other types of evidence.
The arbitrator (or independent expert) will give the greatest weight and importance to transactions relating to a property that is as similar as possible to the actual premises, geographically close and where the date of the transaction is as close as possible to the valuation date for the rent in dispute (Living Waters Christian Centres v Fetherstonhaugh [1999] EWCA Civ 1269; [1999] 2 EGLR 1).
Weight of evidence
The best evidence in a rent review is an open-market letting, followed by a lease renewal or rent review agreement of a similar nearby property, which was concluded shortly before (or even on) the rent review date.
Assuming (and this is not always the case) that the arbitrator’s awards and expert determinations are treated as admissible, then it is for the arbitrator or expert to give whatever weight he or she considers appropriate to different types of transactions. However, the following hierarchy applies:
• Open-market lettings
• Arm’s-length lease renewal or rent review agreements
• Expert determinations
• Arbitrators’ awards
• A lease renewal determined by the court
• Hearsay
Rent-review awards as evidence
If no open-market comparables exist, there may be evidence of rent review arbitration awards and expert determinations. It is not absolutely clear whether this evidence would be admissible. Arbitrators’ awards were held to be inadmissible under the old rules on hearsay (Land Securities v Westminster City Council [1992] 2 EGLR 15). However, in arbitrations under the Arbitration Act 1996, it is open to the parties to agree that evidence of arbitrations and expert determinations is admissible. This leaves it to the arbitrator to decide what weight to give to these, but they are inevitably towards the end of the pecking order.
Of course, even if an award is not admissible, the parties’ valuers (and indeed the market generally) may, despite the confidential nature of arbitrations, still be aware of its existence and this might have an effect on market sentiment.
| Type of evidence | Admissible in rent review? |
|---|---|
| Pre-valuation date events | Admissible |
| Pre-valuation date open-market lettings | Admissible |
| Pre-valuation date rent review agreements | Admissible |
| Pre-valuation date rent review arbitrations/expert determinations | Admissible as to effect on market sentiment. Otherwise depends on the parties or on the directions given by the arbitrator |
| Post-valuation date events | Inadmissible (unless it is to help shed light on the weight to be given to post-valuation comparable transactions) |
| Post-valuation date open-market lettings | Admissible |
| Post-valuation date rent review agreements | Admissible |
| Post-valuation date rent review arbitrations/expert determinations | Inadmissible unless arbitrator directs otherwise or parties agree – these would have no effect on market sentiment as they would not have been known |
Post-review date transactions or events
If evidence is scarce, then sometimes it is necessary to decide tactically (assuming time is not of the essence) whether to delay initiating or progressing the review if it is believed that comparable evidence will shortly become available.
To what extent can a valuer use post-rent review date evidence? There is a distinction to be made between: (i) transactions, events and expectations of future events that have occurred or that exist at the rent review valuation date; (ii) transactions that occur after the valuation date; and (iii) post-valuation events not anticipated at the valuation date.
There is no problem with transactions or events that have occurred prior to the valuation date. Similarly with future events that are anticipated at the valuation date. This is for the simple reason that they would have been known to the hypothetical parties negotiating the hypothetical open-market letting. So, if the review date was after 7 May 2015, the result of the general election would be known. Expectation of future events that could affect the minds of the hypothetical parties could be the anticipated rise in interest rates or the opening of Crossrail.
The reverse side of this coin is that events that occur after the valuation date and that were not anticipated cannot be taken into account because they would not have been known and therefore could not have affected the minds of the hypothetical parties. So if the valuation date had been prior to the collapse of Lehman Brothers, the devastating effect that this event had on the market could not have been foreseen at that valuation date.
Could it not therefore be said that comparables occurring after the valuation date should, for the same reason, also be ignored? The answer to that is no. Although the comparable would not have been known to the hypothetical parties on the valuation date, it nevertheless would have evidentiary value as it would be an indication of rental values. It follows from this, that if a transaction after the valuation date is admissible, so too are events that occur between the valuation date and the date of the comparable, if those events may affect the rent for that comparable. Such events are considered, not because they would be known to the hypothetical parties, as of course they could not have been, but rather for the purposes of ascertaining the weight that should be attached to the post-valuation comparable (Currys Group plc v Martin [1999] 3 EGLR 165).
However, the evidence will become progressively less reliable the further away the date of the transaction is from the rent review date (Segama NV v Penny Le Roy Ltd [1984] 1 EGLR 109).
Applying a multiplier
Another alternative, if there are very few comparables of whole buildings, may be to review one floor of the building and apply a multiplier to the rent achieved in respect of all the other floors, in order to produce a total rent for the building. However, this approach comes with its own issues. For example, the parties may have to agree a hypothetical lease of part of the premises, to reflect the new arrangements, and the tenant may argue that a discount should be applied to the resulting figure, to reflect the fact that the tenant would have to deal with management and services.
Witness summons procedure
Many transactions are subject to confidentiality agreements, which present additional difficulties for valuers. The witness summons procedure may provide an answer to this problem (see “Expert witness: taking the stand”, EG 24 January 2015, p74).
Expert v arbitrator
Finally, if the lease permits a choice between the third party acting as an arbitrator or as an expert, it may be preferable to appoint an expert who will reach a figure based on his own knowledge. However, this distinction between arbitrators and experts has lessened owing to the Arbitration Act 1996, which now allows an arbitrator to make his own investigations provided he submits his provisional findings to the parties for comment.
Jennifer Rickard is head of real estate dispute resolution and Sarah Moore is the practice support lawyer in the real estate dispute resolution team at Nabarro LLP
