by John Furnival
The nation is in one of the deeper recessions which many of us involved in business can remember. The effects are drastic and undoubtedly will have a long-term influence on the country.
In its widest context, the property sector has been affected as badly as any. The downturn in the residential market has been well documented, as it touches every householder in the land. I will, however, restrict my comments to the retail sector, which has also received much press coverage. Steps could easily be taken to help this struggling sector, notably by the RICS in reviewing its third-party referral system.
With the increasing uncertainty in the present market-place, more and more retailers are invoking the clause in their lease relating to the appointment of a third party. Most commercial leases state that, in the event of a dispute between the parties as to the levels of rent at review, the matter will be referred to the president of the RICS to appoint an arbitrator or independent expert. Is it not, therefore, reasonable that the RICS should pay heed to the clamour of voices from both sides of the commercial property equation — landlords and tenants — to reconsider their procedures and guidelines?
References to third parties have increased enormously in the past two or three years, without doubt, mainly as a result of the retail boom during the past decade. The vast majority of retail expansion has taken place through acquiring rack-rented properties and, therefore, those retailers affected now inherit the first round of rent reviews — five years on.
The third-party system allows little scope for an arbitrator to make his own judgment of value, as he is restricted to considering the facts before him in the submissions, contrasted with an expert’s judgment. Similarly, the inequitable situation arising between those shops which are zoned, and others that are valued on gross internal square footage, is extraordinary. An illustration of this is the award on the Boots’ premises in the Whitgift Centre, Croydon, where they occupy an area of over 43,000 sq ft and were awarded, at arbitration, a figure which devalues to £9.72 per sq ft. However, the rent which the landlords (BZW) are quoting, as evidence on zoned shops, equates to £91.30 per sq ft. I hasten to add that many of us are still in negotiation on the zoned shops in the Whitgift Centre and there is every indication that, with recent awards, these figures will reduce considerably, but, clearly, there will still remain an extraordinary differential between the two methods of valuation.
The RICS Arbitration Service seems to be flooded by the current deluge of referrals and, with the best will in the world, it does not have the capacity to deal with the situation.
An immediate and comprehensive exercise must be undertaken to review the whole system — not, I hasten to add, by the RICS itself. It is one of the major problems in that the monolithic institution, while being accepted as the senior professional property body in the UK, must surely be seen to be above reproach and suspicion — not seen as self-policing. If it is to continue to have a virtual monopoly of training the profession, and thereby setting guidelines on valuation, and to be ultimately responsible (almost without exception) for appointing arbitrators and experts to determine rent levels, an independent body should be set up to look at the whole matter before further damage is done.
Retail is one of the major businesses in the UK — it is one of the larger employers, the major collector of VAT and a huge contributor of tax to the Treasury. With so many institutions as landlords of retail properties throughout the country, the retailers are the mainstay, in the sense of revenue, to the funds to service the nation’s pensions.
The Property Managers Association has become so concerned by the RICS referral system that a meeting was arranged in January when a delegation put the following proposals to the RICS:
(1) The institution publish a register of all panel members from which arbitrators or experts are drawn. This should be openly available and updated regularly, through Chartered Surveyors Weekly, as a vehicle. Short biographical notes should be attached to each name.
(The ISVA has, for many years, produced a list of its members who are available as arbitrators or independent experts — it is unfortunate that the ISVA is rarely mentioned in leases.)
(2) On the RICS being approached by a landlord/ tenant to appoint an arbitrator/expert, they should (within seven days) confirm receipt of the application and also name, say, three panel members — one of whom the president is of mind to appoint — but giving both parties an opportunity (within a further 14 days) of objecting, on reasonable grounds, to any of the names submitted.
(As readers will be aware, the form one receives back from the RICS Arbitration Service, confirming that they have been asked to make an appointment, gives either party the opportunity of confirming names of those panel members they would not wish to be appointed … this is absurd as there is no openly available register. Outside the confines of the Arbitration Service, therefore, no one is aware of who the president is likely to appoint.)
(3) All awards and determinations should be reasoned. It is appreciated that the RICS Guidelines indicate that an arbitrator, if asked, should give reasons, but it is by no means mandatory, and many refuse.
(If they do not actually refuse, they ask for an unreasonable fee for this “additional” service. I am aware of great concern by some experts, but by no means all, that they should have to give reasoned determinations.)
- how many times have we heard that valuations are not an exact science?
- what is an expert afraid of?
- why should he not be prepared to be challenged over his determination of rent?
It will be accepted that the rent determined by an expert/arbitrator is one of the major occupational costs to a tenant and, of course, the only revenue for a landlord. It affects both parties for the next five years, is continually quoted in evidence in many other negotiations and third-party referrals in the locality.
- (4) The president should have greater powers to withdraw an appointee prior to an award or determination if such grounds, as conflict of interest or collusion, likely to affect the outcome, can be proved by either party.
- (5) The RICS must take immediate steps to reduce the time taken to make appointments and also stipulate that awards and determinations must be made sooner than is our current experience.
- (6) Arbitrators should also be experts in the field on which they are adjudicating. (Valuations are too complicated a matter to be dealt with by inexperienced people.)
- (7) There should be a set fee for awards — they vary from 4% to well over 6% of the settled rent at present, plus a set fee.
- (8) That the RICS has a duty of care not only for appointments but also a responsibility for the awards and determinations.
The above were the main points raised during the meeting at the RICS. Although we had the impression that most of the points we raised were considered reasonable by the RICS delegation, with the major exception of a reasoned determination by an expert, the only real point of substance which came out of that was the concern about an expert being drawn into litigation. Our view is that such an implicit threat would make experts even more careful on how they function — no bad thing!
While awaiting a response to a series of letters I have addressed to the RICS on this point, I did use a standard RICS appointment form to point out that I am unable to supply names of arbitrators to whom I might object, not having access to a register of members.
To this I received a response from Peter McMahon, head of the Arbitration Service for the RICS, stating that he is “confident that the system adopted by the RICS is correct”, going on to say that “… the president has complete discretion as to whom should be appointed and cannot be fettered by the parties”. This confirmed that all those who are appointed by the president are asked to check, within their own firms, to establish if there is any matter that will give rise to a possible conflict of interest on the subject property. McMahon felt that my suggestion to propose three names to both parties, while to some extent beneficial, was outweighed by the disadvantage that a party to the dispute could seek to delay matters simply by objecting to any, or all, of the names submitted. He added that he understood that it was normal practice for three names to be suggested by each side in a dispute before approaching the RICS for a suitable appointment, if the parties were unable to agree on a surveyor among themselves. This is simply not standard practice in my experience.
This article is written not to denigrate, but out of sheer frustration that the RICS seems to be entrenched in its outdated procedures, and is complacent in the certain knowledge that it controls the system which, in its view, is beyond reproach. It is foolish to suggest that any system can be perfect and, by definition, in a dispute there are bound to be winners and losers. All we are asking for is the most equitable procedure. By totally disregarding our suggestions, more and more referrals will take place and it can only be a matter of time before the RICS Arbitration Service grinds to an ignominious stop!
If there were a central register of RICS and ISVA experts/arbitrators, many more landlords and tenants would be able mutually to agree a third-party appointment without recourse to the RICS Arbitration Service and the whole procedure could, therefore, be speeded up considerably and, by definition, less contentious awards/determinations would be made. In my view, one solution would be for the Chartered Institute of Arbitrators to take the place of the RICS to manage the referral system. They could be empowered to appoint an appropriately qualified arbitrator or independent expert from either the RICS or the ISVA.
In order to deal with this whole vexed system, I would suggest that a working party be formulated with, say, two members from each of the main bodies involved — the RICS, ISVA, Chartered Institute of Arbitrators, Property Managers Association and the British Property Federation, under the chairmanship of a senior official from the Office of Fair Trading or the Law Society in order to make recommendations.
If retail businesses are to survive, the referral system must be reviewed with the utmost urgency. Retailing is traditionally a dynamic business and has, to date, adapted to most market situations. However, in this instance, permanent damage could result in the retail sector if nothing is done to halt this drift towards inequitable solutions and uneconomical properties.
