by David Rose
Having been regarded as something of a “cottage industry” for so many years, the arbitration/independent expert appointment service provided by the president of the RICS has become increasingly important.
From the frequent controversial letters in the correspondence columns of the professional journals it is apparent that the commercial world is largely unaware but very interested in just how this service works and what it has to contribute.
Rent reviews began to be commonly inserted in long leases at 21-year intervals in the 1950s, gradually reducing to 14-, seven- and then five-yearly by the 1980s. It has been usual for leases to provide for the RICS president (very occasionally the ISVA) to be ultimately responsible for an appointment on the application of either landlord or tenant.
The appointment
In the mid-1970s some 1,000 applications were made to the RICS president annually, but by the end of 1990 there were around 12,500. During the past few months this annual rate has jumped to about 16,000. This caused some delay in Coventry, where the service moved from London only last July. That involved a virtually new local team, which now consists of 21 people.
Applications during recessionary and boom periods always increase dramatically (so when are we stable!), and as a result there can be a temporary slow-down in the involved processing service. The word soon gets round, so that parties who would normally defer application, hurriedly submit theirs, thus inevitably clogging an otherwise smooth-running system.
Remember, there are still many old leases in the frame that do not provide for interest on delayed increases, so that it is a sensible if cautious move to have a third-party appointee (TPA) in place on that proverbial back-burner before the review date, and for the modest fee of only £80. He/she is there to be “triggered” at any time should either of the parties decide that negotiation time is over. Given these circumstances, it is not surprising that a TPA finds that seven out of eight cases which he accepts and processes are ultimately settled without actual recourse to him to decide the disputed rent. It has been estimated that there are probably 200,000 commercial rent reviews referred to the profession every year. At the rate of 15,000 now referred on to the service, and if only 15% have to be ultimately determined by the TPA, then nearly 99% are still agreed privately between parties’ own negotiations.
In the past a majority of TPAs have charged a basic appointment fee between £50 and £500. The application and fee to the RICS service is often a “tool of the negotiating process”. Acceptance by the TPA is also part of that process and, despite the argument that this commands a time-cost, the prevailing view is that the TPA is performing a public service. After which point, on settled cases, and if the referral gets to the “directions requested stage”, the cost may well be based on, say, one to two hours’ work at charges between £140 and £200 per hour in London (£60 to £125 outside).
Fuelling the controversial aspect, a distinguished legal advisor has said that expert valuers should recognise the importance of their contribution towards a negotiated settlement, often triggered as a result of the appointment. This could, he avers, justify a reasonable appointment fee. Some suggest that the answer may be for the parties’ surveyors to pay such a fee, and not charge it to their clients!
It is said that there is nothing to prevent parties from agreeing their own TPA, but from long experience this is easier said than done. Names put forward to the other side are not infrequently viewed with a degree of scepticism, for obvious if unjustified reasons, and rejected out-of-hand, sometimes also as a delaying tactic. Where one surveyor’s nominee has been accepted and it turns out later that the rental award does not tally with his client’s idea of value, he gets castigated for “putting that idiot’s name forward”!
Perhaps the main reason for surveyors preferring a presidential appointment is that all parties involved can plainly see the impartiality of the selection made with any imputation of bias avoided.
Another recently suggested way of speeding up the process is that lease provision might be made for appointments by the local chairman of the General Practice Division of the RICS branch. The danger there is that as soon as you localise, up can go the cry “jobs for the committee boys”.
In this important matter of appointment, the president has the last word and the absolute right to appoint the person he considers most fitted for the particular referral.
The rent review world thus remains essentially dependent on the present well-honed system which, by common consent, works perfectly well except for some understandable delays that have occurred two or three times in the past 15 years. The backlog suffered over the past wintry months has now been virtually eliminated, with current applications being converted to appointments within a few weeks.
The panel
While RICS policy is to have no published list as such, obviously the service has a record of those surveyors who have either offered or been invited to exercise their skills as TPAs and who meet the president’s criteria for appointment.
Currently there are around 1,000 chartered surveyors in England and Wales who act as independent experts; of these there are 400 who also act as arbitrators, as well as a further 50 who are arbitrators only — generally those who are no longer involved as actively as deemed necessary in their former specialist field.
Statistically leases specify that disputes be resolved 55% by independent experts and 45% by arbitrators: 97.5% of third-party arbitration referrals are dealt with by written documentation, as opposed to full-blown oral hearings involving the panoply of counsel, solicitors, expert surveyors and the arbitrator.
The Arbitration Service, with its long experience, must be best placed of any organisation to monitor how many surveyors are required geograpically and in which specialist fields.
Training
These days those who wish to continue to act as RICS-appointed arbitrators are encouraged to attend weekend training courses. They are expected to keep their knowledge on procedure and the legal side up to scratch, and this is often accomplished by attendance at weekend conferences or the many weekday seminars organised by the RICS and other commercial bodies — all very expensive!
A number of the leading landlord and tenant figures at the Bar help enormously in all these forms of training, in particular Ronald Bernstein and Kirk Reynolds, the authors of the RICS Guidance Notes and other mighty tomes that have to be kept up with ever-changing case law and procedural fine-tuning.
Reasons
On the vexed subject of reasons, there are clear, shortly-to-be-updated guidelines laid down for the arbitrator so that generally, if asked, he should accede in his terms of reference.
This is rather different from the advice given to the prudent arbitrator by Lord Mansfield (1705-1793): “Consider what you think justice requires and decide accordingly. But never give your reasons: for your judgment will probably be right but your reasons will certainly be wrong.”
Michael Treays fully updated the pros and cons of reasoned awards in his excellent paper published in Estates Gazette (August 4 1990, p 26).
In expert cases, if parties wish for reasons, then it is open to so elect at the outset when they enter into the lease or, failing that, to stipulate it as a condition of any application for an appointment. Otherwise it is commonly accepted that the expert is justified in refusing a later demand.
Fees
No training session, learned seminar or informal gathering of surveyors involved in rent reviews would be complete without the thorny old subject of fees cropping up within minutes of the start of question time. Any lawyers present will howl for an hourly rate; the independent expert will protest that he must have his ad valorem basis to help pay for his insurance premium.
The one thing about which they are all naturally shy is what rate per hour, or what percentage, they think is fair and reasonable. But we do have to remain mindful that, as a result of statutory abolition of fee-scale recommendations, RICS/ISVA-connected people have to be very circumspect, at least in public, on this vexed subject.
In the majority of cases that go through the issue of directions and on to an award or determination, the TPA fee is agreed at the start, following the appointment. Particularly on low-value cases, some fees are hourly or daily based, but most are a percentage of the mean claims of the parties (not the TPA’s figure); between 2% and 5%, dependent on the quantum, complexity and responsibility of the referral. Arbitrators tend to charge slightly less than an expert.
Those who are not “called for service” and whose task is to persuade the arbitrator of the merits of his client’s case before questioning the fee might well pause and ask whether it is right that, in general terms, the arbitrator almost certainly receives a smaller fee than those appearing before him.
It will not be forgotten that, despite their failure to negotiate a settled rent, perhaps either as a result of their own valuation or their client’s conflicting policy, surveyors usually charge ad valorem on the eventual result — often 5% to 7.5% plus a fixed or time charge for assembling their submission and counter-submission. With average London office referrals this can be between £2,000 and £7,500 on top. Incidentally, the advent of the word processor must have tripled the frequently padded submissions, just as it did the length of modern leases!
It ought to be appreciated that the TPA has a very great financial responsibility in arriving at the “right” figure in dispute. The lessor and lessee are bound by the decision unless there are justifiable grounds for successfully challenging it. The “wrong” rent affects not only the immediate review period but can also affect the freehold asset value. It is also very unhelpful to other parties when quoted as comparable “evidence”.
In those instances where both parties feel aggrieved by too high a fee they can, and should, challenge the TPA’s proposal at the outset.
In the rare event that an RICS appointee is unacceptable to both parties, an option is to tell him politely that he is no longer required and appoint someone privately, as was open to them in the first place.
It is understandable that there is more argument in bad than in boom times. Charges have been erratic but by and large have settled down, with parties no longer feeling nervous at challenging the TPA who pushes his luck.
Costs
As to the cost of a reasoned award, much depends on the level of the award fee, but where an additional charge involving extra time, as it obviously does, is warranted, an hourly rate is usually appropriate.
Apart from getting his fee paid, the last task of the arbitrator, sometimes the expert, is the tricky one of having to decide who pays what proportion of all the parties’ costs of the reference and/or his own fee. Some will persuade the parties to settle the matter themselves — the rest do their best to be “judicial” for them. This is what we oft-maligned arbitrators and independent experts continue to strive to do in arriving at that right and sensible rental figure.
Some 25 years ago a Westminster County Court judge, before whom I appeared as an expert witness in a 1954 Act renewal case, dealt with my hard-fought case for a rent rather higher than he accepted by summing me up as “honest but mistaken”. TPAs wish that they could say the same about so many extreme valuation claims on which they have to adjudicate!
