Let me begin by taking the wording of section 34 of the Landlord and Tenant Act 1954:
“The rent payable under a tenancy granted by order of the court … shall be … that at which, having regard to the terms of the tenancy (other than those relating to rent) the holding might reasonably be expected to be let in the open market by a willing lessor …”.
Most rent review clauses follow the same model, requiring the valuer in addition to assume that the premises are vacant and that the willing lessor is negotiating with a willing lessee.
So we have at the outset the concepts of the open market, the willing lessor and reasonable expectation. The meaning of all these was elucidated by Peter Gibson J in Daejan Investments Ltd v Cornwall Coast Country Club [1985] 1 EGLR 77 at pp 79 to 80:
“A willing lessor [is a person who] is prepared to let the premises for whatever is the highest rent he can obtain without a premium”.
“The open market” is one that includes all possible lessees each of whom has had an equal opportunity of bidding to become the lessee of the letting”.
“The rent at which the premises might reasonably be expected to be let in the open market by a willing lessor is the highest rent obtainable”.
Few of us would have any difficulty with the notion that the value of something is what you can sell it for or with the notion that you are likely to get the best price by exposing what you are selling to the widest market. The concept of an open market connotes a market in which there are competing buyers, competing sellers and competing products, where the price will be regulated by reference to the available alternatives and the laws of supply and demand. Moreover, we are all familiar with the concept of “the presumption of reality”, from which expression one might suppose that the transaction the open market value of which is to be determined will closely resemble transactions which actually happen. Let us examine that hypothesis.
Possible scenarios
If a landlord has a shop unit to let, he exposes it to the market and, he hopes, retailers will compete to take it, whereupon he will come to terms with the preferred bidder as to the terms of the lease he is to take. The price or rent which he obtains will be “the best price obtainable in a market which is open to all purchasers”. His marketing included all possible lessees each of whom had had an equal opportunity of bidding. An open market is to be distinguished from an offer to a limited class only (IRC v Clay [1914] 3 KB 466 at p475).
But just a minute. The 1954 Act requires the valuer to have regard to the terms of the lease and, in rent review, the presumption of reality has the same effect. Leases often contain restrictive user covenants. Such a covenant will not only restrict the prospect of alienation but will restrict the initial market and thus have a depressing effect on the rent. As we all know, in Plinth Property Investments v Mott, Hay and Anderson [1979] 1 EGLR 17, the arbitrator discounted the rent by 32% because use of the office premises in question was restricted to the business of civil engineers. That is the very antithesis of an open market. A market consisting only of civil engineers is not an open market and the transaction we are required to value is nothing like the transaction which would occur in the open market.
Take another well known example. The rent of an unusually large unit on a retail park comes up for review. Although at the date of letting that size of unit had been in demand, the major retailers are now only interested in smaller units. The landlord argues, “If I had this unit to let in the open market I would split it up into smaller units and get an aggregate rent of £X and I would only be willing to let it as a whole if the tenant were prepared to pay me a figure approaching £X”. That is what he would do if he had the property in hand and was seeking to exploit it in the open market. But on review he cannot do that. He is stuck with the parameters of the original transaction (Marklands Ltd v Virgin Retail Ltd [2003] EWHC 3428 (Ch); [2004] 2 EGLR 43).
Then again, it may be the premises have become obsolete and effectively unlettable so that in the real world no tenant actually would want to take them. Nonetheless the assumption that there is a willing tenant in a rent review clause requires us to believe, contrary to fact, that there will be a transaction which in the real world there would not be and also requires the valuer, poor chap, to put a figure on it (FR Evans (Leeds) Ltd v English Electric Co Ltd [1978] 1 EGLR 93).
A fourth example. An office building is 20 years old and the plant is pretty well shot. But it still works. The tenant has kept it going; the lifts work, the air conditioning works, but everybody knows that within the next five years all the M&E will have to be replaced. In the real world, if the landlord had the premises in hand, he would refurbish them with new plant and new lifts before reletting but in the world of rent review he cannot do that and must accept a significant hit on the rent because of the deteriorated condition of the plant and the increasingly onerous repairing obligation borne by the tenant. I do not mean to suggest that there is anything unfair about this. My point is that the transaction required to be assumed and valued is not a transaction likely to happen in the open market.
Differences with the real world
It has often been said that, although the transaction is hypothetical, there is nothing hypothetical about the market in which it is supposed to have taken place. No doubt that is true, but where the characteristics of the transaction we are required to imagine differ markedly from the characteristics of the transactions happening in the real market, appropriate allowances and adjustments will obviously need to be made to the evidence derived from the real market. Rather than go on about these differences I thought it might be helpful to express them in the table below.
An open market is an unconstrained market, whereas the market to which regard has to be had for the purpose of lease renewals and rent reviews is highly constrained by the terms of the leases to such a degree that the application of rates drawn from comparables requires any number of adjustments which involve, very often, highly subjective judgments. This will leave the court/tribunal hugely dependent on the integrity of the expert witnesses giving the valuation evidence.
Expert witnesses
I mean no disrespect to valuers but we will all have had experiences of cases in which each side’s surveyor was patently straining every sinew in his client’s cause. His report may duly parrot the rubric from the RICS Guidance Notes or the Civil Procedure Rules but there is nonetheless a very strong whiff of the partisan.
The problem was identified nearly 150 years ago by Sir George Jessell MR in a mining case called Lord Abinger v Ashton [1873] 17 Eq Cas 358 at p373-4:
“Now I will consider the evidence on this point, but before doing so, I must say how the plaintiffs contest it. They contest it by producing the evidence of some experts, whose evidence was met by at least as many experts on the part of the defendants. As to this, I may say what I think I have often said before, that in matters of opinion I very much distrust expert evidence, for several reasons.
In the first place, although the evidence is given upon oath, in point of fact the person knows he cannot be indicted for perjury, because it is only evidence as to a matter of opinion. So you have not the authority of legal sanction. A dishonest man, knowing he could not be punished, might be inclined to indulge in extravagant assertions on an occasion that required it.
But that is not all. Expert evidence of this kind is evidence of persons who sometimes live by their business, but in all cases are remunerated for their evidence. An expert is not like an ordinary witness, who hopes to get his expenses, but he is employed and paid in the sense of gain, being employed by the person who calls him.
Now it is natural that his mind, however honest he may be, should be biased in favour of the person employing him, and accordingly we do find such cases. Undoubtedly there is a natural bias to do something serviceable for those who employ you and adequately remunerate you. It is very natural, and it is so effectual, that we constantly see persons, instead of considering themselves witnesses, rather consider themselves as the paid agents of the person who employs them.”
One cannot stress too much the importance of an expert witness being seen not to be partisan. Unfortunately, however, they so often are. By way of example, here are a selection of common mistakes which betray lack of independence and inappropriate adherence to the client’s cause:
(1) Being the client’s employee: it not infrequently happens that a party calls as his purportedly independent expert witness an in house surveyor responsible for the management of his property portfolio or a surveyor a very large part of whose practice depends on the business of the particular client. The witness, of course, protests his professional integrity in wounded tones but the fact of the matter is that his evidence is holed below the waterline before he begins.
(2) Being paid by results: I once called a witness who was asked whether he was being paid to give his evidence. He replied “Certainly not. Unless, of course, we win”.
(3) Being rude about the surveyor on the other side: it is quite remarkable in what violent terms one sometimes finds surveyors criticising each other’s points of view. This does not do any damage to the testimony of the party being criticised but it does huge damage to the credit of the party doing the criticising, who can be seen at once to have lost his professional objectivity.
(4) Being inappropriately selective: by this I mean only choosing supportive comparables and not dealing with or discussing other relevant but inconvenient material.
(5) Failing to accept (or accepting grudgingly) the other side’s good points and/or being unwilling to adjust the valuation accordingly.
(6) Being unable/unwilling to explain the reason behind some element of his valuation.
(7) Being on record as having given the opposite advice in another case.
(8) Coming up when challenged with evidence which he had failed to mention before.
Not always the highest figure
Finally, it is not always appreciated that, contrary to some of the dicta cited above, the criterion of open market value will not always produce the highest figure. In Lynall v IRC [1972] AC 680 the issue was as to the value of a block of shares in a private company for estate duty purposes. The Finance Act directed that the value should be the price which such property would fetch if sold in the open market at the time of the death. The case for the Revenue was that evidence showed that large blocks of shares in private companies were not sold by announcing that the shares were for sale and inviting competitive bids but rather by engaging an expert who selected a group he thought most likely to be prepared to pay a good price, with whom the directors would then share confidential information about the affairs of the company and the expert would negotiate.
The House of Lords held that this kind of sale was not a sale in the open market but a sale by private treaty made without competition to a selected purchaser at a price fixed by an expert valuer. They concluded that the open market value was £3.50 per share whereas the private treaty sale (informed by news of an imminent flotation) would have achieved £4.50 per share. Counter-intuitively, the “open market” criterion, which one might have expected to increase the price, had depressed it.
Lynall was applied in the casino rent review case of Cornwall Coast Country Club v Cardgrange [1987] 1 EGLR 146. Confidential information not available publicly is inadmissible in an enquiry into open market value.
Jonathan Gaunt QC is a barrister at Falcon Chambers. He delivered the lecture on which this article is based, as part of the 42nd annual Blundell lecture series held in June.
Colin Smith delivered part one of the debate, dealing with the valuation aspects. Read his abridged lecture paper here.
