Negligence — Rent review — Independent expert valuer — Whether expert wrongly relied on retail comparables instead of restaurants — Whether expert should make own inquiries — Whether valuation outside acceptable bracket of values
By a lease
dated October 9 1975 the plaintiff held a term of restaurant premises at 28
Thurloe Street in a parade of shops in Kensington for 20 years from June 25
1975 at a rent reviewed in 1985 of £15,000. The landlord held by an overriding
lease granted on January 4 1991. On April 26 1991 the defendant was appointed
by the president of the Royal Institution of Chartered Surveyors as an
independent expert in accordance with the provisions of the rent review clause
and following a notice served by the landlord seeking a reviewed rent of £45,750
pa. Following submissions made by the plaintiff, on his own behalf, and by a
valuer on behalf of the landlord, on August 24 1991 the defendant determined
that the fair rack-rental value of the premises on June 24 1990 was £27,000.
The plaintiff claimed that the defendant acted negligently in arriving at this
figure, his expert contending that he had placed too much reliance on retail
comparables, the defendant had wrongly rejected the rent determination of a
restaurant at 32-34 Thurloe Street, had not made his own inquiries and had
wrongly valued the upper parts. For the defendant it was said that in a retail
area restaurants must compete with retail uses for space and that he was
following the practice of competent surveyors in using retail comparables.
proper by competent respected professional opinion in the field of property
valuation when he used as comparables rents of similar shop units. The
defendant’s reasons for rejecting the 32-34 Thurloe Street rent determination —
ie the property was an unusual shape, the relevant date was two years earlier
and it was not an open market letting — were questions of judgment about which
different surveyors may well come to different conclusions: the defendant was
not negligent in rejecting this transaction. Although there may be
circumstances when an expert should seek his own comparables, no evidence was
produced of any comparable not provided by the parties in their submissions to
the defendant before his determination which could in any way suggest that the
defendant’s valuation was outside any permissible bracket. The defendant
carried out his duties as an independent expert with competence and without
negligence.
The following
cases are referred to in this report.
Belvedere
Motors Ltd v King [1981] EGD 850; (1981) 260
EG 813, [1981] 2 EGLR 93
Bolam v Friern Hospital Management Committee [1957] 1 WLR 582;
[1957] 2 All ER 118
Singer
& Friedlander Ltd v John D Wood & Co
[1977] EGD 569; (1977) 243 EG 212 & 295, [1977] 2 EGLR 84
Sutcliffe v Thackrah [1974] AC 727; [1974] 2 WLR 295; [1974] 1 All ER
859; [1974] 1 Lloyd’s Rep 319, HL
Wallshire
Ltd v Aarons [1989] 1 EGLR 147; [1989] 02 EG
81
This was a
claim in negligence by the plaintiff, Elley Zubaida, against the defendant,
Philip Richard Hargreaves FRICS.
The plaintiff
appeared in person; Nicholas Dowding (instructed by Masons) represented the
defendant.
Giving
judgment, JUDGE ZUCKER said: Mr Elley Zubaida, the plaintiff, is the
tenant of 28 Thurloe Street in Kensington and Chelsea Royal London Borough.
Under the rent review provisions of the lease by which he held those premises
the president of the Royal Institution of Chartered Surveyors appointed Mr
Philip Richard Hargreaves [FRICS], a chartered surveyor, as an independent
expert to determine the appropriate rent. On August 24 1991 Mr Hargreaves
determined a figure of £27,000.
Mr Zubaida
claims that Mr Hargreaves acted negligently in arriving at that figure which,
it is alleged, was one at which no competent surveyor acting reasonably could
have arrived. Hence this action for damages commenced by writ issued on June 15
1992.
Mr Zubaida has
acted in person throughout this action. In a letter to Mr Hargreaves dated May
22 1991 he said that he has had experience in rent reviews for over 20 years.
He clearly has extensive knowledge of the relevant considerations. He prepared
his case with thoroughness and conducted it with courtesy and determination.
No 28 Thurloe
Street stands on the south side of the thoroughfare in a fairly short parade of
retail and restaurant premises (eight in all), running from the entrance of
South Kensington Underground Station, which stands on the west side of the
property, to Exhibition Road to the east. The premises are probably about 150
years old, constructed on basement, ground and three other floors in brick,
with stone window surrounds, under a stepped, flat asphalt roof. Mr Zubaida
holds the premises under a lease made on October 9 1975 between the
Metropolitan Railway Surplus Lands Co Ltd and Frank Decmar. The lease grants a
term of 20 years from June 25 1975 at an initial yearly rent of £5,150. The
lease contains the following provisions:
Clause 2(5)
[A lessee’s covenant] To put and keep the whole of the demised premises (whatever
their present condition) and the walls and fences thereof and the pipes wires
cables meters channels sewers and drains therein and all additions to the
demised premises and the landlord’s fixtures therein and the sanitary and water
apparatus thereof in good and substantial repair and condition throughout the
said term . . .
Clause 2(7)
[A lessee’s covenant] To paint with three coats of good oil paint in a good and
workmanlike manner and to the reasonable satisfaction of the Lessor all the
wood iron and other external parts of the demised premises previously or
usually painted in the year One thousand nine hundred and seventy eight and
thereafter in every third year and in the last year of the said term (however
determined) and all the wood iron and other internal parts of the demised
premises previously or usually painted in the year One thousand nine hundred
and seventy eight and thereafter in every seventh year and in the last year of
the said term (however determined) And also with every such internal painting
to grain varnish distemper wash stop whiten and colour all such parts as have
previously been or are usually so dealt with and to repaper with suitable paper
of as good quality as that in use at the commencement of the term the parts
usually papered . . .
Clause
2(11)(a) [A lessee’s covenant] Not to use or permit the demised premises or any
part thereof to be used for any purpose other than as to the basement ground
floor and first floor as a restaurant and as to the second and third floors as
and for the residential occupation of the lessee or an employee of the Lessee
as a service occupant . . .
Clause 4(1)
At any time during the fifth tenth and fifteenth years of the term hereby
created calculated from the Twenty fourth day of June One thousand nine hundred
and seventy five the Lessor may serve on the Lessee a notice in writing
(hereinafter called ‘the rent notice’) providing for the increase of rent
payable hereunder as from the expiration of the said fifth tenth and fifteenth
years as the case may be (hereinafter called ‘the review dates’) of the said
term to an amount specified in the rent notice being such an amount as the
Lessor considers to be the open market annual rack rent of the demised premises
for a term equal to the residue of the term hereof then unexpired and thereupon
the following provisions shall take effect:
(a) The Lessee within two months of the receipt
of the rent notice may serve on the Lessor a counternotice calling upon the
Lessor to negotiate with the Lessee the amount of the rent to be payable
hereunder as from the review date as the case may be.
(b) If the Lessee shall fail to serve a
counternotice within the period aforesaid the Lessee should be deemed to have
agreed to pay the increased rent specified in the rent notice.
(c) If the Lessee shall serve on the Lessor a
counternotice calling upon the Lessor to negotiate with the Lessee as aforesaid
then the Lessor and the Lessee shall forthwith consult together and use their
best endeavours to reach agreement as to the amount of rent to be paid
hereunder as from the review dates of the said term as the case may be but
failing agreement the question
hereunder as from the review dates as the case may be shall be referred to the
decision of an expert who acting as an expert and not as an arbitrator (failing
agreement between the Lessor and the Lessee) shall be nominated on the joint
application of the Lessor and the Lessee (or if either of them shall neglect
forthwith to concur in such applications then on the sole application of the
other of them) by the President for the time being of the Royal Institution of
Chartered Surveyors.
(d) The expert shall determine the question so
referred to him by ascertaining the annual rack rent of the demised premises
including any buildings thereon at the date of the rent notice that is to say
the annual rent at which the demised premises and any such buildings might
reasonably be expected to be let as a whole with vacant possession without the
payment of a premium in the open market as between a willing landlord and a
willing tenant for the then unexpired residue of the term hereby granted upon
the same terms and conditions as herein contained (other than rent) and
assuming that the Lessee has observed and performed all the covenants and
conditions by the Lessee to be observed and performed hereafter but
disregarding those matters specified in section 34 of the Landlord and Tenant
Act 1954 as amended by Section 1 of the Law of Property Act 1969 and if the
amount so ascertained exceeds the rent payable hereunder at the date of the
rent notice the difference shall be the increase in the rent payable hereunder
. . .
Clause 5(3)
If the Lessor shall desire to determine the term hereby granted on or after the
Twenty fourth day of June One thousand nine hundred and eighty nine for
redevelopment purposes and shall give to the Lessee six months’ previous notice
in writing of such its desire then immediately on the expiration of such notice
the present demise and everything herein contained shall cease and be void but
without prejudice to the rights and remedies of either party against the other
in respect of any antecedent claim or breach of covenant.
By clause
2(1)(a) of a deed made January 16 1986 between the landlord and the then
tenant, Mr Shirazul Islam:
(1) the user clause in the lease (clause
2(11)(a)) was deleted and substituted for it was the following clause:
Clause
2(11)(a) Not to use or permit the demised premises to be used for any purpose
other than as to the basement and ground floor as a restaurant and as to the
remainder of the property for the use of employees of the lessee as service occupants
or as residential units to be let furnished.
(2) Clause 5(3) of the lease was deemed to be
deleted from the lease. (In other words the break clause was deleted.)
In 1986, under
the rent review provisions of the lease, the rent due as from June 24 1985 was
fixed at £15,000. The next rent review date was June 24 1990. On May 10 1990
the landlord wrote to Mr Zubaida giving notice that it required the rent
payable under the lease to be reviewed as at June 24 1990. It put forward the
figure of £45,750 pa exclusive. On May 14 1990 Mr Zubaida wrote to the landlord
accepting that the rent could be reviewed as at June 24 1990, but claiming that
the rent proposed was exorbitant. The landlord accepted that letter as a
counternotice for the purpose of the rent review provisions of the lease.
With effect
from January 4 1991 the landlord granted an overriding long lease to South
Kensington Developments Ltd (‘South Kensington’).
No agreement
as to a new rent was reached between Mr Zubaida and Mrs Sarah Walker [ARICS] of
Edward Erdman, the chartered surveyors acting on behalf of South Kensington. On
February 1 1991 Mrs Walker applied to the president of the Royal Institution of
Chartered Surveyors for him to nominate an independent expert. On the
application form she described the premises as ‘shop and residential upper
parts’.
On April 26
1991 the president appointed Mr Hargreaves, an FRICS and a partner in Wilmotts
Property Services. Mr Hargreaves gave directions to both parties by letter
dated May 3 1991. The directions included the time for delivery of their
submissions.
The
submissions of both parties rely upon a formula for establishing a rental value
for the premises under review by comparison with the known rental value of
other premises, said to be comparable, which is now widely used and accepted by
surveyors, normally in relation to ground-floor retail premises or other
premises which can be compared with them.
There are two
aspects to the formula. First, the overall area of the premises is determined
‘in terms of zone A’ (abbreviated to ITZA). The area of premises is divided
into zones A, B, C etc, in descending order of value, zone A being the most
valuable at the front of the premises. The area of each zone will normally
differ one from the other. The value attributed to each zone per square foot is
half that of the previous zone. Thus in relation to the value of zone A per
square foot the per square foot value of zone B will be one-half and zone C
one-quarter. So, for example, if a building is 300 sq ft and 100 sq ft is
allocated to each of zones A, B and C, the square footage ITZA will be 100 plus
50 plus 25 — ie 175. Second, the rental value per square foot of zone A of the
comparable is determined by dividing the total rent by the area of the premises
ITZA.
The
determination of those matters enables the valuer to carry out two principal
exercises. First, the areas of all premises under consideration — both the one
whose rent is to be reviewed and comparables — can be determined ITZA, thus
providing a common basis for valuation. Second, once the zone A rate is
determined for a comparable property it can be applied with such adjustments as
are considered to be necessary to the area of the premises under review ITZA to
give a rental value for that property. Adjustments will be made for differences
in location, length and terms of lease, special factors affecting a particular
property etc.
Of course, the
areas to be allocated to each zone, the determination of the zone A rate and
the adjustments to be made to that rate when applying it to the property whose
rent is under review are all matters of judgment for the individual surveyor.
Different surveyors acting competently may well come to different conclusions
in relation to these matters.
Mr Zubaida,
acting on his own behalf, made his submissions by letter dated May 7 1991. They
can be summarised as follows:
1. His
principal comparable was a restaurant at 32-34 Thurloe Street, much larger
premises, for which a rent had been determined in 1989 at £32,400.
2. He submitted
as a further comparable an award which gave a zone A rate of £28.40 per sq ft
in January 1990 in respect of 34 Harrington Road.
3. He directed
Mr Hargreaves’ attention to 20 Thurloe Street, where a court determination was
expected.
4. He cited as
further relevant factors the recession, the fact that the upper floors of 28
Thurloe Street required extensive refurbishment, the bus stop causing serious
obstruction in front of his premises, the effect of the uniform business rate,
the downturn in visitors to the nearby museums and the effect of impending
redevelopment.
5. If the rent
of no 28 had been determined in 1989, at the same time as the rent of 32-34
Thurloe Street was determined at £32,400, the result would have been £13,000.
On June 25
1991 Mrs Walker made her submissions on behalf of South Kensington. They are
extremely detailed. On p3 she set out the dimensions of the ground floor of 28
Thurloe Street by zone and reached the figure of 382 sq ft ITZA. She gave the
dimensions of rooms and areas in the basement and she described the
accommodation on the three upper floors.
Commencing on
p6 she set out her comparables. The first was a music discount centre at 46
Thurloe Street. It was let at a rent of £32,500 pa with effect from April 19
1991. She analysed that transaction as reflecting a zone A rate of £63.60 per
sq ft. The contractual date for the expiry of the lease was in April 1994. Mrs
Walker commented:
The letting
of these premises confirms that there remains a demand for retail premises in
Thurloe Street despite current economic pressures.
She argued
that a restriction for use only for the sale of classical music CDs or videos
was significantly more prohibitive than the user restriction of 28 Thurloe
Street.
She submitted
other retail comparables — 1 The Arcade; 41 Old Brompton Road; 5 Old Brompton
Road; 21 Old Brompton Road —
She set out
the factors which she considered affected the valuation. Among them are these:
1. The lease
is drawn on effectively full repairing and insuring terms in line with the
comparable transactions referred to below.
The repairing
obligations specifically state that the tenant is obliged to put and keep the
property in substantial repair and condition whatever the state of the property
at the commencement of the term.
It is further
provided within the review provisions that the tenant is assumed to have complied
with the terms and conditions of the lease. It is necessary to value the
premises on the assumption that they are in a good and tenantable state of
repair.
2. The user
provisions contained within the lease restrict the use of the property to that
of a restaurant. The user clause in respect of all the shop premises referred
to under the heading comparable transactions are subject to some form of
restriction.
Premises
referred to on Old Brompton Road may not be used for a trade similar to
neighbouring properties in the same parade and consent to a change of use may
also be refused on the grounds of good estate management. Premises at 46
Thurloe Street and 1 The Arcade are subject to absolute user restrictions.
Taking into
account this evidence, and the difficulty of obtaining planning consent for
restaurant use within South Kensington, I am of the opinion that no deduction
for this restriction is warranted . . .
8. The
letting at 46 Thurloe Street and 1 The Arcade illustrate that the demand for
retail premises within South Kensington continues, notwithstanding current
economic pressures. Rents of £32,500 and £37,500 were achieved for nos 1 The
Arcade and 46 Thurloe Street respectively six months and ten months after the
review date. These leases are held on more restrictive terms and the tenant
does not have any right to terminate their lease prior to the end of the
contractual term.
9. Rent
review settlements on Old Brompton Road which show Zone A rates between £60.00
and £66.50 per sq ft effective from the same date of review as 28 Thurloe
Street indicate a general rental tone for the area. These properties are
affected by similar economic, physical and locational characteristics as the
subject property.
Her conclusion
and valuation read as follows:
Having regard
to the above I am of the opinion that the open market rental value of 28
Thurloe Street as at 10 May 1990 amounts to not less than £50,000 per annum
which reflects a Zone A rate of £66.50 per sq ft with £10.00 and £5.00 per sq
ft applied to the basement sales and storage accommodation.
With regard
to the residential accommodation I have adopted a rate of £65.00 per week for
the large bedsits and £40.00 per week for the smaller bedsits. This represents
the lowest figure currently receivable for accommodation within 22 and 20A
Thurloe Street. The highest rate achieved from bedsits within Thurloe St
amounts to £92.30 per week. I have adopted the lower rates as accommodation
above 28 Thurloe Street has shared facilities. I have made a further allowance
of 20% to allow for profit, voids and management costs.
I attach a
detailed valuation in the sum of £50,000 per annum in Appendix EE 12 and ask
you so to determine.
Mrs Walker’s
submission was supported by 12 appendices, which included details and an analysis
of her comparables and at appendix 12, as she states in her conclusion, an
analysis of her valuation of 28 Thurloe Street.
On July 1 1991
Mr Zubaida submitted his counter-representation to Mr Hargreaves in which he
made detailed comments on Mrs Walker’s submission, including her comparables,
which, he contended, had no bearing on 28 Thurloe Street. He further informed
Mr Hargreaves that terms had been reached in respect of 20 Thurloe Street,
namely a rent of £17,000 pa.
On July 3 1991
Mrs Walker sent to Mr Hargreaves her detailed comments on Mr Zubaida’s
submissions. She maintained that the rent should be fixed at £50,000.
On August 24
1991 Mr Hargreaves determined that the fair rack-rental market value of 28
Thurloe Street on June 24 1990 was £27,000.
Following his
articles, Mr Hargreaves has had practical experience as a surveyor since 1971.
At the time in question he was managing director of his company and in charge
of its valuation department. He was appointed an FRICS in 1982 and an associate
of the Royal Institute of Arbitrators in 1985. He had acted as an independent
expert and arbitrator in the determination of rent reviews for over six years
and had made a determination in approximately 100 to 150 cases. About 15% of
such cases have been in respect of restaurants.
The way in
which Mr Hargreaves arrived at his determination is set out in his proof of
evidence, which was adopted as his evidence-in-chief. There has also been
disclosed his detailed manuscript notes made in the course of his determination,
which also show the steps he took before reaching his conclusion.
Having
received the parties’ submissions and their comments upon them, Mr Hargreaves
inspected 28 Thurloe Street and the premises where the parties contended that a
comparable rent had been determined. I refer to the proof of evidence:
7. I
inspected the premises in question and the comparables. I did not carry out any
further investigation of any other additional premises at that time. From my
own experience, including from acting in the capacity as independent expert, I
already had a great deal of relevant personal knowledge of determinations and
open market lettings within that area. In particular, I determined the rent of
65 Old Brompton Road and had considered the contents of the submissions made to
me by the parties. 65 Old Brompton Road is a Kentucky Fried Chicken restaurant,
a few hundred yards from 28 Thurloe Street, which is, in my view, in a superior
location. I considered that Edward Erdman and Mr Zubaida had provided me with sufficient
information in respect of possible comparables in the area. In all the
circumstances I considered that I had sufficient information with which to
proceed to a determination in respect of 28 Thurloe Street.
18.
Nevertheless, I did attempt to canvass the opinions of other experts who had
dealt with other premises on Thurloe Street and that island site. I attempted
to speak to David Coffer [FRICS], who is a fellow surveyor practising in the
same geographical area, in an attempt to discuss the details of 32/34 Thurloe
Street. Mr Coffer was, however, not prepared to discuss such matters with me
and I, therefore, did not pursue this line of investigation. I also considered
consulting with Leslie Aarons. However, I was aware that Messrs Baker Lorenz
were acting on behalf of tenants in respect of other forthcoming determinations
in Thurloe Street, including number 30 Thurloe Street where I had been
appointed independent expert. I, therefore, considered that it would not have
been appropriate for me to do so. In addition, I read the application to have
an independent expert appointed and noted that Edward Erdman had asked the
President of the RICS not to appoint Mr Aarons or Baker Lorenz as they
considered that a conflict of interest arose. I also searched my card index
containing details of all of my previous determinations and details of many of
the comparables cited by both parties in those determinations . . .
22. On 10th
July 1991 I inspected the premises. I carried out check maintenance
measurements the measurements on the plan provided by Edward Erdman using an
electronic/sonic measure. On the ground floor I carried out check measurements
against all five measurements shown on the Edward Erdman plan. My figures
equated with those of Edward Erdman. Their measurement of the length of 32 feet
1 inch was the length produced when the stall riser at the front of the
premises under the window was excluded. I also considered it to be appropriate
to exclude this feature for the purpose of measurement. In any event, the top
of the stall riser was useable space for display purposes.
Mr Hargreaves
also measured the basement, but not the other floors. He then set out his
method of valuation. Para 27:
There are
several different ways of valuing premises, although clearly all of these use
as one of their basic tools the use of evidence from comparable premises. These
rents will either be one as determined by arbitration or by an independent
expert, negotiated between the landlord and tenant, or be open market lettings.
In a case such as this one, when the rent to be determined is the open market
rent, the better comparable is, in my view, one which has been an open market
letting. In addition to this factor one will generally give more or less weight
to a comparable rent dependent upon many factors, including the similarity of
the premises, the terms of the lease and the date upon which the rent was
determined or agreed and their location.
28. For the
reasons set out below I took the view that there was no reason for valuing 28
Thurloe Street differently from a retail unit because 28 Thurloe Street is let
on a lease which restricts the user to that of a restaurant and is indeed used
as a restaurant. The premises are a regularly shaped unit in a parade of shops.
I consider this approach to be particularly relevant on an
restaurants. In any event, I would not have given a good restaurant comparable
any greater weight than an equally good retail comparable.
29. The basic
considerations taken into account by the prospective tenants of such outlets
will generally be the same. Both are interested in the level of passing trade,
the location and area of shop frontage. If anything, restaurant premises would
be valued more highly for planning reasons. Planning authorities tend to allow
a limited percentage of any one parade to be restaurants and will allow a
restaurant to convert its use to retail but not vice versa. This is a
consideration which is often applied by adding an additional percentage after
having valued the restaurant premises by reference to comparable retail
evidence. However, in the particular case of 28 Thurloe Street I did not
consider that the location was a sufficiently good one to justify an additional
percentage uplift on the comparable retail valuation.
Para 41:
In Mr
Zubaida’s submissions he repeatedly drew my attention to number 32-34 Thurloe
Street. I did not consider that the premises could be used as a directly
applicable comparable for determining the rent of 28 Thurloe Street and would
have been too difficult to devalue and adjust in order to be of use as a
comparable at all. This was due to their unusual shape. In addition, the
information before me was insufficient to devalue even if this had been
possible or appropriate. 28 Thurloe Street is a regularly shaped property.
32-34 Thurloe Street is an unusual non-standard shape and on many different
levels which does not have a basement. In addition, I noted that the rent review
for 32-34 Thurloe Street was for 1988, over two years old, and that the rent
was fixed by determination rather than as an open market letting. For all of
the above reasons I did not consider that 32-34 Thurloe Street was a directly
relevant or useful comparable.
42. The
residential element was valued on the basis of comparable information and
information within my own knowledge. As previously stated, I have a great deal
of experience in the letting and valuation of residential premises in this
area, especially where there are flats and bedsits on the upper floors of
commercial premises. Edward Erdman’s approach to the valuation was, having
assumed that all of the tenants’ obligations had been complied with, to add
together the potential retail value of each possible bedsit on the upper floors
of 28 Thurloe Street. In my view a hypothetical tenant of premises such as 28
Thurloe Street would be primarily interested in the premises for their
commercial use. Taking this factor into account and assessing the open market
rent and in the light of my experience and the comparable information within my
own knowledge, I consider that Edward Erdman’s basis of valuation produced a
figure which was too high to reflect the open market value of the premises as a
whole. I therefore reduced the value attributable to the upper part to take
this into account.
43. Having
received the submissions of both parties and having carried out the
investigation set out above, I proceeded to consider all of the matters that
were now within my knowledge and to reach a determination pursuant to my
appointment. I considered the evidence in respect of the other properties
listed as comparables and, bearing in mind all relevant factors, considered to
what extent these comparables could be properly applied to 28 Thurloe Street,
if at all. As can be seen from my notes, I bore in mind the fact that the lease
contained a user clause allowing only restaurant use, though, for the reasons
previously stated, this did not affect my valuation. I considered that:
(a) Number 1 The Arcade was an extremely unusual
or freak letting in terms of its comparability. This property produces a zone A
rental of £264 per square foot, which is extremely high. This is attributable
to the nature of the premises which are a small kiosk outlet. For these reasons
I did not consider these premises comparable.
(b) I then considered the three comparables cited
to me by Edward Erdman in Old Brompton Road, being numbers 5, 21 and 41. From
the evidence provided, I calculated that the rentals for these premises equated
to an equivalent zone A rental of £60.17, £65.77 and £66.50 respectively. I
also considered a comparable which was within my own knowledge by virtue of the
fact that I have determined the rent in respect of those premises as
independent expert. This was the Kentucky Chicken outlet at 65 Old Brompton
Road. I have determined the zone A rental for this property at £70 per square
foot, which I considered to be in line with the above evidence provided by
Edward Erdman, having taken into account all other factors, including location,
prominence, review date, tenure etc.
(c) I read and considered Mr Zubaida’s
submissions and countersubmissions, in particular those in respect of numbers
32-34 Thurloe Street. No rent had been determined in respect of the commercial
areas of 20 Thurloe Street, although I did note that £7,000 had been determined
by the court as the rent payable in respect of the residential upper parts.
(d) For the reasons given above, I did not
consider 32-34 Thurloe Street a helpful comparable, especially as it would have
been difficult to devalue and break down this rental in terms of zone in order
to apply it to 28 Thurloe Street.
44. I
therefore took the view, having taken the above factors into account, that
number 46 Thurloe Street was the best applicable and comparable evidence
available to me. Those premises formed part of the same island site as 28
Thurloe Street and also fronted on to Thurloe Street.
I considered
that both of these factors were relevant in assessing the comparability or
otherwise of the evidence in The Arcade or from surrounding roads. In addition
to its location, number 46 Thurloe Street is reasonably regularly shaped for a
high street outlet and was let on a short term lease for three years. In
particular, it was a recent open market letting. I considered this last point
to be very important, especially as an open market letting will, by its very
nature, incorporate all of the adjustments necessary to take into account the
various factors affecting the commercial positions of a willing landlord and
tenant; for example, the current economic climate, both nationally and locally,
the uniform business rate and increases in utility costs.
45. I did not
make any adjustment to the rental valuation of number 28 Thurloe Street in
order to take into account the fact that 28 Thurloe Street was the only
property in the block, the lease of which did not contain a redevelopment break
clause. I considered that my role as independent expert was to value the
particular property, which was 28 Thurloe Street, on its own particular terms.
If I had made any adjustment in order to take this factor into account it would
have been to increase rather than decrease the rent.
46. For the
above reasons, having decided that 46 Thurloe Street was the best comparable
evidence to 28 Thurloe Street, I sought to validate the evidence provided to me
by Edward Erdman in respect of 46 Thurloe Street. The details of number 46
Thurloe Street were set out in appendix EE5 of Edward Erdman’s report, which in
part consisted of a letter from Sarah Walker to P Moss Esq at London Regional
Transport. This appendix contained a signed confirmation by Sarah Walker that
the information was correct.
47.
Nevertheless, I contacted London Regional Transport who informed me that it was
in fact a Mr. Graham Bannister who had the necessary knowledge of this matter
for my purposes. I therefore contacted Mr Bannister who confirmed the accuracy
of the information provided to me.
48. On the
basis of this information I calculated my own breakdown for the total rental in
order to reach a zone rental figure of £57.32 for zone A. My manuscript
calculation was made on the letter contained in appendix EE5 of Edward Erdman’s
submissions.
49. Having
calculated the zone A rental for 46 Thurloe Street I sought to adjust this
figure in order to take into account the particular circumstances which applied
to the case of 28 Thurloe Street.
50. 28
Thurloe Street was, in my view, in an inferior and less prominent position and
location to 46 Thurloe Street.
51. It was my
view that there was also a reduction in the relevant pedestrian flow the
further you were from the tube exit on Thurloe Street. 28 Thurloe Street would
therefore have fewer passing pedestrians.
52. I therefore
reduced the zone A rental to be applied in my calculation to 28 Thurloe Street
to £50 per square foot. As a matter of interest and by way of comparison only,
I also carried out a calculation with a zone A rental of £45 per square foot.
However, in my view, this is too large a downward adjustment to make in order
to take account of the above factors.
In para 53 Mr
Hargreaves calculated the area of 28 Thurloe Street, ITZA, at 419.05 sq ft.
That is in respect of the ground floor and basement. He valued the basement
store area of 89 sq ft at £3 per sq ft.
Para 54:
The area of
the premises in terms of zone A — 419.05 times zone A rental, plus the rent for
the basement stores — produces a valuation for the ground floor and basement of
£21,219, which I rounded down to £21,000.
55. I noted
from Mr Zubaida’s submissions that he had provided me with a copy of a letter
from the landlord’s solicitors dated 6th October 1989, enclosing a schedule of
areas and rates for numbers 20 to 34 Thurloe Street on behalf of the landlord
who was looking for £5 million for the freehold. I was interested to see that
the same methodology which I was applying was also being applied. Therefore,
although I accepted that this was only the opinion of another person which
could not be checked and verified, I found it interesting that it seemed to
support the view and the approach which I had already adopted.
56. As regard
to the residential upper parts I noted that Edward Erdman was
poor condition and are the subject of Housing Act notices. However, under the
terms of the lease I had to assume that all of the tenants’ covenants have been
complied with, including in respect of repair, decoration, and to comply with
statutory requirements.
57.
Nevertheless, as a prospective tenant of 28 Thurloe Street would, in all
probability, be interested in the premises primarily for use as a restaurant
and not for the upper parts, I considered that the figure being sought by Edward
Erdman was far too high as the assumption was that the premises were to be let
as a whole. I noted from Mr Zubaida’s submissions that the rent of the upper
part of 28 Thurloe Street had been set by the court at £7,000. From my own
knowledge and experience I was aware of what was in my view an extremely good
comparable, being 170 Old Brompton Road, as previously stated, where I had been
independent expert. I personally deal with the valuation of a very large number
of residences and units of all types and, in particular, those situated above
high street commercial units. Therefore, taking the above information into
consideration, together with the relevant circumstances of this particular
case, I considered that £6,000 should be the value attributed to the upper part
when such were being let as a whole together with the ground floor and
basement.
The two
figures of £21,000 and £6,000 gave an overall rent of £27,000, which was the
figure Mr Hargreaves determined.
There were
suggestions by Mr Zubaida of lack of bona fides on the part of Mr
Hargreaves. He suggested that Mr Hargreaves had not measured the premises
himself but had relied on Mrs Walker’s measurements, that he had colluded with
Mrs Walker and that because he acted for landlords in respect of other
properties in the vicinity he had an interest in determining as high a rent as
possible. I reject all those suggestions; there is no evidence whatsoever to
support them. Mr Hargreaves was a straightforward and honest witness. His
evidence is confirmed by his contemporaneous notes. I have no doubt that he
conducted his determination in a straightforward and honest manner and in the
way that he said he did. The issue in this case is whether Mr Hargreaves acted
negligently in arriving at that determination.
I take the
relevant principles of law relating to the duties of an independent expert
appointed to determine a rent pursuant to rent review provisions in a lease to
be well established. They are as follows:
1. An independent
expert, unlike an arbitrator, does not have immunity from suit. He has duties
to both parties to the rent review and is liable in damages if he causes loss
to either of them by failure to take due care or to exercise reasonable
professional skill in carrying out his duties: Sutcliffe v Thackrah
[1974] AC 727, particularly per Lord Reid at p735.
2. He will not
be guilty of negligence if he acted in accordance with the practice of
competent respected professional opinion; and where there is a difference of
opinion in the profession if he has acted in accordance with the practice
accepted as proper by a substantial number of persons in his profession: Bolam
v Friern Hospital Management Committee [1957] 1 WLR 582 per McNair
J at p587.
3. The task of
valuation rarely admits of a precise conclusion. Often there are many
imponderables. Experts using care may arrive at different conclusions without
anyone being justified in saying that any of them did so through incompetence
or lack of care: Singer & Friedlander Ltd v John D Wood & Co
[1977] EGD 569* per Watkins J at p574.
*Editor’s
note: Also reported at (1977) 243 EG 212, [1977] 2 EGLR 84.
4. It is not
the task of the court to seek to replace an independent expert’s figure with
some other figure determined by it, but to determine only whether the
independent expert omitted to consider some matter which he ought to have
considered or took into account matters which he ought not to have taken into
account or in some other way failed to adopt the procedure and practice
accepted as standard in his profession: see per Kenneth Jones J in Belvedere
Motors Ltd v King (1981) 260 EG 813 at p814., [1981] 2 EGLR 93
5. If the rent
determined by the independent expert in an individual case is significantly
outside the bracket which the evidence shows to be acceptable that may be
evidence of negligence on his part: Singer & Friedlander per Watkins
J at pp574-575.
The factual
basis upon which it is claimed that Mr Hargreaves was negligent is set out in
the report of Mr Ian Leslie Aarons [FRICS], the surveyor called on behalf of Mr
Zubaida. The substance of Mr Aarons’ criticisms of Mr Hargreaves are set out in
the following paragraphs of his report:
5.4 It is well established that in Central London
at least, retail evidence is of little or no guide to the valuation of premises
which may only be used for restaurant purposes.
5.5 This must be contrasted to the valuation of
retail premises, where values vary very substantially within even the same part
of the same thoroughfare. For example, the value of retail units in Kings Road
vary very substantially according to whether they are located close to Sloane
Square (at its eastern end), in the middle section at around Sydney Street, or
in the west, at the Worlds End. Values also vary within the individual
‘stretches’ of the street. In assessing the rental value of a Kings Road shop
it would be most unlikely that a retail comparable would be referred to in any
other thoroughfare.
5.6 In valuing restaurants, on the other hand, it
is common to rely on the comparable evidence of similarly used premises over a
much wider area. A judgment has to be made as to the relative value of any
particular location for a restaurant, but there tends to be a general
co-relation between rentals obtained through better located restaurants
compared to those which are located in a poorer position.
5.7 It is my experience that when valuing
restaurants, no reliance should be placed on comparable evidence derived from
retail premises. Clearly restaurants and retail units tend to operate at
different hours of the day, shops generally trading between 9.00 am and 6.00
pm, and restaurants between 12 noon and 2.30 pm, and from 7.00 pm onwards.
5.8 Furthermore, passing trade is of less
relevance to most restaurants, other than those located in an established
restaurant area.
5.9 Also, street frontage is of less importance
to a restaurant than to a retail unit, and whilst the layout of a retail unit
can be a crucial factor to be taken into account in valuation, it is of less
relevance to a restaurant which can trade from irregularly shaped premises.
5.10 Finally, the high cost of fitting out a
restaurant is also a factor that must be taken into account, in particular when
considering the length of lease that can be offered. Generally a lease of at
least 15 years is required to enable all costs to be paid off over a long
enough period. A term of 5 years only is considered too short for an optimum
rent to be achieved on the letting of a restaurant.
5.11 The above factors are generally appreciated
by those valuers who are expert in the valuation of restaurant premises in
Central London . . .
7.16 I consider Mr Hargreaves’ approach to be
basically flawed for several reasons.
a. He does
not appear to have taken account of any restaurant evidence, apparently
rejecting the evidence at 32-34 Thurloe Street.
b. He does
not appear to have made any enquiries as to the value of any other restaurants
in the vicinity, not referred to by either party.
c. He appears
to have valued the premises as a shop, despite the lease permitting them to be
used solely as a restaurant at ground floor and basement level, and not for
retail purposes.
d. He does
not appear to have taken into account the short term nature of the lease that
can be hypothetically offered.
e. He has not
taken account of the unfit nature of the upper floors for letting on a
furnished basis as permitted by the lease, even for service occupiers. The
premises contain a single we and bathroom and small kitchen serving the entire
upper part.
Very
substantial expenditure would have had to be carried out by the lessee in the
provision of additional kitchens, bathrooms and wcs necessary to make
individual units self-contained.
Taking into
account the short term nature of the lease that had to be assumed, the cost of
carrying out the necessary alterations would have been prohibitive.
f. Mr
Hargreaves’ measurement of the basement of the premises appears to be incorrect
and he accepted the landlords calculation of the relevant areas . . .
7.18 If Mr Hargreaves was truly an expert in the
valuation of restaurants in the vicinity, he would have been aware of other
negotiations with which he himself would have dealt, as well as other
‘comparables’ dealt with by other surveyors. For example, I had dealt with the
rent review effective December 1988 of 73 Old Brompton Road, had acted as
Independent Surveyor in determining the rental value of 163 Old Brompton Road
in October 1990, and was nearing the conclusion of negotiations on 85 Sloane
Avenue in
Fulham Road. All of these premises are restaurants . . .
7.20 I would also have been aware of the
negotiations on Daquise at 30 Thurloe Street, and Dino’s, South Kensington.
7.21 I have little doubt therefore that Mr
Hargreaves was regrettably unqualified to hold himself out as a restaurant valuer,
and assessed the value of the premises without taking into account the many
relevant factors, not least including sufficient comparable evidence.
In para 8.1 Mr
Aarons valued the ground floor and basement at £11,547 pa on the basis of a
ground-floor restaurant rental figure of £25 per sq ft. He estimated the rental
value of the upper floors at £2,887. He therefore arrived at an estimated
rental value as at June 24 1990 of £14,439 pa, which he rounded up to £14,450.
When Mr Aarons
gave evidence it became clear that his principal criticism of Mr Hargreaves lay
in the fact that he used retail comparables. Mr Aarons’ contention is that
restaurants are in a category of their own and restaurant comparables only
should have been used.
Mr Geoffrey
Wright, an FRICS since 1986, a partner in Sweby Cowan and a surveyor who has
undertaken numerous restaurant valuations in central London, was called on
behalf of Mr Hargreaves. He drew a distinction between a ground-floor
restaurant in a retail area and what are described as ‘destination’ restaurants
— ie where, because of its nature or location, the restaurant relies
principally on its own name or goodwill in order to attract trade (for example,
where a restaurant is on a first floor or in a side street) or, alternatively,
the premises are situated in a premium restaurant location which itself would
be a ‘destination’ location for restaurants.
Mr Wright’s
opinion is as follows (I refer to his report), para 7.2.4:
That in
Central London Retail Rents are No Guide to Restaurant Rents
As a basic
principle, I take a strong objection to this claim. Within retail areas, a
willing landlord will let the premises for the best available rent, having
regard to planning constraints, location and shape. Generally, restaurant
premises compete at ground floor level with retail . . . Generally, I would
expect a restaurant use to command a rental at least equivalent to an A1 use
(retail) if not greater.
In para 7.2.6
there is this passage:
In a parade
or location of mixed food and A1 (retail) use, restaurants compete for space
with the retail user and the simple fact that the permitted use is restricted
in the subject premises to that of restaurants does not, in my opinion, have a
material bearing upon the outcome of the valuation.
Mr Nicholas
Dowding, counsel for Mr Hargreaves, referred me to passages in two publications
which support Mr Wright’s opinion. The first is in The Handbook of Rent
Review by Bernstein and Reynolds, 1989 revision, updated at October 1989.
At para 8-35 the following is stated:
Ground floor
restaurants in retail shopping locations do not normally present particular
problems where direct comparison can be made with the rentals of similar shop
units. User restrictions may have to be taken into account, however, where there
is an open market differential between restaurant and shop values. Restaurants
in shopping locations, but on floors other than ground, may be capable of
direct comparison with similar floors used for different purposes, but, in the
absence of alternative comparables, regard may need to be had to profitability.
Restaurants in isolated locations may be capable of either direct or indirect
comparison in which case the profits method may be the only viable way of
arriving at rental value.
The second
passage appears in chapter 7, p171, of an Estates Gazette Ltd publication, Valuation
Principles in Practice, 4th ed, 1992. This particular chapter was written
by Mr Hill, formerly the senior partner of Hillier Parker:
Restaurants
In recent
years many of the traditional restaurants and tea shops which were a feature of
most high streets have disappeared owing to their inability to produce profit
margins comparable with those of other multiple shop traders. Where
conventional restaurants do exist they do not normally present valuation
problems as their rental values will be dictated by retail rents in that
location. Recently, however, the appearance of fast food shops usually
providing a limited or specialised range of food, in some cases with national
coverage and backed by press and television advertising, has produced for the
better located units rental values considerably in excess of those obtainable
from the normal shop use in the same location. The valuation of such properties
normally requires a considerable degree of specialised knowledge on the part of
the valuer.
I do not, of
course, have to decide whether the opinion expressed by Mr Wright, supported as
it is by the passages in the two publications to which I have referred, is
correct. I am, however, satisfied by those matters that Mr Hargreaves acted in
accordance with a practice accepted as proper by competent respected
professional opinion in the field of property valuation when he used as
comparables the rents of similar shop units; the restaurant at 28 Thurloe
Street, being on the ground floor in a parade of retail and restaurant
premises.
On the
evidence which I have heard I am by no means satisfied that the opinion
expressed by Mr Aarons obtains significant support in the surveying profession.
The next
criticism of Mr Hargreaves, which is one that Mr Zubaida has maintained with
great vigour throughout, is that he rejected the rent determination in respect
of the restaurant at 32-34 Thurloe Street as a comparable. A rent was
determined in 1989 of £32,000 for a review date in June 1988. Mr Zubaida
maintains that if that rent for much larger premises is properly discounted it
would support a much lower figure than £27,000. Mr Aarons’ report, at para
7.16.a, appears to support that criticism where he says:
He does not
appear to have taken account of any restaurant evidence, apparently rejecting
the evidence at 32-34 Thurloe Street.
It is clear
from his notes that Mr Hargreaves considered 32/34 Thurloe Street. He rejected
it as a directly relevant or useful comparable for three reasons: it was an
unusual, non-standard shape and on many different levels without a basement;
the rent review was in respect of a date in June 1988, which was two years
prior to the review date with which he was concerned; the rent was fixed by
determination, rather than as an open market letting. It is common ground that
an open market letting provides the best evidence of open market rents.
Mr Wright says
of 32-34 Thurloe Street, in para 7.2.4 of the report:
However for
the following reasons I consider that a reasonable surveyor would have treated
32-34 with considerable caution.
The shape of
the subject premises — the large sum of £460,000 (approx), that had been
expended upon those premises by way of improvement. The notional term of 15
months due to the redevelopment break clause in the lease and the evidence was
some 2 years prior to the rent review date; it would, ordinarily, be regarded
as aged. It was a third party determination and not a transaction that was
freely negotiated by the parties in the open market. Most of these points would
require a valuer to apply a great deal of subjective adjustments.
Para 8.1:
For the
reasons already canvassed above, in particular the shape of the premises and
the comparative age of the transaction, in my opinion, it is of little use
other than as a check to a valuation derived from other sources, as much
subjective adjustment is required in order to apply it to the subject premises.
When
cross-examined Mr Aarons said that 32-34 Thurloe Street was the best guide,
though a fairly historic rent review. He added that Mr Hargreaves might have
felt nos 32-34 a little early to use as a guide. It would, he said, be unwise
to rely solely on nos 32-34 as a comparable, because the rent there was
confirmed two years previously.
Whether to use
any particular prior rent determination in respect of other premises as a
comparable and, if so, how to adjust it to meet the different circumstances
concerning the premises whose rent is to be reviewed is a matter of judgment;
different surveyors may well, exercising sound competent judgment, come to
different conclusions. There may, of course, in any particular case, be
features which show that a surveyor may arrive at a conclusion which no
competent
surveyor may have given greater weight to 32-34 Thurloe Street.
I am quite
unable to conclude that Mr Hargreaves was in any way negligent in coming to the
conclusion which he did in relation to 32-34 Thurloe Street for the reasons
that he has given.
The next
criticism of Mr Hargreaves is that he did not make any inquiries as to rental
value of any other restaurants in the vicinity not referred to by either party.
That criticism is partly met by my finding that Mr Hargreaves could rely on
retail comparables. It may, however, be taken as a general criticism that Mr
Hargreaves should have sought other comparables. I have already referred to Mr
Hargreaves’ evidence that he considered that Mrs Walker and Mr Zubaida had
provided him with sufficient information in respect of possible comparables in
the circumstances.
I have been
referred to the report of Wallshire Ltd v Aarons [1989] 1 EGLR
147*, in which it is stated in the headnote that the learned judge ruled in a
similar case to this one that there was no obligation on the independent
surveyor to make inquiries of his own in regard to comparables other than those
presented to him. That statement is perhaps couched in terms which might be
considered too wide. The learned judge in that case held that, on the facts of
that particular case, the defendant acted reasonably in taking the view that he
had sufficient comparables in the submissions by the parties to make it
unnecessary for him to make further inquiries.
*Editor’s
note: Also reported at [1989] 02 EG 81.
Whether an
independent surveyor should make inquiries of his own in regard to comparables
other than those presented to him must, again, be a matter of judgment in the
particular circumstances of the case. Where the parties are professionally
represented by surveyors it is unlikely to be necessary. It may be different
where one or both are not so represented. However, it must be borne in mind
that not all comparables subsequently produced when an independent expert’s
valuation is challenged might have been discovered by him on an inquiry
conducted with reasonable diligence.
I propose to
deal with this point quite shortly by stating that no evidence has been
produced to me of any comparable not provided by Mrs Walker or Mr Zubaida to Mr
Hargreaves which could in any way suggest that Mr Hargreaves’ valuation was
outside any permissible bracket. Indeed, I consider it particularly significant
that, though Mr Aarons arrived at a valuation of £14,450, he does so without
any attempt to justify that figure and without any reference to any specific
rent determination in respect of any other property. In these circumstances I
am unable to give any weight to Mr Aarons’ valuation.
Mr Hargreaves,
as I have said, relied principally on the rent obtained in the letting of
retail premises at 46 Thurloe Street in April 1991 on a three-year lease. He
calculated that the zone A rental rate was £57.32 per sq ft. Because he
regarded it as being in a superior position to 28 Thurloe Street he adjusted
that figure to £50 per sq ft, which is the basis he used to arrive at his
valuation. Mr Aarons does not challenge Mr Hargreaves’ calculation of the
figure of £57.32 as the zone A rent for 46 Thurloe Street. Once his criticism
that it should not have been used as a comparable at all because it was not a
restaurant is disposed of it is clear that a competent surveyor could reasonably
regard it as a relevant and important comparable. That certainly is the opinion
of Mr Wright at para 7.2.8 of his report. No 46 Thurloe Street is on the same
island site as 28 Thurloe Street. It was an open market letting 10 months after
the review date and thus could be taken to reflect the effect on the market at
that time of the recession and the uniform business rate.
In my
judgment, Mr Hargreaves cannot be criticised either for relying upon the rent
obtained on the letting of 46 Thurloe Street in April 1991 as a comparable or
for adjusting it in the way that he did.
A further
criticism of Mr Hargreaves is that he failed to take into account the unfit
nature of the upper floors for letting on a furnished basis, as permitted by
the lease, even for service occupiers. I have already referred to the way in
which Mr Aarons dealt with the upper floors in para 7.1.6 of his report. Mrs
Walker’s valuation of the upper floors was £20,592.
I have already
referred to Mr Hargreaves’ evidence in relation to the way that he dealt with
the upper floors. It is in paras 42, 56 and 57 of his proof of evidence. Mr
Hargreaves, in fact, reduced Mrs Walker’s figure of £20,592 to £6,000. In the
light of the evidence to which I have referred, that figure and the way in which
he arrived at it does not reflect any erroneous considerations or negligence on
his part.
Mr Aarons’
final criticism, that Mr Hargreaves had incorrectly measured the basement, was
not pursued.
It remains to
be said that Mr Wright arrived at a rental value of 28 Thurloe Street as at the
valuation date of £28,100, which he confirmed by cross-checking with a
subsequent open market letting of 24 Thurloe Street in May 1992 and with the
Jones Lang Wootton rental growth index, which showed an increase of shop rents
of over 100% between June 1985 and June 1990.
Mr Aarons was
not an entirely independent witness. He had previously acted for Mr Zubaida.
His valuation of the rent at the review date at £14,450 is less than the rent
fixed at the rent review date of June 24 1985 of £15,000. I prefer throughout
the evidence of Mr Hargreaves and Mr Wright.
My conclusions
are that Mr Hargreaves carried out his duties as an independent expert with
competence and without negligence, that the criticisms made of him are unjustified
and that this action must be dismissed with costs.
Action
dismissed.
