Sep

The market v the evidence

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To consider the property market as a whole or an umbrella term for its sectors and segments depends on the thinking and the nature of the property. Thinking about the property market as if a whole is pointless, except as regards whether to become involved. For the participant, it makes more sense to define the category of property, and its sectors and segments, all of which have their own identities.

Commercial property is governed by business tenancy law. In leases of commercial property, the standard basis for rent review is the (open) market rent. “Open’ is superfluous, business tenancy law has removed any practical distinction. For purpose of the review, the lease contain matters to be assumed and disregarded. Since the property is not physically available in the market to let with vacant possession, the lease will embody what is known as a ‘hypothetical lease’. The hypothetical lease does not have to replicate the lease, but often it would.

The object of the exercise is the market rent. Whether necessary to confine interpretation of the market rent to the locality and/or the market for the type of property depends upon the purpose of the interpretation, also whether the lease so provides. Generally, leases do not. Mostly, leases make no attempt to expressly state that the market for the property should be in any particular locality.

Attempts to impose limitations is to do with interpretation. In reality, market activity, buying, selling, developing, leasing, is a reflection of its participants: developers, investors (landlords), occupiers (tenants). At rent review, any presumption in favour of reality reflects fashion in interpretation. Whether any ambiguities in the construction of a lease, its terms and conditions, should be interpreted literally or based upon commercial common sense.

In the UK, the Labour party was last in government from 1997 to 2019, a period of 13 years and sufficient time to have left a veil of socialism across the board. Regardless of one’s personal politics, the traditional feudal relationship between landlord and tenant, master and servant, has given way to an assumption amongst tenants that the continuing of tenant business plans should take priority over landlord objectives. The balance of power having shifted away from the future into heritage has taken the market in a direction that is out of sync with reality.

Symptomatic of the change in direction is that surveyors mostly value back to front. It is not necessary to justify an opinion, but reasoning is expected. Reasons partly explains the process, in negotiation also a way of undermining a proposal or offer. Addicted to logic, instead of getting a feel for the market then casting around for evidence in support, surveyors cast around for evidence and apply it regardless. To have a feel for the market would require impartiality: the test of integrity is that the opinion would be the same if acting for the other party.

In negotiation, clients expect their advisers to be on the clients’ side but thanks to the judiciary the rules change as soon as the dispute procedure is involved. On referral, the RICS disclosure requirement for arbitrators and independent experts (“third parties”) covers the overt: the object of referral is to have the rent fixed by someone with no vested interest in the outcome. The need to root out partiality amongst surveyors acting as expert witnesses is essential. In common with third parties, the challenge for any expert witness is to approach the matter afresh, with an open mind. Whether an open mind is capable of emotionally detaching from personal preference, let alone client instructions, when the expert witness could be sued for negligence or damages in tort, is a moot point. Truth will out, via a propensity for ridiculing any interpretation that conflicts with the expert’s evidence.

The weight that third parties place on expert witness evidence ought to depend more upon the credibility of the evidence than on the expert witness. Whether the thirty party is able to detach from some preconceived notion varies according to the personalities. Surveyors are prone to socialising with one another. For anyone not in the social circle, an eye for detail is required to point out phraseology in the expert witness report and whether the expert witness is descending into the arena to argue the client’s case. Since surveyors are often more at home with numbers than words, the subtly that numbers symbolise can be lost on the uninitiated.

The market in itself is not interested in evidence. the market is unbridled. The market does not care whether participants are successful or not. But whereas the wider consequences are important in reality, in business tenancy law at rent review the wider consequences for the parties are irrelevant. At rent review, the participants are the hypothetical willing landlord and hypothetical willing tenant. Terminology is defined in a neutral way but that does not stop surveyors from wanting a different gear.

Surveyors do not make the market: we simply interpret it for the benefit of our clients. Our interpretation depends upon not only where we are coming from, so to speak, but also where we want to get to. The influence surveyors have over the direction of the market for the type of property should not be underestimated. It can make or break the landlord’s investment and/or the tenant’s business. It is therefore beholden upon third parties, and expert witnesses, to ensure that the force of collective persuasion does not steer the market in a direction that differs from where the market would go if left to its own devices.
In my opinion, the market would like to take off. To be rid of all the businesses that should have fallen by the wayside long ago, to prune and allow new ideas to flourish. The delay is caused on one hand, by third parties wanting to stand in the way of change, on the other by expert witnesses intent upon preserving the status quo by capitalising on third party failing to rise to the challenge of not disagreeing with interpretation. The projection of landlord frustration is reflected in struggling tenants. It is not the system that is at fault but how the game is being played.

Michael Lever
The Rent Review Specialist
Established 1975

… LandlordZONE.

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