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Lease Terminations – Claims, Check Points and Alarm Bells!

By John Williams, Fellow of the RICS, and Member of the EWI.

Dilapidations casework is expanding and is becoming more intrinsically linked to other issues at lease termination.  It is increasingly common for cases to originate with an Interim Rent Claim against which a Dilapidations Counterclaim is filed and for Expert Valuation Surveyors to receive instructions to deal with the Interim Rent Valuation, to liaise with the Building Surveyor/Solicitor over issues surrounding the contractual dilapidations claim and to provide Diminution Valuation Advice.  However, my own experience over the last few years seems to show, somewhat worryingly, that whilst the number of ‘Experts’ involved in these cases is growing, not all of those accepting such instructions have the knowledge or experience needed to undertake them.  So when reviewing your Experts’ reports, what issues should you look to have been dealt with and what should give rise to some serious concerns over your client’s selection of Expert?

Interim Rent

The Courts have a considerable discretion under S24D Landlord & Tenant Act 1954 to award an Interim Rent that is reasonable in light of (1) the passing rent, (2) any income (or its absence) from subletting areas, (3) the value of the Holding for a year-to-year tenancy under S34 LTA 1954 and, increasingly, (4) the current rental value on market terms.  Has your Expert assessed all of these so that legal argument can be informed and can address where the court’s discretion should operate?  If there are vacant subletting areas, has he considered the application of an allowance to the valuation of any subletting area to reflect the 99 Bishopsgate Case, particularly if only a year-to-year or in practice quarter-to-quarter continuation tenancy are all that the tenant is able to grant a sublease out of, making them highly undesirable in the open market? 

If not, there may be some cause for concern but I have had two cases in the last year that should have rung even more substantial alarm bells but for some reason didn’t.  In both cases my counterpart put forward argument in their reports as to how and why the court should operate its discretion and award the passing rent, in both cases basing this on an assumption as to the conduct of the tenant.  In the first place neither had been involved in the lease renewal negotiations and so they had no personal knowledge of the dealings on which they based their arguments, and in both cases were actually shown by rebuttal evidence to have been wrong in their assumptions. In the second place, how the court is to exercise its discretion is not within the remit of a valuation expert.  It is appropriate for us to consider and advise on the valuation impact of different aspects of how the court may or may not choose to exercise its discretion, but if we descend into argument on how that discretion should be exercised we step into the role of advocate, not expert, and completely undermine our impartiality.

Dilapidations – Reinstatement

This is a complex area and is impossible to deal with in just one article, but there are two scenarios that commonly arise, which need particular attention to detail and which are worth considering here.

Firstly, most leases require landlord’s consent to make alterations and to only provide for the landlord to require reinstatement as a provision of such consent.  However, such leases often permit non-structural and internal alterations or alterations to a shop front without the need for specific consent, meaning that there is no requirement to reinstate such permitted alterations.  If this is the position, has your Expert just required reinstatement of all alterations or have they properly differentiated between those that are subject to a reinstatement requirement, those that did not require consent and are not, therefore, subject to any reinstatement requirement and those that did require but did not receive consent and therefore constitute a breach?

Secondly, where alterations over the life of a lease were licenced, it is not uncommon for the licences to alter to contain different reinstatement provisions.  Again, has your Expert properly reflected on which alterations fall under what type of requirement and treated them accordingly?  Where a provision calls for reinstatement only on reasonably notice, has your Expert properly assessed the time required for reinstatement to be affected and was sufficient notice given?  It still amazes me how often this situation arises in a claim, with a schedule of dilapidations, and therefore notice of requirement to reinstate, being served 3-months prior to the Term Date, only for the supporting paperwork to show that the reinstatement works are so extensive that they will require 4-5 months to undertake.  Ergo, reasonable notice is shown not to have been given by the claimant’s own admission and no liability for reinstatement arises!

Of more concern, is an increasing tendency for some Building Surveyors to interpret the exception of tenant’s fixtures & fittings from a provision to deliver up all fixtures & fittings, as giving rise to a positive obligation to reinstate all alterations made to a demise.  In the last year alone, I have had three counterpart experts proceed to Expert Reports on this basis only to have their client’s legal team point out the folly of this position.  In one case, where the timetable gave sufficient time, the Expert then tried to change his statement of his client’s intentions from requiring removal to requiring repair for his own use (odd given that they did not replace the items concerned) and then alleging that their state of disrepair was such that replacement was needed to effect repair (unevidenced and unrealistic given that they were being utilised by an occupier 5-days before the Term Date).  Needless to say, this position did not, ultimately, prevail but how was it ever allowed to progress and incur substantial cost without a major alarm bell ringing?

Diminution - Objectivity

The assessment of the contractual claim and of supercession and mitigation is a subjective exercise and will arise from the actual actions or intentions of the landlord himself.  However, the diminution valuation is not.  It is an objective assessment in the market place in light of all potential purchasers, of which the actual landlord is only one.  Has your Expert considered purchase scenarios outside of the landlord’s actual actions?  Has he considered, even if he has rejected, alternative uses for the premises?

In assessing his values, has your Expert considered market evidence from comparable transactions and has he weighted them according to relevance and the hierarchy of transactional evidence?  Has he applied yields appropriate to a vacant property rather than investment yields for long term occupations?  These may seem like stupid questions but in the last year alone I have had two counterpart experts assess rental values by reference to a Nil Uplift of the old passing rent based on the upwards only rent review provision in the old lease.  Really?  A new tenant in the open market would base their rental bid on an over-rented valuation and an upwards only rent review provision under a lease that no longer exists?  They then went on to apply a yield based on investment sales of leases with 10-years plus remaining, on an assumption that if the tenant had renewed rather than vacated, this would have been the length of lease they would have taken.  In fact, the subject unit was vacant and unlet at the Term Date and other similar units in the vicinity were experiencing voids of 2 years or more.  They made no adjustment to this to reflect any void period.  Someone should have been hearing alarm bells again!

Diminution – Valuations

Ultimately this is opinion evidence and someone with 25+ years experience in a small market place may well be correct in their assessment even if their evidence is simply that they know the market place and know what someone would pay for the property.  But being right and being credible are not the same thing and in the face of a reasoned valuation in light of a transparent analysis of transactional evidence the so called ‘man-and-boy’ valuation (“I’ve known this area man and boy and know what it’s worth”) may not be seen as having the same level of credibility.  So, has your expert considered all of the evidence?  Have they missed any material transactions that their counterpart has identified?  Have they included all of the transactional evidence of which they are aware?  Have they analysed the transactions in a consistent manner and weighted them in a rational manner?

Finally, are their ‘Valuations in Breach’ transparent and do they follow how the market place actually behaves?  Many valuers still undertake valuations in breach by simply knocking X-pence per square foot off the rental value or adding Y% to the yield with no transactional evidence to support the adjustment.  In reality, though, neither prospective tenants nor investors behave in that way.  They do not walk into a property, say it looks a bit tatty and just knock a random £0.50 per square foot off the rent, add a random 3-months to the rent free period or add a random 1.5% to the yield.  If there are defects that a tenant takes a lease subject to, they will assess which items affect their occupation or liability, will exclude other items from their repairing liability and will assess a rent free period or reduced rent based on the cost of the extra works the property’s condition will require them to carry out.  Investors will look at the impact of that adjustment on their potential income stream, and its timing, will assess what works they need to undertake themselves in order to make a property lettable and will adjust their purchase price accordingly.  They make informed, not random, adjustments that are reasoned and transparent.  If your valuer hasn’t been equally reasoned and transparent then this should ring some serious alarm bells as he will be open to criticism for not approaching value in the same way the market does and may find that the judge will apply less weight to their evidence as a result.

 

John Williams is a Fellow of the RICS, an Associate of the CIArb and a Member of the EWI.  He has over 22-years experience of rent and interim rent valuations and over 19-years experience of dilapidations cases, including Diminution Valuations and Neutral Evaluations of broader dilapidation claims.

Maple Leaf Property Consultants Ltd

john.williams@mapleleaf-pc.co.uk Tel: 01242 861155  Mob: 07506 727727 

www.mapleleaf-pc.co.uk

 

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