Property Journal May-June 2015 by RICS

Property Journal IN CO RP ORAT I N G T H E C O M M E R C I AL P R O P E RT Y J O URNA L, RESID E N T I A L P ROP ERT Y J O U R N A L A N D T HE A RTS S URV EYOR

Valuing build to rent Understanding a new asset class

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COMMERCIAL

RESIDENTIAL

ARTS

Identifying and effectively implementing bright ideas

How to spot common issues and suggest the right solutions

RICS best practice on selling personal property

Innovative FM

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Damp in homes

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Auction guidance

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9 May /June 2015

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“ At ease, everyone. You’re in safe hands.” Louis NHBC Building Control Surveyor and Sergeant in the Royal Engineers Army Reserve

We’re all aware of the complexity of the Building Regs these days. Which is why it’s reassuring to have people like Louis on your side, working with you to interpret them and provide cost effective solutions to help you comply. We work with your team from design to completion, putting all parties at ease.

To find out more about the services we offer, visit www.nhbc.co.uk or call

0844 633 1000

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contents C ON TACTS

UPFRO NT

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5 Opinion

Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org Advisory group: Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Milton McIntosh (Excello Law), Nigel Sellars (RICS), Martin Francis (BNP Paribas), Simon Hooper (Edward Symmons), Lorraine Howells (RICS), Vivien King (Malcolm Hollis) RESIDENTIAL Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org Advisory group: Peter Bolton King (RICS), Andrew Bulmer (RICS), Paul Cutbill (Countrywide), Graham Ellis (RICS), Georgiana Hibberd (RICS), Chris Rispin (BlueBox Partners), Philip Santo (Philip Santo & Co), David Smith (Anthony Gold Solicitors)

ARTS Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org

Affordable housing may be a hot topic on the eve of the general election but real solutions are thin on the ground, says Simon Rubinsohn

6 Update 9 In it for the long term

As the build to rent sector finally takes off in the UK, Jason Hardman and James Coghill summarise key issues from RICS guidance on valuing this new kind of asset

12 Agreeing a formula

Overage agreements are complicated to calculate and need careful management to ensure their security, cautions Max Marrison

15 Taxing times

Jürgen Bauderer outlines some of the key issues for those investing in German real estate

16 On the offensive

Criminal remedies to residential squatting seem to be having a positive effect, say Richard Manyon and Joshua Moger, so will commercial property be next?

18 Putting into practice

Alexander Aronsohn sets out some new categories of publications from RICS

20 Legal Q&A

Legal experts answer common queries

Editorial adviser: Nigel Sellars Property Journal is available on annual subscription. All enquiries from non-RICS members for institutional or company subscriptions should be directed to: Proquest – Online Institutional Access E sales@proquest.co.uk T +44 (0)1223 215512 for online subscriptions or SWETS Print Institutional Access E info@uk.swets.com T +44 (0)1235 857500 for print subscriptions To take out a personal subscription, members and non-members should contact Licensing Manager Louise Weale E lweale@rics.org Published by: Royal Institution of Chartered Surveyors, Parliament Square, London SW1P 3AD T +44 (0)870 333 1600 T +44 (0)24 7686 8555 W www.rics.org ISSN: ISSN 2050-0106 (Print) ISSN 1759-3395 (Online) Editorial and production manager: Toni Gill Sub-editor: Gill Rastall Senior designer: Wasim Akande Creative director: Mark Parry Advertising: Charlotte Turner T +44 (0)20 7871 5734 E charlotte@wearesunday.com Design by: Redactive Media Group Printed by: Page Bros

Journals online

CO MME RCI A L

22 Strengthening the BID

Julie Grail explains how property owner BIDs work and their role in supporting thriving city centres

24 Auditing across borders

Alison Mungall discusses how businesses with operations across Europe can optimise energy saving opportunities

26 Putting innovation to work

Michael Ripper and Graham Halkyard summarise research on what makes innovative FM and how to ensure that fresh thinking is put into practice

29 Unreasonable behaviour

There are broader grounds than might be thought for opposing renewal of a troublesome tenant’s lease under the Landlord and Tenant Act, says Faiza Ahmad

30 Levels of loss

Terry Davis examines the different ways that a valuer can quantify loss

32 The number one industrial killer John Toms explains the dangers of asbestos

Increasing numbers of members are choosing to view their journals as downloadable pdfs, instead of paper publications, by changing their member preferences on the RICS website. Regular emails inform members when the pdfs of the latest journals are available. While helping RICS to reduce its carbon footprint, viewing the journals online provides you with the same technical information in a format that is quick and convenient to read on screen. To change your preferences, visit www.rics.org/mydetails

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UPFRONT C O N TEN TS Property Journal INCORPORATING TH E COM M ERCIA L PROPERTY J OURNA L , RESIDENTIA L PROPERTY J OURNA L A ND TH E A RTS SURV E YOR

contents R

Michael Parrett discusses the issue of dampness in buildings

38 Don’t slip through the cracks

Identifying and effectively implementing bright ideas PG.

RESIDENTIAL

Damp in homes How to spot common issues and suggest the right solutions PG.

PG.

ARTS

Auction guidance

May /June 2015

rics.org/journals

RICS best practice on selling personal property PG.

Front cover: © Shutterstock

A RTS

42 Thinking about the year ahead Emma Vigus considers` anticipated trends in professional indemnity insurance for RICS-regulated firms

Philip Santo considers the importance of clearly defined terms of engagement and highlights some additional cautions about property location

44 The get-out clause

40 Relativity from the real world

46 Testing the water

James Wyatt investigates important research into the relationship between freehold and leasehold values

Understanding a new asset class Innovative FM

RES I DE NTI AL

36 We have a problem

Valuing build to rent COMMERCIAL

A recent court decision could lead to exceptional damages awards, says Milton McIntosh

Understanding the performance of materials is key to reducing the damage caused by flooding, explains Alan Cripps

41 In a fighting mood

Annis Lampard provides a further bulletin on recent activity by HM Revenue and Customs on property transactions

48 A matter of principle

Does one solution to the looted art issue fit all, asks Milton Silverman

52 Working by the rules

Colin Young explains why his auction house complies with RICS best practice

50 Selling personal property at auction Jan Ambrose summarises the information contained in the new RICS guidance note

Property Journal is the journal of the Arts & Antiques, Commercial Property, Dispute Resolution, Facilities Management, Machinery & Business Assets, Management Consultancy, Residential Property and Valuation Professional Groups While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. RICS cannot accept any liability for any loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. All rights in the journal, including full copyright or publishing rights, content and design, are owned by RICS, except where otherwise described. Any dispute arising out of the journal is subject to the law and jurisdiction of England and Wales. Crown copyright material is reproduced under the Open Government Licence v1.0 for public sector information: www.nationalarchives.gov.uk/doc/open-government-licence

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OPINION Affordable housing may be a hot topic on the eve of the general election but real solutions are thin on the ground, says Simon Rubinsohn

Home straits

News headlines scream almost daily about the housing crisis. Meanwhile, as the election nears, politicians vie with each other to boast about how many houses they are going to build over the course of the next parliament with little detail as to how these targets are going to be met. The bald facts are startling. A good guide to affordability, the first time buyer house price earnings ratio compiled by Nationwide Building Society, currently stands at five compared with a long-run average of 3.5, i.e. the typical house bought by someone taking their first step onto the property ladder costs roughly five times the mean earnings of a full-time worker. Scrolling down to a regional level tells a not dissimilar picture. London is predictably an outlier, with a house price earnings ratio almost double the historic average (nine compared to five) but there is no part of the UK, according to Nationwide, where this indicator of affordability is not currently in excess of the long-run average.

It is, of course, not difficult to find a justification for this trend; the low level of borrowing costs means that much higher monthly mortgage payments can be financed out of a typical salary. However, whether this can be sustained when, eventually, interest rates do begin to edge upwards remains to be seen. The recovery in the economy and the related pick-up in demand to purchase real estate is one very visible reason why prices are quite so elevated across most of the country at the present time; but the other side of the coin is the lack of property to buy. The monthly RICS Residential Market Survey, which tracks new instructions coming onto agentsâ&#x20AC;&#x2122; books, suggests that the flow of second hand property to the market has been on a downward path for more than a year. This is being reflected in the historically low level of stock members are holding, with the average number of properties per branch now below 60.

Newbuild shortfall Meanwhile, the picture from the newbuild sector is hardly more encouraging. Recently released figures charting housing starts in England (figures for the rest of the UK have yet to be published) suggest that developers are struggling to crank up the build rate in the way that

might meet the aspirations of many. For the whole of 2014, the official data indicates that around 137,000 new units were started, which, while better than in any year since 2007, still falls way short of the best estimates of projected household formation (in the ballpark of 240,000). This imbalance between housing need and the supply trend is being reflected in the feedback we are getting from members completing the Residential Market Survey regarding expectations for both prices and market rents over the medium term. While any judgment that stretches out over a number of years needs to be treated with some caution, I believe that RICS property professionals have a more informed finger to stick in the air than the rest of us. For what it is worth, we are being told that house prices are set to rise nationally by a compound rate exceeding 20% over the next five years, while for the capital the figure is nearer 30%. And if you think there might be some relief for those looking to access the private rented sector, the projected numbers from respondents to the survey for this tenure says otherwise. It is quite conceivable that these estimates will change over time but if they prove anywhere near the mark, a new rather more colourful adjective will be required to replace the current favourite to describe the housing challenge. To head this off, RICS has stepped up to the plate through its Property in Politics agenda with a range of proposals

designed to accelerate the delivery of new homes. These include the creation of a new planning class, amberfield, where local authorities have identified sites suitable for sustainable development alongside measures to ensure that the adoption of local plans is compulsory as well as the creation of new Delivery Development Units with reformed compulsory purchase orders. Whether this will be sufficient to lift the home building trajectory onto a new plane remains to be seen. I admit that I favour the rather more controversial challenge of revisiting the issue of the Green Belt, although I recognise that many of you will have a very different view. For now, I leave you with the startling (for me) statistic that the area covered by Englandâ&#x20AC;&#x2122;s Green Belt has more than doubled since 1979 and now accounts for more land across the country than is built on. b Simon Rubinsohn is Chief Economist at RICS and regularly provides comments for national newspapers including the Financial Times, The Guardian and The Telegraph srubinsohn@rics.org

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UPFRONT U P DAT E

UPDATE More guidance on agents’ fees In the light of recent media attention, the Property Redress Scheme (PRS) has issued further guidance on unfair fees being charged by letting agents to their consumers. The PRS is one of three consumer redress schemes authorised by the UK government, with a role to provide fair and reasonable resolutions to complaints between members of the public and property agents and professionals. In England and Wales, letting agents are able to charge prospective and existing tenants for services and administration in addition to any rent or deposit paid. Such practices have been outlawed in Scotland since 1984. In a report issued by the PRS last month, it was revealed that of the

complaints about agent members, the most common involved unfair or excessive fees charged to the consumer. This has been reinforced by figures from Citizens Advice, which has hit out at agents’ “inexplicable fees”. To aid fee transparency and educate member agents, the Property Redress Scheme has issued two guides – one for agents and their landlords and another for agents and their tenants. It is not the role of redress schemes to prescribe or prohibit any fee in general. However, agents must be able to provide evidence to support the fees they charge. A PRS ombudsman may choose to make an award to the consumer if it is decided that the members’ fees are unfair or have not been presented in a clear and transparent way.

The guides have been summarised from the Competitions and Markets Authority Consumer protection law guidance for lettings professionals and are designed to help each party understand what may be deemed as an obscure or unjustifiable fee. Sean Hooker, Head of Redress at the PRS, said: “Agent fees needed to be looked at in an objective and reasoned way and agents should be provided with guidance on what they can and cannot charge. Tenants and landlords also need help understanding which practices are legitimate and legal. It would have been remiss not to make our agent members fully aware of their obligations.” n Download the guides at http://bit.ly/1Hskbhk

Sustainable retail project A new retail task group was launched at Ecobuild in March to help measure the health, wellbeing and productivity benefits of sustainable retail property. The UK Green Building Council (GBC) project will form a key part of an upcoming World Green Building Council global campaign on healthy buildings, and follows last year’s well-received report Health, wellbeing and productivity in offices. The task group will be international in scope, ensuring the outputs are relevant for the retail sector globally. Retailers, as well investors are increasingly keen to understand the relationship 6 M AY/J U N E 2 0 1 5

between sustainable store design, the health and wellbeing of staff and customers, and profit. The task group will seek to adapt existing ways of measurement to strengthen the business case for sustainable stores, and pilot the metrics in real stores to gather best practice case studies. John Alker, Interim Chief Executive at UK GBC, said: “Green buildings must not only meet our planetary needs, but also the needs of people and business. That is why health, wellbeing and productivity in the property sector is essential for making the business case. But it’s time to go from awareness raising to action, and driving change.”

The first sponsors of World GBC’s global campaign are Arup, Land Securities, Marks and Spencer, Skanska and Saint-Gobain. Zoe Young, Property Plan A Project Manager at Marks and Spencer, said: “Post occupancy evaluations of our most sustainable stores have identified increased customer and staff satisfaction. Developing retail specific metrics will enable us to further establish the business case and understand whether, in addition to being more resource efficient, sustainable shops can attract more revenue.” David Richards, Director at Arup, added: “The health and wellbeing of the building

occupants is of primary concern and becomes an integral part of our professional duty.” Meanwhile, Staffan Haglind, Green Business Officer at Skanska, said: “We already know that building features affect people. Now it’s time to let these factors inform business decisions.” The task group will publish its interim results in mid-2015 and the first schedule of work will be completed by early 2016. The free Healthy Offices App, available for iPad and Android, was also launched at Ecobuild. It allows users to explore last year’s report in a more interactive format, with new case studies and opinion pieces. n More information at www.ukgbc.org.uk

UPFRONT UPDATE

In brief... Dilapidations Roadshow

Boost for smaller housebuilders The Homes and Communities Agency has launched the Builders Finance Fund, providing £525m for schemes between five and 250 units. For projects of between five and 14 units, the fund will be exclusively available to SMEs and is accessed on a recoverable capital investment basis. The aim is to accelerate or unlock viable housing schemes that have slowed down or stalled.

bb Bids must be submitted by a private sector developer which must have control of the site. bb There is a minimum investment of £200,000. bb The site must have local authority support. bb Schemes must have planning consent and be capable of implementing by 30 June 2015. n Builders.FinanceFund@ hca.gsi.gov.uk

Consumer video Residential surveyors can now share via their websites a new video from RICS explaining the importance of an RICS home survey to consumers. Link to the video at n http://bit.ly/ricssurveyvid

The annual RICS Dilapidations Roadshow returns at locations around England from May to July with refreshers on case law, diminution valuations break clauses and R22. Sessions have been designed to help practitioners understand the implications of dealing with disputes. Attendees will be able to gain a comprehensive understanding of the anatomy of a dilapidations liability together with the opportunity to consult in more detail with panel experts, taking away practical guidance. n For more information, see http://bit.ly/ricsdilaps

IPMS seminars A series of regional seminars around the UK offers the opportunity to find out about International Property Measurement Standards (IPMS) for office buildings. The afternoon events, running throughout May and June will be led by expert practitioners and will combine details of the new RICS professional guidance (an update to the existing Code of Measuring Practice), along with interactive case studies in the use of IPMS.

The programmes will be of particular interest to practitioners working in commercial property markets, facility management, rating, BIM and data services, occupier management, asset management, development, planning, commercial valuation and general surveying. n For more information, see http://bit.ly/ricsipms

Party walls – appeals and awards Party wall legal issues can be complex and costly, especially if the process fails and appeal is made to the County Court. A series of seminars running from May to July provides practical, essential details, tips and legal advice to avoid an appeal and discusses common pitfalls in the party wall process. Sessions will be held across England and in Cardiff. n For more information, see http://bit.ly/ricspartywall

RICS Residential Conference 2 July, London This year’s conference will focus on the path for residential property after the general election, with insights on housing supply, private rental sector regulation and addressing skills shortages. n http://bit.ly/ricsresi

New lender guidance The RICS Lender’s independent monitoring surveyor (IMS) guidance note is aimed at surveyors appointed to provide technical advice relating to

project risk to those lending for real estate property development. Its primary focus is to provide a model of service delivery through each stage of a project’s

life. Many lenders require an IMS to be a chartered surveyor and recognise the role as a specialist service. The guidance note provides a reference point

for lenders, understanding that many of them might have their own developed requirements. n Download at http://bit.ly/ricsims M AY/J U N E 2 0 1 5 7

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UPFRONT STR AP L I N E

There’s more to see and do at Housing 2015 THE NEW REALITY This year CIH’s Annual Conference and Exhibition in Manchester takes place six weeks and five days after the general election. There will be a new political reality; new uncertainties and new opportunities. Join over 8,000 other housing professionals for the most vibrant three days in the housing calendar. Speakers include:

Cathy Newman, Political Correspondent, Channel 4 News

Duncan Weldon, Economic Correspondent, Newsnight

Dr Gerard Lyons, Chief Economic Advisor to the Mayor of London

Miranda Green, Journalist and Former Liberal Democrat Adviser

Alex Lowe Industry Head, Google

Reeta Chakrabarti Social Affairs Correspondent, BBC

A delegate place gives you free entry into two new features Related competencies include Legal/regulatory compliance, Sustainability

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XXX xxx srubinsohn@rics.org

Visit www.cihhousing.com to book your delegate place

IMAGES ©

UPF R O NT VA LUI NG BUI LD TO RENT

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As the build to rent sector finally takes off in the UK, Jason Hardman and James Coghill summarise key issues from RICS guidance on valuing this new kind of asset

In it for the long term

The residential investment market has experienced significant change in recent years. The private rented sector (PRS) has virtually doubled in the past 15 years and this growth is forecast to

continue. While house prices have largely recovered and in some locations are forging ahead since the 2008 crash, rental values have also seen large annual increases. These factors have in part led to the increasing attractiveness of the sector to a broader range of investors. In recent decades, the ownership of residential investment housing stock has largely been in the hands of small buy-to-let landlords with institutional investors

such as pension funds seeing too many barriers to entry. Some of these barriers, such as a lack of stock on a large scale or the volatility of the wider housing market have started to reduce in recent years and both domestic and international investors are actively seeking or securing blocks or portfolios of residential assets to hold for long-term rental. Government policies and funding such as Build to Rent (http://bit.ly/buildtorent) are also encouraging new participants to enter the market. According to CBRE Research, having regard to both standing investment stock and forward funding/ purchase opportunities, there were more than £2bn of transactions in the new PRS during 2014, with institutions such as M&G forward funding the development of 150 flats in Acton, Greater London, followed shortly after by Invesco forward funding a similar development in Hayes, Middlesex. Both will be held for long-term rental. Such investment is not confined to the South East, with the Hermes/Countrywide

JV having secured a number of residential blocks in Manchester, Birmingham and the East Midlands. CBRE and Savills agree that there is more than £20bn of funds allocated to PRS and actively looking for assets, following the example of the East Village, where Delancey/ Qatari Diar JV bought the 1,400 private flats that made up the London 2012 Athletes’ Village plus development plots for a further 2,000 flats in a £560m deal, the largest investment in this sector to date. PRS is perceived as a new market, and it was vital to ensure that valuers and valuations properly reflect the investment rationale of this world. RICS, particularly Alan Collett during his period of presidency, saw a potential valuation conundrum and asked Dr Robin Goodchild of Lasalle Investment Managers to chair a working group to prepare an information paper. The resulting Valuing residential property purpose built for renting appeared in autumn 2014. Before looking at the paper’s implications for n

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valuers, it is important to consider how residential investment properties were treated historically.

Historic approach Traditional valuation methodology for residential investments has principally comprised an application of an initial, typically gross, yield and an assessment of the discount to the owner occupier value or vacant possession value. The main reasons were either a trading approach to estimate the level of return by crystallising the discount achieved at purchase through retail sales or a rudimentary appraisal of income return. While these approaches will continue to be the yardstick of many investors active in the market, change is coming, with income driven investors very much in evidence. Until now, transparency around operational costs has generally prevented a detailed assessment of net income. This is beginning to change as new investors request a more thorough financial appraisal, including detailed projections of income and expenditure. The key driver for many of these new entrants is income and long-term income growth where net yields and discounts to vacant possession (VP) are being supplemented by cash flow analysis. Investors will still have regard for initial yields, both gross and net, but the relationship to VP is becoming more of a benchmark than a principal method of comparative appraisal.

Identifying the market The key principle for the valuer is unchanged, of course, with the fundamental question to be asked at the outset of any instruction: “Who would the purchaser (or category) be of this property?” Hence, to 1 0 M AY/J U N E 2 0 1 5

UPFRONT VAL U I N G B U I L D TO RENT

understand the approach adopted in assessing value, we must understand the investment drivers for the now varied players in the market. Short-term, three to-five year trading strategies will still be very much part of the market. These investors will typically seek higher returns from opportunities that are generally perceived as having more risk and market exposure, i.e. by selling down in the owner occupier market. Recent transactions clearly show that there are new entrants in this space, too, particularly targeting non-performing loan sales and distressed asset sales opportunities. They are, though, joined by an increasing number of traditionally commercial real estate investors, which now see residential as an opportunity to balance investment risk across their real estate portfolios and seek a hedge against inflation in the longer term. These new investors have a different rationale, more closely linked to long-term income. The assessment of likely returns over 10 or more years in a net income and growth explicit cash flow is therefore likely to be increasingly required and the valuation approach adopting either this or a net income and day one capitalisation yield must reflect this.

Requirements for advice It is acknowledged that the residential sector offers a wide range of assets, which generate different styles of financial return, from ground rents and houses in multiple occupation to dispersed portfolios of houses and bespoke private rented apartment blocks. Different assets must therefore be appraised in different ways. An understanding of the

Short-term, three-to-five year trading strategies will still be very much part of the market nature of the asset and the investment strategy of the likely purchaser will inform the valuer of the most appropriate methodology to arrive at an opinion of value. For example, fragmented portfolios of residential housing, which may lack management efficiencies and could be more suited to a break up strategy, are likely to be assessed on a shorter term trade out. In this situation, acknowledging the differential between wholesale pricing to retail values will be a key driver. Image © Shutterstock

Where an asset is designed to drive management efficiencies and specified more to the rental market, an income approach may also be considered. It is also important to note that while the private rented sector does not at present have its own planning use class, the sector is now starting to implement restrictive covenants of use as PRS for defined periods. On the face of it, this is a new area for valuers of residential property and will require a different approach to straight C3 residential. For the income investor, Plan A was always long-term rental, but there is now no Plan B. How does this impact on value? Those at the coalface of residential investment valuation will be debating this and other questions as the shape of the market changes. Without a plethora of evidence of similar transactions, it is necessary to rely on core valuation principles and interpret the situation as it presents itself.

UPFRONT VA LUI NG BUI LD TO R ENT

bb appropriate void or rate of occupation: or if a new asset, the rate of letting up bb net capitalistion yield and overall return (IRR).

The question is “what is being sold?” If the answer is the right to receive the net rental income for the defined period (because this is what the asset will generate) followed by either a sale as an investment or a break up to vacant possession value, we must then interrogate the income potential. The valuer could provide an explicit yield calculation for the defined period with a reversion to vacant possession or investment value. However, at this stage in the emergence of the market, investors are looking for a more detailed projection of income and expenditure during the ‘term’. This suggests an explicit cash flow and reference to an overall internal rate of return approach might be required.

RICS view The information paper Valuing residential property purpose built for renting looks in detail at the emerging PRS market and seeks to raise awareness

among valuers. It should be noted that, as far as valuation approach is concerned, it is limited to residential properties designed to be rented for a defined period. This does not mean that the subject property has to be limited to being rented only – although we are starting to see planning and fundingrelated restrictions – it is more the fact that the property will appeal to this new PRS market. The document is clear in advocating an income driven approach to such assets having regard to: bb rental income: from the residential units and probably other elements such as car parking, storage bb costs: including both life cycle (by way of a sinking fund possibly) and day-to-day running costs such as letting /property management fees, maintenance and upkeep bb assessment of market rent: are current rents above or below market levels? bb future growth rates: relating to both income and costs

So, a fair question seems to be: “Does this mean vacant possession values are irrelevant?” Of course, the answer is “no”, unless there is restriction on renting in perpetuity or long period. However, the principal approach to the valuation of PRS assets going forward is likely to be a net income one with vacant possession values providing a useful benchmark. It is likely that we will see an end to subjective discounts to aggregate vacant possession values for entire blocks or portfolios and any difference between the sum total of the parts of a block from an owner occupation perspective and the market value will be defined by the yield.

What does this mean for valuers? The information paper means that valuers will need to have a thorough understanding of the performance of private rented portfolios. They must also seek to ask for detailed management accounts to underpin the assumptions in their cash flows and increasingly

use their wider knowledge of the sector to ensure that market assumptions are adopted as opposed to the incumbent landlord’s current expenditure analysis. Valuations should be supported with comparable evidence. As mentioned previously, the lack of transparency in management accounts proving net operating income will continue to be a challenge to valuers where investors increasingly seek clarity. Over time, this is likely to develop to the point of more detailed accounts being available through investment transactions.

Future directions As the UK population continues to grow and the demand for housing increases, largely unmet by supply, house prices and rental values are likely to rise. With significant global equity sources continuing to seek a home with income-producing assets, demand for residential investment stock designed and built for long-term rental will emerge. The valuation of these assets will therefore follow the same path. b

More information > Download the information paper at http://bit.ly/rentprop15

Jason Hardman is Head of Residential Valuation, Valuation and Advisory Services at CBRE and James Coghill is Head of Residential Capital Markets at Savills. Both were members of the working group that produced the Valuing residential property purpose built for renting information paper jason.hardman@cbre.com; jcoghill@savills.com

RICS training Valuation of land for affordable housing: rics.org/valuationland Residential property valuation: fundamentals: rics.org/resivaluation Related competencies include Valuation

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UPFRONT OVER AG E

Overage agreements are complicated to calculate and need careful management to ensure their security, cautions Max Marrison

Agreeing a formula

he inclusion of overage provisions in property contracts continues to be a popular way to protect the interests of the seller. Commercial agents negotiating deals use overage as a means to protect their clients when the true value of land is not ascertainable or cannot be realised on the sale. It is often used by local authorities, public sector bodies and charities that have a responsibility to ensure assets are not sold too cheaply. An overage obligation is a contractual promise by a buyer to make an additional payment to a seller, which represents a share of the increased value of land after the occurrence of an agreed trigger event during a set period of time. The terms ‘clawback’, ‘anti-turning’, ‘anti-embarrassment’, ‘uplift’ or ‘kicker’ clauses are used interchangeably, but essentially they all mean the same. These trigger events can include the following: bb planning permission is obtained for development or change of use bb implementation of planning permission bb practical completion of a development bb disposal of property with the benefit of planning permission bb disposal of a completed development bb disposal of land at an increased price within a fixed time period. After careful consideration, a decision should be taken on whether overage is to apply on more than one occasion. A buyer will not want to make an additional 1 2 M AY/J U N E 2 0 1 5

payment if the grant of planning permission is unsatisfactory or subject to judicial review, or where the buyer may decide not to implement the permission. A seller must also consider when the liability arises for a buyer to make the additional payment. It may be inappropriate to insist on overage to be payable on the grant of planning permission or the implementation of a new development if the purchaser does not have the financial resources to comply at that stage. It is wiser to request the payment be made on the sale or letting of a specified number of units.

Avoiding overage Buyers will often attempt to avoid paying overage. A good illustration is the 2010 case of Renewal Leeds Ltd v Lowry Properties Ltd. The contract specified an overage payment was due on a development if the total sales revenue exceeded £7.4m on the trigger of the final sale of a completed residential unit. Lowry Properties obtained planning permission and built 84 houses, but only sold 80 of them. The last four were advertised at more than 126% of the market value, yet despite an offer from Renewal Leeds to buy the houses at the inflated price, Lowry Properties declined to sell. The property contract contained no obligation on Lowry to build or sell the units, but fortunately for Renewal Leeds, the court was prepared to imply a term that if development commenced, the units would be completed and sold. This case highlights the importance of drafting clear contracts and it is recommended that overage provisions always contain a ‘good faith’ clause.

Calculating overage The formula for calculating the overage payment can be complex. It may be a fixed sum, a percentage of the increased value of the land with or without planning permission, or a share of the sale price, less base value and development costs (including the Community Infrastructure Levy). In recent years, the courts have been kept busy settling disputes relating to the construction and interpretation of the overage formulae. Again, legal drafting must be clear and record the intentions of both parties. We would always recommend that appropriate valuation advice is obtained to support this process and the contract contains a worked example. The length of the overage period must also be considered carefully. If it is too short, the buyer will simply ‘land bank’ the property until expiry. If the period is too long, it will effectively sterilise the land and make it less attractive to potential purchasers, which could ultimately have a negative effect on the purchase price.

After careful consideration a decision should be taken on whether overage is to apply on more than one occasion

UPFRONT LEG AL

Protecting your agreement Security for the overage payment is a very important issue and must be dealt with at the outset of a transaction, when negotiating heads of terms. Overage is a personal obligation on the buyer, triggered by the occurrence of a particular event during an agreed period. The burden of the contractual promise does not generally bind the buyer’s successors in title, so the prospective purchaser’s current financial standing must be considered, along with their likely ability to make overage payments in the future. The buyer’s economic prospects might change and in the event of insolvency, the seller could end up ranking as an unsecured creditor. Ideally, a seller would look to secure the overage payment by taking a first legal charge over the land. If the payment is then not made on the due date, the land can be sold and the money recovered from the sale proceeds. A legal charge is a very effective mechanism although there are, of course, drawbacks. Most significantly, it is usually unacceptable to any lender providing finance for the proposed development. In the unlikely event that a bank agrees to the seller taking a legal charge over the land, it will insist on a deed of priority being entered into, to restrict the amount secured in favour of the seller. There are numerous other ways to secure an additional payment, such as a third party guarantee. The downside with this arrangement is that a guarantor’s financial standing could diminish during the overage period and may not constitute adequate security in the long run. Bank bonds are a less

common option because they are very expensive to obtain and unsuitable in situations where the potential amount of overage is unknown. Overage can be secured by what is known as an equitable lien over the property. Where the overage payment is defined as forming part of the purchase price, an equitable lien will arise on exchange of contracts and enables the seller to apply for a court order to sell the property and receive the payment from the proceeds. To be effective, the seller must lodge a notice of the lien before the buyer’s transfer is registered. Like the legal charge, a seller’s lien is unacceptable to funders and when acting for a buyer we always include a provision in the contract that states the seller is not entitled to any lien over the property. Overage can also be secured by indirect means, such as reserving a right over the land, retaining a ransom strip or by imposing restrictive covenants that dictate what kind of development can take place. However, there is a danger in relying on such implicit methods. For example, there is always the possibility that a Lands Tribunal may seek to discharge or modify a restrictive covenant and a ransom strip might not work if a buyer/developer is able to find an alternative access. The most common means of securing overage and enforcing provisions against the buyer’s successors in title is by way of a deed of covenant and restriction. Using this method, a restriction is entered on the registered title that states no disposition is to be registered by the Land Registry without the seller’s consent and this will only be given if the disponee enters into a deed of covenant agreeing

to comply with the overage provisions in the original contract.

Conclusions In summary, overage can be incredibly complex and take considerable time to negotiate. The impact on potential sales must be considered and it should not be seen as an easy option if the seller is unsure the purchase price represents the market value of the land. Provisions should be negotiated by suitably experienced solicitors, with input from surveyors’ specialist valuation advice. When agreeing terms and the means by which the overage payment is to be calculated, it is important the buyer is motivated to develop land. If the seller is too greedy, the purchaser will simply delay work on the site for the duration of the overage period. Consideration must also be given to the management of overage provisions in the contract. A seller should monitor what happens to the property and not rely entirely on the buyer to provide information. This can be especially difficult when the transaction has been completed and/or employees within the organisation responsible for negotiating the overage move on to pastures new. b Max Marrison is Head of Commercial Property at Taylor & Emmet LLP max.marrison@tayloremmet.co.uk

Related competencies include Contract practice

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A DV E RTI S I N G

RICS P ROP E RT Y JO URN A L

PJSA Ltd

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The chosen individual will get involved in the active management of our current, expansive rural portfolio as well as providing support for project work (which includes acquisitions & disposals, planning, valuations etc). Similarly, you will be encouraged to identify additional income generating opportunities from new ideas and the client base. The post will suit a chartered surveyor, ideally between 0 – 2 years’ PQE. Salary and package will reflect experience (circa £21 - £28,000 DOE). For a confidential chat and to obtain a full and detailed job description contact Jan Wright 01753 855011 or please email jan@pjsa.co.uk

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To 30017-RICSpropertyJournal-HP-130215.indd ad ve rtise con t a c t C h a r l o t te1 Tu r n e r +4 4( 0 )2 0 7 8 7 1 5 7 3 4 or c harlot te@wearesu nday. c o m 1 4 M AY/J U N E 2 0 1 4

04/03/2015 15:55

UPF R O NT TA XI NG T I M ES

RI CS P RO PERTY JOUR NAL

TAXING TIMES

Jürgen Bauderer outlines some of the key issues for those investing in German real estate

interest expenses are generally tax deductible provided the respective debt is effectively connected to German (taxable) income and interest is charged at market rates. However, the German earning stripping rules impose a ceiling on the deductibility of net interest expenses (i.e. interest expenses less interest earnings) of up to 30% of earnings before interest deduction, taxes, depreciation and amortization. This rule applies to interest on loans from both related and unrelated parties. Exemptions to the rules include a de minimis threshold of €3m, i.e. net interest expenses of less than €3m pa are generally deductible irrespective of the 30% ceiling.

ermany is often viewed by international investors as the most stable real estate market in Europe. In addition, continuously low interest rates result in attractive financing conditions that make up for constantly high multipliers across Europe. Before embarking, foreign investors should in particular be aware of the following tax aspects and particularities.

Real estate transfer tax Real estate transfer tax (RETT) is imposed not only on the direct acquisition of real estate (i.e. in asset deals), but also on certain share deals. While the detailed rules can be somewhat complex, as a general principle RETT is triggered if 95% or more of the shares in a company that, directly or indirectly, owns German real estate are transferred within five years or are, without any time limitation, assembled in the hands of one or a group of acquirers. In general, in case of asset deals RETT is levied based on the consideration paid, and in share deals based on the so-called special tax value of the real estate (in practice, usually amounting to 70% of the fair market value). The applicable RETT rates depend on the state where the real estate is located. Currently, rates in Germany vary between 3.5% (e.g. Bavaria and Saxony) up to 6.5% (e.g. Schleswig-Holstein, Nord Rhine Westphalia and Saarland). Further increases may be decided by the states over the forthcoming years. In case of a share deal, RETT may only be avoided by not exceeding the thresholds of less than 95%. Depending on the specific facts, this may be achieved by the seller retaining a 5.1% stake in the structure.

Trade tax In addition to corporate income tax (CIT) at an effective rate of 15.825%, real

estate investments may also be subject to trade tax (TT), provided a permanent establishment is maintained in Germany. TT generally is levied based on the CIT base, adjusted by certain add-backs and deductions. Depending on the municipality, the applicable rate generally varies from 7% to 17.15%, potentially causing a substantial overall tax leakage. To avoid this, German-bound real estate investments are often structured by using a foreign corporation (e.g. a Luxembourg SARL) as the acquisition vehicle. However, in such scenarios, care must be exercised to avoid a German permanent establishment. In particular, it has to be documented that the property company maintains its effective place of management outside Germany (e.g. by regularly held board meetings abroad) and that substantial management decisions are not delegated to German service providers such as property managers. German property managers should also not be authorised to legally represent the property company (e.g. in concluding lease agreements).

Earning stripping rules For efficiency reasons, foreign investors aim at ensuring that interest payments on internal and external debt are tax deductible. Under German tax law,

Regulated fund vehicle In practice, institutional investors such as pension funds, sovereign wealth funds, or insurance companies may prefer or are for regulatory reasons only allowed to invest in or via regulated investment fund vehicles, such as a German domestic asset pool (Sondervermögen). A fund of this type does not have a legal personality and is not incorporated, but is established in contractual form (i.e. contractual-type funds) between the investors and the investment fund’s management company. Due to the lack of legal personality, assets belonging to the fund are legally owned by the management company, which holds them in trust and for the account of the fund and the investors. A domestic asset pool provides several tax advantages, e.g. a complete tax exemption (CIT and TT) at fund level – provided certain criteria are met – but taxation with 15.825% at foreign investor level, a non-application of earning stripping rules at fund level and a RETT neutral transfer of fund units. b Jürgen Bauderer is Partner, Real Estate Tax at Ernst & Young Juergen.Bauderer@de.ey.com

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RICS P ROP E RT Y JO URN A L

UPFRONT S Q UAT T I N G

quatting has something of a tradition in the UK. In the form of occupation of common or waste land by the landless class, it was an issue in the Peasants’ Revolt in the 14th century, and in the Diggers movement that followed the English Civil War. In some ways, it can be seen as one of the first forms of non-aristocratic land ownership. Times have moved on, however, and now squatters pose an issue for property developers, land owners and landlords alike, targeting property when it is most vulnerable, for instance during redevelopment. Both commercial and residential property owners need to be aware of the preventative measures to minimise the risk of squatting and, should these fail, the powers available to regain exclusive control of their land. In the modern context, although not a legal term, squatting takes place when a person enters property without the permission of the landowner and settles or resides on that land. This can also include circumstances in which entry to or possession of the property was initially lawful, for instance under a tenancy without statutory protection, but where following the lease’s expiry, that individual has remained in occupation.

Occupation rights In terms of protection from eviction, the rights of squatters to remain in occupation of a property are based on section 6 of the Criminal Law Act 1977 (CLA). This makes it an offence for any person, without lawful authority, to use or threaten violence to secure entry to premises against the will of those inside. This applies even where the person in occupation is a trespasser and the person seeking to enter the property is the owner. In addition, illegally evicting or harassing a residential tenant can be a crime under the Protection from Eviction Act 1977. This can prevent the removal of unauthorised occupiers in most 1 6 M AY/J U N E 2 0 1 5

On the offensive Criminal remedies to residential squatting seem to be having a positive effect, say Richard Manyon and Joshua Moger, so will commercial property be next? circumstances, save where a court enforcement officer has a warrant or the police are acting by the powers recently bestowed on them by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASP). Over the past few decades, squatters have used the CLA to make lawful evictions difficult for landowners. In order to regain possession of their properties, landowners have historically had to apply to court for the appropriate order for possession and warrant for eviction. This summary procedure can take several weeks, and another few weeks can be taken up before the court bailiffs attend to enforce the warrant. An alternative procedure is to obtain an interim possession order (IPO). When this is issued and served, squatters must leave the relevant property or they will be commiting a criminal offence. These processes are costly as well as time

consuming. Both involve attending court at least once and frequently there is no prospect of making recovery from the squatters for property damage, loss of rent or costs.

New criminal remedies Landlords and developers alike, therefore, welcomed the government’s decision to criminalise some forms of squatting in residential premises, introduced by LASP. Section 144 of that act states that an offence is committed when: 1. A person is in a residential building as a trespasser, having entered it as such. A building is residential if it is “designed or adapted, before the time of entry, for use as a place to live” 2. The person knows or ought to know that they are a trespasser 3. The person is living in the building or intends to live there for a period.

UPFRONT S QUATTING

Figure 1: Response to squatting Is the property residential? NO YES Did the squatter previously have a right to occupy the property (lease or licence, etc)?

YES

NO The maximum penalty for the offence of squatting is six months’ imprisonment, a fine of up to £5,000, or both. As well as introducing this new offence, amendments were made to the Police and Criminal Evidence Act 1984, giving uniformed police officers the power to enter and search premises for the purpose of arresting individuals for the offence of squatting. Crucially, this provides a way for residential property owners to remove squatters from their land without having to wait (and pay) for a possession order and associated warrant, or for an IPO. When the legislation was introduced, there was considerable scepticism that it would be effective or properly policed. These concerns appear to have been largely unfounded, and the police appear to be willing to enforce the law in a robust fashion. For example, a 2014 Freedom of Information Act request revealed that in the period from 1 September 2012 to 1 September 2013, the Metropolitan Police arrested 247 people for the offence of squatting in a residential building. Of these, 112 were charged and 101 convicted. The courts also seem willing to impose serious penalties where they deem it appropriate; 22 of these 101 convictions resulted in custodial sentences. The figures seem likely to have a deterrent effect on the squatting community. As such, in a case of residential property, reporting squatters to the police seems an important first step and should result in eviction in appropriate cases. At the time of any report a property owner should be prepared to prove their ownership. There should be no attempt by the property owner to remove the squatters without the police or a bailiff acting under a court order, although the option to give the squatters an opportunity to vacate prior to contacting the police or making a court application might be considered.

Gaps in the law The main criticism of the recent changes is that the offence only applies to residential

Does the squatter know they are a trespasser? NO Possession proceedings

property. The only source of redress available to non-residential property owners is through the civil system set out above. This poses a significant problem for commercial landlords and developers because the expectation is that squatters will now target unsecured commercial property rather than risk being found guilty of a criminal offence by occupying a residential property. There has been some indication that the government regards the criminalisation of squatting in residential property as a first step, and that further legislation may follow. The rationale for excluding commercial property is unclear, and there have been several instances of squatters causing substantial disrepair to such premises since LASP came into force. Additionally, an offence can only be committed if a person has entered and remains in the residential property as a trespasser, i.e. whose original entry and occupation of the building was unauthorised. Accordingly, tenants who entered the property legitimately but who have remained in possession after the expiry or forfeiture of their lease, cannot be guilty of the offence. Figure 1 illustrates the circumstances in which property owners will be able to report the issue of squatting to the police to deal with under LASP, and when they will be left only with the previously existing civil remedies.

YES Report the matter to the police

guardians). Care should be taken to regularise any occupation with a tenancy agreement, allowing no tenants to remain without a right to do so. Commercial landlords planning redevelopment should put in place tenancies outside the Landlord & Tenant Act 1954 with break options. In appropriate cases, landlords should consider keeping property occupied by temporary tenants such as charities or other businesses prepared to vacate when required. Advanced project management and correct tenancies are vital. If squatting does arise, a report should be made to the police, or possession proceedings brought as soon as possible. This is not only because of the damage that could potentially be caused or to protect property interests generally, but because, allowed to remain in possession for a significant period of time, a trespasser may acquire permanent ownership rights. The timeframe involved in gaining such rights depends on whether the land is registered. In the case of unregistered land, the period is 12 years of exclusive occupation, while for registered land, it is 10 years. This area of squatters’ rights remains unaffected by LASP. b

Richard Manyon is a Senior Associate with expertise in property disputes and Joshua Moger is a Trainee Solicitor at Payne Hicks Beach rmanyon@phb.co.uk

Course of action Of course, owners should take practical steps to avoid unauthorised occupation from arising. Adequate security might include robust locks, alarms, monitored CCTV, fences (preventing access to car parks and open land) and security guards (patrols or permanent property

Related competencies include Property management, Legal and regulatory compliance

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RICS P ROP E RT Y JO URN A L

UPFRONT R I C S G U I DAN C E

Putting into practice

Alexander Aronsohn sets out some new categories of publications from RICS

The RICS hierarchy has five main levels of standards, guidance and information applicable to its members: bb international standards bb RICS professional statements bb RICS code of practice bb guidance notes bb information papers.

The hierarchy has been recently reviewed to make it easier for members to understand, more user friendly and in line with RICS’ international standards vision. The highest level is international standards, defined as: “Standards, with international scope that set out detailed requirements to be satisfied by a practitioner, and the procedures for checking conformity to these requirements.” International standards comprise high-level principle-based standards developed in collaboration with other relevant bodies by experts and panels, which 1 8 M AY/J U N E 2 0 1 5

are subject to international consultation and stakeholder review. They bring together the highest levels of expertise and professionalism that reassure the international marketplace of the level of ethics and service they can expect from an RICS chartered surveyor. International standards are drafted to allow RICS, and other appropriate organisations, to assess conformity and are mandatory for all RICS members. RICS has long been a supporter of the development of such universal standards, and not only fully embraces them, but also proactively supports their adoption by others around the world. However, as stated in the Red Book introduction, acceptance alone is not enough – effective implementation is the key. If confidence and public trust is to be achieved, standards must not only be uniformly interpreted and consistently applied but also actively monitored and enforced. RICS is at the forefront of developing international standards, working in coalitions with organisations around the world, acting in the public interest to raise standards and increase transparency within markets. International Property Measurement Standards

(IPMS) (ipmsc.org), International Construction Measurement Standards, International Ethics Standards and others will be published and will be mandatory for RICS members. In respect of valuation, the RICS Red Book, although not an international standard on its own, incorporates and is fully compliant with International Valuation Standards published by the International Valuation Standards Council (www.ivsc.org).

Defining roles RICS guidance material is designed to be compliant

with specific statutory or regulatory requirements in local jurisdictions, while being consistent with relevant national and international standards. RICS national association valuation standards have mandatory status in the countries or states to which they apply. They are intended to supplement the international standards or, in the case of valuation, the global valuation standards to meet local statutory or regulatory requirements where these are not embodied in a self-contained set of national standards.

UPFRONT RI CS GUIDANC E

RICS professional statements lie beneath international standards and are the highest level of guidance within the RICS hierarchy. They are defined as: “A document that provides members with mandatory requirements or a rule that a member or firm is expected to adhere to.” The term professional statement encompasses practice statements, Red Book professional standards, global valuation practice statements, regulatory rules, RICS rules of conduct and government codes of practice. It is the duty of every RICS member to comply with relevant professional statements, and to take account of other guidance produced by RICS in a particular area of expertise, in order to maintain high professional standards. RICS considers that any professional statements are technical standards for the purposes of Rule 4 of both the Rules of Conduct for Members 2007 and the Rules of Conduct for Firms 2007 (as amended from time to time). There may be disciplinary consequences for failing to comply. Members should also note that, when an allegation of professional negligence is made against a surveyor, the court is likely to take account of any relevant professional statement published by RICS in deciding whether or not the surveyor acted with reasonable competence. Failure to comply with professional statements may, accordingly, lead to a finding of negligence. In the opinion of RICS, a member conforming to the requirements of this professional statement should have at least a partial defence to an allegation of negligence. Where members depart from the practices set out in professional statements, they should do so only for good reason and the client must be informed in writing of the fact of and the reasons for

this. There may be legal and disciplinary consequences for doing so. The most recent professional statement is on the Measurement of Office Buildings, which replaces the office section of the Code of Measuring Practice 6th Edition (COMP). Consultation took place in February and the statement is due to be published in Q2 2015. Just like the Red Book, it incorporates and is fully compliant with IPMS published by the IPMS Coalition. The IPMS Standard Setting Committee is currently drafting international standards for measuring other building classes such as residential, industrial, retail and mixed use. Over the next two years RICS will issue further professional statements, which will replace the COMP for these building classes.

Unifying guidance Codes of practice are defined as: “A document approved by RICS, and endorsed by another professional body/ stakeholder, that provides users with recommendations for accepted good practice as followed by conscientious practitioners.” Codes of practice often lie in a grey area, with part of some codes being mandatory due to statutory regulations and the rest being voluntary. Normally, status of the code and whether it is mandatory or good practice is defined in the document itself. To simplify the RICS hierarchy, it is the intention of professional groups to phase out the majority of these over the next few years and replace them with either professional statements or guidance notes. RICS guidance notes are defined as: “A document that provides users with recommendations or approach for accepted good practice as followed by competent and conscientious practitioners.” Guidance notes contain further material and

Acceptance alone is not enough – effective implementation is the key information on good practice appropriate for particular circumstances. Where procedures are recommended for specific professional tasks they are intended to embody ‘best practice’ which, in the opinion of RICS, members should adopt to demonstrate professional competence. Although not mandatory, guidance notes can often be referred to as part of court proceedings where they are often treated as such. Therefore, if for any reason a member has chosen to ignore the advice given by their professional body on best practice it may be prudent to incorporate a file note explaining why in this instance the note was not followed. Lowest in the hierarchy are information papers, which contain practicebased information that provides members with the latest knowledge and/or research and are also used by stakeholders and other interested parties. Although not mandatory, it is again recommended that members are familiar with information papers where applicable because these could often be referred to as part of court proceedings.

bb consumer guides bb research. RICS Insight is a new category of published information by RICS and can be defined as: “Issues-based input that provides users with the latest information. This term encompasses thought leadership papers, market updates, topical items of interest, white papers, futures, reports and news alerts.” The Insights series will delivering high-quality RICS knowledge and output to promote understanding of the profession, aid knowledge transfer and stimulate debate. Economic reports are usually based on a survey of members, or a document highlighting economic trends. An example is the Residential Market Survey, which is published on a monthly basis. Consumer guides are designed solely for use by consumers, providing limited technical advice. Examples already published by RICS include home surveys and the guide to the residential property purchase process. Research documents are: “Independent peer-reviewed arm’s-length research document designed to inform members, market professionals, end users and other stakeholders.” Examples include RICS sustainability research (http://bit.ly/1uOLnC8) and Unleashing Sub Saharan African property markets (http://bit.ly/19eOnhx). b

Alexander Aronsohn FRICS is RICS Director of Technical International Standards aaronsohn@rics.org

Information In addition to the above hierarchy of guidance, RICS also publishes four categories of documentation for information only, under its public interest agenda: bb RICS Insights bb economic reports

Related competencies include Conduct, rules, ethics and professional practice

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RICS P ROP E RT Y JO URN A L

UPFRONT L EGA L Q & A

Legal Q&A Limitations on claims

We received an overvaluation claim relating to a valuation carried out in 2007. Doesn’t the right to bring a claim expire after six years?

> Alexandra Anderson and Katharine Fletcher

The basic rule is that, for a claim in contract, the time for bringing a claim expires six years after the date of breach of contract. So where a claimant claims that a valuation was too high, the right to recover damages for breach of contract usually expires six years after the date of the valuation. By contrast, the time for bringing a claim in tort starts to run when the claimant suffers a loss. For a lender, this may not be until the borrower defaults on loan repayments, which could be months or even years after the valuation. Further, if a claimant can demonstrate that they did not have the requisite knowledge to bring a claim during the primary limitation period, they may be able to rely on section 14A of the Limitation Act 1980 to extend the time for bringing a claim. This provides that, as long as the claimant brings the claim within three years of learning the facts necessary to bring the claim (subject to a long-stop of 15 years), the claim will be in time. What if the borrower never made any repayments? Would their inability to repay be partly to blame for the bank’s loss? The test for whether a lender has suffered a loss rests on the value of the property and the borrower’s covenant to repay the loan being worth less than the amount of the loan and the interest that has accrued on it. Only once the amount outstanding on the loan account exceeds the value of the property and the covenant will a loss occur and the time start to run for bringing a claim. This begs the question of how you value a borrower’s covenant – a point on which the courts have given little assistance. However, the point has been addressed in the recent case of Toombs v Bridging Loans Ltd (BLL), which provides some helpful guidance. The claim involved a valuation prepared in September 2006. The borrower defaulted and BLL issued a claim on 16 May 2013, 2 0 M AY/J U N E 2 0 1 5

+info Alexandra Anderson and Katharine Fletcher specialise in defending claims against surveyors at RPC alexandra.anderson@ rpc.co.uk katharine.fletcher@ rpc.co.uk

alleging that the property was worth only 75% of the value advised by Toombs in September 2006. Toombs applied to have the claim struck out, on the basis that it was time barred. The application failed, but Toombs was given permission to appeal. On appeal, the court considered two key issues: bb at what point did the value of the borrower’s covenant became inadequate to make up the difference between the amount of the loan and the value of the property bb when did BLL have the requisite knowledge of its loss, for the purposes of section 14A? The borrower had failed to make any repayments, either by the original deadline (2 May 2007) or by an ‘extended’ deadline, approximately six months later. The judge held that, in the absence of any other evidence as to the value of the borrower’s covenant (BLL had failed to produce any), the failure to make any repayments was of itself clear evidence that the covenant was worthless. As a result, when the borrower failed to repay the loan on 2 May 2007, BLL’s security was limited to the value of the property alone. Since the property was alleged to be worth less than the amount outstanding on the loan account as at 2 May 2007, BLL suffered a loss at that date. The time for bringing a claim therefore expired on 2 May 2013, two weeks before BLL issued its claim. The judge also held that BLL had ‘knowledge’ of its loss when the borrower failed to repay the loan by the agreed extended date in December 2007. It could therefore not rely on section 14A and the claim was time barred. So what does that mean for my claim? If the borrower went into default more than six years before the claim was made, and in the absence of evidence to show that their covenant was still of some value, then the claim is probably out of time. If the borrower is a special purpose vehicle, or a sub-prime borrower, the chances are that the covenant is of little or no value on the date the loan is made. Surveyors should take a robust approach to late claims, and the judgment in Toombs provides useful ammunition in arguing that such claims are time barred. b

RICS P ROP E RT Y JO URN A L

COMMERCIAL

com mer cial M AY/J U N E 2 0 1 5 2 1

C RICS P ROP E RT Y JO URN A L

COMMERCIAL BIDS

Strengthening the BID Julie Grail explains how property owner BIDs work and their role in supporting thriving city centres

he Business Improvement District (BID) concept has been active in the UK for a decade following introduction of the primary legislation in 2003 and the respective regulations in 2004. The legislation places the onus to invest with the occupier of premises and this becomes a mandatory levy following a successful business ballot. Despite a long history of BIDs across the Atlantic, starting back in the 1950s, the UK’s levy of the occupier rather than the owner as in North America reflects the countries’ differing taxation systems. The UK BID model has proved very successful so far, with a rate of growth far greater than anyone anticipated. Close to 200 BIDs are now in place across the country, which are demonstrating value to their levy payers and as a consequence achieving strong mandates into second and third terms. The success rate at renewal ballot is now running at 91%. Inevitably, much of the early focus of BIDs is on place management and marketing but the more mature locations are evolving into a strong leadership and place shaping role (see RICS Property Journal, May/June 2014, p30). However, to achieve and sustain a long-term and strategic approach it is necessary to engage with property owners that carry the investment interest. 2 2 M AY/J U N E 2 0 1 5

While many BIDs have sought voluntary contributions and involvement from property owners, only a small number of metropolitan BIDs have achieved sustainable engagement. Some feel that a voluntary basis is not enough to deliver a comprehensive and resilient service, hence the desire to see the formal establishment of property owner BIDs. The provisions for property owner BIDs were incorporated into the Business Rate Supplement (BRS) Act 2009, but only where a BRS and an occupier BID already exists. This means that for the moment it is only applicable in London (where the only BRS exists), but will allow valuable testing in the areas where the interest is most advanced through Heart of London Business Alliance and the New West End Company. Beyond this first testing phase, even if legislation allowed for more far reaching property owner BIDs, this model is unlikely to be relevant everywhere. It is most likely they will be appropriate in metropolitan-type locations where there is a smaller incidence of owner occupation. Clearly, where owner occupation is high and/or where there is disparate ownership the owner-based BID model is less relevant or achievable.

Broad principles The property owner BID is modelled on the existing occupier BID principles and as such is relatively non-prescriptive,

leaving much of the detail to local determination. Key elements are: bb The rating system, using existing hereditaments, is the foundation for identifying the eligible liability. bb The liable owner will be determined by the BID proposer and specified in the Business Plan Levy Rules. Only one ‘class’ of owner can be specified per BID to apply to all hereditaments. It is likely that the class of owner identified will be the long leaseholder immediately behind the occupier, i.e. the interest receiving the rent from the occupier. The rules are then likely to define the ‘class’ by way of description of owner including lease term, but this will be agreed locally based on the needs of the particular area. bb The voter list is prepared by the BID proposer and voters are not limited to England as per the occupier BID regulations. bb The local authority has a limited right of veto in respect of the voter list prior to going to ballot; the onus on the BID proposer to create and clean the voter list differs from the approach in the occupier BID regulations. bb The property owner BID must be established as a separate BID mechanism but in practice it is expected that this will be run and managed within an existing BID company. bb The property owner BID area must be exactly co-terminus with the existing occupier BID area. bb The term of the BID will be set out in

C O MME RCIAL BIDS

m Regent Street sits within the New West End Company BID area

the BID proposal and may be up to five years but cannot continue beyond its term in the event that an occupier BID has failed to renew in the meantime. It is uncertain how the practicalities of this will work at this stage in the event of a failed occupier BID renewal mid-term through an owner BID.

Pathfinder locations There has been strong appetite to see the establishment of the property owner BID model across the West End of London both in the Heart of London Business Alliance area (Leicester Square through to Piccadilly) and the New West End Company area (Oxford Street, Regent Street and Bond Street). In the late 1990s the fledgling groups were made up exclusively of owners, assuming that any BID legislation coming to the UK would be based on an owner levy. Throughout the past decade of BID development and implementation on occupier BIDs, these owners have remained active and have continued to provide voluntary contributions and take places on the respective BID boards. These same property owners are now leading the evolution to a mandatory levy on property owners following a successful ballot. Both BIDs are preparing to go to a ballot of property owners â&#x20AC;&#x201C; Heart of London is planned to be first in May/June 2015 and New West End Company will follow in September/October. There will be differences in approach from the two

There has been strong appetite to see the establishment of the property owner BID model across the West End of London areas, in the same way that occupier BIDs develop different levy rules to suit their specific area. For example, the charging principles for owner occupiers is likely to be a greater for New West End Company than for Heart of London. In the case of Heart of London, two ballots will run in tandem because the current BID company runs two tangential BID areas as one organisation. It is anticipated that the combined area will cover 82 owners and the initial data analysis has identified 98% of owners. Despite early concerns from some that ownership identification would prove problematic, this example exceeds the ballot situation for most occupier BIDs where hereditaments on a rating list are sometimes not recognisable and engagement can be difficult at local level due to vacancies, delays on rating list updates etc.

The basis of the property owner BID for Heart of London is to supplement the existing income streams with a guaranteed owner investment over a five-year term, which will have a greater focus on the long-term values. From the consultation so far, the key areas for the business plan are focused around public realm and transformational place management, destination marketing and prestigious events, and CO2 emissions and business resilience. For New West End Company, there will be one ballot and the levy will run alongside its existing occupier BID income in the same business. Their area incorporates a total of 120 companies based on the same principles as the occupier BID, which charges retail/leisure uses only. Some specific treatment for their owner occupiers is likely to be singled out within the levy rules but the exact details have yet to be confirmed. The consultation and subsequent business plan development has thrown up a strong focus on additionality beyond the statutory provisions, a broad marketing approach continuing to focus on a global marketplace, a robust street management service, plus potential direct investment into public realm schemes.

Extension beyond London There is a desire from government to see this concept extended beyond the capital, subject to satisfactory implementation in the London pathfinders and certainly interest and discussions are developing across other major cities, particularly Manchester and Newcastle. Parliamentary time will be required to establish the necessary legislation. However, a lateral thought may see the introduction of a Business Rate Supplement of a de minimis scale in areas outside London merely to enable implementation of a property owner BID. C Dr Julie Grail is Chief Executive at British BIDs juliegrail@britishbids.info

Related competencies include Economic development

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COMMERCIAL EU S U STAI N AB I L I TY

Alison Mungall and Inge Hertzog discuss how businesses with operations across Europe can optimise energy saving opportunities

Auditing across borders

rticle 8 of the EU Energy Efficiency Directive requires all member states to introduce a scheme for mandatory energy audits to be undertaken by large enterprises within their jurisdiction (see Figure 1). The intention is that these regulated, self-certified audits will identify energy savings opportunities that will drive the take-up of energy efficiency measures. Qualifying enterprises must complete energy audits by 5 December 2015 and every four years thereafter. Each EU member state is responsible for the design and administration of the regulations within its country – in the UK, it will be implemented by the Energy Savings Opportunity Scheme (ESOS). But the challenge for large enterprises operating across Europe is that they have to comply with differing schemes in each EU country.

Legislative background The Europe 2020 strategy (http://bit.ly/1vJ4hpb), introduced in 2010 by the European Commission, is the EU’s 10-year growth strategy to ensure that Europe’s recovery from economic crisis follows a “smart, sustainable and inclusive” trajectory. Alongside a range of socioeconomic key performance indicators, the climate and energy package includes the following targets: bb increase the proportion of EU energy consumption produced from renewable resources to 20% bb achieve a 20% improvement in the EU’s energy efficiency by 2020 bb reduce EU greenhouse gas emissions by 20% against a 1990 baseline by 2020. The EU Energy Efficiency Directive, published in 2012, established a set of 2 4 M AY/J U N E 2 0 1 5

binding measures that will support the attainment of these ambitious Europe 2020 targets. For example, member states are required to commit to sub-targets that require energy to be used more efficiently at all stages from production to final consumption. The aim is to: bb incentivise investment in the development of innovative green technologies and renewable energy, enabling the EU to remain a competitive player in the growing global market ease the dependence on imported fuels; in 2011 net imports of fuels to the EU amounted to €388bn, more than 3% of EU GDP (http://bit.ly/1AnKgc7) bb reduce the negative social externalities caused by fossil fuel pollution. However, the implementation of EU Directives has historically proved to be a cumbersome process and the Energy Efficiency Directive has been no exception. On 26 March 2015, the European Commission announced that all countries, with the exception of Malta, will be subject to infringement procedures for missing the 5 June 2014 deadline to inform the commission how they were transposing the directive. The commission has announced that it will refer Hungary to the European Court of Justice for failing to transpose the

directive into national law and proposes a daily penalty of €15,444 per day. The final amount of the daily penalty will be decided by the court. The commission continues to monitor transposition and reporting progress and “will address any shortcomings”(MEMO/15/4666).

Differing responses In the UK, ESOS stipulates that organisations assess 90% of their energy consuming activities and then select one or a combination of four routes to compliance. It is required that the identified energy saving opportunities be signed off by a board member, thereby bringing energy efficiency onto the boardroom agenda. The Belgian interpretation goes a step further by mandating that all recommendations noted by the energy audit be acted on. The French interpretation is relatively lenient, allowing 65% rather than the UK’s 90% of the obligated enterprise’s total energy consumption to be audited in the first phase of the programme. In the Netherlands, the use of energy audits in industry is promoted by the existing long-term agreement 3 (LTA3) and long-term agreement for the energy efficiency of ETS enterprises (MEE) systems, in which more than 1,100 companies already participate; these systems cover 80% of the energy used

Figure 1 Article 8 definition of ‘a large enterprise’

≥250

≥250 employees

employees but an annual turnover of

≥€50m

and an annual balance sheet total

≥€43m

C O MME RCIAL EU S USTA I NAB ILITY

Figure 2 Responses across member states

France

Netherlands

Spain

Belgium

Audits done before 5 December 2015 only have to cover 65% of the of the obligated enterprise’s energy bills. Thereafter, audits will have to cover 80% of the obligated enterprise’s energy bills

1,100 companies already participate in systems that promote energy audits in industry, thereby already fulfilling audit requirements. Further activities may, however, be required

There is a stated intent to recognise the accreditation of assessors legally established in any other member state

by industry and 25% of the Netherlands’ total energy consumption (http://bit. ly/1z1bUYv). As part of these systems, companies must design an energy efficiency plan (EEP) every four years and implement a ny cost-effective measures identified in the process. The EEPs for the period 2013 to 2016 were drawn up in 2012, and so the majority of organisations in the Netherlands already fulfil the requirements of Article 8 and may only have to carry out minor work to ensure full compliance by 5 December 2015. Member states are at different stages of Article 8 transposition and not all have provisions in place that meet the requirements. Moreover, there is a range of approaches to its implementation, reflecting national circumstances. A significant number of member states intend to allow large enterprises to comply via a certified energy management system, such as ISO 50001. The majority consider that penalties are necessary to ensure compliance. For example, sanctions are already transposed in France. Firstly, a notice is issued requiring compliance within a certain timeframe. If the enterprise still does not comply, a fine is issued proportionate to the seriousness of the infringement, up to 2% of revenue (excluding taxes) in the previous financial year, increasing to 4% in the case of further infringement.

Burden or opportunity? The primary opportunity for multinational businesses is that the technical and commercial information uncovered by the audits can be used to formulate cost-effective recommendations for energy efficiency improvement packages. Businesses are obliged to comply with the Directive in each of the member states in which they operate, provided they meet the qualification criteria. In the coming months, a range of strategies will emerge across the EU. Some corporations could find compliance to be a considerable administrative burden, with duplication of effort in each country to comply with different schemes. However, given the financial and reputational risks of

The Flemish Energy Agency requires that all recommendations noted by the audit be acted on

non-compliance, many businesses will choose to manage compliance across their European operations from one office, which will take overall responsibility. Economies of scale can be achieved by carrying out streamlined, systematic measurement of energy consumption, leading to the identification of significant energy efficiency measures across their European operations.

Uniform approach The extent to which a business benefits from the scheme will depend on how well the compliance strategy is designed. Although the legislative requirements vary from one member state to another, there are considerable opportunities for streamlined compliance. Multinational businesses would be wise to begin by establishing a working group of key individuals from qualifying operations across the corporate group. Each relevant transposition of Article 8 must then be interpreted and distilled into a universal data collation model and evidence pack structure. The model is then deployed across all territories, enabling the centrally responsible operation to ensure that individual operations are suitably prepared. The aggregated dataset can be verified in advance of submission, ensuring accuracy and minimising the risk of error. Aggregated programme management will be key to ensuring compliance across

Figure 3 Key actions by Article 8 participants

Measure energy use

Action findings (not legally required by all member states)

Store data and notify scheme administrator

Identify energy efficiency and energy management opportunities

Evaluate opportunities

all operations and mitigating the risk of non-compliance in any one operation. The advantage of a uniform approach is that it ensures comparable results and facilitates business decisions to be made in a pan-European context. There are, however, a number of idiosyncrasies that limit the extent to which it can be applied. The scope of energy consuming activities to be considered may differ, for example, as might the available routes to compliance. Furthermore, the Directive does not dictate that the lead auditor can be accredited in any country, leaving it to the member states to impose requirements and restrictions to foster their own auditing skillset. Such variances serve to fragment what could otherwise, ideally, have been deployed as a Europe-wide energy management strategy. The key to successful Article 8 compliance will be building an effective European plan, with contingencies to account for current uncertainties in some member states. The plan should include a working group of key personnel, a compliance framework so that requirements in individual states are understood, a system for efficient data collection and a programme to implement a management system, which takes into account local variations. Article 8 states that the programmes developed by member states should not only mandate the energy audits, but also encourage the subsequent implementation of the recommendations. Therefore, 2015 will be a pivotal year in energy management across European enterprises. C

Alison Mungall is Compliance Director and Inge Hertzog a Compliance Analyst at Carbon Credentials Energy Services alison.mungall@carboncredentials.com

Related competencies include Economic development

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COMMERCIAL FAC I L I TI ES M AN AG EM ENT

Michael Ripper and Graham Halkyard summarise research on what makes innovative FM and how to ensure that fresh thinking is put into practice

Putting innovation to work

the needs and expectations of the customers.”

The research

and the key areas that clients and their FM suppliers believe are important. To begin, what is innovation? For our purposes and our understanding of how facilities management innovation works in practice, the Business Dictionary definition works well: “To be called an innovation, an idea must be replicable at an economical cost and must satisfy a specific need. Innovation involves deliberate application of information, imagination and initiative in deriving greater or different values from resources, and includes all processes by which new ideas are generated and converted into useful products. In business, innovation often results when ideas are applied by the company to further satisfy

Recent research based on information from more than 60 major occupiers and facilities management suppliers by Opex Consulting and Selsby Consulting found that only 10% of occupiers believe that innovation in FM can be described as ‘good’. Testing the findings against three case studies in the 2014 report RICS Strategic facilities management case studies (http://bit.ly/1DodU2V) we sought to understand how important a good process is in the successful implementation of innovation

With the initial research, four main areas of interest were tested: bb what is the market perception of current ‘innovation’ performance? bb which are the main focus areas of property and FM innovation? bb what process should be in place to make sure that strong, innovative ideas are developed in the first place? bb what process should be in place to make sure that the identified innovations are implemented?

Market perception There were significant similarities with the perception of the current success of FM innovation, with the majority of customers and suppliers believing it to be either ‘fair’ or ‘poor’. Figure 1 shows the comparative perceptions of the top six issues, ranked by occupier preference, compared with the ranking from suppliers. Innovation related to cost and the quality of the service

were both understandably ranked highly by occupiers, while suppliers thought that cost was more important and quality was ranked only fifth. Innovation in health and safety and space utilisation was perceived to be of relatively high importance to occupiers but assigned relatively less importance by suppliers. Perhaps most surprising was the gap in perception of the importance of innovation in energy and sustainability.

Key factors in success The main part of the research focused on what aspects of the innovation process are essential to ensuring that ideas are constantly being developed to meet changing business needs and successfully implemented. The key criteria in order of importance to both occupiers and suppliers are shown in Figure 2. When it came to implementation, a clear business case, a project plan and regular reporting were seen as vital to success, but only around 25% of respondents believed that

Figure 2

Figure 1

Essential criteria (% respondees)

% who think this issue is very important Quality of service

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Cost Health & safety Space utilisation Energy and sustainability Property strategy 0%

10%

20%

Occupiers

2 6 M AY/J U N E 2 0 1 5

30%

40%

Suppliers

50%

60%

70%

80%

Contract Client sharing Spare time Supplier’s Client part incentives business for supplier process of innovation requirements team team

Very important

Always / often done well

C O MME RCIAL FACI LI T I ES M A NAG EMENT

Figure 2

these were always/often done well. Successful innovation was not perceived to be simply about the supplier identifying innovation; the occupier client/ customer was also seen to be a critical part of the process. Effective implementation is also seen to be of significant importance. Probably not unsurprisingly, given the low overall opinion of good innovation, both suppliers and clients/customers thought that these issues were not normally dealt with particularly well!

Case studies Armed with the outputs of our research, we interviewed the people who were instrumental in the success of three of the RICS case studies to try to understand the significance of good innovation practice in their settings. Case study 1: Using BIM on a PFI at UCL Academy London Specific benefits include: bb engineers can plan preventive maintenance visits more easily by seeing a 3D image of the equipment bb information available to FM engineers via a handheld device bb caretakers are saving an average of ten minutes per task because they receive the job details directly on their device (this increases to 25 minutes per task for engineers). Case study 2: Merging asset and facilities management to produce efficiency and flexibility in the NHS In Widnes, the Clinical Commissioning Group identified the need for more diagnostic facilities in the

Case 1 Important or not

Criteria

Approach

Client part of innovation team

While UCL Academy was the end user, the PFI organisation (BAM PPP) was the client and the main project sponsor to implement the innovation.

Supplier's process

The supplier had not set up a systemised process that created the idea; rather an issue arose and the client identified the solution. The solution also created a new product development opportunity. The supplier’s process was more focused on the implementation.

Spare time for supplier team

Additional resource was provided including paying for additional client input and project and technical input from the supplier.

Client sharing business requirements

Client wanted to be a thought leader in the market and create better systems to support this. They were looking for pilot study to test outcomes.

Contract incentives

No contract incentives in place for the supplier to identify innovations.

Project plan

Detailed project plan in place including the significant dependencies between the client, suppliers and users, milestones, responsibilities etc.

Clear business case process

The business case was an important part of the process including identifying the benefits, the cost, the programme etc. All of the forecast outcomes were tested as part of the project implementation.

Regular reporting

Formal reporting against both programme and budget with regular progress meetings held.

       

Case 2 Important or not

Criteria

Approach

Client part of innovation team

The client was central to the innovation process. Six weekly strategic client meetings were held. Importantly the meetings were attended by the same senior people, partly because they saw Estates making a valuable contribution to clinical outcomes).



Supplier's process

Supplier (NHS Estates) had a good innovation process which included the collation, analysis and sharing of performance data with the client and regular strategic meetings.



Spare time for supplier team

Specific projects did attract additional resources.



Client sharing business requirements

CCG and Estates regularly meet to discuss changing clinical requirements and how property can support these changes.



Contract incentives

This was not perceived to be important in implementing changes on this project.

Project plan

For individual projects detailed implementation programmes were agreed.

Clear business case process

Clear business case process using “Green Book” methodology to assess preferred way forward.

Regular reporting

Projects were managed at a detailed level. There was also a dashboard used for reporting in the six weekly strategic meetings which was very important.

community to reduce the number of people attending Accident and Emergency unnecessarily. An existing building has been fitted with x-ray and ultrasound equipment and an urgent care centre created. Where previously the

top floor contained expensive and under-used office space, it is now being renovated into clinical accommodation. Case study 3: Improving the image of FM KPMG took the decision

   

to pay its staff the living wage but did not want to increase its costs. Working with its suppliers resulted in a more productive, flexible, multi-skilled service with significantly higher rates of retention.

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n Conclusions Most client organisations want continuous improvement and innovation from their property and facilities contracts, but in the majority of cases were disappointed. The main areas where both clients and suppliers identified a need for improvement were related to how innovation is managed and implemented as a collaborative team, and less about the technical capability of the FM supplier and their ability to identify innovation in the first place (e.g. the ability to identify cost, quality, energy innovation are not the biggest areas of concern). Furthermore, review of the RICS case studies indicated that in some cases, good practice across all implementation criteria need not be in place; however in all cases strong client/customer engagement was perceived to be critical. bb Our recommendations therefore are:

COMMERCIAL FAC I L I TI ES M AN AG EM ENT

Case 3 Important or not

Criteria

Approach

Client part of innovation team

The client is an integrated part of the process and has a clear process to understand changing business requirements and to work with FM suppliers to deliver innovation.



Supplier process

The client and the suppliers have regular meetings and use information to challenge current performance. However this innovation did not appear to arise from a structured supplier process and was more of a result of a changing requirement by the client.



Spare time for supplier team

The challenge was made at a strategic level within supplier organisations and additional resources were made available.



Client sharing business requirements

The main starting point for the innovations identified on this project started with the client identifying the business objective and was driven by maintaining business reputation.



Contract incentives

The client has the ability to reward good behaviours such as contract improvement with longer contract duration. However, there was no direct incentive related to this innovation.



Project plan

Programme management was delegated to suppliers although high level milestones were set.

Clear business case process

All parties knew the criteria for business success and identified solutions to meet these business needs.

Regular reporting

Progress against milestone was regularly reviewed.

  

bb that the client is an integrated and active part of any innovation process bb there is sufficient time for the supplier team to think creatively about innovation towards specific needs bb suppliers have a good

innovation process so that both their own and the client team know their role and responsibilities bb the business case for change is managed and the progress of innovation monitored and reported.C

Michael Ripper is Consultant at Opex Consulting michael.ripper@opexconsulting.co.uk Graham Halkyard is Director at Selsby Consulting graham.halkyard@ selsbyconsulting.co.uk

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C C O MMER C IA L LEGA L

RI CS P RO PERTY JOUR NAL

There are broader grounds than might be thought for opposing renewal of a troublesome tenant’s lease under the Landlord and Tenant Act, says Faiza Ahmad

Unreasonable behaviour landlord can oppose a tenant’s statutory right to a new tenancy on the grounds set out in subsection (a) to (g) of section 30(1) of the Landlord and Tenant Act 1954 (http://bit.ly/landt1954). In summary, they are: (a) tenant’s breach of repairing obligations (b) tenant’s persistent delay in paying rent (c) other substantial breaches or any other reason (d) suitable alternative accommodation (e) tenancy was created by a subletting (f) landlord’s intention to redevelop (g) landlord’s intention to occupy. The landlord must specify the grounds of opposition in its section 25 notice or counter-notice served in response to a tenant’s section 26 notice.

Ground (c) Following decades of being underused, ground (c) has recently stolen the spotlight having been the subject of two important cases in 2014 – Horne and Meredith Properties Ltd v Cox and Billingsley (http://bit.ly/1NCMjio) and Youssefi v Musselwhite (http://bit.ly/youssefimusselwhite). In both cases, the landlord successfully opposed the tenant’s right to a new tenancy on ground (c) which provides that: “The tenant ought not to be granted a new tenancy in view of other substantial breaches by him/her of his/ her obligations under the current tenancy, or for any other reason connected with the tenant’s use or management of the holding.” In other words, if the tenant has committed other substantial breaches

(not covered by grounds a) and b) or there is any other reason connected to the tenant’s use or management of the holding, the court will be asked to determine whether the tenant ought to be granted a new tenancy.

Horne and Meredith In Horne and Meredith, the tenants subjected the landlord to a relentless 16-year campaign of vexatious and expensive litigation. The landlord successfully argued that this satisfied the second limb of ground (c) and the court agreed that in view of the tenants’ behaviour they ought not to be granted a new tenancy. Because the litigation related to alleged obstructions to rights of way granted to the tenants under their lease the court found this was a ‘reason connected with the tenants’ use or management of the holding’ (‘holding’ being the premises, the rights of way and the right to park). The Court of Appeal reconfirmed, referring to the case of Beard v Williams [1986], that the word “or” in the subsection makes it clear that it is not necessary to find a breach of obligation in order to satisfy ground (c) which in fact allows a much broader analysis of any matters relating to the tenant’s use or management of the holding. In finding that the tenants ought not to be granted a new tenancy, the court considered whether it would be fair to the landlord, having regard to the tenants’ past behaviour, to be compelled to re-enter into legal relations with them.

Youssefi v Musselwhite The Youssefi case concerned a landlord opposing renewal of a tenancy on grounds (a), (b) and (c). The court found that disrepair caused by the tenant’s failure to control the growth of a creeper on the external wall of the building did not satisfy ground (a) because it was the landlord’s obligation

to repair the exterior and in any event it was not a substantial breach because the cost of repair was only £350. The court found there were no relevant substantial breaches. Ground (b) also did not help, because the court found that the persistent delays in paying rent were minor in nature. The landlord was, however, able to prove the first limb of ground (c). The court agreed that the tenant’s persistent and wilful failure to allow the landlord access to the property and to comply with the positive obligation in the lease to open a business at the premises in the use classes specified constituted substantial breaches and in the circumstances refused to grant her a new tenancy.

Practice point Often the relationship between a landlord and tenant will break down, sometimes irretrievably. Landlords who have suffered at the hands of a badly behaved tenant will feel frustrated at the limited grounds available to oppose their request for a new tenancy. Where there is a history of persistent and/or substantial breaches and/or other reasons, landlords and their advisers should actively explore the broad scope of ground (c) where (a) and (b) are not enough to satisfy the court that the tenant ought not to be granted a new tenancy. b Faiza Ahmad is Associate at Hamlins LLP fahmad@hamlins.co.uk

RICS Training Commercial landlord and tenant: rent review and lease renewals rics.org/ commerciallandlordtenant Related competencies include Landlord and tenant

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COMMERCIAL D I L AP I DAT I O N S

Levels of loss Terry Davis examines the different ways that a valuer can quantify loss

or many years, landlords’ surveyors have prepared schedules of dilapidations (SoD) based on breaches of repairing covenants, costed them and then served such on the tenant. The tenants’ building surveyor would then negotiate and in all probability agree a settlement whether or not the landlord had carried out the work. The settlement would have been based on the quantum of the breaches of covenant and was often unrelated to the landlord’s actual loss. A series of cases including Ruxley Electronics & Construction Ltd v Forsyth [1995] and Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd [2013] and, of course, the Dilapidations Pre-Action Protocol show that landlords cannot claim for something that they have not lost. Although this has come as something of a shock to elements of the profession, the concept has its roots in Section 18 (1) of the Landlord and Tenant Act 1927 and is the basis of common law loss calculations. Breach of contract (in these circumstances) is quantified by damages, which can be defined as the reimbursement of a loss suffered. So now we have ‘loss’ – the landlord should obtain reimbursement of any loss suffered by the breaches of lease covenants by the tenant. Such loss can often be established by the cost of carrying out the work defined in the SoD, 3 0 M AY/J U N E 2 0 1 5

although this can still be challenged by the tenant as not representing the actual loss. But if the work has not been carried out, then the landlord has to prove actual loss according to the Protocol. Under these circumstances, the loss has historically been established by way of a diminution valuation (DV) and their use could continue despite recent court cases indicating that loss can possibly be established directly, There are various scenarios but a valuer (or any other surveyor) must consider: bb what is the best use of the premises and what would the hypothetical purchaser do – redevelop, convert, refurbish or repair? (The presumed purchaser of the premises if they were to be put on the market for sale at or shortly after the date of termination of the lease, as in a DV). bb the actual landlord’s intentions can (generally) be considered irrelevant – the hypothetical purchaser, the prudent landlord or market forces will define what to do with the premises (a hypothetical landlord who acts prudently by always following market forces with the objective of maximising value, profit and/or income) bb the valuer should then consider the options, and select the one that achieves the highest value in a practical manner – use of development appraisals may be required to establish this.

Assessing diminution The position established above then drives the valuation forward.

Redevelopment Under this heading we presume that the premises will be demolished – so does this mean that there is nil diminution? Not necessarily – if no planning consent exists as at termination then it may be prudent to let the premises on a shortterm basis. Some work may be required to achieve such a letting and this would prove the maximum loss suffered due to any disrepair – the figure would be capped by the maximum net income from the short-term letting. If planning was available so that immediate demolition can be considered, there may still be a loss suffered by the landlord if the former tenant’s alterations or fixtures have not been removed, thereby increasing the cost of demolition. The valuer may be assisted in this task by an architect drawing up a ‘content sketch’ to enable the valuer to prepare the necessary development appraisal to prove that redevelopment is the route to follow. In certain circumstances it may be appropriate for the former tenant to submit a planning application for redevelopment. Conversion The valuer will need to establish the extent of work still required to rectify breaches of repairing covenants and that superseded by the conversion work. All aspects of supersession come into play. In general, external work is still required but will be constrained by supersession arguments.

C O MME RCIAL DI LA P I DATIO NS

Market driven supersession The valuer should identify those parts of the premises that require upgrading to satisfy the market and provide evidence of such. Again, the landlord’s intention are not relevant but a development appraisal may be required to show that upgrading the premises gives an economic return and so would be carried out by the prudent landlord. All repairs so superseded are to be marked as such and deleted from the total. Justification again required under section 5.6 of the Protocol.

Refurbishment Again, it is necessary to establish to the extent of work in the SoD required and that superseded by the proposed works. Repair This route assumes that the premises will be unchanged as to use and general layout but elements of the building may require replacement or improvement. In this case, it is reasonable to assume that the work in the SoD will be required unless ruled out by supersession arguments supported by post-termination events. Although in principle post-termination events are not relevant, in the real world the courts tend to take notice of such.

Next steps So what are the practical ways of achieving these scenarios? Supersession The actual landlord’s intentions are not generally relevant, the prudent landlord or the hypothetical purchaser’s intentions apply. Dealt with by response to the landlord’s Scott Schedule – does supersession apply (RICS Property Journal, March/April 2014, p17)? Individual items in the schedule marked as such and deleted from the total. Justification pursuant to section 5.6 of the Protocol is required and this can be included within a separate page of the Scott Schedule.

Landlord has carried out work but tenant considers this excessive or subject to supersession A DV will probably be required to show the loss based on an assessment of the work the valuer thinks was necessary to achieve a letting or sale without discount, delay or further expenditure. It may be possible, however, to argue this effectively by way of a response to the Scott Schedule. This element of the work will indicate the loss to include within the DV and may be significantly less than the cost of work carried out. The cost of the work must be proportionate to the loss suffered/the benefit gained. The burden of proof is on the tenant where the landlord has carried out the work Premises let with extended rent-free period, incoming tenant does the work The premises have been let on the basis that the incoming tenant takes a new full repairing lease and commits to carrying out the work listed in the SoD either within an agreed time scale or by the end of the term. The loss will be established by a DV and will need to separate the ‘normal’ rent free period from the ‘additional’ rent free agreed as compensation to the tenant for carrying out the dilapidation work. The loss will be the quantum of the additional rent free brought to a present value (PV). Premises re-let with repairing obligations capped by schedule of condition A DV will be required to establish loss. To get the premises back into a positon where they can be re-let on full repairing terms work will be required at the end of the new lease term. The valuer must establish the extent of such work and the

loss will be the PV of the cost of the work at the end of the term. Premises sold in disrepair A DV will be required to prove loss. The purchaser’s intentions must be taken into account on the basis that they are the ‘hypothetical purchaser’s’ intentions as well; this would mean that we take into account purchasers with a special interest. Did the purchaser have a survey? Did purchaser renegotiate price after survey? What work did or will the purchaser have to carry out on completion of purchase? This will establish the cost of repairs that the purchaser will need to carry out, taking into account any aspects of supersession. It is reasonable to assume that if the premises had been in repair then these works would not have been required and the purchaser would have paid more for the premises. This identifies loss. Special circumstances In all the above examples it has been presumed that market value or market forces will prevail. However, the loss being established here is that of the actual landlord, and we must not let ‘the tail wag the dog’. What if the landlord is a family trust that cannot sell or where a sale would generate a large capital gains tax liability? The landlord would be able to prove that their best economic solution is to maintain the building for the income and therefore other arguments are irrelevant. While I believe this approach is correct, many other valuers would disagree. C Terry Davis FRICS is Principal at TN Davis Chartered Surveyors terry@tndavis.co.uk

RICS training Dilapidations: leases explained – Part 1 rics.org/dilapsentry Dilapidations: leases explained Part 2 rics.org/dilapsadvanced Related competencies include Valuation

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COMMERCIAL AS B E STO S

The number one industrial killer

John Toms explains the dangers of asbestos

sbestos is an issue that needs to be considered before buying, adapting or demolishing any pre-2000 constructed property. Despite being a banned product, asbestos-related diseases are still the cause of around 5,000 deaths per year, according to Health and Safety Executive (HSE) statistics (www.hse.gov.uk). However, asbestos surveys are quite often left until late in the project, as many within the industry will testify. Refurbishment projects discussed between the client, surveyor, architect and successful contractor are then subject to a last-minute asbestos check, which inevitably means acquiring quotations for surveys within a very tight timeframe. This crucial survey needs to be undertaken at the very beginning of the process to avoid a possible knock-on effect to the project dates and/or purchase of a property. Aside 3 2 â&#x20AC;&#x192; M AY/J U N E 2 0 1 5

from finding notifiable products (that require a 14-day report to the HSE and inevitable delays), there are unforeseen costs associated with their removal. These could add a minimum of 30 days to a project that was due to start after the asbestos survey.

Survey preparations During the planning stages for works in all properties built pre-2000, a refurbishment and demolition survey is needed before any work can be carried out. This is used to locate and describe, as far as is reasonably practicable, any asbestos-containing materials in the area where refurbishment work will be taking place, or the whole building if demolition is planned. Consequently, such surveys will be extremely intrusive and involve a destructive inspection to gain access to areas where work is planned. The survey undertaken by an asbestos team is distinctly different to most other methods. Quite apart from the personal and respiratory protective equipment

needed, there is the time taken to create intrusions, check materials, follow drawings to see where, for example, historical pipework might be located and new pipework installed, sampling the material(s), analysing the volume and producing a detailed report that all subsequent parties can follow. Key to an effective asbestos survey is planning and preparation, the degree of which will depend on the extent and complexity of the building portfolio. Surveys of this type are not just about taking samples; there needs to be sufficient initial exchanges of information and a clear understanding between the duty holder, surveyor/contractor and asbestos consultant. Typically, an asbestos surveying consultancy will require information including: bb full plans/drawings (marked up where appropriate) of the site(s) bb in relation to refurbishment surveys, the Scope of Works (normally forwarded to the contractor). This will allow the consultant to ensure that the planned work is preceded by a project-specific intrusive survey bb access arrangements, safety and security information, fire alarm testing, permits and contacts for operational or health and safety issues bb full details of the building in terms of its use, processes, hazards and priority areas. Although the above information is crucial, nothing can match a physical inspection

C O MME RCIAL AS BESTO S

of a building prior to providing a quotation. This will give a much more accurate appreciation of the site and include all the information on which the parties can agree, such as sample volumes and accessible areas.

Listed buildings Many people think that asbestos was only used from the 1960s onwards. In reality, the material dates back thousands of years to ancient Greece and Egypt. It was commercially mined and exported from around 1870, and used in around 3,000 products; it is not confined to textured coatings, but can be a floor surface, pipe wrapping, riser, skirting board, inside doors, packed into windows, concealed inside walls and in loose insulation materials. The installation of domestically available oil and gas central heating systems started around the 1920s. At this time, asbestos was very popular and with its strengths including the ability to withstand heat and moisture it was therefore specified within boiler systems, heating cupboards and pipe lagging. It was also used to insulate the attic floors of some properties, quite often placed loosely between timbers. When looking to purchase a property for domestic or commercial use, a major consideration has to be its value and whether there is a potential for negative equity. Insurance cover, meanwhile, is determined by the current rebuilding cost taken from the information provided. The risk of not knowing the asbestos content could therefore affect the charges to adapt a property, its eventual sale price, and the rebuilding cost for insurance purposes. When weighed against the value of a property, an asbestos management survey is therefore a considerable potential saving, both financially and in terms of health. All too frequently people will not have considered that asbestos might be present in a listed building, which could cause considerable scheduling issues until the appropriate survey is undertaken. There is also the issue of whether property damaged by storm, flood or fire, could be reinstated within the agreed rebuilding cost (or sum insured), taking into account the considerable charges associated with removing asbestos. Several high-profile listed properties are known to contain asbestos, including royal palaces and numbers 10 and 11 Downing Street. It was once considered

The HSE perspective is simple; the works cannot proceed without a risk assessment in the form of an asbestos refurbishment survey to be a fantastic building product, and widely specified by architects, particularly prior to 1985. It was popular in renovation and modernisation works in older properties and was often used during the 1990s for textured coatings. It is clear that whether looking to purchase, adapt, modernise or upgrade a listed building, the strong potential for asbestos presence should be considered and appropriate measures taken to prevent disturbance. Specialist restorers of listed buildings (whether domestic or commercial properties) must obtain a refurbishment survey for asbestos, because there is a great possibility that it will be displaced during this type of work. The death toll caused by asbestos disturbance is high among tradesmen, particularly electricians and plumbers, and, of course, the occupier could also be living at the property while the work is taking place. It is a legal requirement that any contractor or specialist restorer undertaking such works has received formal asbestos awareness training, or a refresher course, valid within 12 months.

Flooding Flooding is a relatively regular occurrence in the UK often causing widespread damage. Asbestos professionals have an important role in advising clients, whether in the case of commercial, domestic or industrial buildings, about the possible impact of fibre release when considering the stripping out and drying of properties. All properties built pre-2000 could conceivably contain asbestos in some form. Restoration contractors may be appointed by insurance companies to assist with stripping out wet building materials and drying of the structures. Of primary concern is the manner in which this takes place. Removal of wet contents, stripping the wet building items and installation of drying equipment is a standard method, often not preceded by

an asbestos survey and this is possibly problematic. Aside from the potential for prosecution for not having the requisite refurbishment survey, the HSE will also want to know whether those tradespeople, often including surveyors, architects and engineers, have received formal asbestos awareness training, again, another legal requirement for almost everyone aligned to the construction industry. So, what should insurers, brokers and loss adjusters be doing? Checking and verifying that contractors have received asbestos awareness training is crucial. The HSE perspective is simple; the works cannot proceed without a risk assessment in the form of a asbestos refurbishment survey. This creates an environment in which the property is safe to work and install air blowers and moisture extraction equipment. Accordingly, the Construction Design and Management coordinator, surveyor, architect and loss adjuster must ask for a site-specific asbestos refurbishment survey before disturbing the fabric of any building constructed pre-2000. Although highly intrusive, this type of survey is intended to prevent people working or living at the property being affected by fibres and hopefully ultimately remove asbestos from its unenviable position as the largest industrial killer in the UK. C John Toms is Director, Asbestos Division at IOM Consulting Ltd john.toms@iom-world.org

Related competencies include Health and safety, Building pathology, Valuation reporting and research

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40th

ANNUAL SERIES

BLUNDELL LECTURES TOPICAL ISSUES IN PROPERTY LAW LEASEHOLD ENFRANCHISEMENT: A PORPOISIVE APPROACH? Monday 1st June 2015 6.00pm, Adam Rosenthal, Falcon Chambers and Natasha Rees, Forsters LLP RENEWAL OF BUSINESS TENANCIES – SOME CURRENT ISSUES Monday 8th June 2015, Stephen Jourdan QC and Jennifer Rickard, Nabarro LLP SUCCESSFUL CHALLENGES TO ARBITRATION AWARDS – NEVER OR JUST HARDLY EVER? Monday 22nd June 2015, Kirk Reynolds QC and William Densham, Eversheds LLP PROPERTY LAW IN A CHANGING WORLD: A VIEW FROM THE SUPREME COURT Monday 29th June 2015, Lord Neuberger of Abbotsbury followed by a celebratory champagne reception. For the full programme and list of speakers email lucinda@quadrilect.co.uk or call 020 7242 4141 mentioning this advert Lecture Format & Timing: Refreshments will be served from 6pm. Each lecture will start at 6.30pm and finish around 8pm. Prices: £65 + VAT each lecture or a discounted rate of £234 + VAT for all four. Venue: Royal College of Surgeons, Lincoln’s Inn Fields, London, WC2

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R E S I D E N TI A L B U I L D I N G PAT HO LO GY

We have a problem Michael Parrett discusses the issue of dampness in buildings

ampness in buildings is at best misunderstood and at worst completely misdiagnosed. This is the first of four articles considering the investigation and identification of some of the main causes and possible solutions.

High abutting external ground levels This is usually where alterations outside a property have resulted in the abutting ground levels being level or higher than the physical horizontal damp proof course (DPC) and the interior finished floor level. The Public Health Act 1875 introduced the need for DPCs. It is important that period properties built before this date can ‘breathe’, i.e. there must be no physical structures or high abutment detailing against the outside walls. Ground levels should be low enough (without exposing often shallow foundations) to allow the base of the wall below the finished floor level to evaporate any moisture wicked up from the ground. Together with good subfloor ventilation, this can prevent moisture rising above the finished floor level by capillarity (but be aware of whether there is a high local water table). A typical solid-walled pre-1930s property with abutting ground levels above the DPC will suffer lateral moisture penetration because it has a conduit to push moisture through the wall. Warning signs: Penetrating damp will find its way into the timber skirting boards and bottom of timber door linings and will show raised moisture levels. There may also be damp stains above the timber skirting. Any soil against the external 3 6 M AY/J U N E 2 0 1 5

n Ten bags of rubble and arisings were removed from two external cavity wall voids (12m long) at low level from a 1980s building

n Blocked cavity wall void from the building. Rubble had been lodged in the void since construction. Mould and dampness to the corresponding internal area had been mistakenly attributed previously to condensation from the occupants’ lifestyle wall will transfer soluble salts (typically chloride and nitrate ions) and a pattern of internal dampness that could appear to be rising damp, i.e. dampness that has risen vertically from below the DPC. Surveyors should distinguish between penetrating and rising damp; they have different causes that often require different remedies. The solution: This is normally resolved by removing any physical structures, high abutment detailing or soil levels from against outside walls. Building Regulations state that abutting ground levels should be a minimum of 150mm below the DPC. As a general guide for period properties, abutting ground levels should be 200mm250mm below the finished floor level.

Blocked cavity walls High abutting ground levels against a cavity wall should not ordinarily give rise to a damp problem on the inner leaf wall because of the protection from the physical gap. If there are signs of low-level damp in the inner leafs then suspect the cavity void is physically blocked, creating a conduit for moisture to laterally penetrate or rise. Images © Michael Parrett

I have seen voids filled with everything from mortar deposits and broken bricks to parts of window casements and bricklayers tools. Clerks of works should ensure that bricklayers building new cavity walls leave gaps at the base of the outer leaf. The voids at low level can then be checked for any cementitious or other deposits that drop in as the wall becomes higher. However, not all walls are checked and many voids are physically blocked. Where retrofit cavity wall insulation is used, there is a good chance that some sections of the void will be blocked and should be cleared before the insulation is installed. Anecdotal evidence suggests that blockages may not be found by

Surveyors should take a holistic view of damp problems, not just perform cursory visual checks

R ESIDE NTIAL BUI LDI NG PAT HO LO G Y

m A twofold problem: raised external abutting ground levels against a solid masonry wall above the height of the internal finished floor level, and cementitious render in contact with the rear patio serving to wick groundwater and make the solid wall vulnerable to rain splash soaking into the wall at low level

The sample is subjected to a calcium carbide test to determine its total moisture content. In most standard brick types, look for a total moisture content of no higher than 0.5%, then undertake an optical endoscope examination of the cavity, either using the same internal hole or by drilling through an external horizontal mortar course. Unfortunately, insulation may mean zero visibility and it may be necessary to remove bricks at different points on the outer leaf to make a proper physical examination of the void. Any blocked cavities must be cleared out. Surveyors should take a holistic view of damp problems, not just perform cursory visual checks. It entails confidently and professionally pinpointing the exact problem by following a process of elimination. R The next article in the series will cover high water tables and flooding

m High abutting external ground levels, within approximately 75mm of the physical horizontal damp proof course against a solid masonry wall retrofit cavity wall insulation installers, who may at best only do a visual check of 10% of voids. The use of cavity wall insulation in relation to damp is very topical and was debated in Parliament at the start of the year. I have never seen any evidence of where the dew point temperature (at which air can no longer ‘hold’ all its water vapour, which then condenses into liquid) may be reached in a wall. Consequently, it is difficult to understand whether any resulting condensation could form on the cavity wall side of the inner leaf wall or within the cavity void (which would lack any vapour barrier) creating interstitial condensation. Looking for clues: The existence of blockages might be indicated by recent alterations to older buildings with cavity walls (e.g. built from 1920s onwards), such as adding modern gas flues, repositioning windows and rerouting overflow pipes, which often result in arisings dropping inside the cavity wall. Surveyors should not assume that just because the outside ground level is marginally below or tight to the DPC that a cavity wall will prevent penetrating damp.

Check the internal timber skirtings for raised moisture readings using electrical resistance or capacitor meters. Be aware that walls containing conductive materials, e.g. buried electrical cables or carbonaceous materials, may give false high readings. If internal timbers have high moisture readings (above 20%-22% is when timber will decay), the source must be located. Has it come from inside, e.g. a solid floor? On retrofitted solid floors, ground moisture can be squeezed up at the margins because the retrofitted floor membrane may not be interleafed with the original wall DPC. Usually, the membrane terminates at the perimeter wall, either trimmed off below the finished floor level or up behind the timber skirting, irrespective of whether the walls have a DPC. Detailed testing: If it is suspected the moisture has come from the wall, check whether its core is damp by taking a sample of the inner leaf or solid wall, ignoring the plaster. This should be extracted by the cold drill method so the drill’s heat does not falsely dry the sample.

More information > Approved Document C: Site preparation and resistance to contaminates and moisture http://bit.ly/1vhNNcP BS 8102:2009 Code of practice for protection of below ground structures against water from the ground http://bit.ly/1LcNzr8 BS 8203:2001+A1:2009 Code of practice for installation of resilient floor coverings http://bit.ly/1EPZ6bO BRE Good repair guides http://bit.ly/17qkObt Diagnosing damp: Ralph Burkinshaw and Mike Parrett http://bit.ly/1G2tEsb Mike Parrett’s Guide to building pathology http://bit.ly/1zeIO7X

Michael Parrett is a Building Pathologist, Chartered Building Surveyor and Founder of Michael Parrett Associates. He was recently awarded an Eminent Fellowship of RICS info@dampbuster.com www.michaelparrett.co.uk

Related competencies include Building pathology, Inspection

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R E S I D E N TI A L C AS E N OTES

Philip Santo considers the importance of both clearly defined terms of engagement and property location

Donâ&#x20AC;&#x2122;t slip through the cracks

T The decision in Hubbard v Bank of Scotland plc [2014] brought to mind an investigation into structural movement that had been required some two years after a mortgage valuation had been completed on an inter-war semi-detached house (photo 1). As with the Hubbard case, the mortgage valuer had identified slight cracking to plasterwork of walls and ceilings and around some door openings. He reported that this appeared to be associated with slight structural movement that seemed long-standing and non-progressive and further significant movement was unlikely. In contrast to Hubbard however, this property had been extensively altered (2) so the valuer recommended appropriate enquiries to ensure that all works had been properly carried out with the necessary approvals, particularly in relation 3 8 â&#x20AC;&#x192; M AY/J U N E 2 0 1 5

to alterations to the load-bearing walls. Two years later, the owners contacted the lender about cracking that had developed in several parts of the property (3 to 5 ). Cracking had also occurred to bathroom tiling and kitchen floor tiles that had been laid since the owners took occupation. The ensuing investigation confirmed that movement was recent and seemed to be continuing. The owners said that cracks had been scarcely noticeable when they moved in and most of the visible cracks had developed during the past year. It was not difficult to conclude that the mortgage valuer had accurately described the condition of the property at the original inspection and his conclusion and report reflected the evidence available then. Consequently, there was no liability attached to the inspection. The owners were advised to contact their insurers so that the cause of the movement could be identified and appropriate action taken.

Location factors The location of the property was not especially unusual, but there were one or two distinctive features. The house stands at the top of a hill, with ground sloping away in all directions. There were

three oak trees along the side boundary near the house, the tallest about 9m (1 and 2). Oaks are often associated with structural damage to buildings in areas of shrinkable soils, but problems are not usually encountered when this is not present. The locality had no history of structural movement and the Geological Survey map showed no suspect subsoils in the area. It was later learned that after a period of monitoring and soil sample analysis, the insurers concluded that the trees had caused the problem and they were subsequently felled. Frustratingly, more detailed information about this later investigation was not available. The Hubbard case also followed a mortgage valuation involving a limited inspection. The valuer did not move furniture, lift carpets or carry out anything other than a basic visual inspection and the guidance notes to the report made this clear. In Hubbard, as in this case, the mortgage applicant had declined the offer of a more detailed report. If a more detailed survey had been carried out prior to purchase, the surveyor might have come to the same decision about movement as the mortgage valuer. Hopefully, the presence of three distinct risk factors: sloping ground in the vicinity, close proximity of oak trees and the history of Images ÂŠ Philip Santo

3 4

R ESIDE NTIAL CAS E NOTES

1 Front elevation. The attached garage is concealed behind the oak trees on the left. The road in front of the property slopes gently downwards to both left and right

3 Front entrance porch, showing cracking to the side wall. The crack extends upwards within the porch recess and across, above the porch opening behind the front wall

2 Rear elevation. The first-floor dormer and single-storey rear extension are parts of later alterations. The proximity of the oak trees along the side boundary is clearly visible. The plot slopes gently downwards before the ground falls away more steeply beyond the rear boundary

4 Internal cracking. This was one of the recent

structural alterations would have prompted a particularly thorough analysis beforehand. This confirms the need for keeping a detailed record of the evidence on site and the surveyor’s reasoning. The claimant in Hubbard discovered cracking after moving in, and raised an action against the surveyor for professional negligence. This was based on the surveyor’s alleged failure to advise that subsidence was or might be ongoing, to suggest that specialist advice be obtained or to suggest a substantial reduction in the valuation of the property due to the cracking.

Appeal dismissed

The claimant was unsuccessful at first and the Court of Appeal agreed the surveyor had not been negligent. The claimant knew the report was not a ‘full structural survey’ (building survey). In dismissing the appeal, the court found it unrealistic to suggest that a valuation surveyor, who sees a small, long-standing crack displaying no signs of ongoing movement, is negligent by failing to recommend a full structural survey. It said: “To set the duty at that level would mean that the sale of any property that displayed cracking of almost any kind would be held up pending a full structural survey.

cracks that had not been present during the original inspection

5 Characteristic evidence of movement at the corner of the front reception room, adjacent to the party wall

Such a conclusion would not be welcome by vendors, lenders or borrowers.” It is heartening that the court clearly defined the scope of duty of a surveyor preparing a mortgage valuation and a surveyor undertaking a full structural survey, recognising that a valuation surveyor’s duty is much more limited. If a retainer states that the task is limited to a visual inspection, the surveyor cannot be expected to look beyond the surface. This reinforces the need to set out clearly the scope of the retainer and ensure the client fully understands it. The same principle applies to different levels of survey inspections. The standard terms and conditions of the various RICS-branded survey products state their respective distinguishing features. For those who prefer to offer their own survey products, there is now a requirement to clearly benchmark them against one of the three Levels of Service defined in the RICS guidance note Surveys of residential properties (http://bit.ly/17Rn4Zj).

benchmarking not only provides clarity about what will be covered during an inspection and report but also helps the public when comparing products. The Hubbard case illustrates this can have a material impact on whether a surveyor is ultimately found to have been negligent. Further good news from Hubbard is confirmation that a valuation surveyor only has a duty to report on apparent defects that could have a material effect on value. They do not have to recommend more extensive investigations unless there is sufficient evidence. The existence of cracking did not in itself create an obligation to recommend a full structural survey, in circumstances where there were no signs of ongoing movement and the cracking had no material impact on value. Hubbard provided definitive endorsement that the approach taken in this case was correct.R Philip Santo FRICS is a Director of Philip Santo & Co psanto@philipsanto.co.uk

Variations There may well be variations from the specific definitions of each level because practitioners understandably seek to offer individualised services, but these must be clearly spelled out. This

Related competencies include Building pathology, Inspection

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R E S I D E N TI A L L EAS EHO L D R EFO R M

James Wyatt investigates important research into the relationship between freehold and leasehold values

Relativity from the real world

Relativity is the name given to the relationship between the value of the freehold of a property and the value of the same property held on a lease. Knowing the correct relativity is vital in establishing the value of a leasehold interest of less than 80 years, but there is much debate over its calculation. Over the years, various agents have put forward graphs depicting their opinion on relativity. These have been subjective and the majority have been created by agents and surveyors who work for the great estates, e.g. Gerald Eve (Grosvenor), Savills (Wellcome, Phillimore), Knight Frank (Church), WA Ellis (Cadogan and Ilchester) and Cluttons (Cadogan, John Lyons). Opinions can differ and John D Wood & Co removed its name from the Gerald Eve curve, when they subsequently analysed the information and derived a higher relativity. Aware of the problems in calculating relativity, the UK government commissioned the College of Estate Management to investigate the market evidence, but unfortunately, this report could find no discernible pattern. At the 4 0 M AY/J U N E 2 0 1 5

request of the Upper Tribunal, RICS formed a working party to derive a definitive relativity, but this resulted in a collection of individual opinions and no conclusion was formed. Parthenia’s research into relativity, derived from around 8,000 flat and house sales using hedonic regression, examines more market evidence than all the existing graphs combined. In the case of Kosta v The Trustees of the Phillimore Estate, this objective independent analysis of the market evidence was put before the Upper Tribunal. The analysis is on actual sales in the market from 1987 to 1992 i.e. from the ‘no Act world’ and therefore untainted by the rights conferred and the adoption of other graphs of relativity. The analysis of the market evidence suggested the price of the freehold should be reduced by around 31% compared to the existing relativity graphs.

Figure 1 The Market Relativity v Pure Tribunal The Market Relativity is derived from analysing 7,969 sales from prior to the Act and the Pure Tribunal is derived from 601 decisions of the London Panel

Real Relativity

Pure Tribunal

However, the Upper Tribunal did not find in favour of this real world relativity for four reasons. 1. The valuation date was 2011 and the results of the research only became available in 2012. Therefore, the Upper Tribunal stated the hypothetical purchaser would have had to rely on the existing graphs. By inference, it does mean this new relativity could be used for any valuation from 2012 onwards. 2. The Upper Tribunal stated that some of the point estimates in the model were illogical. However, it was explained a line of best fit was used (regression) and this used the midpoint of the point estimates. The average relativity put forward by Dr Philippe Bracke, now at the Bank of England, is derived from three models and the relativity is increasing at a decreasing rate and is not flat as suggested by the Tribunal (see Figure 1). Bracke pointed out there were no point estimates, confidence intervals or statistical tests of the existing graphs. All the experts agreed hedonic regression was an appropriate technique for deriving relativity and no-one could find any serious errors or mistakes. The Upper Tribunal concluded the research was formidable. 3. A lack of valuation evidence in support of this new relativity was also cited. This reasoning has caused much consternation from surveyors, because what is valuation evidence if not the evidence of actual sales? With more than 8,000 flat and house sales, this new analysis has far more market evidence than all the existing graphs combined, which typically have only a few hundred. 4. The final reason not to adopt this new

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Surveyors have a duty of care to their clients; at the very least, they should inform and offer them the opportunity of using this research

evidence-based relativity was because relativity may have changed since the 1987-92 period. However, no-one could clarify or quantify whether it has changed and if it has increased or decreased. In addition, it should be remembered the relativity adopted by the Upper Tribunal was based on the subjective analysis of sales, settlements and decisions from a similar period and therefore would be similarly afflicted. When deciding not to adopt the new relativity, the Upper Tribunal was very careful to state its decision was for the ‘present case’. The decision has

been criticised by many for being inconsistent with previous rulings, illogical and circular. One of the most respected practitioners in the industry stated: “Its rejection is tantamount to saying that Arrowdell and Nailrile Ltd v Earl Cadogan [2009] 2EGLR151 was wrongly decided – albeit in the presence of much inferior evidence.” Parthenia believes that its research is the only objective, statistically robust and peer-reviewed relativity. Although it has yet to find favour at tribunal, several cases have been conjoined and the Upper Tribunal has agreed to hear them in the next few months. Surveyors have a

duty of care to their clients and given its potential impact, at the very least, they should inform and offer their clients the opportunity of using this research. R James Wyatt FRICS is a Director at Parthenia Research jwyatt@parthenia.co.uk

Related competencies include Valuation

In a fighting mood

Annis Lampard looks at recent activity by HMRC on property transactions y article for the Property Journal (Widening the net, July/ August 2014), highlighted major changes to the taxation of property and the consequences for those involved in property transactions. In the first few months of 2015, a picture has emerged of HM Revenue and Customs (HMRC) activity around property transactions. It is understood that HMRC’s ‘tax take’ for capital gains tax (CGT) resulting from its investigations for the 2013-14 year was a record high of £136m. This was a significant increase from the previous year’s level of £110m, which was itself a record high. It might be expected that this rise was due simply to a

combination of rising house prices, share prices and tax rates. However, as some experts have already pointed out, the rise seems due to HMRC’s belligerence. This is to be expected, given the high pressure on HMRC from bodies such as the Public Accounts Committee to close the tax gap. Looking outside CGT at other taxes on property transactions, there are signs that this broader trend may continue. There is increasing momentum behind HMRC’s Let Property Campaign (http://bit.ly/1bBEcwX) targeting undeclared rental income. As an example of HMRC’s determination, in January it announced that it had arrested two individuals on suspicion of a £1m CGT and income tax fraud relating to properties in east London and Essex. The case is being handled by

HMRC Criminal Investigations. Even at this early stage, HMRC appears to be sending a clear message that it takes offences relating to the avoidance of property taxes seriously. A press release specifically mentioned the current taskforce aimed at those suspected of dodging CGT. A wider message for RICS members is that HMRC may well seek interviews with the professionals involved in any suspected transactions, either to gather more evidence for its case through the use of third-party information notices or to explore how widely any potential fraud may have spread. It goes without saying that the time and effort involved in assisting HMRC with its enquiries is a distraction from normal business. It is worth noting that any such enquiries are likely to be run through HMRC’s

Criminal Investigations teams, which will be tenacious in any inspections they carry out. Some members may fear reputational consequences if it becomes known that they assisted HMRC, even in good faith. If any RICS members are contacted by HMRC to assist with enquiries into third parties, it is recommended that they seek professional advice about the best way to proceed. R Annis Lampard is a Senior Manager in the Tax Investigations Team at Grant Thornton UK LLP annis.lampard@uk.gt.com

Related competencies include Capital taxation

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R E S I D E N TI A L P R O FES S I O N AL I N D EM NI T Y

Emma Vigus considers anticipated trends in professional indemnity insurance for RICS-regulated firms

Thinking about the year ahead

any RICS-regulated firms will have benefited from improved activity levels across the property and construction sector over the past 18 months. This is encouraging news, but what impact will the return to comparative prosperity have on the availability and price of professional indemnity insurance (PII)? The message regarding the cost and availability of PII remains positive for those firms that are not involved in providing surveys and valuations at the point of a transaction. There has been only a marginal upward trend in claims activity so premiums remain competitive, with multiple RICS-listed insurers prepared to battle hard to win good-quality business and new insurers entering the market with an aggressive appetite for businesses perceived to represent a low risk. Although rarely encouraged by either brokers or insurers, firms not involved in providing surveys and valuations (either now or historically) should shop around to ensure that they are benefiting from the best available insurance rates and policy coverage.

Contractual obligations Despite favourable insurance market conditions for non-surveying and valuation (S&V) firms, businesses of all types should keep a close eye on their contractual obligations as clients become increasingly demanding. This applies particularly to those firms operating in aggressively 4 2 M AY/J U N E 2 0 1 5

cost-conscious sectors such as high street retail and the public sector. Additionally, in the light of recently challenging economic conditions, firms that subcontract work must take steps to ensure that their contractors are financially stable and maintain adequate PII cover. Given an increasing focus on the environmental credentials of property, RPC, in its annual insurance review (www.rpc.co.uk), also anticipates a rise in the number of green construction claims, stating: “New technologies and products are not always proven and are less likely than established products to be successful. Companies, particularly start-ups seeking to exploit the market, may not have sufficient experience to design, inspect or construct the new technologies. Contracts are unlikely to have been tailored to protect contractors against the risks of innovative products that are not guaranteed to work and all this is set against a background of constantly fluctuating political pressures, guidelines, regulations and subsidies.” For the S&V sector, insurer appetite remains limited, with PII rates and accordingly premiums continuing to trouble many surveying businesses. Although Howden data shows a noticeable reduction in new notifications, there remain a large number of unresolved claims relating to work done between 2006 and 2010. Given the time lapse, those matters yet to be settled are often complex and costly. The recent case of Titan vs Colliers is a perfect example, representing the first time a UK court had dealt with a negligence claim brought by a Special Image © iStock

Purpose Vehicle established for the purposes of a loan securitised against a portfolio of commercial properties. Law firms acting for claimants are using the Colliers case as an opportunity to actively encourage balance-sheet lenders to pursue surveyors as a way of generating investment returns; PII insurers will remain understandably nervous about removing reserves from matters that may have been dormant for several years, even where they may be considered time barred.

Increased appetite Insurers that have continuously supported valuers over the past six years are pushing hard for PII rate rises or deciding not to offer renewal terms. Encouragingly, however, a number of new insurers are beginning to show an increased appetite for valuers, as evidenced by the recent launch of the Howden PII facility, which is jointly underwritten by a panel of five RICS-listed insurers. This appetite is often extremely selective and will frequently only be sparked by an informed insurance broker presenting a business that is demonstrably stronger in terms of risk management than its counterparts. Carly Butters, Professional Indemnity Underwriter at CNA Hardy comments: “As with all professions, firms that can demonstrate strong internal risk management procedures are far more attractive to underwriters. This is not about merely evidencing compliance with RICS requirements, it is about seeking out the firms that go above and beyond and those that can demonstrate that their business culture actively encourages adherence to process in favour of chasing the pound.”

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The past three years have seen a move towards greater information sharing, particularly in the residential sector done, particularly in terms of data sharing between lenders, surveyors and insurers. However, increased transparency across the residential sector is certainly one of the developments in terms of PII and risk management that should be celebrated.

Summary

The future While the decline in notifications and a steady improvement in insurer appetite might point to a rosier future for valuers, the industry must ensure that the 2006-09 lapses in risk management are not repeated and that when the next property downturn hits, surveying firms can provide a robust defence to the inevitable influx of claims. Daniel Prince, PI Underwriting Manager at Barbican says: “Looking to the future, I am increasingly concerned about firms doing work for new lenders without undertaking any due diligence. This applies particularly to smaller businesses not receiving instructions from high street lenders or via panel managers who will struggle to find the time to complete a thorough due diligence exercise.” More new lenders are entering the UK market, often with very aggressive lending targets, he adds. “Hopefully, the Mortgage Market Review (MMR) will have a positive impact on lending practices. I would question the stringency with which MMR will be applied in an organisation where the desire to win new business may take priority over consistent regulatory adherence. “My concerns would be heightened if the lender was providing higher risk securitised products, e.g. buy to let mortgages. Surveying firms and panel managers thinking of undertaking work for new lenders must ensure that they carry out due diligence on the lender.” He believes this should include gathering information on: bb the types of loans offered bb typical loan to value ratios

bb attitude to higher risk borrowers, for example, the self-employed and those with County Court judgments bb the management and underwriting team bb a thorough review of the contractual terms, particularly clauses relating to turnaround times, fees and penalties bb management’s history of bringing negligence allegations against surveyors. Butters is positive about the increased use of technology in the valuation sector. However, she remains concerned about the more fundamental facets of risk management, specifically highlighting a lack of supervision of surveyors operating from remote locations and the impact of surveyors operating outside their area of expertise.

Knowledge sharing A lot of the information to which Prince refers will not be publicly available, which highlights the increasing importance of valuers maintaining an open dialogue with their peer group, the insurance industry and panel managers. Encouragingly, the past three years have seen a move towards greater information sharing, particularly in the residential sector with a number of cross-sector forums providing early warnings of emerging risks. The insurance industry is also waking up to the value of data, so a future where data on claims trends becomes more readily available can be anticipated. This should in turn make it easier for firms to take an informed view on the work they do and do not want. There is undoubtedly more that could be

Although insurance industry commentators have long been calling for a wholesale rise in PII rates across all professions, the continued influx of new insurance capacity provided by investors looking to improve on the returns offered by more conventional investment vehicles seems set to continue. As long as this trend prevails, rates for lower risk, non-S&V firms are unlikely to move. On current evidence, 2015 should also herald the stabilisation and in some cases the reduction of insurance rates for good-quality residential S&V firms. For firms involved in commercial property, a lot will depend on the cost to insurers of claims that remain unresolved and Insurers will be waiting with bated breath for the result of the appeal in the case of Titan vs Colliers (due to be heard in October). Currently, commercial firms may have to wait before they benefit from the increase in insurer appetite that their residential counterparts are beginning to enjoy. Irrespective of insurance premiums, the message for all professional services firms remains unchanged: deliver good-quality work and be prepared to prove this to a judge. R Emma Vigus is a Director at Howden Insurance Brokers emma.vigus@howdengroup.com

Related competencies include Business planning, Conduct rules, ethics and professional practice

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R E S I D E N TI A L L EGA L

A recent court decision could lead to exceptional damages awards, says Milton McIntosh

The get-out clause

Section 28 of the Housing Act 1988 was brought in to deter landlords from seeking to harass Rent Act and other protected tenants. Prior to the legislation, unscrupulous landlords could obtain vacant possession and thereby secure higher rent or capital receipts in respect of their properties. The recent Supreme Court decision of Loveridge v London Borough of Lambeth [2014] highlights the fact that the valuation exercise directed by the section may lead to anomalous damages awards.

Section 28 This applies if a landlord unlawfully deprives a residential occupier of their premises. It is also applicable if the occupier vacates because of harassment by the landlord, who knew this would probably be the outcome of their actions. In such circumstances, a landlord is liable to pay the former residential occupier damages, assessed on the basis set out in section 28. The basis for the assessment of damages is the difference in value between (a) the value of the interest 4 4 M AY/J U N E 2 0 1 5

of the landlord in default determined on the assumption that the residential occupier continues to have the same right to occupy the premises as before the time they ceased to occupy (the not-in-breach valuation) (b) the value of that interest determined on the assumption that the residential occupier has ceased to have that right (the in-breach valuation). The landlord’s interest in the whole building, not just in the tenant’s demise, has to be considered, and it is to be assumed that the landlord is selling their interest on the open market to a willing buyer (whether in fact, they would or could sell in the open market).

Loveridge demonstrates section 28’s potential to lead to overcompensation of tenants It is clear that the valuation exercise required to be undertaken by the section is aimed at not compensating the tenant for their actual loss, but paying them the amount of the gain that the landlord could achieve by reason of the eviction. If a sizeable marriage value is released from the merger of the tenancy and the reversion, then by virtue

of section 28 the whole of that value is payable to the former tenant. The wording of the section is broad; it applies not just to a landlord who deliberately harasses their tenant but also to one who “unlawfully deprives” a tenant of their residence. Someone who by mistake deprives a tenant of their premises may also be caught, as can be seen from Loveridge v Lambeth.

Facts of Loveridge Loveridge was a secure tenant of Lambeth Council. He had a weekly tenancy of a ground-floor flat in a small block that contained one other flat on the first floor, which was also occupied by a secure tenant. Loveridge’s tenancy required that he notify Lambeth of any absence from his flat of more than eight weeks. However, in early July 2009, in breach of his tenancy, he went abroad and left his flat unoccupied for an extended period, although he did arrange for continued payment of his rent. In late September 2009, having for some reason decided that Loveridge had died, the council re-entered the flat, changed the locks and left a notice to quit, which expired in late October 2009. Shortly after the expiration of the notice to quit, the council returned to the property and cleared out and disposed of Loveridge’s belongings. Lambeth Council offered the flat to someone else the day before Loveridge returned to the country in early

December 2009. He arrived on a Saturday and was unable to contact the council; the following Monday, before the council heard of his return, the new tenancy was completed. Although Loveridge had been in breach of his tenancy by his extended absence, it was clear that the council had unlawfully evicted him. He was awarded agreed damages in respect of his belongs of £9,000. It was further agreed that, as a minimum, common law damages for unlawful eviction of £7,400 were also payable. In dispute, however, was whether statutory damages were payable under section 28 and if so, at what level.

Lambeth’s approach The council contended that nil statutory compensation was payable. It pointed to the requirement under section 28 that it be assumed its interest in the block was being sold in the open market. The parties had agreed that, in reality, if a local authority sold or transferred its reversion on a secure tenancy to a private landlord, the sale or transfer would convert the secure tenancy into an assured tenancy and expose the tenant to having to pay a market rent. Lambeth said that effect had to be factored into the hypothetical valuation of its interest. It said that, in respect of valuation (a), the not-in-breach valuation, because of the assumed hypothetical sale and the transfer effect, it was to be assumed that both

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flats in the block had become subject to assured tenancies and the block was worth £304,000. As regards valuation (b), the in-breach valuation, the only difference was that Loveridge’s former flat was vacant as opposed to subject to an assured tenancy. There was no valuation difference, it said, with its interest again being worth £304,000. Thus, as the difference between valuation (a) and (b) was nil, no statutory compensation was due to Loveridge.

Loveridge’s approach Loveridge disagreed. He adopted as the starting point for his valuation (a) the assumption that both flats were subject to secure tenancies (as opposed to assured tenancies). By reference to the capitalisation of rents payable under the tenancies, his valuation (a) was £123,000. As for valuation (b), he valued the block on the assumption that his former flat was vacant but that the firstfloor flat remained subject to a secure tenancy. By reference to comparables for his former flat and the capitalisation of the rent payable for the first-floor flat, he arrived at a valuation of £213,500. The difference between (a) and (b) of £90,500 was, Loveridge argued, payable to him as statutory compensation under section 28.

Court of Appeal’s decision The court agreed with Loveridge’s approach, pointing to the section 28 requirement that valuation (a) be on the assumption that the occupier continued to have the same right to occupy the premises as before the time

he ceased to occupy. It said that, immediately prior to his eviction, Loveridge’s right was that of a secure tenant. It did not consider that the notional sale assumption led to an adjustment of the right consequent on the sale. Although in reality, such a sale would lead to an adjustment, the words of the statute barred it. The court said that, within the artificial exercise directed by section 28, regard to the effect of one assumption (the transfer effect) was halted by the terms of another. As a result, Loveridge was entitled to statutory damages of £90,500.

Comment The Loveridge case demonstrates the potential of section 28 to lead to over-compensation of tenants. Loveridge suffered an actual loss of £7,400 (his common law damages entitlement), but was awarded £90,500, essentially representing his common law loss plus the whole of the marriage value notionally arising from the termination of his secure tenancy However, it is arguable that this is exactly what Parliament intended to

Section 28 may apply regardless of the landlord’s intent deter unscrupulous landlords from acting unlawfully in the hope of making a profit. More worrying is that the amount awarded to a tenant may be wholly unrelated to the profit the landlord actually makes. In the Loveridge case, Lambeth Council never intended to sell or relet other than to another secure tenant and actually relet to a secure tenant. However, such facts are irrelevant to the valuation exercise that has

to be undertaken. Lambeth made no gain at all and caused Loveridge a loss of just £7,400 but still had to pay £90,500 in damages. Equally concerning is the fact that section 28 may apply regardless of the landlord’s intent. A landlord may deliberately act unlawfully with a view to making a profit but make no money, and, in those circumstances, one can see the justice in penalising them for their actions regardless of the outcome. However, section 28 can apply, as in Loveridge, even where the landlord has acted inadvertently or mistakenly. The Supreme Court recognised these issues and, in its concluding remarks, suggested that Parliament might wish to revisit section 28 to deal with its anomalous effects. R

Milton McIntosh MRICS is a Consultant Solicitor at Excello Law mmcintosh@excellolaw.co.uk

Related competencies include Business planning, Conduct rules, ethics and professional practice

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R E S I D E N TI A L FLO O D I N G

Understanding the performance of materials is key to reducing the damage caused by flooding, explains Alan Cripps

Testing the water

F Following a flood event, we regularly hear the terms ‘resistance’ and ‘resilience’, but what do these terms actually mean? Flood resistance is about reducing the amount of water entering the property. This can be achieved by installing water-resistant doors and frames, non-return drainage valves, air brick covers and automatic closing airbricks. But while these products are ideal for flash or shortterm flooding to a limited height and duration, standing water will find its way through the brickwork. If the height 4 6 M AY/J U N E 2 0 1 5

of the flood water reaches above 600mm, depending on its construction structural damage can occur to the property. Nor do such products protect against ground water. Before fitting, it is important to assess the type of flood risk together with the type of construction. This should be carried out by a competent and qualified person, such as a chartered surveyor.

Thinking ahead Flood resilience means taking measures to reduce the damage caused by flood water that enters the property and limit the disruption to the occupiers. The use of resilient materials is key, such as replacing a timber ground floor with concrete and a tiled finish and replacing a chipboard-based kitchen with stainless steel or 100% waterproof kitchen furniture now becoming available. Other measures include

raising ground-floor sockets above the flood level to minimise damage and allow faster reoccupation of the property. Boilers and other connected ancillary items should be installed above the predicted flood levels, preferably at first-floor level. Ground-floor underfloor heating systems should be avoided and all heating controls should be positioned above flood water levels. Skirting board within the predicted water levels should be constructed from resilient materials, for instance plastic, with plasterboard wall finishes substituted with a waterproof equivalent. The same applies to door frames and doors which has the result of making the cleaning-up process much faster once the water has receded. In addition, minimal materials would need to be replaced and the occupier would be able to return to the property much more quickly. The impact of flood water on buildings can be immense, but much will depend on the nature of the flooding and the design and construction of the property. In order

to be able to improve the flood performance of the buildings it is first necessary to understand the damage that flooding can cause and the performance of materials, components and elements of the building. R

More information > Please refer to BSI publication PAS 1188 2014: • Part 1 Flood protection products, specification: building aperture products • Part 2 Flood protection products, specification: temporary products • Part 3 Flood protection products, specification: building skirt systems • Part 4 Flood protection products, specification: demountable products. Later this year BSI will publish BS 85500: 2015 Guide to improving performance of buildings: Flood resistance and resilient construction.

Alan Cripps FRICS is RICS Associate Director of the Built Environment Professional Group & Forums acripps@rics.org

Flooding: issues of concern to RICS surveyors and valuers (Residential property), 1st edition RICS information paper has been published online at http://bit.ly/1NbV8QR Related competencies include Environmental assessment, Housing strategy and provision

RICS P ROP E RT Y JO URN A L

ARTS

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A RICS P ROP E RT Y JO URN A L

ARTS L EGA L

Does one solution to the looted art issue fit all, asks Milton Silverman

A matter of principle

T The uncomfortable position faced by the British Museum and a number of other public galleries was brought to my attention a while ago by the Commission for Looted Art. This is a charitable body whose main purpose consists in seeking restitution of Nazi looted art. Occasionally, the British Museum has claims made against it with regard to ownership of the many thousands of objects it holds. In the case of Nazi-looted art, the bona fide purchase by the museum of the object in dispute has usually taken place many years ago. This meant, as a matter of strict law owing to the Limitation Act 1980, any potential claimants were out of time, because the museum had held good title to the objects for more than six years. But what if the museum actually wants to return the work of art concerned to the claimant? 4 8 M AY/J U N E 2 0 1 5

A moral dilemma In June 2000, the Trustees of the British Museum explained to a House of Commons Select Committee that if it were established that the museum was holding objects looted by the Nazis during the Holocaust, then it would wish to find a way to achieve a return of the objects to the victims’ families. However, section 5(1) of the British Museum Act 1963 provides as follows: “The Trustees of the British Museum may sell, exchange, give away or otherwise dispose of any object vested in them and comprised in their collections if: (a) the object is a duplicate of another such object, or (b) the object appears to the Trustees to have been made not earlier than the year 1850, and substantially consists of printed matter of which a copy made by photography or a process akin to photography is held by the Trustees, or (c) in the opinion of the Trustees the object is unfit to be retained in the collections of the Museum and can be disposed of without detriment to the interests of students: Provided that where an object has become vested in the Trustees by virtue of a gift or bequest the powers conferred by this subsection shall not be exercisable as respects that object in a

manner inconsistent with any condition attached to the gift or bequest.” It will be appreciated that these three reasons for selling, exchanging or giving away of any object vested in the British Museum were pretty tight. Other institutions were facing the same problem. A number of Holocaust art Image © iStock

claims were being brought where no legal claim would lie because of the Limitation Act. Yet, morally, the institution may think it proper to return the object concerned. Was there a way round it? In 1970, a High Court Judge determined that the Court or the Attorney General may authorise “a payment…out of Charity funds that is motivated simply and solely by the

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Owing to the Limitation Act, any potential claimants were out of time, because the museum had held good title to the objects for over six years of the museum made clear that the Snowden Principle would be a convenient solution for all concerned, the Vice Chancellor decided in his judgment that, because none of the express exceptions allowing for disposal of the object under section 5(1) applied, the Snowden Principle could not become another implied exception since “the very existence of the express exceptions negated the recognition of further but implied exceptions”. This very inconvenient judgment for all concerned had a curious consequence in a more recent case.

The Spoliation Advisory Panel

belief of the Trustees or other persons administering the funds that the Charity is under a moral obligation to make the payment”. This became known as the Snowden Principle.

Was this the answer? Not quite. In 2002, the British Museum agreed a restitution claim brought by the Commission for Looted Art on behalf of the heirs

of the late Dr Feldmann, in connection with four drawings that had been stolen from him in March 1939 by the Gestapo. By May 2005, no restitution having been possible, and after an approach by the British Museum together with the Commission, the Attorney General brought the issue before the High Court. Even though the trustees

The panel was set up to consider claims from people or their heirs who lost possession of a cultural object during the Nazi era that then came into the possession of a UK museum or gallery established for the public benefit, and to advise the Secretary for State for Culture Media and Sport on what action should be taken. The panel published its recommendations concerning claims by a Bertha Gutmann against the British Museum

and the Fitzwilliam Museum in respect of pieces of porcelain in their collections. Gutmann’s claims were found to be good. The British Museum was hidebound by the 1963 Act. However, the Fitzwilliam Museum in Cambridge had no such restrictions. The panel therefore recommended that the porcelain in the possession of the Fitzwilliam Museum be returned to Gutmann and, in the final words of their report “that restitution is the appropriate remedy”. In the case of the British Museum, as the panel stated: “We expect that, had restitution been available, the claimant would have sought it, as she has done in the Fitzwilliam Museum case.” In other words, Gutmann did not seek restitution against the British Museum because she was advised that it simply could not be provided. So, the panel had to recommend a payment of £18,000, this being the estimated value of the disputed porcelain it held. The result was that the British Museum had to keep the porcelain, even if the Trustees did not want to do so. It would appear that one ruling does not fit every situation. A

Milton Silverman is a Senior Partner at Streathers Solicitors LLP mcsilverman@streathers.co.uk

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ARTS AU C T I O N S

Jan Ambrose summarises the information contained in the new RICS guidance note

Selling personal property at auction

team of experts has contributed to the second edition of this guidance note: Alice Farren-Bradley (Art Recovery Group) is technical author and the working group comprises Paul Davidson (Bonhams), Alistair Morris, Rupert Toovey (Rupert Toovey Antiques & Fine Art Valuations Ltd), Wei Jiang (Shenyang University), with contributions from Paul Britton (Paul Britton Art Surveyor and Valuer) and Alan Fausel (Bonhams).

Before the sale Auctioneers are reminded not to offer property that they are not competent to sell, to have the appropriate insurance and to undertake due diligence. Sellers should be fully aware of the auctioneer’s conditions of business. Auctioneers must ensure that the venue is suitable, there are no covenants forbidding its use for conducting an auction, the room size is adequate, and the premises comply with health and safety and fire regulations. Some local authorities have additional requirements. Sale property must be kept secure and properly insured, and there must be 5 0 M AY/J U N E 2 0 1 5

satisfactory parking and access to and from the venue at viewing times, on sale days and for the removal of property. There are additional requirements for country house sales.

RICS members’ accounts rules state that clients’ money must be kept separate from other money in a designated client account The auctioneer must ensure that there is no prohibition against holding an auction at off-site premises, the hirer has no objection to the venue being open to the public and the permitted size of the room will accommodate the anticipated number of bidders. The venue must comply with fire and health and safety regulations; the auctioneer must ensure that the insurance cover maintained by the hirers of the auction room is satisfactory and Image © iStock

that any local authority regulations can be observed. The auction house is responsible for marketing the sale. Auctioneers should judge whether to use the internet, press and other media or direct mail and posters, ensuring that information on any website does not conflict with the hard copy catalogue. Interested parties should be made aware of any amendments following first publication of the catalogue via both print and online media. The auctioneer should state prior to starting the auction if any items are withdrawn and advertise the results as soon as practicable afterwards. Viewing times depend on the size and nature of the sale. All items on display must be marked with a dedicated lot number. The guidance note offers assistance on substantially reducing the risk of third-party claims. There is advice on arrangements where the bids are in the room, by telephone, live internet or commission bids. Telephone, proxy or internet bids should be governed by written terms that are signed by the bidder. Procedures need to be understood and agreed by both seller and bidder. Telephone, proxy and internet bidders must be made aware that they should enquire immediately prior to the sale if there have been any material variations

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or amendments. Online auction houses must set a closing date and time for receipts of online bids and other contractual terms to which the sale is subject.

Pre-auction On occasion, sellers who purported to be the legal vendor have subsequently been found not to have the right to sell. This could either be because of oversight or fraud. The auctioneer should be aware that these circumstances can arise and may wish to obtain appropriate indemnities from the seller. Where appropriate, the auctioneer should obtain confirmation from the seller’s solicitor that relevant money laundering checks have been carried out and that the seller giving instructions has the power to sell. For further information, see RICS Regulation Money laundering guidance (http://bit.ly/1En9Ql9). Terms should be agreed in writing and incorporate a definition of the auctioneer’s basis of appointment and information regarding fees and expenses and how deposits are accepted and held. They should also cover the auctioneer’s rights regarding bids and bidders, whether they are empowered to sign the auction contract on behalf of the seller and if they can repudiate a contract after the gavel has fallen. The auctioneer has a responsibility to ensure that prospective buyers recognise the possibility of the seller selling or withdrawing the property at any time before the sale. Buyers should verify the availability of the lot immediately prior to auction, although the auctioneer should use reasonable endeavours to notify interested parties and update online listing if a property is sold or withdrawn beforehand.

The sale The auctioneer should announce at the commencement of the auction that it is being conducted under published conditions and indicate where these can be found. Attendees should be advised at the start and during the sale of any alterations made since the catalogue was printed or listed online. Any material variations to the item that may have arisen in the lead-up to the auction should be incorporated in a notice prominently displayed in the saleroom.

Where a sale is advertised as having no reserve price, an auctioneer must not withdraw the property because bidding has failed to reach a particular level, but must sell it to the highest bidder. Any auctioneer who withdraws property in those circumstances is likely to incur personal liability under a collateral contract with the highest bidder. Consecutive bids on behalf of the seller should not be accepted nor made by the auctioneer. The auctioneer’s right to settle a dispute should be included in the conditions of sale. It is good practice for the auctioneer to indicate where the bid lies before the fall of the gavel. The auctioneer should clearly indicate the highest bidder and the final bid amount before bringing down the gavel. It may be a breach of the auctioneer’s legal obligations for them to bid for property within their own sales. Where a lot fails to reach the reserve price, the auctioneer should state that it has not been sold, not bring down the gavel and not give the impression that the bidding is at or above the reserve price. Auctioneers should have procedures in place in the event of public disorder during a sale. All professional auctioneers are advised to carry professional indemnity insurance. Buyers are responsible for insuring the property on the fall of the gavel. Prospective buyers should be advised of this in the conditions of sale.

After the sale Arrangements for the buyer to take possession of the property will normally cover payment, associated documentation and any additional charges. For successful sales, the seller will expect payment in line with the contract. Where property fails to sell, the client should be advised promptly and action agreed. RICS members’ accounts rules state that clients’ money must be kept separate from other money in a designated client account.

Property governed by special statutes Auctioneers are reminded that certain categories of property (e.g. firearms, artefacts and cultural objects) may be covered by special legislation. Auctioneers should make it clear in

their conditions of sale that the buyer is responsible for any subsequent export of the purchased property.

Post auction Published results must be accurate. Subject to the seller’s agreement, ‘after sales of property’ may be concluded after the auction.

Conditions of business Generally, these should include: bb the capacity in which the auction house acts bb the auctioneer’s rights bb the circumstances in which the bidder will become the buyer bb the title of the seller, lien of the auctioneer, and passing of title to the buyer bb caveats as to the description of the items bb the availability of condition reports bb the assumption that the bidder has legal capacity bb the means through which bids may be made bb indemnities and liabilities bb terms governing storage and insurance bb the treatment of property unclaimed and not paid for bb taxes bb glossary. RICS guidance notes are intended to represent best practice. Although members are not required to follow the recommendations contained in the note, they should be aware that when an allegation of professional negligence is made against a surveyor, a court or tribunal may take account of any relevant RICS guidance note in deciding whether the member had acted with reasonable competence. A Jan Ambrose is Editor of the RICS Property Journal Arts section jambrose@rics.org

The RICS guidance note Selling personal property at auction 2nd edition is available for members to download at http://bit.ly/1zoYKGG

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Colin Young explains why his auction house complies with RICS best practice

Working by the rules

T The RICS guidance note Selling personal property at auction (http://bit.ly/1zoYKGG) contains a wealth of good advice. But why is it so important for the client to go to an auction house that applies these standards, and how difficult is it for the auctioneer to adhere to them on a daily basis? The publication of this guidance note is timely: an article in Antiques Trade Gazette (ATG) is a cautionary tale of what can happen if clients use unregulated auction houses (http://bit.ly/1KdXo5X).

A case of fraud In December 2014, Cameo Fine Art Auctioneers was found guilty on nine out of 11 charges of having defrauded customers of up to £250,000. The case was brought by West Berkshire Council’s Trading Standards. According to both ATG and Newbury Weekly News the jury at Reading Crown Court heard 5 2 M AY/J U N E 2 0 1 5

how Cameo’s boss Jonathan King “lived the high life while fleecing customers. Clients were routinely fobbed off or sent dud cheques; goods went ‘missing’ and the bank accounts of online bidders were raided. King’s defence was that his brother-in-law, who also worked for the firm, was bleeding the company dry”. In 2012, King and his brother-in-law were both arrested, following an investigation by trading standards officers that involved contacting hundreds of former Cameo customers both in the UK and abroad. Beset by allegations of non-payment, missing goods and credit card irregularities, Cameo suspended trading. The unfolding scandal was covered by stories in ATG and the local press. Cameo was also the subject of The sheriffs are coming, a BBC documentary regarding county court judgments. Prior to the arrests, the-saleroom.com had suspended Cameo from its online bidding platform after conducting an investigation

into its activities following a number of complaints. Simon Berti, Managing Director of Arts and Antiques at ATG Media, owner of the-saleroom.com, says: “Although Trading Standards had not become involved at that stage, we felt we had to act in the interests of both buyers and sellers, as well as those of all the other auctioneers using the site. People have to be able to rely on the integrity of such a service and those using it. That is why we chose to take these precautionary measures.”

RICS-regulated organisations So how do I consider myself qualified to comment on ‘fly-by-night’ auction houses and RICS-regulated organisations? I am managing director of Golding Young & Mawer, an organisation that started out in 1864 and now has four sites in Lincolnshire (Bourne, Grantham, Lincoln and Stamford). Both William Gregory, Head of Private Client and Professional

It is vital to have good systems in place, to check them and work in a team with your colleagues

Services Department, and I are former RICS/ATG award winners. Recently, the firm has won an important international contract, and I am a member of the team that is undertaking a four-year worldwide antiques valuation programme. Undoubtedly, one of the major reasons why the firm was awarded the contract was because its valuations are the responsibility of RICS-registered valuers, who work to Red Book standards and are regulated by a professional organisation. This gave Golding Young & Mawer a huge advantage over many unregulated firms, both large and small.

Terms and conditions Consumer protection law is increasingly impacting on the sale of chattels by auction. The Unfair Terms in Consumer Contracts Regulations 1994 stipulates that contractual

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Surveying the world of fine art valuation: Colin Young (centre) with Senior Valuers John Leatt (left) and William Gregory (right)

terms are expressed in “plain intelligible language”. Accordingly, I firmly believe it is in the interests of auction houses to set out comprehensive terms and conditions for the benefit and protection of all parties. Golding Young & Mawer’s were taken from the model provided by RICS (visit http://bit.ly/1HLENRQ). The auction house, buyer and seller’s responsibilities and liabilities are explained here; the golden rule is that all parties should have notice of them before or at the time of making the contract.

Due diligence The guidance note states that valuers should be competent to sell property and undertake due diligence. How does this work in practice? I first experienced the excitement of the auction house when I was taken on

as a manager’s assistant at the age of 18. Three years later, I moved on to take the saleroom manager’s role at Goldings. With the arrogance of youth, at 21, I thought I knew everything about antiques; I think I believed it too. I could deal with 90% of the work and simply guessed the last 10%. Now, with over 28 years in the profession, and more than one and a half million lots under the hammer, very little has changed. I still can deal with 90% of the work but I ask a colleague about the remaining 10%. Of course, the secret to staying at a 90% performance level is to keep your CPD up to date and maintain your skills.

Check your systems It is vital to have good systems in place, to check them and work in a team with your colleagues. Look Image © Colin Young

I first experienced the excitement of the auction house when I was 18 at the items for sale, assess them and ensure that all the necessary bases are covered. It is crucial to adhere to your instructions and check all the details before sending it to the client. Always resolve potential queries before they go the other side of the counter. In terms of valuations, it is good practice to ask a colleague to give a final check of your work prior to signing off and to ensure there is a proper paper trail of instruction. Given that your company has such systems, does the RICS guidance note

offer sound advice to an auction house? Ultimately, common sense overrides everything. You apply the recommended best practice wherever it is possible, but auctions are not black and white. Best practice has to be flexible and adaptable to circumstance, which is why it has the status of guidance note. It is the responsibility of the saleroom manager at each of Golding Young & Mawer’s four sites to ensure that the auction venue complies with health and safety and other legislation. This is done by reviewing M AY/J U N E 2 0 1 5 5 3

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n the premises on an ongoing basis, with a major inspection undertaken annually. Legislation dictates that this risk assessment includes signage and ensuring the safety of staff as well as buyers and sellers. The results may mean it is not possible to conduct the auction at offsite premises and you also have to consider risks for your team working at clients’ premises and on transport contracts. Although no auction house can ever completely eradicate the possibility of money laundering or third-party claims, the risk can be minimised. A reciprocal due diligence comes from taking instructions from a regulated law firm, which will instruct a firm regulated by RICS to have exhibited its own due diligence to the beneficiaries and HM Revenues and Customs. But not all instructions are straightforward and you have to establish that the person instructing has the authority to do so. A signed indemnity is a further precaution, and you should always be wary and very suspicious if something does not appear to stack up.

Bidders behaving badly By very virtue of our business, the atmosphere at a sale can become very excited and tense, and passions can run high. In extreme cases, it can lead to disruptive behaviour. The RICS/Society of Fine Art Auctioneers and Valuers terms and conditions model states that “we shall have the right to refuse admission to our premises or attendance at our auctions by any person”. In the event of public disorder during a sale, the auctioneer should assert their authority and advise the offenders that it may be a public auction, but it is being held in private premises, 5 4 M AY/J U N E 2 0 1 5

requesting calm or giving the opportunity to leave. If that fails, they are within their rights to call the police and report a breach of the peace. You should be prepared for every eventuality.

Professional regulation While I generally view the world of antiques and fine art through critical eyes, I have an absolute passion and serious focus about my profession. In my view, no-one should conduct auctions or provide valuations if not regulated by a professional body such

as RICS or the National Association of Valuers and Auctioneers. It seems to me that the auctioneering business is made up roughly by 50% of qualified professionals and 50% who are not. I know many very good unqualified people, most of whom do not see the point of spending time and money to become a member of a professional organisation. This is a great shame. Legislation is what is needed; they would qualify if they had to and it would also cut out the rogue elements who can come into the business by the back door. Sadly, the story of Cameo Fine Art Auctioneers is not an isolated one. I have read the same stories time and again over the years, so when will the profession ever learn? UK government pushes professional self-regulation over legislation. That can only work if the legislation means that everyone has to be regulated by RICS or another professional body. Until that happens, the public will never truly be protected, and unfortunately, many potential sellers still look at gloss over substance. A flashy website

with smiling faces and fancy words are currently the only qualifications required. As I said at the beginning, the fact that the firm is regulated by RICS was a huge bonus when we were tendering for the international valuation programme. It is also an excellent way of seeing off the competition from unregulated firms. Let us shout about RICS regulation and the fact that members’ accounts rules state that clients’ money must be kept separate from other money in a designated client account. Being regulated by RICS is without question the most potent piece of ammunition in the armoury. It not only promotes your own profession standing, but the inadequacies of those unqualified and unregulated players who you may view as competition. Use the RICS logo with pride. It is the hallmark of a professional auctioneer and valuer. A Colin Young is Managing Director at Golding Young & Mawer cry@goldingyoung.com

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