At rent review, the phrase 'going to arbitration' is often bandied about during negotiations as a means for one party to get its own way. Whether or not the parties can agree the rent without involving the dispute resolution procedure, it is common for a represented or experienced party to invoke as a negotiating ploy. For whatever reason, it is important to understand what you are letting yourself in before taking the step or allowing the procedure to run its course.Some of what I am about to explain is taken from ML Guide - Arbitration at Rent Review: the Landlord's Perspective - which you can read on my website at http://www.michaellever.co.uk/mlguide/mlg02/At rent review, there are two methods of dispute resolution to a third party: (1) arbitration; (2) a surveyor acting as an expert (known as an independent expert). Whether you would have a choice and the riming for a decision depends upon the wording of the lease: generally, a lease will state one method only. Although the referral procedures are similar, the role of the third party is completely different.In outline, the main difference between arbitration and independent expert is that an arbitrator is bound by the rules of evidence and the award (of rent) cannot be more or less than the rental extremes submitted by the parties. An arbitrator is expected to use expertise in assessing relevance and quality of evidence and arguments and can make his own enquiries, but contentions must be proven, either from fact or experience. An independent expert, however, can make up his own mind regardless. An independent expert is an impartial surveyor-valuer whose opinion (determination) of rent the parties have covenanted to accept.An arbitrator's authority is derived from the Arbitration Act 1996; an independent expert's authority is derived from the actual lease. An independent expert is simply a valuer, so may be sued for negligence. An arbitrator cannot be sued for negligence but, provided a written reasoned Award is given, appeal can be made within 28 days on points of law or for irregularity, such as misconduct.From now on, except where stated, to avoid repetition, I shall refer to the arbitrator or independent expert as the "person".Whether acting in the capacity of arbitrator or independent expert, the person is an independent, unbiased, and emotionally detached person whose jurisdiction and powers are governed by, for an arbitrator, the Arbitration Act 1996, and for an independent expert by the actual lease itself.Every lease is different, so the appointment procedure will vary. Usually, the referral is to a surveyor, expressly or implied a chartered surveyor. Older leases may require the appointment to be made by the President of the Law Society, or the Chartered Institute of Arbitrators, or a local Chamber of Commerce. Generally, modern leases require a person to be a (chartered) surveyor appointed by the President of Royal Institution of Chartered Surveyors (RICS); some leases enable the parties to agree and appoint a suitable person as a precursor to RICS application. Depending upon what the leases says, it could be required that the person would be familiar with the area in which the property is located and/or experience of the type of premises. In any event, the person must have no involvement with either party, unless agreed or any conflict of interest disclosed and accepted beforehand.Assuming the appointment selection procedure is administered by the RICS, either the landlord or the tenant, or both, may apply to the RICS, depending upon the lease. The applicant pays an administrative fee to the RICS, currently �395 inclusive of VAT, for the appointment and undertakes to be responsible for the person's costs. In the past, it was possible to influence the RICS's selection process by listing, by reason of conflict of interest, names of person(s) likely to be sympathetic to the interest of the other party: (landlord- or tenant- bias). Following case law, the applicant must now show good reason why any particular person(s) should not be appointed.RICS selection procedure takes 2-6 weeks, depending upon the availability of an impartial person. On appointment, the RICS writes to both parties to confirm the appointment or nomination and name and address of the person. Previously, the applicant would include a copy of the lease with the application form, but nowadays the copy lease has to be provided by one of the parties direct to the person. I am unsure of the reason; I guess to reduce RICS admin. Whether the dispute procedure should have been initiated at all or by whom is not something with which the RICS would get involved. The RICS simply processes the application. It is possible to halt the process if the review is agreed before the person's identity is disclosed by the RICS to the parties, but unlikely for the application fee to be refunded! Whether half the RICS application fee would be payable/reimbursed by the other party depends as regards an independent expert upon the lease, or in the case of an arbitrator the award.On referral, costs are an issue. Each method has its own rules. There is no overriding scale of charges, each person has their own basis. The amount of rent involved is often of no consequence. Costs can end up disproportionate to the amount of rent involved. Generally, the person will charge based on an hourly rate, or with an independent expert sometimes a percentage of the difference in opinion of rent contended by the parties (an approach that can be great fun to reason over when one or both parties do not proffer any opinion). Generally, I find that the person'�s hourly rate ranges from �250 to �350 plus VAT and disbursements/travelling costs. I have not (yet) encountered requests for payment in advance on account, but that may be a reflection of my reputation; I think reputable advisers would be expected to have honourable clients. Sometimes, the person would charge a fixed amount where the matter is agreed without much of the person's involvement. In some cases, a person will agree to cap their own costs at a pre-agreed figure. Some arbitrators, particularly in London where apparently money is no object, can run up a few thousand pounds for not much more than a preliminary letter and a few reminders. I have encountered some arbitrators who, despite being informed by both parties the matter is settled and to take no further action until they hear from the parties, continue to send reminders for progress and wrack up more costs because they've decided unilaterally the parties are taking too long to complete the matter. Since a person cannot usually accept instructions from other landlords or tenants in the vicinity, the person is effectively denied the opportunity for new business, so maybe there is some merit in the parties having to pay extra, even though that presupposes new work coming the person's way in any event. Greedier persons tend to be a law unto themselves!Contrary to popular belief, each party does not necessarily pay half the costs. With arbitration, costs are not only those of the arbitrator, but also the costs of the parties'� surveyors, lawyers, etc. Per the Arbitration Act 1996, an arbitrator is empowered to award costs of proceedings and jurisdiction overrides the lease. If the lease says each party is to bear half the costs and/or half the fee payable to the RICS for the appointment of the arbitrator, then whether such requirements are observed is entirely within the arbitrator'�s discretion. Since an independent expert'�s authority is derived from the lease, whether the independent expert's jurisdiction extends to the parties'� responsibility for his costs as well as the parties' own costs depends upon the particular lease. For leases that are silent on the matter of an independent expert's costs, the applicant party would be responsible for the whole of the independent expert's costs, with no right of recovery of any share from the other party. Frankly, I consider the omission of responsibility drafting ignorance/experience, in any event inequitable; I await a test case.An appointment is personal to the person. Often, the person will be a principal or partner of a firm of surveyors, either based locally, regionally or nationally depending upon availability and the RICS selection, and the type of property and/or requirements of the lease. On appointment, the person will write to both parties to ask if more time is required for negotiation or whether directions for conduct of the proceedings should be issued. The person will also confirm basis of costs.To ensure and maintain impartiality, all communications to and from the person are sent to both parties. No '�without prejudice'� communications during negotiations beforehand must be disclosed to the person. When 'without prejudice' communication is disclosed, inadvertently or in attempt to influence, the onus is on the other party to draw the matter to the person's attention so that the person knows to avoiding seeing it.The procedure adopted by an independent expert is usually along the same lines as for arbitration, despite having no basis in law. In theory, presupposing no procedure stated in the lease, an independent expert could simply go ahead and determine the rent. In practice, that would be unusual. What independent experts prefer is to invite the parties to make written representations/submissions - often, terminology is casual or muddled - whereupon the independent expert will send a copy of one party's submission to the other and invite counter-submission. Having received all '�submissions'� the independent expert will inspect the premises and subject to wanting clarification of any matters arising will proceed with the determination that would then be released, subject to prior payment of his costs. Prior payment for release/publication is normal: one party can pay the whole amount or a moiety. Where the independent expert is authorised to determine costs, often the determination in two stages: the first on rent, the final determination on costs. The costs determination would follow the similar procedure as with the first determination. Whether an independent expert would provide a reasoned valuation depends upon the requirement of the lease or the independent expert'�s discretion.Where appropriate, the person requests a Statement of Agreed Facts. The Statement contains common ground, that is matters concerning the property and lease that are not in dispute; it can also include evidence. Since a SOAF is a binding contract, I consider it important to include a suitably-worded exclusion.For arbitration, broadly the same procedure as for independent expert is adopted, except that where one or both parties are represented by advocacy there may be a third date in the procedure for further examination. I find the easiest way to explain what happens as follows:Assuming arbitration and assuming both parties represented by surveyors. The landlord's surveyor and tenant's surveyor respectively will act either as expert witness or advocate or a combination of both, provided the surveyor make it clear at all times in which capacity he/she is acting.For expert witness, the terminology is 'report' and 'points of reply. For advocate, 'submission' and 'counter-submission' and 'further examination'. After the preliminaries have been sorted, the person issues directions for conduct of the proceedings, with timetable closing dates for the various stages.Most referrals are undertaken between the person and the respective parties' surveyors. Whether one party is called the claimant or defendant depends upon the person. The formality and terminology can be more lax than if lawyers are also involved. Generally, referrals are in writing only, but an oral hearing can be included depending upon the complexity of the review.The overriding duty of an expert witness is to the judicial body/tribunal - namely, the arbitrator - regardless of the party paying the expert witness fees. An expert witness task is to provide an impartial honest opinion (valuation) of rent, amongst the tests of integrity that the opinion would be the same if acting for the other party. An expert witness is indifferent to the outcome. Following criticism by the court of surveyors acting as expert witness entering into the arena to argue the client's case (advocacy), the RICS issued a mandatory practise statement for representative surveyor on referral. Rather than limit the PS to arbitration, it includes independent expert determination. Many chartered surveyors are somewhat 'sniffy' about advocacy, preferring to act as expert witness. Consequently, what normally happens is that since the surveyor that acted in the negotiation will likely reason the party instructing something afresh adds to the costs unnecessarily, that same surveyor will also act as case manager for the referral preliminaries and thereafter when the referral is underway also act as expert witness. Whether realistic for the '�surveyor-ex-negotiator'� to emotionally detach from the client's expectation and do as expected of an expert witness is a challenge. It can be done and I do it. [I'�ve created a method that combines the best of both worlds and which I've used successfully on every occasion for clients, but how I am not going to explain!]A 'submission' - I use the term loosely - is a rarely just a few pages long. Generally, my submissions run to 15-20 pages, counter-submissions similarly, and excluding exhibits. Approximately 10,000-30,000 words is typical and takes me a day or two to prepare and write. I wouldn't go so far as to suggest the detail required puts writing a Phd into the shade, but possibly not far off. In a case last year, I submitted 900 pages.How long referral takes depends upon the efficiency of the person, the availability of personnel, and the complexity of the review. For a relatively straightforward referral, I estimate approximately 4 months: 2-4 weeks for the RICS selection process, 2-3 weeks to sort out and agree preliminaries with the person, 2-3 weeks to first closing date, 2 weeks to next closing date, another 2 weeks to third closing date where involved, 2-3 weeks for the person to inspect, and ignoring any other matters arising, 2-3 weeks for the person to confirm the award/determination is ready for publication, subject to prior payment of the person's costs; allow another couple of weeks for payment.On costs, a party's costs can be protected by what is known as a Calderbank offer. I am not going to explain what that means here, it's a subject in its own right, so I'll do so at another time. Suffice it to say, a Calderbank is a '�without prejudice'� offer to accept to avoid the costs of referral. A Calderbank offer will only have efficacy when the phrasing of the offer and the costs provision in the lease are supportive.Apart from exposure to the procedure, or taking a back-seat and leaving everything to your surveyor to deal with, something you are letting yourself in for is loss of control of the outcome. Negotiations are subjective: regardless of the valuation guidelines in the review clause, the parties can agree whatever rent they like. As soon as referral takes over, the review is wholly objective, the strictures of the valuation guidelines in the lease paramount. It is important, therefore, even if you instruct a surveyor to act for you , to have an understanding of the process. Whether necessary to instruct a surveyor is a decision too. Generally, it is advisable. With arbitration, you cannot leave it to the arbitrator to decide. An arbitrator can proceed ex parte, but not advisable. With an independent expert, you could leave it all to independent expert, but again not advisable because are not going to be able to draw attention to whatever you think the arbitrator or the independent expert should take into account; it would be wrong to assume the person would consider every possibility. An experienced competent surveyor on your side would be able to influence the outcome.As a negotiating ploy, threat of referral may work, but has more chance of succeeding when an application is actually made to the RICS. At each stage of the referral procedure, it is possible to agree if the other party is willing. Referral concentrates the mind and actual costs can be contained, perhaps under �1000/�2000 ex VAT shared by the parties. With a rent review at 5 yearly intervals, an extra �500 (ignoring VAT) on costs equates to �100 a year. It might also be the only way to get the other side to agree to an increase. For example, for a review I dealt with recently, the multiple retailer tenant's surveyor was adamant of nil increase, negotiations dragged on for months getting nowhere. As soon as the referral was put in motion, agreement was reached for just over 10% more in rent, an increase in capital value of the landlord's investment of some �50,000, and the referral cost about �500 ex VAT.Re-reading the above, it is perhaps a tad simplistic. On referral, there are permutations to consider, as well as the psychology involved. Even so, I trust you get the gist.In the next article, I'll talk about Calderbank offers. After that about Dispute Resolution on Renewal of a Lease. In the meantime, please feel free to comment below.
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