Monday 27 March 2017

Rent review legislation of 2010 sees growth in demand for arbitrators

Arbitrations can arise at the time of a rent review
Arbitrations can arise at the time of a rent review

Paul McNeive

I was surprised the other day to hear an agent comment that up to half of all rent reviews are now being referred to an arbitrator for decision. That's a proportion well above the traditional pattern, so I met an expert, John Shannon of Colliers International, to find out what is going on. Coincidentally, one of the last arbitrations I handled in practice saw one of the parties represented by John's father, the late Peter Shannon, who is fondly remembered in the business.

Arbitrations can arise at the time of a rent review when the landlord and tenant are unable to agree on the new rent. Standard leases contain a clause saying that, where such a dispute arises, the parties can apply to the president of the Society of Chartered Surveyors Ireland (SCSI) to appoint an arbitrator. Ideally, the parties will be represented by surveyors, who handle the entire matter.

Once appointed, the arbitrator can invite written submissions from the parties, setting out their arguments as to what the rent should be, and usually centred on comparisons with other lettings of similar properties. Each party is shown the other party's submission and is then allowed to make a counter-submission. The arbitrator may then call an oral hearing, during which both parties present their case. The process, from appointment of the arbitrator, through to the making of an award, usually takes about six weeks, although there have often been up to six months of entrenched negotiation, before the parties take the arbitration route.

As John Shannon explained, the increase in arbitrations is due to recent strong rental growth in some sectors.

"There was practically no rent review work from 2009-2014, as there was nothing to argue about, due to upwards-only reviews and a weak market. A big factor has been the introduction of upwards and downwards reviews from 2010, so there has been an increase in the number of reviews since 2015, reflecting the first cycle of five-yearly reviews," he said.

"Office rents are doubling for reviews from 2010 to 2015 but some retail lettings in provincial towns are seeing rent reductions over the same period," he told me.

The advent of upwards and downwards reviews has prompted debate on the analysis of lettings. One example is 'the hypothetical term'. Take the case of a 10-year lease where the value of tenants' inducements such as a rent-free period and a fit-out allowance would be averaged out over ten years and deducted to reflect the net effective rent. Now, however, there is an argument that the value of incentives should only be calculated over the period where there is certainty as to the rent (i.e. five years), which reduces the net effective rent.

This issue hasn't been tested in court yet, nor has any arbitrator taken a firm position on it in a decision. According to Shannon, the issue of upwards and downwards reviews is also a conundrum for fund managers, who are valuing rents that are "uncertain".

A welcome development is that under the Arbitration Act 2010, arbitrators must now explain their decisions, improving the transparency of the process.

Some leases provide for the appointment of an 'expert' rather than an arbitrator, with the main difference being that an expert doesn't have to give reasons for his decision.

Another interesting subtlety is that whilst an expert can draw on all of his or her experience in reaching their conclusions, an arbitrator is bound to consider only the submissions made.

In other words, if the arbitrator is aware of a 'silver bullet' comparison, which one of the parties has missed, he or she must ignore it.

For valuers, an appointment as arbitrator on a large letting is good news.

The arbitrator's fee is guaranteed and they don't release their decisions until they are paid by both parties. The arbitrator performs a 'quasi-judicial' role where the focus is to set a fair rent and to ensure both parties are treated equally.

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