A Perfect Storm? 

THE RISE IN THIRD PARTY DISPUTE RESOLUTION AT RENT REVIEW

Economic pressures are affecting both landlords and occupiers of industrial premises. As landlords seek to boost rental income to counter a downturn in capital values, an increasing number of occupiers are resisting. As a result, both are turning to third parties to resolve the dispute.

Oliver Bates, a director in our lease consultancy team, explores the options and pitfalls.

Economic downturn

Impact on Landlords: The global rise in inflation and the subsequent increase in the Bank of England interest rates has resulted in the outward movement of yields across both multi-let and single-let industrial/warehouse premises. Consequently, landlords are seeking to recover/offset the reduction in capital value by maximising rental uplifts across their portfolios.

Impact on Tenants: Inflationary pressures have also affected tenants, with increasing costs associated with utilities, staff, fuel, supplies and business rates due to the recent revaluation. Consequently, some industrial occupiers are experiencing a downturn in profits and in some instances an affordability issue when faced with a substantial rental increase.

We therefore have a situation where landlords are aggressively seeking rental uplifts but with tenants willing to fight for every penny. As a result, MK2’s lease advisory team has seen a marked increase in rent reviews being determined/awarded by third party expert/arbitration.

Expert/Arbitration: Most rent reviews mechanisms will include a provision in the event of a dispute to refer the matter to a third party. The most common forms of dispute resolution within commercial leases are either via an independent expert or arbitration - or sometimes both - with one of the parties having the ability to elect how the matter is resolved.

What should you do if there is a choice of dispute resolution methods?

There are various differences between an expert’s determination and an arbitrator’s award.

When considering which route to go, key considerations include costs, procedure and evidence.

Costs: Simply, the arbitrator has an ability to make an award in respect of all of the costs involved in the arbitration process i.e. their fees, the landlord’s fees and the tenant’s fees. Typically, this is in the region of £15,000 - £30,000 plus VAT (possibly higher if there are legal matters to consider).

The ability for an expert to make a determination in respect of costs is directed by the terms of the lease. The most common position is that the expert can make a determination in respect of their costs only, not the landlord’s and tenant’s costs. However, in some instances an expert does have the ability to determine all the costs (as for arbitration).

Consequently, the stakes can be higher in respect of costs at arbitration compared to expert.

Procedure: Another issue to consider is the difference in procedure. It is possible to seek an oral hearing during the arbitration process, but this is not available as part of the expert process. This is an extremely valuable tool if one party has a particularly strong case and will put the other side’s expert under pressure. It is easier to be a keyboard warrior compared to being examined/challenged during a hearing. ·

Evidence: A further issue to consider is how the processes differ in dealing with evidence. An arbitrator can only make an award based on the evidence presented, whilst an expert can rely on their own research.

If there is a plentiful amount of transactional evidence supporting your opinion/position then arbitration should be the preference, particularly in consideration of higher stakes in respect of costs. In the absence of significant transactional evidence then it may be preferable to refer the matter to an expert.

Conclusion

The wider economic climate impacting both landlords and occupiers of industrial premises alike has resulted in an increasing number of rent reviews being settled by either expert or arbitration.

This is not a process to be feared and can be a useful recourse in the event of a genuine difference between the parties.

We would, however, recommend that the parties involved should use best endeavour to reach a negotiated settlement due to the costs, inherent risk and time (which can be around 16-20 weeks) involved in a third party resolution, which should be the last resort.

Contact Oliver Bates for further information: T: 0121 752 5126 M: 07539 310820 E: obates@mk2.co.uk