Taking a rent dispute to an arbitrator is not a decision to be taken lightly. Michelle Perrett explains.
Over the past year increasing numbers of licensees have been taking the plunge and taking their rent dispute to arbitration after finding increasing competition is hitting the bottom line. With pub companies looking to increase their income through upward rent reviews, more licensees than ever before are deciding to fight their corner. This inevitably means a hotly-contested debate over rental rates in which both the tenant and landlord put forward their valuation arguments to an arbitrator or independent valuer.
Valuation is essentially an opinion and there is inevitably scope for disagreement between the licensee and landlord. But is it really worth going to arbitration and what does it really mean for the publican? Barry Gillham pictured), chairman at Fleurets, argues that arbitration can be a costly business if you are not well prepared.
"Most disputes should be capable of resolution by compromise," he said. "However, blindly proceeding to arbitration without acknowledging flaws in your own case will be extremely costly."
An arbitrator will usually charge on an hourly basis, which can range from £260 per hour in London to £175 outside the capital. "Given the time involved, an arbitrator's fees will typically be in the range of £6,000 to £15,000," said Mr Gillham.
"The other side will be sure to expose the flaws in your argument and the losing party could be asked not only to pay the whole of the arbitrator's fees but also the costs incurred on the other side."
However, if you feel there is no alternative but to get a third party in to look at the evidence it is time to call for an arbitrator.
Licensees should be aware that this third party may not only be an arbitrator, who takes on the role of a judge, but also an independent valuer who asks for people to submit their valuations and make a decision on the rent based on this.
Mr Gillham argues that it is better if the two parties can agree on someone to take on this role. If they can't, most lease agreements provide for the Royal Institute of Chartered Surveyors (RICS) to make the appointment. Once the arbitrator is involved he will issue strict directions for submissions and comments on the case.
"The majority of cases proceed by way of exchange of written submissions, although the arbitrator can call for a personal hearing," says Mr Gillham. "Although a hearing is more expensive, you might consider that you can put forward a stronger case at a personal hearing. Weaknesses in the other party's case are better exposed in cross-examination."
An arbitrator will make a decision based on the evidence submitted to him. Licensees must be prepared and have written evidence to present.
"Arbitration will favour people who have the strongest case and who have taken the time and trouble to prove all their facts and to set them out in an understandable manner," adds Mr Gillham. "Time costs money and often the party with the deepest pocket is able to put forward the best case."
He says that the arbitrator has "absolute power" to award costs of the winning party against the losing party. The best way around this is to come to an agreement beforehand on the division of the costs - especially as this can be anything up to £36,000 for an average pub. Most parties will also make a "Calderbank" offer before arbitration. This outlines the amount of rent which is acceptable to both parties.
The arbitrator will make his decision on who pays what based on this as well as whether anyone has acted in a way that increases the costs of the hearing or has acted unreasonably. An independent valuer is unable to award costs and will split the bill for his services 50-50 between the parties. He may charge anything up to £8,000, which makes him a cheaper option for a licensee who will not incur costs or be asked to pay the landlord's costs if he loses.
Mr Gillham advises licensees to look for an independent local valuer who has knowledge of the geographical area. This is because experienced licensed property valuers are limited across the UK and will probably already have pub company clients.
However, "in the end analysis, arbitration is little more than an expensive lottery", he concludes.
Advice
- Take professional advice on the rental value of your property
- Be prepared to listen to this advice even if you don't like what you hear
- It is better to negotiate a settlement. You will need to balance the costs of the arbitration against your rent
- Make an offer to settle on the basis of "without prejudice except as to costs"
- Generally it is better to push for an independent valuer rather than an arbitrator
- Select a fair and knowledgeable person to act for you
- If you cannot agree on the person, you must accept a nomination from RICS
- Consider the costs of losing your case
- You must be prepared to answer questions that are not favourable to your case and you will be better prepared if you take professional advice
- Cross your fingers and hope for the best.
From Barry Gillham, Fleurets