COMMON QUESTIONS - ACROSS COMPETANCIES Flashcards
To what valuations does the Red Book apply?
Red Book applies to all valuations unless a valuation is listed as an exception
What valuations are exceptions to the Red Book?
If for internal purposes (for client to know market value of their property)
If for agency work prior to acquisition or disposal instructions (EG advertise at price X and if it does well, we’ll up the price but if it is not getting much interest then we will lower the price)
If for stautory function (where the Law tells us what to do)
If acting as expert witness (EG if you can’t agree a rent review or lease renewal, then you would give an expert witness report in court - arbitrator or judge would tell you what to do, not the Red Book)
If in negotiation or litigation
Name the Red Book Global Bases of Value?
Market value
Market rent
Investment value
Fair value
What factors make up the all risks yield?
Buildings physical characteristics
Tenants covenant strength
Market rent to see if property is under or over rented (EG 7% market yield, would increase if over rented or decrease if under rented)
Other lease terms - likely to be some uncertainty in net rent (EG unexpired lease term)
Anticipated rental growth (links to location)
What is a gross yield?
The rent expressed as a percentage of the purchase price/ market value
What is a net yield?
The rent expressed as a percentage of the gross acquisition cost (IE purchase price plus purchaser’s costs which include agents fees, legal fees, VAT on fees, and stamp duty)
Explain the process of the term and reversion technique?
We capitalise the passing rent until review or reversion (to market rent)
(Do this, by multiplying the passing rent by the YP for the number of years to the reversion)
We take the market rent to be received at review/reversion and then capitalise that into perpetuity (gives value at that moment in time) to get the market value.
Capitalisation = multiplying by the YP
We then defer it further, at a PV of £1, for the period of the term
The reversion gets capitalised at market rented rate, but the term gets capitalised at a lower rate due to the lower risk (if over-rented, then term would have higher yield and reversion would have lower yield)
Also known as block-income approach (value each block of income)
Explain the process of the hardcore/layer technique?
We capitalise the rent passing into perpetuity
We then take the additional rent that we expect to recieve at review/reversion and we capitalise that into perpetuity
This gives top-slice value at that moment in time
We need to defer it for the period of the term
The bottom slice is capitalised below market rented rate due to reduced risk, and the top slice is capitalised above this rate to show increased risk
There is risk at review that you won’t recieve the additional rent
How would you arrive at a discount rate when carrying out a discounted cash flow?
UK Government Stock (Gilts) form the basis of yields
Start with risk free rate and add on market risks and property risks
Take risk free rate and add the risk premium
Name grounds under the s30(1) of LL & T Act 1954 under which a LL can obtain posession?
7 grounds:
T has failed to carry out repairs
T has persistently delayed paying rent
T is in substantial breach of some other covenant
L offers suitable alternative accomodation (LL doesn’t have to own the property, so long as they can secure another space)
Where the tenancy was created by a sub-tenancy and the building let as a whole would produce a higher rent than from separate lettings
L intends to demolish or substantially reconstruct the premises and cannot do so without obtaining possession
L intends to occupy the premises for his own purposes (LL must have been LL for minimum of 5 years - S30(2))
(last 3 grounds are the no-fault grounds)
In what circumstances is a T entitled to compensation when a LL successfully opposes a new lease under the 1954 Act?
The last three grounds (the no-fault grounds) as the tenant is required to leave through no fault of their own
NOTE: if it is one of these grounds (e, f or g) AND another (a, b or c) then the tenant should not get compensation! Has to be ONLY no-fault grounds
What lease terms affect the rent at review?
The rent review clause itself - definiton of rent, assumptions we need to make, and matters that are disregarded
The frequency of review (the longer the period between reviews, the higher the rent)
Restrictions on user/alienation, insurance provisions, repairing liability etc
Overall, the more flexible a lease is, the higher the rent
Protected tenancies (inside 1954 act) should demand higher rent - T has security at lease expiry
What are the differences between an indepdent expert and an aribtrator?
Arbitrator acts on evidence and arguments submitted; Experts has duty of investigation but can request evidence from the parties
Arbitrator makes an award; Expert makes a determination
Arbitrator conduct based on Arbitration Act 1996, but Independent Expert is RICS surveyor so governed by RICS Rules of Conduct
You can sue an independent expert for negligence, but you can’t sue an arbitrator
An arbitrator can award costs (EG the ‘wrong’ party pays all costs); an independent expert can’t usually award costs (these costs get met in equal proportions by LL and T - usually stated in lease)
What is the purpose of a Calderbank letter/offer?
Used to protect against costs liability at arbitration - no point making a calderbank offer if have indepedent expert
What must a Calderbank letter/offer contain?
An unconditional written offer to settle the rent review
A reasonable proposal regarding costs incurred up to the date of the offer
A time within which the other party must accept the offer by (usually 21 days)
A statement that is made ‘without prejudice save as to costs’
This means this offer can’t be used as evidence unless it comes to arbitrator awarding costs
‘without prejudice’ = does not prejudice anything I am subsequently going to say
Both parties can make Calderbank offers - can make as many as they want
Can make Calderbank offer at any time during negotiations (before or after arbitrator gets appointed)
Paper determination - usually evidence is all in writing and no hearing needs to take place
Offer states that everything is agreed EG size of unit etc
Person A believes comparable evidence suggests rent of £80K per year
Person B believes comparable evidence suggests rent of £100K per year
Arbitrator makes an award (£85k) and says ‘before I award costs, does anyone have anything to show me?’
Person A says - I made Calderbank and would have accepted £80K!
All costs made against Person B from date that offer could have been accepted
What is an assignment?
Tenant transfers legal interest in lease to another tenant. Incoming tenant takes over lease obligations.
What is sub-letting?
Lease property from tenant, rather than Landlord. Original tenant maintains relationship with Landlord, and sub-tenant has relationship with original tenant.
Difference between assignment and sub-letting?
With assignment, original tenant is no longer liable under the lease. With sub-letting, original tenant remains liable but creates new relationship with sub-tenant. Landlord and sub-tenant have no direct relationship.
Aim of LL & T Act 1988?
S1 of LL & T Act 1988 states consent must be provided within reasonable timeframe (no delays)
Aim of LL & T Act 1927?
S19 of LL & T Act 1927 states consent must not be unreasonably withheld
S18 of LL & T Act 1927 limits the amount of damages a LL is able to recover for breach of T repairing covenants
Enables the business to register improvement
What should PM do when receives application to assign or sub-let?
Review lease - what are the terms? Are there reasonable grounds for witholding conset? Is there AGA clause? Does the sub letting have an impact on the capital value
Request undertaking of surveyor and legal costs
Check if proposed market rent is same as passing rent
Check effect on investment value of property
Check if incoming tenant will pay a rent deposit
Surveyor to provide recommendation to client and obtain client approval
Licence for Assignment or Licence for Sub-Letting required
Process for completing LtA application?
Receive T application - needs to be in writing, surveyor to check lease provisions and request undertaking
Review it and get third party input (Building Manager / Building Surveyor / Planners / Insurers)
Consider nature of works, whether rental value would be improved as result, the impact on building operations, consider getting warranty, LL to confirm if they require reinstatement at lease expiry
Respond and obtain undertaking for costs from T
Document the LtA
Complete final inspection to ensure works were done accordingly.
Note: if T believes LL being unreasonable at any stage, can go to Court
What is forfeiture?
Clause in lease that allows landlord to re-gain possession of lease
Either by peaceful re-entry or Court action
