Are property agents to blame for upward only rent reviews?

In negotiating commercial leases, many landlords and tenants employ property agents (brokers) to act on their behalf; typically these people are chartered surveyors. The aim of this paper is to explore the role that these brokers play in the shaping of commercial leases in the context of the current debate in the UK on upward only rent reviews. This role can be described using agency theory and the theories of professionalism. These provide expectations of behaviour which show inherent tensions between the role of agent and professional, particularly regarding the use of knowledge, autonomy and the obligation to the public interest. The parties to eleven recent lease transactions were interviewed to see if the brokers conformed to the expectations of agency theory or professionalism. Brokers that acted for industrial and office tenants behaved as professionals in using their expertise to determine lease structures. However, those acting for landlords and retail tenants simply followed instructions and behaved as conduits for their clients, a role more usually associated with that of an agent within the principal-agent relationship. None of the landlords’ brokers saw themselves as having responsibilities beyond their clients and so they were not promoting the discussion of alternatives to the UORR. The evidence from these case studies suggests that agents are not professionals; to behave entirely as an agent is to contradict the essential characteristics of a professional. While brokers cannot be held entirely responsible for the lack of movement on the UORR, by adopting predominantly agent roles then they must take some of the blame. However, behind this may be a much larger issue that needs to be explored; the institutional pressures that lead to professionals behaving in this way.

The uncertainty of valuation

Valuation is often said to be “an art not a science” but this relates to the techniques employed to calculate value not to the underlying concept itself. Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. Uncertainty in the comparable information available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) is considering ways in which the uncertainty of the output figure, the valuation, can be conveyed to the use of the valuation, but as yet no definitive view has been taken apart from a single Guidance Note (GN5, RICS 2003) stressing the importance of recognising uncertainty in valuation but not proffering any particular solution. One of the major problems is that Valuation models (in the UK) are based upon comparable information and rely upon single inputs. They are not probability based, yet uncertainty is probability driven. In this paper, we discuss the issues underlying uncertainty in valuations and suggest a probability-based model (using Crystal Ball) to address the shortcomings of the current model.