Property Journal September-October 2016 by RICS

Property Journal INC OR P ORAT I N G T H E C O M M ER C I AL P R O P E RT Y J O URNA L, RESIDE N T I A L P ROP E RTY J O U R N A L A N D P E RS O N AL P ROP ERT Y JOURNA L

Data: are you making the most of it?

Understanding performance metrics

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How data could transform the built environment 30 PG.

COMMERCIAL

RESIDENTIAL

PERSONAL PROPERTY

Valuation and EPCs

Housing supply

Consumer rights

What do valuers need to know about MEES?

Continuing RICSâ&#x20AC;&#x2122; overview of the solutions

A guide to rights changes for sales professionals

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September/October 2016

rics.org/journals

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contents C ON TACTS

UPFRO NT

COMMERCIAL

5 Brave new world

Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org Advisory group: Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Milton McIntosh (Excello Law), Nigel Sellars (RICS), Martin Francis (BNP Paribas), Simon Hooper (Edward Symmons), Fiona Haggett (RICS), Vivien King (Malcolm Hollis) RESIDENTIAL Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org Advisory group: Mike Basquill (RICS), Andrew Bulmer (RICS), Paul Cutbill (Countrywide), Julian Davies (Earl Kendrick) Graham Ellis (RICS), Chris Rispin (BlueBox Partners), Philip Santo (Philip Santo & Co)

Jeffrey Matsu examines how economic risk can be managed in an interconnected and rapidly changing world

6 Update 8 Shape the future

Introducing IPMS for Industrial Buildings, Alexander Aronsohn encourages members to respond to the consultation

10 Employees performing badly?

PERSONAL PROPERTY

Helen Crossland provides an employer’s guide to managing poor performers

Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org

12 Legal Q&A

Editorial advisor: Nigel Sellars Property Journal is available on annual subscription. All enquiries from non-RICS members for institutional or company subscriptions should be directed to: Proquest – Online Institutional Access E sales@proquest.co.uk T +44 (0)1223 215512 for online subscriptions or SWETS Print Institutional Access E info@uk.swets.com T +44 (0)1235 857500 for print subscriptions To take out a personal subscription, members and non-members should contact licensing manager Louise Weale E lweale@rics.org Published by: Royal Institution of Chartered Surveyors, Parliament Square, London SW1P 3AD T +44 (0)870 333 1600 T +44 (0)24 7686 8555 W www.rics.org ISSN: ISSN 2050-0106 (Print) ISSN 1759-3395 (Online) Editorial and production manager: Toni Gill Sub-editor: Matthew Griffiths Designer: James Tuthill Advertising: Emma Kennedy T +44 (0)20 7871 5734 E emmak@wearesunday.com Design by: Redactive Media Group Printed by: Page Bros

Journals online

Legal experts answer common queries

14 Should you be seeing red?

Infrared thermal imaging is an underused tool in the surveyor’s kit, maintains Stewart Little

16 Living with change

Tom Makokha makes the case for prioritising diversity to help meet the challenges of globalisation

18 Enabling a superfast future

Claire Haynes and Helen Garthwaite stress the importance of sustainable digital infrastructure for broadband connectivity

20 Taxing times

Restrictions on interest deductibility have implications for real-estate investment fund structures, explains Robert Walker

CO MME RCI A L

22 Peak performance

Rachel Dick outlines a framework giving facilities managers an holistic view of asset performance

25 The high road and the low road Recent English and Scottish legislation establishes different requirements for energy performance, writes Liz Stewart

26 Getting creative

Thomas Mann reports on a pilot scheme that could help facilities management innovation

28 MEES: know the risks

Andy Miles and Chris Bennett highlight what valuers and lenders need to know about the Minimum Energy Efficiency Standards

30 Data mania

Dynamic data could change the way buildings are valued and managed, Sonny Masero explains

32 In demand

Mark Hampson argues that the role of the specialist dilapidations surveyor is now vital

27 The machine age

Great minds and cutting-edge technology are the future of surveying, says Chris Sullivan

Increasing numbers of members are choosing to view their journals as downloadable pdfs, instead of paper publications, by changing their member preferences on the RICS website. Regular emails inform members when the pdfs of the latest journals are available. While helping RICS to reduce its carbon footprint, viewing the journals online provides you with the same technical information in a format that is quick and convenient to read on screen. To change your preferences, visit www.rics.org/mydetails

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UPFRONT C O N T EN TS

contents R

RES I DE NTI AL

36 You get what you pay for

Emma Vigus explains why lower premiums for professional indemnity insurance could have unforeseen consequences

38 The golden rule of surveying

Michael Parrett continues his series on damp, considering how use and occupation of dwellings can contribute to the problem

Front cover: © Shutterstock

PE RSO NA L PRO PE RT Y

44 Are we forgetting something? Nick Sanderson assesses how to address the neglected sector of retirement housing

46 Pressing the other buttons Jeremy Blackburn continues his series summarising RICS residential policy

42 What the eye can’t see

In the first of a new series of articles, Martin Beattie and Graham Ellis suggest why out of sight should not mean out of mind

50 Small print, big issues

Pierre Valentin and Azmina Jasani look at the effect of new consumer protection laws on the sale of fine art, antiques and collectibles

Property Journal is the journal of the Arts & Antiques, Commercial Property, Dispute Resolution, Facilities Management, Machinery & Business Assets, Management Consultancy, Residential Property and Valuation Professional Groups While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. RICS cannot accept any liability for any loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. All rights in the journal, including full copyright or publishing rights, content and design, are owned by RICS, except where otherwise described. Any dispute arising out of the journal is subject to the law and jurisdiction of England and Wales. Crown copyright material is reproduced under the Open Government Licence v1.0 for public sector information: www.nationalarchives.gov.uk/doc/open-government-licence

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UPF R O NT OP I NI ON

RI CS P RO PERTY JOUR NAL

Jeffrey Matsu examines how economic risk can be managed in a rapidly changing, interconnected world

Brave new world

U Uncertainty seems unbounded these days. Policymakers were still grappling with the hangover from the global financial crisis when “Brexit” added to the toxicology. As if fiscal budgets and monetary tools were not already under enough pressure, the UK’s vote to leave the EU has triggered a wave of political, economic and financial turmoil. Whenever and whatever the final outcome of the UK’s talks on its relationship with Europe may be, a heightened sense of risk prevails. Financial market volatility has punctuated what was already poor business and investor confidence going into the referendum. Businesses do not like uncertainty, and in the foreseeable future they are likely to respond with deferred investment and hiring, which will have a negative effect on consumer spending. Property could be hard hit, with potential repercussions for broader financial stability.

Growth and stability With growth prospects weak and uncertain, the role of

monetary policy in balancing financial stability with price stability has come to the fore. One of the key risks is that sustained low interest rates can encourage excessive risk-taking and leverage, thereby promoting the formation of bubbles. Even so, higher rates alone may not be an appropriate response if the amount required to manage asset prices in one sector has a disproportionately negative influence on the rest of the economy. A more targeted approach that utilises counter-cyclical regulations and supervision is more likely to address excesses as they materialise, while promoting a less pro-cyclical response in the event of a downturn. Strengthening the resilience of the financial system with such a framework then informs monetary policy, enhancing its effectiveness. Financial stability can be enhanced by decoupling the lending and regulatory cycles from that of the real estate market. An approach that considers the entire cycle should help to balance the tendency of both lender activities and regulatory oversight towards exacerbating such cyclicality, thus reducing the drop from peak to trough. The financial system’s resilience to shocks can be increased by requirements for systemically important financial institutions (SIFIs) and other organisations to hold sufficient levels of Image © Shutterstock

loss-absorbing capital and liquidity buffers so as to offset unexpected losses, particularly during a bank run. In the event of the latter, an effective resolution regime needs to be in place to prevent contagion of other market participants. Minimum margin and central clearing requirements for derivative transactions could better address the risks caused by connections between financial firms. The counter-cyclical capital requirements and stress tests introduced under the Basel III framework can help strengthen resilience by targeting risks as they emerge. Meanwhile, a regulatory framework that provides sufficient oversight of the shadow banking system and covers a more comprehensive array of SIFIs and activities can help to prevent risks from migrating to the periphery.

A global response Globalisation has increased the importance of international policy coordination as well. Very loose monetary policy can trigger a downward spiral of competitive currency devaluations and protectionism, which would be highly counterproductive in lifting global aggregate demand. For example, the Smoot–Hawley Tariff Act 1930 raised US tariffs on more than 20,000 kinds of imported good to record levels, prompting retaliatory tariffs by

the country’s trading partners that likely extended the Great Depression. In recent times, global trade volumes have increased more slowly relative to global output in each of the past five years. To neutralise what has become an overreliance on easy money and its toxic side effects, fiscal stimulus in areas such as infrastructure investment can raise domestic demand, restore confidence and accelerate economic recovery. Until growth and inflation return to a more stable trajectory, an approach focusing on monetary normalisation and fiscal austerity could reinforce secular stagnation and contribute to the erosion of living standards. In a highly interconnected global economy driven by rapid technological change, the current sense of anxiety is palpable. Geography no longer binds the mobility of capital or labour, each in pursuit of higher returns. Such fluidity of resources creates extraordinary opportunities as well as risks. Ultimately, sustainable growth in the real estate market and the overall economy can be better achieved by the enhanced market transparency and greater levels of confidence and trust that are enabled by property professionals. b

Jeffrey Matsu is Senior Economist at RICS jmatsu@rics.org

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UPFRONT U P DAT E

UPDATE New resources on climate change Discussions of climate change can be both political and polarising. However, the consensus view of the evidence remains that the risks posed by global climate change could prove devastating: for example, it has been claimed that rising temperatures could make a sixth of all species extinct by the end of the century. The relevance to those working in property and construction is evident, not least because buildings and construction are responsible for about 30% of total greenhouse gas emissions around the world. Launched in May the new isurv section, Climate change: adaptation and mitigation, sets out the main issues of

which APC students and professionals need to be aware. This section makes clear that built environment professionals need to understand risks to which developments may be exposed, opportunities that may arise, and when these might occur. This includes understanding what is required in terms of mitigating against and adapting to future climatic changes as far as possible. Associated benefits include reducing the risks to business continuity and decreasing exposure to extreme weather damage. The issues are also examined in terms of relevant legislative and policy drivers,

and the implications for existing building stock. A brief, high-level overview of the themes and their implications is then given in the summary. The author is Chris Burgess, an associate at sustainability consultancy Greengage, and the section will follow the Sustainability channel’s quarterly updating cycle. Its publication reflects the isurv sustainability board’s continued commitment to aligning content with the priorities of those affected by developments in this fast-paced and hugely important area. n www.rics.org/climateadaptation

Art ethics event

RICS proptech partnership Following RICS’ recent partnership with property technology (proptech) firm MetaProp NYC, the 2016 Global Real Estate Technology Confidence Index 2016 has now been published. The index offers insight into the impact that the technology is set to have on the built environment, as predicted in the RICS Futures report Our Changing World. The key points are: bb technology is likely to have its biggest impact on the commercial and residential property markets; however, 35% of investors also expressed interest in technologies focusing on other asset types, such as retail, hotels, parking and leisure 6 SEP T EMBER/OC T OBER 2 016

bb the proptech sector’s revenue will grow, with the emergence of a few dominant players likely bb competition for tech start-ups will increase as investors become more comfortable with digital solutions. The partnership means that our members will continue to gain insight into proptech trends. n www.metaprop.org/confidence-index n www.rics.org/proptech Dan Hughes is Director, Data and Information Product Management, RICS dhughes@rics.org

Images © iStock; Shutterstock

Introduction to Art Market Standards – Code of Conduct and Ethics in the Art Market Friday, October 7 2016, RICS, London Karen Sanig, Partner and Head of Art Law at Mishcon de Reya, Chris Ingram, Collector at the Ingram Collection, Transparency International UK and Mark Dodgson, Secretary General of the British Antique Dealers’ Association (BADA), will discuss art market standards, with moderators Claire Grindey of RICS and Patrick Legant and Selina Skipwith of the Association of Professional Art Advisors (APAA). Fees: APAA/RICS/BADA members £30; students £20; others £45 n brownpapertickets. com/event/2560780

STANDARDS International Standards IPMS for Office Buildings

n https://ipmsc.org/standards/ office

Recently published RICS HomeBuyer Service Professional Statements

The RICS HomeBuyer Service (Level 2 survey) RICS HomeBuyer Report (Survey), 1st edition n www.rics.org/hbreportsurvey RICS HomeBuyer Report (Survey & Valuation), 5th edition n www.rics.org/ hbreportsurveyvaluation

Service Charge Residential Management Code, 3rd edition n www.rics.org/resiservicecharge

Electrical safety course for letting agents A free online course has been launched to help letting agents in understanding the importance of regular electrical safety checks. The Electrical Installation Safety course has been developed by the National Association of Professional Inspectors and Testers (NAPIT) with the National Approved Letting Scheme (NALS), an independent licensing scheme for letting agents. Commenting on the launch, NAPIT Trade Association Chairman Frank Bertie said: “Conditions in some parts of the private rented sector are currently worse than in any other form of tenure, and a lack of understanding of electrical safety requirements and best practice is a significant contributory factor. With this new course, NAPIT and NALS have worked together to raise awareness.”

The course focuses on giving those involved in letting accommodation in the private sector the knowledge necessary to comply with their legal obligations and ensure appropriate electrical checks are conducted for their premises. It includes extensive, user-friendly guidance on the different regulatory requirements in England, Scotland and Wales, considers industry best practice in performing periodic electrical inspections, and provides tips to help landlords conduct simple visual checks. The course is free of charge and can be taken by anyone who has an interest in electrical safety. To get started, you can create an account at the NALS elearning site, using your NAPIT or NALS membership number to self-enrol. n http://elearning.nalscheme.co.uk n info@napit.org.uk

Sharpen your gavel skills Cobham, 12 October 2016 In association with the Society of Fine Arts Auctioneers, we bring you a day of training with Roger Hollest FRICS. Following the highly successful Sharpen Your Gavel Skills CPD event at Lawrences of Crewkerne earlier in 2016, we are

holding a second of these in the South East. Aimed primarily at those starting out in auctioneering, this is a fantastic opportunity to pick up tips and learn what is required to become a good auctioneer at the rostrum. The morning will cover the legal position of an auctioneer

Residential Panel Managers, 1st edition n www.rics.org/resipanelmanagers

Surveys of Residential Property, 3rd edition n www.rics.org/ resipropertysurveys

Forthcoming

Conflicts of Interest professional statement Publication expected autumn 2016. n www.rics.org/standards

In consultation

International Property Measurement Standards: Industrial Buildings Until 30 September 2016. n https://ipmsc.org/consultation CLARIFICATION The image on p.46 of the July/August issue of Property Journal shows Telford Homes’ Icona towers in Stratford, east London, which is a policy-compliant, affordable-housing scheme that bears no relation to the Parkhurst Road development discussed in the article.

and all aspects involved in taking a sale, including appearance, use of voice and general behaviour. We will also look at a typical auctioneer’s book. In the afternoon, each candidate will have the opportunity to role play selling a few lots and receive constructive criticism. By the end of the afternoon, you should have a clear idea of what is required to become

a good auctioneer. You will have experienced selling from a rostrum as well as knowing about the skills you need to work on in order to improve your performance. We would welcome practised auctioneers to join us to provide real-life experience and knowledge that is invaluable to those who are starting out. n www.rics.org/gavelskills SE P T E MBE R /OC T OBE R 2 0 1 6 7

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UPFRONT I P M S I N D U STR I AL

Alexander Aronsohn introduces IPMS for Industrial Buildings and encourages members to respond to the consultation

Shape the future

ince the publication of IPMS for Office Buildings and the closure of the consultation process for IPMS for Residential Buildings, the IPMS Standards Setting Committee (SSC) has been hard at work finalising IPMS for Industrial Buildings, the third building class in the suite of international property measurement standards.

Definitions

As it has with all previous IPMS consultation documents, the SSC has been refining definitions and adding new ones to ensure that the industrial building standard is fit for purpose and meets the market’s needs. Informed by feedback it has received during the consultation process for IPMS for Residential Buildings, the SSC has also revised the definitions of both internal dominant face (IDF) and vertical section to make them more user-friendly. The definition of IDF is now as follows: “The inside Finished Surface comprising more than 50% of the floor to ceiling height for each IDF Wall Section. If such does not occur, then the Finished Surface is deemed to be the IDF.” Moreover, the SSC felt that vertical section was incorrectly titled – particularly when a number of markets tried to translate the term into their own language – and has therefore changed this term to IDF wall section and revised the definition as follows: “The internal finish of a section of an External Wall, ignoring the existence of any columns, that is either recessed from or protrudes from its adjacent section.” The SSC is committed to revising these definitions across all building classes when the first edition of the IPMS suite is completed towards the end of 2017. The SSC has also considered necessary definitions that are more or less unique to this building class. It has therefore devised six additional definitions, which are particularly useful for the measurement of industrial buildings. 1. Covered area: the extent at ground level of the area of a building covered by one or more roofs, the perimeter of which – sometimes referred to as the drip line – is the outermost structural extension, exclusive of ornamental overhangs. 2. Catwalk: an internal or external walkway above the surrounding area that provides higher-level access. 3. Clearance height: the maximum height in a building or section of a building, measured to the lowest point of the roof structural 8 SEP T EMBER/OC T OBER 2 016

element or building equipment such as ducting, gantries, pipework or sprinklers. 4. Loading bay(s): area(s) designed for vehicles next to or adjacent to a loading dock. 5. Loading dock(s): elevated platform(s) at an opening of a building that is designed for receiving or dispatching goods or equipment. 6. Mezzanine: an intermediate or partial storey, other than a catwalk, between the floor levels or roof of a building, and usually fully or partially open on one or more sides. As with the previous IPMS for Office and Residential Buildings, the criterion of IPMS 1, which is equivalent to gross external area, retains the following definition: “The total of the areas of each floor level of a Building measured to the outer perimeter of external construction features, which may be reported on a Component-by-Component basis for each floor of a Building.” However, in order to meet the needs of the industrial market, the measurement practice has been revised to state that: “In the absence of external construction features, for example an open-sided Building or a free-standing canopy, IPMS 1 is to be measured to the Covered Area.” The definition of the covered area is a measurement that is also included, although it is stated separately so users have the flexibility to compare these measurements with previous ones on a like-for-like basis.

Limited-use areas The SSC has also included three further examples of limited-use areas (see box, below) to meet industrial measurement needs.

Examples of limited-use areas Example 2 – Clearance Height: Parts of a Building with restricted height may need to be separately identified, in which case the Clearance Height is to be stated. Example 5 – Area difference from Covered Area: Where the Covered Area outside the External Walls is not functional for the primary use, this part of the Covered Area may be classified as a Limited-Use Area. Example 6 – Miscellaneous: Parts of industrial Buildings might be taken to have limited use for other reasons such as floor loading capacity or contamination.

Image © Shutterstock

UPFRONT I P M S I NDU STR IAL

As you may know from the previous IPMS, limited-use areas constitute all or part of a floor area that is not fully available for the primary use. IPMS for Industrial Buildings also includes the revisions to the IPMS for Residential Buildings Exposure Draft, and a new technical section that not only links the sum of the component area to IPMS 1 but also connects the sum of the component areas minus “Component Area B1 – the external Wall” to IPMS 2 – Industrial Buildings. In all other matters, IPMS 2 – Industrial Buildings is more or less identical to the previous IPMS, and is still defined as the total of the areas of each floor level of a building measured to the IDF.

Measurement bases Finally, in respect of IPMS 3 – Industrial Buildings, the measurement standard for exclusive occupation, the SSC identified two different measurement bases, IPMS 3A – Industrial, and IPMS 3B – Industrial, to meet global market needs. The committee also recognised that whereas some markets may only use one of these bases, others may use both. However, both these bases are defined as the floor area available on an exclusive basis to an occupier. IPMS 3A – Industrial Buildings is “that part of the Covered Area in exclusive occupation measured to its perimeter, to the Finished Surface of walls shared with Common Facilities, if any, and, where appropriate, to the centre line of shared walls between occupants”. It should also be noted that the part of the covered area outside the external walls is included in IPMS 3A but must also be measured and stated separately, and in some circumstances IPMS 3A will equal IPMS 1.

IPMS 3B – Industrial Buildings is “that part of the Building in exclusive occupation measured to the IDF Wall Section of external construction features and otherwise to the Finished Surface, and, where appropriate, to the centre line of shared walls between occupants”. In some circumstances, IPMS 3B will equal IPMS 2. The SCC hopes that you will all be pleased with the improved clarity of the IPMS for Industrial Buildings Consultation Document. Further details on the industrial standard and copies of both the consultation document and response form can be found on the IPMSC website (www.ipmsc.org). We look forward to your participation in the consultation process, which will be running until 30 September. b

Alexander Aronsohn FRICS is RICS Director of Technical International Standards and Executive Secretary of the IPMS SSC aaronsohn@rics.org

Related competencies include Measurement of land and property

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RICS P ROP E RT Y JO U RN A L

UPFRONT L E GA L

Employees performing badly? Helen Crossland sets out an employer’s guide to managing poor performers

ddressing poor performance is often seen to be such a time-consuming a process for employers that it is tempting not to intervene and hope for a natural improvement or conclusion. Yet underperforming employees can cost a business dear, and a reluctance to manage the situation can send a dangerous message that such behaviour is accepted and tolerated in the organisation. Belatedly tackling unsatisfactory performance can also see the employee challenge the action on the basis of inconsistent treatment.

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Legalities Capability, focusing on poor performance rather than health-related absence, is a potentially fair reason for dismissal, although the overriding aim of managing unsatisfactory performance is to encourage the individual to improve. For the employee, the process will generally involve an informal review followed, if necessary, by formal performance management. Should an employee be dismissed on performance grounds, as with any dismissal, the employee could claim unfair dismissal at an employment tribunal if they have two or more years’ service. With a ‘capability’ dismissal, this could occur where the employee claims to have had

their contract terminated prematurely or without just cause, or if the procedure taken was unfair. In most cases, tackling performance concerns during the probationary period – which should be extended if there are any inklings of uncertainty – will best protect the business from the commercial and management costs that follow from underperformance and the risk of claims. However, regard should be given to other claims the employee could raise, including discrimination, for which no minimum length of service is required. In such cases, and particularly where unsatisfactory performance may be connected to a disability, it might then be advisable to follow a formal process to show the dismissal was not for an unfair or discriminatory reason. Contractors need not be subject to performance management, and any concerns should be reviewed in conjunction with the contract for services governing the individual’s work.

Correct procedures Performance issues are commonly dealt with under an organisation’s disciplinary procedure, although it is strongly

UPFRONT LEG AL

advisable to keep the two issues distinct and have a separate policy for each. This will also deter any confusion as to the true reason for any dismissal. When addressing performance issues formally, the correct legal procedure to follow is the ACAS Code of Practice, or the employer’s own performance management/capability procedure, provided the measures are not less than the minimum standards set out in the ACAS Code. Taking legal advice is always recommended before proceeding, especially where there is a question mark over whether the person has a disability that may affect their performance. Minor lapses in performance can often be remedied through informal discussions or normal day-to-day management, and it is important that where such problems arise, line managers come to the fore in highlighting any shortcomings in a fair and reasonable way. If the performance concerns are not resolved in this way or prove to be more serious, then the following process should be adopted: 1. undertake a reasonable assessment of the employee’s performance with evidence gathered 2. write to the employee setting out the concerns regarding their performance, also enclosing the evidence compiled, and inviting them to attend a formal capability meeting 3. hold a formal capability meeting at which you: bb clarify the required standards the employee has failed to meet and examine the evidence in this respect bb allow the employee to ask questions and respond to the evidence presented to establish any reasons for the poor performance bb identify what can be done to assist the employee, for example, additional training or supervision bb set agreed targets for improvement and a time scale for review; any formal improvement plan should involve regular review meetings between the employee and relevant manager at which the employee’s progress is appraised, and they are advised of any aspects of their work that still warrant concern 4. write to the employee after the meeting with your decision, advising them of any sanction you have chosen to apply (see below), as well as offering them the right of appeal. Employees must be advised in any letters inviting them to a formal capability or appeal meeting of their right to be Images © Shutterstock

accompanied by a fellow employee or a trade union representative.

Sanctions Once the formal capability meeting has taken place, the appropriate outcome can be decided. If concerns remain, the standard scenario would be to issue a written warning, followed later by a final written warning if problems persist. However, if the individual’s performance has fallen seriously below standard, a first and final written warning may be justified. It would be risky and unusual to terminate an employee on performance grounds without a warning having been given first. Formal warnings should be in writing and specify: bb the areas in which the employee’s performance has fallen below the required standards bb targets for improvement and the review period in which improvement is required, e.g. eight weeks bb any measures the employer will take to assist the employee in improving their performance, such as additional training or supervision bb the regularity of meetings during the review period at which progress is examined, e.g. weekly bb the possible consequences of insufficient improvement by the end of the review period bb how long the warning will remain on file e.g. a fixed term or indefinitely bb the employee’s right of appeal.

performance improves to the required standard, no further action need be taken. Only once the employer is satisfied that it has made reasonable use of sanctions and is confident that no further measures can be taken to assist the employee should they consider termination. A further capability meeting will normally be necessary after a written or even a final written warning before the employee can be dismissed.

Conclusion Performance issues highlight the need for good, consistent management, whereby employees know what is expected of them and managers understand their responsibilities. Probationary periods and appraisals are useful arenas for assessment, but only have a purpose if managers are honest about the employee’s standing and then document and act on any concerns. Often, there is a desire to avoid a difficult conversation, or to overstate an employee’s performance in the belief this will encourage improvement. Other work demands may also intervene. While such factors are valid and understandable, they could lead to missed opportunities to tackle problems at an early stage, when a formal procedure might not be required, and unnecessarily draw out or undermine any process that might then be needed to manage the performance of an employee on a formal basis. b Helen Crossland is a partner at Seddons LLP helen.crossland@seddons.co.uk

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Legal Q&A RICS P ROP E RT Y JO U RN A L

UPFRONT L E GA L Q & A

Assigning lease to guarantor

I act for the landlord of an office premises in central London. A large corporation with several group companies occupies the premises as tenant, and their obligations are guaranteed by one of the group companies. The tenant company is in some financial difficulty and it has made a formal application to my client to assign the lease to that group company. My client is minded to consent to the assignment but has asked for advice.

> Jeremy Ferris

It has been more than 20 years since the Landlord and Tenants Covenants Act (the act) came into force, on 1 January 1996. For any lease that has been granted since that date, the act has applied so that a tenant, and any guarantor of that tenant’s interest, will be automatically released from liability as soon as the lease is assigned. The liability for both will then pass to the assignee. The ‘anti-avoidance’ provisions are set out at section 25 of the act. Essentially, that section renders void any agreement seeking to modify or frustrate the operation of the act. Over the last two decades, both the House of Lords and the Court of Appeal have grappled with the balance between the commercial needs and practice of tenant companies and the provisions of the act – in particular, the provisions concerning anti-avoidance. Until recently, there has been some uncertainty as to the effect of the oft-adopted practice of assignment of a lease to a guarantor under the lease. That guarantor is often a group company and assignment has historically been used as a commercially beneficial and convenient mechanism to spread risk and liability between organisations in a larger group. The recent case of EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch) has given clarification regarding the legality of such arrangements. Briefly, the facts were that HMV Retail occupied a shop in Worcester under a lease created after 1 January 1996; the lease was therefore a ‘new’ lease, to which the act applied. EMI guaranteed HMV’s liabilities, and when HMV went into administration in 2013, an application was made to the landlord to assign the lease to EMI. The landlord granted consent and the licence to assign was completed in November 2014, providing for EMI to honour HMV’s covenants in the usual way. A few months after completion of the assignment, EMI sought a declaration from the court that, although the assignment itself was valid, the tenant’s covenants in the lease could not be 12 SEP T EMBER/OC T OBER 2 016

Jeremy Ferris is a partner at Furley Page LLP jcf@furleypage.co.uk

enforced against EMI. The landlord counterclaimed by seeking a declaration that either the lease was vested in EMI and the covenants in the lease were enforceable, or the assignment itself was void so that the lease remained vested in HMV, with EMI still bound as original guarantor. In reaching its decision, the High Court made clear that the whole purpose of the act was to prevent the resumption of liabilities on either a tenant or a guarantor. The court therefore held that in spite of the agreement between the parties, HMV could not validly assign its lease to EMI. Any agreement that sought to implement such an arrangement was void. The original lease thus remained vested in HMV, with EMI remaining as guarantor under the terms of its guarantee. The court was therefore prepared to take an holistic approach as to the terms of the act. It was quite prepared to enforce the anti-avoidance provision that otherwise would have diluted the whole purpose of the act. Implications Although providing valuable clarification, the decision has not been universally welcomed, particularly by businesses that have been in the habit of assigning leases between group companies. The presiding judge, however, commented that in spite of that, “the fact that such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there”. Alarm bells have therefore been set ringing. Landlords must be aware that there is a risk that any existing lease that has been assigned is potentially unenforceable. That is so even in cases where the assignment was given voluntarily or was an intra-group assignment. Considering all of this in relation to the current case and the application to assign, it will almost certainly be reasonable for your client to refuse consent; and as ever, the reasons for the refusal for consent should be given in writing. As to alternatives, your client might for example call on the guarantor to take a new lease of the premises. That would not fall foul of the act because it is not an assignment. There would however be stamp duty land tax to pay, and therefore perhaps a natural reluctance to proceed in that way. b

The Property Litigation Association has sent a proposal to the government regarding a change in the relevant law: http://bit.ly/2a431cM

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UPFRONT IRT

Should you be seeing red? Stewart Little looks at infrared thermal imaging, a not-so-new but underused tool in the surveyor’s kit

What is infrared thermography?

1990s, and camera prices have fallen year on year as economies of scale are brought to bear. Nearly 100 years on, the physics are the same but the cameras are infinitely better: they are smaller, portable, better performing and, of course, cheaper. While similar to normal cameras, IRT cameras are able to ‘see’ in a different wavelength, capturing a different part of the electromagnetic spectrum. Infrared energy is all around us, emitted by every object you can think of, and IRT cameras pick up this energy from excited, animated molecules. The detector in the camera is sensitive to radiated energy in a certain wavelength in exactly the same way that a digital camera is sensitive to

Infrared images have been around since John Logie Baird demonstrated his camera at Box Hill in Surrey in 1929. The device was huge, needed liquid nitrogen to keep it cool, and was not exactly the last word in style and practicality. Nevertheless, it paved the way for where we are today. Things went digital in the

It is all about energy and how it escapes from an object

nfrared thermal imaging technology has been around for nearly a century. It has a multitude of uses, ranging from medical science to military and police operations, and in the building surveying world it can be employed to detect defects and energy deficiencies, informing decisions on the maintenance of built assets. This article explores the technology, thermal colour interpretation and the benefits for building surveying.

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visible light. Infrared radiation is invisible to the naked eye, however. Everything above absolute zero (that is, –273.15°C, or 0 kelvin) has energy. The more energy something has, the more its molecules move; the more they move, the more they radiate. Conversely, as temperature lowers, molecules slow down. When they reach absolute zero they stop. Water offers the clearest example of this principle in action: bb cool water down and the molecules form bonds and turn to ice bb when the molecules are heated, those bonds break and turn to water bb if the heat is increased, the molecules become so excited they move further apart and change state into a gas: steam has more energy than water and much more than ice. A modern IRT camera can detect that energy radiated by an object and turn it into an image that is visible to the naked eye. When the button is pressed on a

UPFRONT IRT

In general – although not always – red means hot and blue means cool. Red on the outside can mean a damp house or missing insulation, for instance, although the same problem might appear blue on the inside.

Uses of IRT As has already been suggested, the use of IRT in different sectors is on the rise. For building surveying applications, IRT is ideal for detecting energy deficiencies and building defects, and so it is increasingly used in conflict resolution where there are claims of poor workmanship. Specifically, IRT surveys are used to detect water ingress, condensation, draughts, porous brickwork, delaminating render and slumped insulation. An IRT survey can establish all sorts of building defects, in, for example: bb roofs: establishing when they should be refurbished bb walls: identifying gaps in cladding, wet insulation, badly fitted windows, ingress, dampness, mould growth, delamination, voids, condensation, airtightness bb cavities: missing insulation, wet or voids in the walls bb floors: failed damp-proof membranes, trapped moisture below concrete, wet timbers, gaps in insulation, pipework below, underfloor heating.

thermal camera, the thermometers it contains record the temperature in front of them; today’s cameras typically have around 76,800 thermometers. The result is what is called a thermal picture displaying an array of colours, all signifying differences in energy absorption and loss. This makes for an invaluable tool when you want to ascertain the condition and performance of property stock.

Interpreting IRT colours Every time a picture is taken, that temperature data is stored. The image can be interrogated and manipulated for a variety of purposes. Consider a thermogram of a house: this may often show, for example, red or white windows, green walls, blue render or yellow timber cladding. Each image has several parameters that can be modified digitally – among others, distance to object, humidity, emissivity, level and span – all of which affect how the camera visualises the temperature of the object.

IRT is most commonly used to assess housing stock and make informed decisions about potential retrofitting by quantifying the images and detecting energy deficiencies. By using it before and after retrofitting, visual evidence can be provided as to the quality of workmanship and improvements. At the time of built asset disposal and acquisition, IRT therefore comes into its own to provide a clear visual assessment of the property portfolio. A crucial factor in the successful use of IRT as a surveying tool is the weather. The best atmospheric conditions for thermal imaging surveying are after sunset, with little wind and no rain, fog or mist. When surveying houses, the heating must be on inside; when surveying a roof, it must be after a sunny day. As emphasised above, it is all about energy and how it escapes from an object. As an aside, it is worth noting that – contrary to popular belief – even if a thermographer can see someone inside their house while taking an IRT picture, the picture itself will not show this, because infrared radiation cannot pass through glass. So taking images of the Images © Shutterstock, IRT Surveys

house in the twilight will not mean that its inhabitants are photographed; in fact, the thermal picture is more likely to reveal the thermographer with their equipment.

Advantages of IRT technology bb It is quick: the problem can be identified within seconds and remedial action discussed. bb It is reliable: in the hands of a qualified thermographer, who is able to interpret the image correctly and explain it clearly, the thermal image cannot lie. bb It is non-destructive: no holes are drilled, and no physical penetration of the building or roof fabric is undertaken. bb It can reduce the cost of refurbishment: by literally pinpointing where the problem is and uncovering its extent, only targeted repairs and maintenance are required. bb It enables easier compliance with health and safety legislation: there is no requirement for scaffolding, climbing, or a cherry picker. IRT can also be installed in drone technology, making surveying a roof or tall building much easier. IRT is not new, but it is increasingly being used as a building surveying tool to assess a large portfolio of properties rapidly and impartially and make informed decisions about their refurbishment. Although the advantages are numerous, the most important ones are speed and cost-effectiveness. b

Stewart Little is CEO of IRT Surveys stewart@irtsurveys.co.uk

Related competencies include Inspection, Remote sensing and photogrammetry

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UPFRONT I N T ER N AT I O N AL

Tom Makokha makes the case for prioritising diversity to help meet the challenges of globalisation

Living with change

hen Prof. Tim Berners-Lee published a paper entitled “Information Management: A Proposal” in August 1991, few readers would have realised that they were looking at his blueprint for a commercially viable internet and arguably the world’s first website. More than 2.5bn people now use the internet globally; few people would disagree that the world has changed drastically in the last few decades. In the past, for instance, the core of the construction consultancy sector in the UK predominately consisted of traditional private cost consultants and project management practices, primarily servicing UK-based clients. My own introduction to the industry was as a trainee building surveyor, undertaking surveys for public authorities in London. But many of my clients now operate in domestic, pan-European and global markets, often concurrently, from a UK base.

New markets Globalisation has dramatically and permanently changed the way in which I and my colleagues work. This in turn has forced changes in my clients’ business models, corporate cultures, diversity and the geographical locations in which they operate. Many of these changes have been induced by global labour and consumer forces in emerging markets and the rapid advance of e-commerce. It is now possible for anyone in the world with internet access to shop virtually at any time and in any global market. Some commentators suggest that 25% of all retail sales in the US and the UK will be conducted online by 2020. But what does all this have to do with diversity? When commentators refer to globalisation, they usually mean the rapid socio-economic development of capitalism globally that has spurred and continues to spur profound change, drastically eroding geographical and social barriers. This has enabled communities, corporations and governments to connect with one another very efficiently, particularly in emerging markets such as Russia, India, China and South America.

One can therefore deduce that in order for the professional real estate services sector to survive and prosper, it will need to recruit from a diverse and expanded talent pool, to satisfy the ever-more expansive demands of clients. In May 2011, the report Equality and Diversity: good practice for the construction sector was published by the UK Equality and Human Rights Commission, on behalf of the Construction Leadership Diversity Forum (http://bit.ly/1BgpRUE). The evidence collected for the study demonstrated that the following benefits would accrue with robust implementation of good diversity and equality practices: bb efficiency savings thanks to improved staff retention bb a wider pool of talent available to the industry from under-represented groups bb a more diverse supply chain that would offer better support for small businesses bb improved on-site working relationships based on respect for everyone’s differences. How, though, do we move the topic of diversity up the industry agenda? Many readers may recall that a similar debate took place on matters of health and safety some decades ago. To think once more in the timeframes of technology, when Apple brought out its first Mackintosh desktop in 1984, cavalier approaches to site inductions and personal protective equipment were not unusual. Would this be acceptable today? There has clearly been a thoroughgoing cultural change in the industry that has seen a health and safety ethos inculcated in personnel at all levels. I suggest that it is high time that matters of diversity, equality and inclusion are treated in the same manner if we are to deal successfully with the numerous threats, opportunities and challenges that globalisation will continue to present. C

Cross-fertilisation These connections have led to the breakdown of cultural barriers and encouraged the cross-fertilisation of ideas. It is these new ideas, generated by the markets in which our clients operate, that have changed client expectations of the scope of professional real estate service delivery models that we need to offer. 16 SEP T EMBER/OC T OBER 2 016

Tom Makokha is a building surveyor at CBRE, and RICS representative on the Construction Industry Council Diversity Panel tmakokha.tm@gmail.com

Image © iStock

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UPFRONT CONNECTIVITY

Claire Haynes and Helen Garthwaite highlight the importance of sustainable digital infrastructure for broadband connectivity

Enabling a superfast future

uperfast broadband connectivity is now regarded as essential by businesses and the majority of homeowners. The government’s ambitions for digital connectivity are also high, with a target for 95% of the UK to have access to superfast broadband from 2017. The Building (Amendment) Regulations 2016 implement the Broadband Cost Reduction Directive 2014/61/EU as law in England and Wales. The primary purpose of the legislation is to contribute to reducing the costs and obstacles to deploying superfast broadband. The regulations offer an established route to set requirements for buildings, with an enforcement mechanism already in place. The 2016 regulations introduce a new Part R of Schedule 1 to the Building Regulations 2010 which contains a new requirement that all new or existing buildings that are subject to major renovation works are adequately equipped with the necessary infrastructure to support superfast broadband of at least 30Mbps. The government has also issued Approved Document R: Physical infrastructure for high-speed electronic communications networks, which gives practical guidance on compliance with the technical parts of the new requirement. Although compliance with the regulations is not guaranteed by following the guidance, there will be a presumption of compliance. This also

brings a degree of flexibility as there is no obligation to adopt any particular solution from an approved document, so other ways of complying can be discussed with the relevant building control body. The Building Regulations take effect on 1 January 2017 in England, and for a limited number of energy-generating sites in Wales; however, they will not apply to works that are subject to existing building control notices and applications submitted before this date. A building will meet the regulatory requirements if it is designed and constructed in such a way that it is ready to receive superfast broadband in the future, but it does not need to be installed immediately after completion of the works.

Major renovations The new regulations apply not only to new-builds but also major renovation works to a building. These works are defined as encompassing structural modifications of the entire internal physical infrastructure or a “significant part” of it, comprising installations such as ducting that host the wired or wireless access networks through which broadband services are delivered. The regulations and guidance give no explanation of what is meant by renovation of a “significant part” of internal infrastructure, however. This will lead to uncertainty as to whether some refurbishment projects are covered by the new requirements. The installation of new ducting throughout an entire building will mean that the new regulations are applicable, but suppose an anchor tenant requires new ducting in their premises – will they apply in this case? Given the lack of guidance, it will be a question of fact and degree in the individual circumstances of each case.

Access points The regulations provide that in-building infrastructure is to be installed up to a “network termination point”, the physical spot at which an occupier is provided with access to 18 SEP T EMBER/OC T OBER 2 016

broadband. For multi-occupancy buildings, there will typically be multiple network termination points, with one in the premises of each occupier. Where works are carried out to such a building, that building must also be equipped with a “common access point” for broadband connectivity. This is a physical point inside or outside the building that is accessible to broadband providers, where they can connect to internal infrastructure. Single-occupancy buildings will also be required to have an access point, but there will only be one network termination point connected to it. The new requirement is only to provide in-building infrastructure between the access point and the occupier’s network termination point. Site-wide broadband infrastructure extending externally from the access point is outside the scope of the new regulations, as is cabling or in-building infrastructure beyond the network termination point. Although the regulations will enable improved connectivity, they missed an opportunity to go further and cover the requirements for site-wide infrastructure – an important consideration given both the increasingly connected world in which we live, where more public spaces and areas between buildings are connected, and the drive towards ‘smart cities’.

Exemptions The regulations will apply to dwellings and non-residential property. However, there are exemptions for certain types of building and building work. These include: bb conservatories and other small detached buildings that contain no sleeping accommodation bb buildings that are listed or in a conservation area, for which compliance would unacceptably alter their character or appearance bb buildings in isolated areas where the prospect of a high-speed connection is considered too remote to justify equipping the building bb major renovation works where the cost of compliance would be disproportionate to the benefit gained. Image © Shutterstock

UPF R O NT CONNECT I V I T Y

A person wishing to take advantage of the latter exemption would need to demonstrate to building control that the cost of compliance would be unreasonable, taking into account the work required and the alternative means of high-speed broadband delivery available. There is no guidance, though, on what would constitute an unreasonable level of expense.

Incentives for stakeholders The guidance states that suitable ducting should be provided to connect all network termination points to an appropriate access point, for example wall ducts or, for multi-occupancy buildings, dedicated vertical and horizontal riser service routes. Implementation of the new regulations will not be without challenges or costs, particularly for older buildings that were not designed with space for broadband infrastructure and ducting. The new regulations will encourage developers, investors and occupiers to consider IT infrastructure early when moving premises or in their development project, because non-compliance could significantly affect a building’s

The regulations offer an established route to set requirements for buildings value, marketability and use. For some developers and investors, the cost effect of the regulations may be minimal as many new buildings are now designed to be fibre-ready with ducting for broadband access and termination points already integrated into the design; for others, the changes will be a wake-up call. The new regulations are another step in the right direction for the legal framework to keep pace with the practical realities of technology. A new Electronic Communications Code is promised as part of the forthcoming Digital Economy Bill, underpinning agreements to install and maintain communications apparatus on land and property. A project led by the City of London Corporation, with

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the backing of former Culture and the Digital Economy Minister Ed Vaizey, has also developed a standardised wayleave. Together with the new regulations, these initiatives should help to improve connectivity and reduce the costs and delays of the current protracted wayleave and street works processes. While green buildings have firmly established their place in the market, we have recently seen a change in focus towards the ‘wellness’ of buildings, and we predict that connected buildings will follow in their footsteps. b

Claire Haynes is Professional Support Lawyer in the Commercial Property team at Wedlake Bell chaynes@wedlakebell.com Helen Garthwaite is Partner in the Construction team, Wedlake Bell hgarthwaite@wedlakebell.com

Related competencies include Building pathology, Legal/regulatory compliance

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UPFRONT TAX I N G T I M E S

TAXINGTIMES

Robert Walker considers the potential implications for real-estate structures of restrictions on interest deductibility

As a part of its Base Erosion and Profits Shifting (BEPS) project, the OECD has, through action 4, recommended rules that limit the deductibility of interest expenses and economically equivalent payments. In the context of the property sector, where debt is commonly secured on assets, the BEPS risk should be low because interest deductions in respect of third-party debt are typically claimed in the territory where the property is located and the income is taxed. However, while there have been a number of representations on behalf of the sector claiming that the deductibility of interest on third-party debt is sacrosanct, this is not the OECD’s stated intention; it is

20 SEP T EMBER/OC T OBER 2016

concerned that third-party debt may intentionally be taken out in the most highly taxed jurisdictions in order to reduce a group’s overall liability for tax. As interest will commonly be a – if not the – significant expense for real-estate investors, the financial impact of restrictions in the availability of relief will need to be carefully considered. The UK has already confirmed that it intends to implement the OECD’s interest-relief proposals. Following an earlier consultation and the publication of the Business Tax Road Map in March, the Treasury issued a further consultation document on 12 May, in respect of its intention to introduce interest restriction rules from 1 April 2017.

Outline of proposals The starting point of the proposed regime is to restrict the deduction for interest to 30% of the “UK group” taxable earnings before income tax, depreciation and amortisation (EBITDA) for corporation taxpayers. Taxpayers will then have the option of increasing this to the level of the ratio between the worldwide group’s actual net external interest and EBITDA, if that is higher than 30%. There will also be a £2m de minimis amount. This means that the first £2m of interest will always be deductible regardless of the rate of deduction set under the ratio tests.

An infrastructure exclusion is also mooted for certain long-term public benefit projects. The key criteria proposed for these are that the project benefits from private finance, a public body obliges the operator to provide public benefit services, it is financed by third parties, and revenues are subject to UK tax.

Real-estate implications For groups that operate in different territories, issues are likely to arise where the level of gearing and interest charges naturally vary from one territory to another. So if the UK-interest-to-EBITDA ratio is higher than that of the worldwide group – and more than 30% – there will be restrictions on deductibility. Other complications may arise where, for example, interest is capitalised or profitability patterns naturally vary, such as in the early stages of property development when interest costs may be high and income low. Restrictions on interest deductibility could result in a breach of the loan covenants that relate to cash flows.

Non-resident landlords Offshore investors in UK property will usually be subject to UK income tax on rents received rather than corporation tax. The initial proposals apply to corporation taxpayers only, which would, therefore, exclude most non-resident

landlords. However, the consultation paper asks whether and how the regime should be applied to companies that are subject to income tax rules under the non-resident landlord regime.

Property investment funds One issue affecting funds is that some structures will be established as corporate groups preparing full consolidated accounts. In these situations, it is likely that the debt of all the group companies will be counted in determining the ratio of group interest to EBITDA, which may therefore increase the capacity for deductions. However, the holding entity of a fund may equally be a partnership or a trust that holds its assets through separate subsidiaries. In this case, each subsidiary will be subject to the single-company fixed rate of 30% for its interest-to-EBITDA ratio. The government has recognised that there are potential issues with regards to real estate investment trusts and property authorised investment funds – for instance, the rules may mean an increase in the amount required to be distributed – but have not indicated that they would provide for an outright exemption.

Next steps Although the Treasury has invited comments on the proposals, it is not anticipated that substantial changes will be made before the introduction of the rules in April 2017. Hence, investors in real estate should be starting to consider the potential impact of the rules on their financial models. b

Robert Walker is Partner and Real Estate Tax UK Network Leader at PricewaterhouseCoopers LLP robert.j.walker@uk.pwc.com

Image © Shutterstock

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C OMMERCI A L

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CO M M E R C I A L FAC I L I TI ES M AN AG EM ENT

The workplace and the associated strategy can potentially have a positive effect on the workforce’s quality of life.

Metric 1: Space utilisation

Peak performance Rachel Dick sets out a framework that can help facilities managers get an holistic view of how assets are performing

eal estate (RE) and facilities management (FM) professionals will be faced with a whole host of operational decisions every day, but more and more strategic choices that drive the business’s overall objectives require data to support decision making. Specifically, the key decisions in FM and RE are as follows. bb How does the asset base support the business’s objectives? bb What is the return on investment (RoI) from the asset base? bb How big does the asset base need to be to support business functions? bb What are the big risks for the asset base and how likely are they to happen?

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bb When do the cost, performance and risks of the asset outweigh its value? bb What investments need to be made to mitigate risks? bb When are acquisition and disposal decisions required? bb Where should new assets be based? There are some key metrics (as outlined in Table 1) that can prove useful in decision-making, regarding the need to maintain, acquire or dispose of space and help transform work cultures. Both RE and FM professionals have a significant impact on the overall success of the organisation – particularly now as the connection between wellness and productivity has begun to be recognised widely by employers and the costs related to poor mental health are rising. Image © Getty

The underutilisation of space represents an avoidable cost for businesses. Regulation 10 of the Workplace (Health Safety and Welfare) Regulations 1992 states that, with regard to room dimensions and space requirements: “every room where persons work shall have sufficient floor area, height and unoccupied space for purposes of health, safety and welfare”. The associated Approved Code of Practice and Guidance goes on to state that: “the total volume of the room, when empty, divided by the number of people normally working in it, should be at least 11m3”. The Health and Safety Executive says: “in making this calculation, a room or part of a room which is more than 3m high should be counted as 3m high”. This requirement does not easily translate into a m2/workstation metric. The Government Property Unit (GPU), however, has an overall goal of achieving 8m2/full-time employee (FTE) as part of its office rationalisation programme, which will establish 20 multiregional and multi-use hubs that will have a positive impact on 270,000 central government staff in The State of the Estate in 2014–15 (http://bit.ly/28SJ2O6). The GPU achieved the 10m2/FTE in 2015 and has established 8m2 as its challenge for 2016 and onwards. The GPU is also changing its business processes to enable and encourage more flexible approaches to working. It recognises the positive influence on employees’ mental health of not having to follow a traditional nine-to-five, office-based work pattern that typifies white collar work of the last century.

Metric 2: Cost of occupancy Often, the location and quality of a property is an investment in brand that is intrinsically linked to the return. However, using RoI alone as a measure, then poor-quality, cheap and uncomfortable space can prove just as productive if the team has a positive working culture. The cost of occupancy must be understood in the context of how well the space is used and the RoI it represents for metric 4, rather than considering it as an isolated operational cost. Control of occupancy costs does not simply involve a blanket reduction of operational services, but means tailoring

C O MME RCIAL FACI LI T I ES M A NAG EMENT

Table 1 Managing and applying data in properties Metric 2: Cost of occupancy

Metric 3: Safe, comfortable and compliant

• Rents and rates • Insurances • Utilities • FM costs • Lifecycle (furniture, fixtures, finishes and equipment) • IT equipment • Asset depreciation • Data from metric 1

• No. of failed statutory compliance checks and requirements • Energy rating of building • Customer satisfaction survey results

• Workstations/ m2 • No. FTEs/desk

• £/m2/year • £/ workstation/ year

•Overall % of statutory compliance • Average % of customer satisfaction • Building energy rating

• £/year/m2 • £/year/FTE • £/year/ workstation • RoI

• Average no. of sick days per employee • Annual spend on recruitment • No. of leavers/ joiners

Description/ purpose

Space use by floor/building/ location

Total occupancy cost by building and location

Building safety, security and comfort levels

Profitability of FTEs and space/ workstations

Loss of productive business time

Question(s) answered

• How densely occupied is this office? • Is this space being used appropriately/ to its most productive capacity?

Is the space expensive?

Correlations to test

Is there an optimal workstation/ occupation density in terms of increased motivation and productivity (i.e. critical mass)?

Do high occupancy costs result in increased motivation/ higher levels of productivity?

Metric 1: Space utilisation

Data required

Functional unit(s)

• No. of FTEs • No. of desks • Gross internal area

• Is the building legal? • Is the building popular?

• Do statutory compliance levels indicate high or low occupancy costs? • Is customer satisfaction related to no. of sick days taken?

Metric 4: Space productivity

Metric 5: Location productivity

Metric 6: Start of day wellbeing

Metric 7: Lease life

• Gross profitability • No of FTEs • Data from metrics 1 and 2

• No. of sick days • Staff retention rates • No. of workplace incidents • No. of workplace accidents

• Journey distances by range per employee • Average journey time

• Lease end dates • Equipment end dates • IT hard and software end dates

• % of staff living between x and x miles from workplace • Journey to work speed (mph) as potential indicator of wellbeing/ stress levels

% of life remaining per lease, equipment and IT assets

Suitability of locations to workforce

Determine decision milestone dates

Does the workspace represent a good RoI?

Does the building represent avoidable costs (in term of reputation and recruitment)?

Is profitability linked to customer satisfaction?

Is the no. of sick days related to the building location (i.e. is the loss of productive time a result of building location)?

• How motivated do employees feel when they arrive at work? • How many employees would like to work flexibly?

Is employee wellbeing linked to profitability?

When do business decisions need to be made by and is reinvestment required?

Is statutory compliance low because use of asset is being prolonged due to lease end date/end of life is close?

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them to ensure that each building or asset has sufficient provision, according to the frequency and intensity of use as well as the associated statutory compliance requirements.

Metric 3: Safe, comfortable and compliant The building should be both physically safe and secure, with clear circulation space and secure entrances, as well as complying with relevant regulations. The level of statutory compliance achieved at any one time will directly relate to the maintenance strategy and the level of occupancy costs identified in metric 2. Low levels of statutory compliance start to represent high levels of backlog maintenance activities – that is, those activities that when not undertaken represent an operational risk. Effectively maintained buildings tend to perform well in terms of energy use, while high levels of backlog maintenance typically indicate poor energy performance, irrespective of the age of the property. The level of cleanliness will directly affect the satisfaction of staff, clients and visitors. It could also have an impact on staff turnover, absenteeism and productivity. A poorly maintained, shabby-looking building that is energy-inefficient has the potential to be a barrier to business development because it could be seen as evidence of a lack of corporate social responsibility, ultimately leading to a loss of reputation.

The connection between wellness and productivity has begun to be widely recognised by employers costing employers £1–2bn. In 2012, the Parliamentary Office of Science and Technology stated that poor mental health in the workplace costs the UK an estimated £26bn a year, with: bb absenteeism costing £8.4bn bb presenteeism costing £15.1bn bb staff turnover costing £2.5bn.

Determining what an organisation deems productive depends on the nature of the business and its required outputs. A crude but universally comparable metric is gross profit: the productive output is measured as £/m2 or £/workstation, and then divided by the cost of occupancy to ascertain the RoI. To increase the RoI, either output needs to increase or occupancy costs need to be lower. The automation of processes and outsourcing often represent an opportunity to achieve these, but focusing on people, processes, systems and data can yield longer-term results.

The Oxford English Dictionary defines “presenteeism” as “the practice of being present at work for longer than required, especially as a manifestation of insecurity about one’s job”. In 2013, The Economist stated that working longer hours drains productivity rather than increasing it, and countries with longer average working hours are much less productive than those that work fewer (http://econ.st/28OpmO6), while in 2015, the Guardian reported the results of a University College London study finding that a 55-hour week increased the risk of strokes by 33% and coronary heart disease by 13%, compared to those who worked between 35 and 40 hours per week (http://bit.ly/28LUKbY). Strokes and heart disease are preventable when they are associated with lifestyle choices. This represents an opportunity for RE and FM professionals to have a positive influence on staff at the level of building and location through the provision of amenities such as proximity to fitness facilities, access to green space, bike racks, lockers and changing rooms, fridges and food preparation areas, choices regarding interior design and, where appropriate, availability of more healthful food options.

Metric 5: Location productivity

Metric 6: Start of the day wellbeing

In 2001, the World Health Organisation said the impact of mental health problems in the workplace has serious consequences, not only for individuals but also for the productivity of the enterprise. In the UK that year, 80m days were lost due to mental health issues,

Measuring commuting times and the speed of journeys is important because if a location is difficult to access it will be stressful for staff and reduce their productivity at the start of the day. Opportunities to work differently or relocate the workplace nearer to the

Metric 4: Space productivity

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staff base are potential solutions. If a building location does not depend on specific geographical features – unlike, for instance, in the oil and gas, utilities and water sectors – then assets that are difficult to access could represent a barrier to attracting new talent and existing and potential customers.

Metric 7: Lease life The overall business strategy should be informed by an awareness of the point at which assets will reach the end of their legal service life or the date when contracts need to be renewed, as these timings determine when investments and decisions are required. This also represents an opportunity for change and transformation, especially in working practices that are associated with particular locations – such as late starts or early finishes because of the difficulty in reaching a location – or particular buildings – such as poor energy performance as a result of occupiers’ behaviours.

Conclusion Achieving the right size for your workplace involves assessing flexible working solutions appropriately for risk and making the right equipment available. Another essential, albeit intangible, element is the trust bestowed by the organisation’s leaders on those who choose to work away from the primary location. Senior members of the organisation must lead from the front to demonstrate that trust to the staff. The management consultant Peter Drucker once famously said culture will eat strategy for breakfast, so your workplace strategy must be informed by the cultural norms of an organisation. However, when those norms have a direct impact on the premises’ RoI, there is a compelling argument to transform workplace strategy. C

Dr Rachel Dick FRICS is Senior Consultant, Data Services at RICS rdick@rics.org

Related competencies include Analysis of needs of client, Corporate real estate management, Data management

C O MMER C IA L ENERGY EFFI CI ENCY

The high road and the low road Liz Stewart outlines some contrasts between the requirements of recent English and Scottish energy performance legislation

Regulations aimed at improving energy performance of commercial properties are following respective national trends in the UK. Property owners north and south of the border face different regimes when it comes to monitoring and improving energy efficiency – just as they do when selling or leasing. The UK Energy Efficiency Regulations are designed to improve the environmental performance of qualifying assets and reduce energy bills. Underpinning both regimes is a principle that the cost of improvements be recouped via long-term savings in energy bills. Significant differences between the requirements operating in Scotland, England and Wales have, however, given rise to fears of a negative impact on commercial property markets.

Monitor or improve After a lengthy consultation, Scottish ministers have issued the draft Assessment of Energy Performance of

Non-Domestic Buildings (Scotland) Regulations 2016 (the 2016 regulations). With effect from 1 September this year, there will be a general requirement to monitor or improve the energy efficiency of qualifying commercial properties with a floor area of more than 1,000 sq. m; buildings constructed to the 2002 building standards or more recent iterations are exempt from the requirement. While owners of qualifying properties will be required to carry out certain energy efficiency improvement works and keep a display energy certificate at the property, the Scottish government has, so far, failed to prescribe a minimum energy standard. With few exceptions, the sale or grant of a new lease on qualifying property will trigger the need for the owner to provide a prospective buyer or tenant with an Action Plan, in addition to the energy performance certificate (EPC) that is already required. This plan will identify the improvement works needed to meet the target energy performance standard for the building, to be established by the relevant assessor. Once an Action Plan is registered, the owner can choose to complete the required works within 42 months, or defer and record the property’s energy Image © iStock

consumption via an annually registered Display Energy Certificate. Responsibility for compliance rests with the owner, as defined by the regulations. Failure to comply can result in a penalty charge of £1,000, and the responsibility for enforcing compliance will lie with each Scottish local authority. In England and Wales, energy efficiency standards are already in operation under regulations introduced in 2015 for both domestic and non-domestic property. With effect from 1 April 2018, it will be unlawful for landlords to grant either a new lease or sub-lease, or to renew the lease on properties, with an EPC rating below E. Unlike the position in Scotland, the government south of the border has opted to incorporate the new regulations into the current EPC regime and has gone so far as to prescribe a minimum EPC rating. While sales are excluded, many more properties in England and Wales are held on long leasehold rather than freehold or ownership – in contrast to the position in Scotland.

Exemptions Some protection measures are contained in the legislation in England and Wales to reduce the adverse impact on the value of properties, so there are exemptions under certain circumstances. One such exemption operates where the improvement works identified to bring the energy rating up to the required minimum target rating will result in a reduction of more than 5% in the value of the property. Examples of such cases are not easily identified; however, projects that result in a reduction in the net lettable floor area of the property could be considered. Exclusions also apply where third-party consent for improvement work cannot be

RI CS P RO PERTY JOUR NAL

obtained, and there is some recognition that older buildings may require exemption by virtue of the fact that they may not be capable of meeting the minimum standard. As yet, it is unclear to what extent the Scottish government will mirror these exemptions.

Commentary Holyrood has taken a very different and arguably softer approach to the requirements imposed by Westminster. While the Scottish legislation is due to come into force 18 months before its English counterpart, property owners north of the border can opt to postpone the achievement of energy performance targets by opting to monitor instead. As a result, properties with poor energy performance ratings may not become sustainably obsolete and owners will have no real incentive to invest in improvement works – unlike their counterparts in England or Wales. Practical guidance on the operation of the 2016 regulations is now available. While it was hoped this would help clarify a number of key issues to help align the Scottish regime with its counterpart south of the border, as yet this has proven not to be the case. C

Liz Stewart is Partner, Commercial Property at Stronachs

Related competencies include Asset management, Letting/leasing, Sustainability

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CO M M E R C I A L FAC I L I TI ES M AN AG EM ENT

Getting creative Thomas Mann reports on a pilot scheme that could help innovation in facilities management

Finding the time Innovation – developing new ideas that improve quality and create value – is certainly fashionable. This process is distinct from conventional “continuous improvement”, which aims only to eliminate waste and inefficiency from existing processes. Figure 1 shows the differences. The extent to which even the more basic goals of continuous improvement have been achieved in FM is certainly debatable. Our clients report extremely uneven service quality across providers, and between different contracts with the same provider. This suggests that basic operational improvements are needed. But businesses that fail to innovate tend to get left behind. Examples spring to mind of photography companies that failed to embrace the shift to digital technology, supermarkets that were late to get online and the music business’s apathy towards online streaming. Industries that do not innovate stop being viewed by their clients as adding value and are instead seen only as entailing a cost – which must be 26 SEP T EMBER/OC T OBER 2016

reduced. These industries have become commoditised, with cost-cutting leading to a race to the bottom. Their margins are destroyed, and this leaves little room for business development. All of these issues are well rehearsed in FM: it has previously been reported that the sector is struggling to be seen as strategic in the boardroom (http://bit.ly/28Orfu7). Continuous improvement is no longer sufficient. To increase its value to clients, FM needs to position itself as a strategic partner – not only in terms of reducing the cost of its own service, but in increasing service quality and benefits for the client.

Figure 1 Differentiating continuous improvement from innovation

Service quality

he majority of organisations still see facilities management (FM) as a simple business cost, and the industry does little to dissuade them of that view. Our clients in both the public and private sectors are either resigned to this or desperate to see a stagnant service leap forwards, reducing costs at the same time as improving service quality. But can clients help providers to help themselves? An interesting new trial in the railway industry points to a possible approach.

Status quo

Continuous improvement

Time Image © iStock

Innovation

It may be that innovative business models or technologies are what is needed to transform the existing paradigm.

Railing against stagnation This pursuit of cheaper service alongside rather than at the expense of better service is an objective with which the UK railway industry has struggled. Barriers to innovation are systemic in UK rail, and have been highlighted in industry studies such as 2011’s Realising the Potential of GB Rail, also referred to as the McNulty report (http://bit.ly/28SNLzx). The report identifies the following barriers to innovation. bb Misaligned incentives and business drivers for the many parties involved in the rail industry lead to fragmentation. Different planning and budgetary cycles for train operators, Network Rail and the government hinder connected thinking and prevent effective cooperation. bb Franchise periods are considered too short for the benefits of innovative approaches to enable a return on investment, so operators often fail to invest throughout the term of a franchise. bb Supply chains, staff and trade unions also find themselves operating in a culture of contradictory incentives and a complex legal framework, reducing their engagement as a result of fatigue and risk-aversion. These challenges are all recognisable to those working in FM. Financial

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disincentives to innovation are often contractually anchored. For example, fixed-price contracts, short contracts and inappropriate transfer of risk all discourage suppliers from developing new ideas. A lack of resources directed by clients and suppliers towards innovation is also usually noted as a primary barrier – no people, no time and no budget. The Department for Transport is therefore trialling an approach to overcome these various barriers, the Innovation in Franchising Funding Scheme, which is being tested on three new rail franchises: Virgin Trains East Coast, TransPennine Express, and Northern Rail. Their respective franchise agreements mandate that, for three years, the train operator will allocate 1% of annual turnover to fund trials of innovative technologies or processes. The money is placed into an account by the operator at the start of the year, and it must then prepare business cases for innovation projects to access those funds. An industry innovation body provides governance, defining what qualifies as innovation, and determines

Businesses that fail to innovate tend to get left behind the funding allocations. Operators are encouraged to partner and innovate to enable improvements across the whole railway, not just measures that will directly benefit themselves. Money that is not spent in the trial period will be lost by the operator. The trial will create an estimated £50m innovation fund from 2016 to 2020. Public-sector procurement bodies could choose to implement similar measures for FM. In the private sector, this process would have to be led by the client. New FM contracts could mandate that contractors create a fund to trial innovative ideas. The preparation of a business case is a key stage in this process, so the client can ensure that the contractor innovates in an acceptable way. Given that the funds will already have been accounted

The machine age

Great minds and innovative technology are the future of surveying, says Chris Sullivan

echnological innovations are designed to make both our work and personal lives easier – so why has the property world been reluctant to embrace them? Perhaps for some, modernisation dilutes a skillful craft that took years to learn. But for surveyors in particular, investing in the latest technology can help increase productivity, save time and reduce costs, all of which can then be passed directly on to clients – the very purpose of our profession. Building information modelling (BIM), unmanned aerial vehicles (drones), thermal imaging and telescopic cameras all provide property firms with the commercial capabilities to lower development costs and save time. These tools can increase the overall accuracy Image © iStock

of surveying by enabling a closer look at hard-to-reach places. They can detect even minute details during a survey, such as crucial stress and damages or leaks, often just by seeing through a building’s fabric or viewing inaccessible roof space. They also maximise the safety of surveyors in difficult or hazardous conditions. For example, in areas where there is minimal ground access, drones omit the need for the construction of scaffolding, avoiding time-consuming and expensive processes. Overall, the adoption of these technologies means we can now get a much more comprehensive picture of the projects on which we work, and as a result, provide more accurate, efficient and cost-effective services to our clients. As surveyors slowly wake up to the benefits of technology, others in the property world are doing so as well. A 2014 survey of 1,000 UK construction

as a cost, with no guarantee that they might lead to any direct benefit, there is all the more incentive for the contractor to work with the client to test innovative solutions to business challenges.

An approach worth considering? The trial of innovation in rail franchising will indicate whether this approach works or barriers remain in the way of innovation. We will have to wait until 2020 for a full review. You may think: “Nice idea, but let’s get basic service provision up to a consistent level before we look at innovation. Let’s not run before we can walk!” But what if this is as good as walking gets? What if we need to invent some roller skates? C

Thomas Mann is Senior Consultant at Faithful+Gould thomas.mann@fgould.com

professionals by the National Building Specification, revealed that BIM adoption had increased from 13% in 2011 to 54% in 2014 (http://bit.ly/28YZy3J). This significant leap came after a May 2011 warning by the UK government’s Chief Construction Advisor Paul Morrell that the industry must adopt BIM or be “Betamaxed out”. Technology’s capacity to overcome the demands faced in modern surveying is already proving incredibly efficient, cutting the time and costs of projects. Embracing technology will completely transform the sector, allowing us to lead the wider property industry and better serve the current and future needs of our clients. While this means the role of the traditional surveyor will evolve, the future surveyor will combine centuries of human expertise with impressive technological capabilities – so we should welcome the era of the “Robosurveyor” C. Chris Sullivan is Partner at Malcolm Hollis christopher.sullivan@malcolmhollis.com

www.rics.org/futures

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MEES: know the risks

Andy Miles and Chris Bennett highlight what valuers and lenders need to know about the Minimum Energy Efficiency Standards

ollowing the Energy Act 2011, the Minimum Energy Efficiency Standards (MEES) were established last year to make it unlawful to let either residential or business premises that do not achieve a minimum standard, currently set at an energy performance certificate (EPC) rating of E. There will be a soft start to the implementation of the MEES legislation for all new leases after April 2018, and a “hard start” to the implementation for all properties by April 2023. The market has been aware of these proposals for the last five years, and it is clear that the majority of commercial funds and real-estate investment trusts have for some time been assessing their existing portfolios and the assets they have acquired. They now have plans in place for tackling the letting issues that will potentially arise in two years’ time. But what about lenders who secure debt on commercial property assets? How do they view the implications that this legislation may have on assets that they either have already under charge or propose to take on? Are lenders fully considering the impact that this legislation has on both the value of the asset and future cash flows that service the debt? Furthermore, how are commercial property valuers advising their lending clients with regard to risk?

Risk The single most important aspect for a lender when assessing credit risk is to consider the likelihood of repayment, both in terms of principal and interest, and the implications of the MEES are critical in this regard. Although there is an awareness of the MEES and in particular minimum EPC requirements, lending market convention has yet to evolve to cover all aspects of

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the credit implications. For example, there is inconsistency in approach to the assessment of space that becomes unlettable, both for the capital expenditure and the valuation implications of improving such space to at least an E rating. In the majority of instances, lenders increasingly require the borrower to have valid EPCs available or prepared as part of the due diligence process, to demonstrate that the minimum rating is currently being achieved. This can be a condition of funding, and a lender can also require the implementation of asset management objectives and a programme of capital expenditure – irrecoverable through service charge or sinking fund obligations – to maintain or improve the EPC ratings. However, lenders are in general still taking a light-touch approach to the MEES, in terms of both being consistent in credit policies and understanding the underlying EPCs themselves. For example, market practice would not tend to distinguish between individual EPCs in terms of their remaining duration or requirement for re-assessment and the duration of the loan to which they relate. It should be noted that there is the real likelihood that “older” EPCs, which currently have a shelf life of 10 years, could easily mask risk. Where the EPC was prepared many years earlier, there is the potential that the asset could have a significantly poorer rating if it were re-assessed today, given the ageing of buildings and tightening of regulation. Some lenders will consider an EPC to be out of date if it is more than two years old and may require a fresh certificate be prepared by an approved assessor. It must be remembered, however, that the monitoring of EPC assessors remains unregulated.

Void periods Returning to the original observation about credit risk and repayment, there is a significant chance that lenders are wrongly assessing void periods, in respect of vacant space that does not hold the relevant EPC rating, when they consider new leasing beyond April 2018. The impacts of this are twofold. First, the introduction of voids – and possibly other irrecoverable costs such as empty rates or service charge shortfalls – will reduce the level of rental income with which to service the debt; second, the underlying security could become less valuable as a result of required capital expenditure that may be irrecoverable. Both factors could adversely affect the ability of the asset to enable repayment of the loan at maturity. In this instance, the guidance of the lender’s valuation advisor is of significant importance in terms Image © Shutterstock

C O MME RCIAL VA LUATIO N

Lenders should increasingly take a proactive approach to understanding the framework for MEES of understanding the implications of non-compliance with the MEES regulations. Both issues are material because breaches in debt service levels affect loan ratings for regulated lenders, lessening the economic performance of loans in terms of the increased amounts of regulatory capital employed. Delays in repayment of the loan at maturity are also important for the deregulated sector, typically represented by close-ended debt funds with fixed investment and divestment periods. The materiality of these issues is compounded by the fact that properties with non-compliant EPCs would most typically be found in the secondary or tertiary sectors of the property market, with possible negative implications for the long-term availability of credit to these markets.

Valuers’ role From a valuer’s perspective, part of preparing a valuation report for “secured lending purposes” is to ensure that the lender is advised of the risks to the potential future value of the asset and the cash flow it may generate. EPCs are a potential source of risk, so certificates must be obtained where available and considered carefully before the valuation figure is prepared. At this juncture it is critical that the valuer does not stray outside their area of competence, proffer advice or make assumptions that then prejudice their own professional indemnity insurance. The valuer may identify

where risk exists, but must recognise their limitations and only incorporate likely capital expenditure charges, having obtained them from a reliable source and discussed them with the client; the report must refer to the source of figures. So what should the valuer be seeking? If the property asset is being traded, then the valuer must request the EPC or EPCs; failing that, they should consult the EPC Registers online (www.epcregister.com). It is possible that, if the property is not being traded – for instance, because it is being refinanced – or existing lettings pre-date the 2008 legislation, certificates may not be available, although these situations are becoming rarer. The valuer must ensure that they have sight of the “recommendation” section of the certificate, because this often becomes separated from the rating page. That section will at least give directives as to what can be done in the short, medium or longer term to improve the rating of the asset. Where a rating is edging towards the danger zone or is already in the F or G bands, the valuer should advise that the steps recommended to improve it be properly costed by a building surveyor or quantity surveyor, as it is very probable that these expenses will fall to the landlord – the borrower – to meet at lease expiry. If a property is being acquired on the open market, it is very likely that the purchaser has already factored this risk into the price, although this should not be taken for granted. It is a situation that needs particular consideration with a refinancing, as a borrower may not have reflected the cost in their assessment of market value. In these instances the valuer will need to focus on ensuring that any risk is taken into account and the lender advised accordingly. If preparing a vacant possession assessment, the valuer should certainly be looking to factor these costs in to it to ensure the hypothetical building is fully marketable.

Vigilant lending To mitigate risks, lenders should increasingly take a proactive approach to understanding the MEES framework and its implications for their own loan portfolios, whether these comprise new or historical loans. Steps that should be implemented include obtaining EPCs in respect of all space subject to the MEES and considering the duration of the EPCs relative to loan length. For non-compliant EPCs, lenders should ensure that the borrower has set aside sufficient capital and should also obtain professional advice as to the feasibility of implementing the programme in terms of both cost and time. All of the above demonstrates that communication between the valuer, the lending client and the borrower is paramount. C

Andy Miles FRICS is Partner at Knight Frank andy.miles@knightfrank.com Chris Bennett MRICS is Senior Manager at DekaBank chris.bennett@deka.de

Related competencies include Leasing/letting, Sustainability, Valuation

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CO M M E R C I A L FU T U R ES

Data mania Sonny Masero explains how dynamic data could change the way in which buildings are valued and managed

What is this obsession with data? The internet and the success of companies such as Google and Facebook have caused data to capture the popular imagination like never before. How can these corporations with vast, apparently intangible, assets be some of the largest businesses in the world? Their extraordinary value is not based on physical assets, yet these businesses are transforming and disrupting most of the established industries, and the property sector is next in line. Data will affect yields and property valuations at an increasingly accelerating rate. ‘Proptech’ and ‘CREtech’ are terms that have already been coined for the innovative use of technology in the property and corporate real-estate sectors. The hype has not yet reached fever pitch, but you can see that the excitement about data-driven apps is on the rise. There are obvious examples of proptech software hosted in the cloud, enabling, for instance, online estate agents and crowd-funding sites for property investment, computer-aided facilities management, building energy 30 SEP T EMBER/OC T OBER 2 016

management systems, intelligent building management systems, computer-aided design and building information modelling – or, for the acronym-happy, CAFM, BEMS, IBMS, CAD and BIM – as well as property asset management platforms. Some of this software has been around for some time and migrated online, while other applications have been devised specifically for the mobile internet era. Their success depends on three key abilities: bb to provide commercial value to customers bb to acquire data and use it to provide valuable intelligence bb to enable both of the above at scale.

Market needs Property assets do not change at the same speed at which they create data, so the sector and technology are out of sync. The professionals who manage assets on a day-to-day basis are not always online, and tend to concentrate more on lease agreements or building maintenance than on apps for buildings. Properties do generate data, and in large quantities, but this shouldn’t mean that the market becomes data-driven. The use of technology should instead be need-driven and, in some cases, event-driven. A real-estate data strategy must be driven by the requirements of the property, the portfolio and the market, and needs will obviously

differ between asset classes and grades. While traditional property valuation principles will persist, commercial properties will be able to deliver greater value with the use of smart data for differentiation and operational optimisation. For corporate real estate, data will be used to get more from a company’s most important assets, namely their people. How will this change the role of the property manager?

Dynamic information Data is already being used to make buildings more efficient and easier to maintain, which can reduce operating costs and increase net operating income. It is also being used to manage buildings so that they are more comfortable, reducing complaints from employees and tenants and thus improving relationships and productivity. In addition, data is used to prioritise investment, increase yields in portfolios and maximise the use of capacity in estates. Technology is creating an increasingly rich picture of how properties perform in real time and this will, in due course, inform the design and refurbishment of buildings as well as more

Image © Shutterstock

dynamic lease or service charge arrangements. Internet and mobile technology has changed the way that properties operate as offices, retail spaces and specialist uses such as data centres. Property portfolios and corporate real estate have altered as a result, particularly in the last decade, while performance data has also become more visible through portfolio benchmarking and disclosure requirements, and there is no reason to expect that this change will stop – or will indeed do anything other than accelerate. To satisfy clients, tenants and occupiers who will have more asset data available to them, property managers will need to be data-enabled to maximise returns. There will be room for negotiation over data about the market – such as comparable freeholds and leases – geospatial information, the condition of

C O MME RCIAL FU TUR ES

property’s physical assets and how the building is managed, including operational costs, as well as the satisfaction of building users. This is not a change in the type of data – the change is in the volume and velocity of data. It is now possible to monitor instantaneously how comfortable and productive people are in an office or see in real time where shoppers tread in a store. The latest price information is available at your fingertips – and at those of the occupier.

Reviewing strategy Property owners and asset managers should both review their data strategy on the following four levels to ensure that software can be synchronised with established asset management and business processes: 1. customer/client/tenant relationship management 2. portfolio/estate management 3. property management 4. facility/building management. The business need for data insight on each level is likely to be framed by a defined frequency, for instance, with a live feed, daily or weekly digests, monthly or quarterly reviews, or annual reporting. Complexity in a portfolio or a

Data is already being used to make buildings more efficient and easier to maintain property will also be a factor, determined by the number of users, properties, uses, tenants, data sources and data volume. This frequency and complexity is key to deciding whether software is required or a spreadsheet will suffice. An evaluation of the value of a tool should be performed in the context of an event – the transaction or service delivery – taking place at each level.

Choosing tools Sorting through the available data solutions is not a straightforward process. In hindsight, it is easy to identify winners such as Google, LinkedIn and Facebook, but not so in advance. The best option is to consider the following principles when selecting tools. bb Time to value: the process of data acquisition must be inexpensive and should deliver value quickly. bb Open: tools should use open standards and be both web-based and interoperable to avoid getting locked into a single provider and enable combination of data sets. bb ‘Easy button’: users will be time-poor, so data analysis should provide insight at a single click rather than assuming sophisticated knowledge of systems. bb Collaborative: no single person is responsible for a

commercial property, so the tool should enable sharing of data insights and action. bb Push: real-estate professionals may be familiar with apps in their personal life but it is not the norm in the sector to use them, so tools will need to provide succinct information in a useful and timely way. In the interest of disclosure, my company Demand Logic tries to adhere to these principles to help ensure long-term success. As a software company, we provide the equivalent of a Fitbit for buildings, which monitors live data and provides insight for facilities managers. We work with many large property companies, investors and their managing agents and contractors to improve the way in which buildings are managed and maintained. Customers such as RBS and Land Securities appreciate the value in which live data about comfort and productivity, the condition of heating, ventilation and air conditioning (HVAC) and the energy performance of individual pieces of equipment can fundamentally alter asset management. They understand it can improve the conditions for occupiers while also saving on energy and maintenance. It can also improve the commissioning process and reduce defects in the warranty period. This enables our customers to demonstrate to existing and potential occupiers that their properties are built, acquired and managed well. These are all immediate steps that can be taken to improve conditions for

occupiers and reduce operating expenses. In the future, this data could be used in a variety of other ways. In property acquisitions, due diligence can be improved with live data about the condition of the building services and a better understanding of the potential for operational energy savings. For instance, does a long-term, scheduled planned preventive maintenance (PPM) contract deliver the best building performance? Live HVAC data can inform a hybrid maintenance model that combines essential PPM with demand-led maintenance, meaning that engineers can deliver maintenance on demand. Data will change the property sector. Those property managers who understand this impact early and equip themselves with the right tools will secure value early as well; they will be better prepared for the next phase of technology innovation as well. Late adopters will see less value as these practices become the norm, providing less differentiation, and they will be less able to adapt as we see accelerated change. C

Sonny Masero is Chairman of Demand Logic sonny.masero@demandlogic. co.uk

www.rics.org/futures

Related competencies include Data management, Property management, Property records/information systems

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COMMERCIAL D I L AP I DAT I O N S

Mark Hampson explains how vital the role of the specialist dilapidations surveyor now is

In demand

t is a common misconception that dilapidations work levels increase during a recession and lag in the boom time. In fact, the situation is quite the opposite. While the buoyancy or otherwise of the property market affects both the number and the nature of dilapidations instructions in different ways, there are many other factors that create opportunities for building surveyors carrying out such work. Many of the long leases agreed in the 1990s and 2000s are now coming to an end. Because of these lengthy leases, the buildings to which they relate may now require substantial upgrading to attract new tenants or purchasers. Service installations, in particular, may not fulfil modern expectations, and the building itself may fall short of the incoming minimum energy efficiency rating. Determining who is to pay for these big-ticket items is where the building surveyor with specialist dilapidations experience comes in. Over the past few years the importance of dilapidations has received increasing recognition from property stakeholders, not just at the end of leases but right through the property lifecycle, particularly in acquisitions, rent reviews and asset management.

Acquisitions A competitive market means that those who purchase property with residual lease terms now want to price in accurate dilapidations recovery figures during the acquisition process. Take, for example, the buyer of a 100,000 sq. ft office with a residual lease term: the difference between a recovery rate of £10/sq. ft and £20/sq. ft will amount to £1m for the whole building. The numbers really stack up, so landlords need to know what a tenant may be liable for and factor that in to their bidding price or refurbishment appraisal options. But how is an accurate recovery rate formulated? The answer, again, lies with instructing a specialist dilapidations 32 SEP T EMBER/OC T OBER 2 016

surveyor who has a thorough grasp of all of the relevant issues. Factors such as knowing what dilapidations items and costs will survive in the event of a refurbishment are critical, and require a comprehensive understanding of the lease and dilapidations law.

Rent reviews Generally, rent reviews are carried out on the assumption that, at the review date, the tenant has complied with their covenants and that any of their improvements will be disregarded. This can cause difficulties. Say the tenant has replaced a suspended ceiling system. They may argue this is an improvement and should therefore be disregarded at rent review. The landlord, on the other hand, may hold the view that the tenant was simply complying with their covenant to repair. Without clear evidence of the damage to the old system, which would demonstrate whether or not the covenant to repair had been triggered, it will be difficult for the valuer to make an assessment. Had a record been taken of the physical condition of the original ceiling at the time of lease commencement in an annexed schedule of condition – perhaps in conjunction with covenants worded to limit liability – such arguments could be properly assessed by the dilapidations surveyor, so the subsequent rent review would be a true reflection of the condition at that time.

Asset management As capital value growth slows and property yields are squeezed, landlords and their advisors are exploring a range of asset management options to create value. Cost recovery is high on the list, and dilapidations considerations are more and more important to decision-making. What dilapidations generally boil down to is determining what liability a tenant has for outstanding repairs. This is often far from straightforward as there are many issues to grapple with: debates around repair or replacement, whether the landlord will do the work or not or

even opt for more extensive works or improvements, to name but a few.

Repair versus replacement Unsurprisingly, a plethora of court cases have explored the issue of repair versus replacement. Invariably, tenants will prefer the cheaper, patching-up repair option, while for landlords replacement will be more appealing. But precisely when does patching-up become an unacceptable method of repair, leaving wholesale replacement, at the tenant’s expense, the only viable option? Sometimes, the only practical and economic way of dealing with disrepair is replacement, as for instance where the claimant can produce credible evidence that repairs are not reasonable or possible. Incidentally, just because a building element has exceeded its indicative life-expectancy does not automatically validate a claim for its replacement, unless replacement would be both cheaper and lease-compliant. Take an ageing air-conditioning fan coil unit, for example. Its motorised controls or fan decks may not be working, so replacement may be cheaper

C O MME RCIAL DI LA P I DATIO NS

compared with continued, piecemeal repair, given the increasing difficulty of sourcing salvaged components, and the associated labour costs. There may also be external influences to consider such as bye-laws or the Building Regulations, which may dictate that a higher or more up-to-date standard is required. The ever-tightening regulations governing the use of CFCs and other gases in air-conditioning systems are a good example of this. The precise wording of the lease is also key. Where the covenant to repair extends to keeping the property in good condition (as in Credit Suisse v Beegas Nominees Ltd [1994] EGLR 76), this can foster the expectation of a higher standard of repair than clauses without the stipulation. While the argument is surprisingly little used in negotiations, it could be employed more widely in the current climate.

Landlord claims Landlords sometimes have to go beyond the scope of the tenant’s remedial works and carry out enhancements and improvements to present the property to the market in a desirable condition. Image © Alamy

But what impact does this have on the dilapidations claim against the former tenant? Will it negate their ability to recover some of their costs? In Sunlife Europe Ltd v Tiger Aspect Holdings Ltd [2013] EWHC 463 TCC, it was found that, where a tenant leaves a building in disrepair and the landlord decides to carry out improvements rather than simply repair it, the latter can still recover the original cost of repairs. But this can only be done if a landlord can prove that, had the premises been left in reasonable repair, they would not have replaced the disputed elements. Putting Sunlife to one side, there are numerous cases where it has been found that the tenant only has to pay for dilapidations if the landlord has carried out – or has demonstrated their intention to carry out – the necessary repairs. However, in @sipp Pension Trustees v Insight Travel Services Limited [2015] CSIH 91, the Inner House of the Court of Session – the Scottish equivalent of the Court of Appeal – upheld a lease provision allowing the landlord to recover the cost of dilapidations without proving that it would actually carry out the work.

The court found that a clause in the lease, which stated that at the lease’s end the tenant would pay the landlord for the cost of putting the premises into a good and substantial state of repair, was in fact a payment provision and not a claim for damages for breach of contract; therefore, the issue of whether or not the landlord intended to carry out the work was irrelevant. Accordingly, the landlord was entitled to payment as the tenant had failed to carry out the required repairs. This case reverses the trend that has emerged in the courts over recent years in dilapidations cases and will, no doubt, be welcomed by commercial landlords. Dilapidations are an issue not just at lease-end but practically throughout a building’s lifecycle, whether this concerns pursuing or defending interim dilapidations, service charge disputes, property acquisitions, rent reviews or broader asset management. Specialist building surveyors appreciate the technical assessment of a building’s physical condition and the remedial works required to put defects right, and are ideally placed to deal with the complexities of dilapidations law. With large sums often at stake, the case for instructing a specialist is clear cut. C

Mark Hampson is Head of Dilapidations at Malcolm Hollis mark.hampson@malcolmhollis.com

RICS Dilapidations Forum Conference will take place on 22 September in London. Book early to avoid disappointment www.rics.org/dfc

Related competencies include Legal/regulatory compliance

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R E S I D E N TI A L P R O FE S S I O N AL I N D EM NI T Y

You get what you pay for Emma Vigus explains why lower professional indemnity insurance premiums could have unforeseen consequences

he professional indemnity insurance (PII) market is a friendlier place for valuers than it was two years ago. Trends in PII claims are largely driven by the economic cycle: allegations of negligence rise during a downturn and fall as conditions improve. The past year has been no exception, seeing a significant fall in new PII notifications across all professions. A review of recent notifications across the surveying sector shows a return to a level of claims similar to those experienced before the economic downturn in 2008. Typically, low-value claims arising from property management, building surveys and estate agencies occur fairly frequently and are often being settled under the excess. Higher-value matters relating to services such as rent reviews, Law of Property Act receivership and development valuations occur much less frequently, but are now far more likely to be backed by a robust case than the so-called ‘confetti-letter’ accusations of 2009–2012 relating to valuations; one firm received more than 100 such letters in one day. But despite the relatively benign claims environment, there are, as always, some key events of which firms should be aware.

Cyber liability Most businesses increasingly rely on IT and data. If IT networks are interrupted or data is mislaid, stolen or rendered inaccessible, your business and clients may suffer negative impacts ranging from financial loss to reputational damage. You may think you have resilient systems in place in your organisation, but your business is increasingly likely 36 SEP T EMBER/OC T OBER 2016

to be affected by some form of breach, whether as a result of malicious intent or other causes. Should the worst happen, you will need immediate access to specialist expertise to minimise damage and re-establish operations as quickly as possible. Those resources will often not be available in house and can be very expensive. This is one of the main reasons stand-alone cyber liability cover is so critical: it will provide protection for some financial losses but, more importantly, it gives access to mitigation services designed to reduce the impact of a data breach significantly. These services are unlikely to be available under a PII policy.

Money laundering and fraud Anti-corruption charity Transparency International estimates that over £180m of UK property transactions have faced criminal investigation since 2004 as suspected proceeds of corruption (www.transparency.org.uk), while the National Association of Estate Agents believes that hundreds of millions of pounds are laundered through the UK every year. Encouragingly, mortgage fraud fell in the first quarter of 2016, but there are suggestions that the

Use brokers with a long-standing expertise in arranging PII for the surveying profession

Ensure you have resilient security systems in place in your organisation

procedures used by agents, surveyors and solicitors are not sufficiently rigorous to safeguard against either fraud or money laundering.

Recruitment Recruiting and retaining good-quality staff is regularly cited as a challenge for professional organisations. The surveying profession is no exception, with some sectors experiencing a significant decline in new recruits. This affects risk profile, as poor-quality or badly managed staff are more likely to be the subject of a negligence allegation.

Increasing regulation Each new regulation represents another rule with which a company can fail to comply and potentially, therefore, be found negligent. Regulation can increase the cost of running a business, heighten pressure on employees and detract from customer service, all of which can enhance risk.

Managing PII A badly managed PII buying process will affect a firm’s risk profile. It might, for example, result in the erroneous purchase of a non-RICS-compliant policy or a failure to comply with the terms and conditions of the policy wording. Effective and informed management of the PII buying process is more likely to mean that your policy performs effectively in the event of a claim.

R ESIDE NTIAL P ROFES S I ONA L I NDEMNITY

to notify insurers of a matter that could lead to a claim could be ruinous. Insurers accept that firms have claims and notifications but they will want to see that you have learned from mistakes, so be prepared to explain the steps you have taken to prevent these recurring.

Manage the relationship with your broker

Two-way information flow Stay in touch with your insurance broker so that you remain informed about any foreseeable changes in insurance rate and demand. Your broker’s role does not begin and end at renewal. Use their expertise throughout the year to get, for example, guidance on the insurance implications of launching a new service.

Risk research Remain informed about risk: speak to your colleagues, your broker, your peer group and your clients. Staying informed should help you respond to changes in risk, allowing you to adapt processes or apply caution when taking on new work.

It’s all in the preparation Start the PII renewal process at least six weeks ahead of the due date. The process should start even sooner if your business operates in high-risk areas, or has a long list of notifications or claims. Allow plenty of time to finalise the proposal form, which should always be completed by a principal of the business and reviewed and approved by all equivalent senior members of the organisation before submission.

A responsible person Ensure that the person responsible for buying the policy comprehends the business, understands PII and appreciates how to manage the buying process. Their role will become even Image © iStock

more critical after the Insurance Act 2015 takes effect.

The Insurance Act 2015 The act represents the greatest change to insurance contract law in the UK for more than a century. It mainly affects commercial insurance and will apply to contracts issued, renewed or amended after 12 August 2016 where they are governed by UK law. Ensure you are aware of the changes the act introduces, particularly those relating to disclosure of material information.

Complete the proposal form This can be challenging, but the disclosure of accurate information is vital to ensuring you comply with the requirements of the act. The form is a representation of your business, so it should be completed neatly, accurately and legibly. Poorly completed forms are unlikely to result in a favourable response from insurers. Once the form has been submitted, you should be prepared to respond promptly and accurately to additional questions from insurers.

Do not deny any claims made All claims, notifications and circumstances must be reported in detail to insurers ahead of renewal. Your own claims report should be consistent with that provided by your insurer. Presenting a long list of claims and notifications may not make your PII cheaper, but failing

Use brokers with a long-standing expertise in arranging PII for the surveying profession. Manage the relationship with your broker and insurers sensibly, as strong relationships may help secure better results at renewal and during claims negotiations. We would counsel against inviting several brokers to quote year after year because this may lead to insurers and brokers alike taking a jaundiced view of your firm. Securing a competitive quote for PII is clearly important, but you must understand what you are buying – that is, what your policy does and does not cover – and you should be comfortable with the expertise and service levels on offer from both your insurer and broker. Very few people can accurately predict the economic cycle or its impact on the level of claims, but all firms can take steps to ensure that both their risk management and insurance policies are as robust as possible. Emerging risks are often difficult to foresee and assess in terms of their timing and impact. Better identification of such risks – and opportunities – demands that we counter the trend for focusing on the minutiae and broaden our field of vision. We must consider what lies over the horizon, and where possible accommodate that in the development of risk-management policies rather than focusing exclusively on ticking the boxes in front of us. R

Emma Vigus is Director of Howden Professional Indemnity emma.vigus@howdengroup.com

Related competencies include Inspection, Insurance, Property records and information systems

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R E S I D E N TI A L B U I L D I N G PAT HO LO GY

The golden rule of surveying Continuing his series on the connections between building design, failure and occupants’ lifestyle, Michael Parrett considers how use and occupation contribute to damp problems

38 SEP T EMBER/OC T OBER 2016

Figure 1 Damp problems by tenure (Source: English Housing Survey 2014 to 2015; http://bit.ly/1U9OFde) Owneroccupied

Private rented

Local authority

Housing association

Percentage

n considering the use and occupation of a dwelling, we should look at how humans function in a space that architects and builders have provided for them. How does this result in damp? A fundamental cause is underheating, especially in social housing or rented properties. This may be because heating is expensive but provides little benefit, especially in thermally inefficient buildings; because the occupier is in fuel poverty, that is, spending more than 10% of their disposable income on heating their home; or because they spend their money elsewhere. The Local Government Association’s 2013 report Tackling fuel poverty through local leadership (http://bit.ly/29aaziH) stated that there were 3.5 million households living in fuel poverty in 2010, compared to one million in 2004. Reports of condensation and mould are higher in the private rented sector than local authority or housing association properties, although when combined these latter groups are where most of all types of damp problem occur (see Figure 1). We have often found properties where internal temperatures struggle to reach 11–12°C in winter, and even cases where tenants never used their heating. However, internal temperatures below 15°C can seriously damage the health of pre-school children, the sick and the elderly. The World Health Organization recommends that an ideal internal temperature during winter in the northern hemisphere is 18–24°C. Overcrowding is another issue, especially in social housing, as the more people there are living in a property, the more moisture they produce through their daily activities. Conversely, such properties also experience underoccupation, for example, where an elderly person is still living in a family home that is now largely

Rising damp

Penetrating damp

empty. They often do not heat the entire property so many rooms remain cold throughout the year. Ventilation is another major factor: it is common for through-wall air vents in old properties to be covered over to reduce draughts, while trickle vents in double-glazed windows are often covered by curtains or roller blinds, making them ineffective. People also tend not to open their windows, especially when it is cold or because of security considerations. These all demonstrate that occupiers often do not understand ventilation and condensation risks. Other aspects of occupiers’ lifestyles that produce excess internal moisture include drying clothing over radiators, removing internal kitchen doors, historic use of liquid-based fuels such

Condensation or mould

Any damp problems

as Calor gas, running unvented tumble dryers, and cooking, washing and bathing. When combined, these cause increased moisture as a result of use and occupation, poor heating and reduced ventilation, creating an environment ripe for condensation.

What’s the problem? Moisture moves from a centre of high concentration to one of low concentration. Condensation, leading to mould growth, happens when the moisture content of the air remains at or above 70% at any given internal temperature. Table 1 demonstrates that the warmer the air, the more moisture it can hold and the higher the vapour pressure, and vice versa. When the temperature is higher, moisture moves away from its source,

R ESIDE NTIAL BUI LDI NG PAT HO LO G Y

Table 1 The relationship between air temperature and water vapour (created by Michael Parrett Associates, based on psychrometric chart calculations taken from BS 5250: 2002) Air temperature (°C)

Water vapour (g/kg air)

Vapour pressure (mb)

Table 2 Range of typical moisture emission rates in a four-person household (Source: BRE Digest 297) Source

Moisture emission (litres/day)

Four people asleep for eight hours

1–2

Two people active for 16 hours

1.5–3

Cooking

2–4

Bathing, dishwashing etc.

0.5–1

Normal daily total

5–10

Additional sources: Washing clothes

0.5–1

Drying clothes (e.g. in unvented tumble dryers)

3–7.5

Paraffin heater during evening

1–2

Maximum daily total

10–20

To understand damp and mould, we have to go through a deliberate process of eliminating what is not causing it until we are left with what is for instance the kitchen and bathroom, further into the property. As the air cools, for example in a bedroom, it can no longer retain the same amount of moisture. Water vapour-laden air then forms a liquid condensate on any surface where the temperature is below the dew point. Table 2 shows that in every 24 hours, a typical four-person family produces a lot of moisture through normal daily activities. What happens to all this? Can it escape or be expelled from the building? Table 3 shows that a dry occupancy produces around a third to a half of the moisture of a wet occupancy.

Linking condensation, damp and mould

Table 3 Dry, moist and wet occupancy (Source: BS 5250: 2002) Daily moisture generation rates Number of persons in household

Dry occupancy1 (kg)

Moist occupancy2 (kg)

Wet occupancy3 (kg)

3.5

1 Dry occupancy: where there is proper use of ventilation, this includes buildings unoccupied during the day; results in an internal pressure of up to 3mb in excess of the internal vapour pressure. 2 Moist occupancy: where internal humidities are above normal; likely to have poor ventilation, possibly a family with children, and water vapour excess is 3–6mb. 3 Wet occupancy: ventilation is hardly ever used, high moisture generation, probably a family with young children; water vapour pressure excess is >6mb.

When the moisture content of internal air remains at or above 70% relative humidity, mould will start to grow on cooler surfaces such as walls and ceilings. Any large items of furniture in an internal corner, between two external walls for example, will only trap water vapour-laden air and increase the condensate forming due to a lack of airflow. Humidistat-controlled extractor fans in kitchens and bathrooms are usually sensor-driven; typically, when moisture in the air reaches 65%, the fan will switch on to ensure that the humidity is kept below 70%. But if the internal temperature is too cold, the moisture may not be in a vaporous state long enough for the extractor fan to be effective. If a property is adequately ventilated and heating levels are good – which may require good insulation – then mitigating moisture that results from use and occupation should be possible.

Misdiagnosing issues Damp bedevils many surveyors who, when visiting a property and finding mould SE P T E MBE R /OC T OBE R 2 0 1 6 39

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Case study At an estate in south London, most dwellings in each of the 12-storey tower blocks that were built in the 1960s had evidence of mould forming on the internal surfaces of external bedroom walls. The landlord was considering internal thermal drylining to these walls, which would have meant considerable expense. In a study of six individual apartments, the two bedrooms in each showed evidence of mould on the internal surfaces of external walls, which were of a conventional cavity construction. Level four pathological examination and testing in each apartment found no evidence of penetrating dampness through the walls, however. Hygrometer and temperature probes were installed in the bedrooms, hall, kitchen and bathroom of each dwelling in the investigation. Living rooms were not monitored, though, as none demonstrated any evidence of mould or dampness. After 10 days of monitoring, the results indicated water vapour-laden air emanating from the kitchens and bathrooms as humidity levels peaked in excess of 70% relative humidity, the point at which mould growth will start occurring. Similar levels of humidity were detected in both bedrooms and through the hall. The cause of this extra moisture was found to lie in the tenants’ use and occupation, not in issues with the building construction itself. Problems

on a wall, often make the automatic assumption that it is caused by the tenant’s lifestyle – certainly in the private rented or social housing sectors. This is a huge mistake. The golden rule of surveying is to assume nothing. At this point, we still do not know whether the cause of the mould is the tenant, the property or a combination of both. To understand damp and mould, we have to go through a deliberate process of eliminating what is not causing it until we are left with what is. This is driven by knowledge and measurement. The first question is: if the residents were not living in that property – and so there was no cooking, washing or bathing – would there still be mould? Is it the result of use and occupation, or is it 40 SEP T EMBER/OC T OBER 2 016

included defective extractor fans in kitchens and bathrooms, underheating, overcrowding and the removal of kitchen doors. In some cases, there were multiple causes of damp in individual apartments. In one dwelling, the data showed that moisture levels were greater than 90% relative humidity in the hall and bedrooms but much lower in the kitchen and bathroom. After questioning the occupier and using the data collected, we identified the exact times and days when the moisture levels were at their highest. It turned out that the occupier had been pulling her tumble dryer into the hall and opening the front door of the property slightly, hoping that the moisture exhausted by the machine would be vented to the outside, given that its hose was missing. We found this was clearly not happening. Instead, very high levels of moist air were migrating into the cooler bedrooms and condensing on the external walls, whose surface temperatures were below the dew point for long periods. Without measurement and monitoring, it would have been very difficult, if not impossible, to have identified these problems. The dwellings did not require thermal drylining, as this would merely have dealt with the symptoms of dampness and mould and not their cause or source, which was related to tenants’ use and occupation.

wholly or partly due to the design of the building or any defects? I am often asked this question when acting as an expert witness in court cases. We have to take an holistic approach, which will often involve a level four survey – for more information, refer to Diagnosing damp (http://bit.ly/29yOWEV) and Michael Parrett’s guide to building pathology film series. These surveys entail invasive procedures, such as calcium carbide testing, using an endoscope to look inside cavity walls, and hygrometers to see whether a solid floor is exuding damp. We are trying to discover whether the building fabric has failed or is experiencing endemic moisture that has nothing to do with the occupiers. Without measurement and Images © Michael Parrett

monitoring, a surveyor cannot truly define the source and cause of a damp problem. This holistic approach means the surveyor has to understand design (see Property Journal May/June 2016, p.36) and defect issues (Property Journal July/August 2016, p.42), and how these are both related to use and occupation (Property Journal March/April 2016, p.38). When ruling out causes, we should gather important information as we first inspect a property. For example, if visiting in January, when condensation may be related to low outside temperatures, use the opportunity to question residents about their use of heating. Just because the system is on when we visit does not mean that it is always on. How does the tenant use it on a typical winter’s day? Take electricity and gas meter readings and use these as a baseline for any subsequent visits. Understanding energy consumption over time can be very revealing about heating use and can be modelled with energy providers – they can tell you how much energy four occupants in a typical two-bedroom ground-floor flat should be using to keep their home warm, for example. Take some initial environmental measurements, such as internal and external air temperatures, and calculate the amount of moisture in the internal air, expressed as relative humidity. By correlating temperature, relative humidity and vapour pressure, the dew point

R ESIDE NTIAL BUI LDI NG PAT HO LO G Y

Severe Aspergillus and Penicillin mould colonies forming on the internal surface of an external wall in an underheated wet occupancy with three adults and two children (see Table 3).The most toxic of moulds in aspergillus fumigatus is part of a ubiquitous, saprophytic fungi, invasive aspergillosis, in the immunocompromised patient population, which causes very serious illness with high mortality rates n

The presence of mould n colonies similar to those shown in the image, left, with the addition of the domestic cup fungus (Peziza domiciliana) indicates that there is more than a single cause of the dampness. In this case, use and occupation of the dwelling coupled with rainwater penetration around the ill-fitting window frames results in both mould and fungal growth to the external solid wall overclad with ‘dot and dab’-applied plasterboard dry lining

Any theory about the cause of damp has to be proved, and this often involves long-term monitoring of the internal air can be calculated. This is critically important because, by measuring internal wall, window and ceiling surface temperatures, we can then determine whether these surfaces are below the dew point. If so, there is a risk of condensation.

Overcoming the issues Education of surveyors and residents alike is crucial to understanding and minimising condensation. For example, some surveyors maintain that moisture caused by plants, fish tanks and pets in properties is an issue, but unless these are at excessive levels then they are rarely identified as making a significant contribution to condensation. Measures that can minimise condensation problems include whole-property ventilation systems – as used in Passivhaus properties – and heat-recovery systems. However, some

simple preventative measures for residents include: bb using a humidistat-controlled extractor fan bb ensuring lids are used on boiling pans bb not drying clothes over radiators bb opening windows regularly bb ensuring tumble dryers are properly vented, especially those with hoses bb keeping internal kitchen and bathroom doors closed during periods of peak moisture production bb regularly wiping damp and wet surfaces, especially around windows, and safely removing mould growth using a domestic biocide.

Identifying use and occupation issues Any theory about the cause of damp has to be proved, and this can only be done with proper training and thorough measurement, which often involves long-term monitoring. Surveyors must acquire the knowledge that various building types dating from different periods are susceptible to inherent defects, which can cause damp. Solving condensation problems is often complicated, but always remember that it is not a cause of damp but a consequence of different factors. It is not just down to the heating and ventilation habits of occupiers – it is very often about design, defects and the materials that have been used in construction.

An incorrect diagnosis is easily made, but can have huge consequences for occupiers and for the choice of remediation or improvement to the property. Forming properly considered opinions and recommending appropriate solutions can only be done by understanding the complex links between these issues. R

Michael Parrett is a building pathologist, chartered building surveyor and founder of Michael Parrett Associates. He is an Eminent Fellow of RICS and the lead author on the Building Pathology Damp section of isurv info@michaelparrett.co.uk www.michaelparrett.co.uk

British Standard 5250: 2002 Code of practice for control of condensation in buildings BRE Digest 297 – Surface condensation and mould growth in traditionally-built dwellings

Related competencies include Building pathology, Design and specification, Housing maintenance, repair and improvements, Inspection

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R E S I D E N TI A L S U RV EY I N G

What the eye can’t see

In the first in a series of articles, Martin Beattie and Graham Ellis explain why out of sight should not mean out of mind hen it comes to drains, one limitation of a standard home survey is that assessment is based on a visual inspection, in accordance with guidance in the RICS Home Survey services professional statements or RICS UK professional guidance Surveys of residential property, 3rd edition. The extent of the survey should therefore be made clear to a potential client at the outset before agreeing terms of engagement.

Drain inspection: RICS Home Survey services Each mandatory professional statement includes a description of service, setting out for the client what the surveyor will do, and contains the following guidance for surveyors in section G6. Survey level one: RICS Condition Report Services are generally hidden in the construction of a property, which means that only the visible parts can be inspected and the surveyor does not conduct specialist tests. The visual inspection cannot assess the efficiency or safety of: bb electrical, gas or other energy sources bb plumbing, heating and drainage installations, or whether they meet current regulations bb the inside condition of any chimney, boiler or other flue; inspection covers to the underground drainage systems are not lifted, neither are the systems tested. Survey level two: RICS HomeBuyer Report As with the RICS Condition Report, the surveyor can only inspect the visible parts of the available services for a HomeBuyer Report and does not carry out specialist tests or assess their safety or compliance with regulations. Drainage chambers are, except in the case of flats, inspected visually from ground level – where it is safe and reasonable for the surveyor to lift covers – but neither the drains nor drainage systems are tested. Survey level three: RICS Building Survey As with the Condition and HomeBuyer Reports, the surveyor only inspects the visible parts of the services. They do not carry out any specialist tests other than through their normal everyday operation. Intermittent faults of services may not be apparent on the day of inspection. As stated in the mandatory professional statement for surveyors (G6 Drainage): “The surveyor opens all reasonably accessible, lightweight inspection chamber covers within the curtilage of the property. The assumed routes of the drain runs and their general condition are reported, based on a visual 42 SEP T EMBER/OC T OBER 2 016

inspection. Where a water supply is available and turned on, the surveyor may also run water through the system as part of the inspection; they must attempt to identify the means of foul and surface water disposal. There have been changes to legislation [http://bit.ly/1rl1Exp] with which the surveyor should be familiar before undertaking the inspection.”

Drain inspection: Surveys of residential property, 3rd edition The guidance in the RICS Home Survey professional statements is mirrored in this document for members who undertake their own format of surveys. Survey level one (e.g. Condition Report) The surveyor will not lift inspection chamber covers. Image © iStock

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If there is no visible sign of anything untoward, how can the surveyor be certain that everything is as it should be below ground level? Survey level two (e.g. HomeBuyer Report) The surveyor will lift accessible inspection chamber covers (where it is safe to do so) and visually inspect the chamber(s). Survey level three (e.g. Building Survey) The surveyor will lift accessible inspection chamber covers where it is safe to do so, and observe the normal operation of the services in everyday use. Their ability to do so will be restricted where properties are empty, drained down and services disconnected. Assuming all services are connected and functioning fully and safely, normal operation usually includes: bb turning on water taps, filling and emptying sinks, baths, bidets and basins, and flushing toilets to observe the performance of visible pipework, when the surveyor considers these appropriate in assessing the system bb lifting accessible inspection chamber covers to, for example, drains and septic tanks, where it is safe to do so, identifying the nature of the connections, and observing water flow where a water supply is available. In all cases, the surveyor will advise the client that further tests and inspections are needed if the owner or occupier does not offer evidence of appropriate installation or maintenance, or the client seeks assurance of their condition, capability and safety. A surveyor will often inspect the drains while looking at the grounds. Again, this is a visual inspection only. RICS Home Surveys requirements for the three survey levels are the same.

Inspecting grounds: RICS Home Surveys services

Inspecting grounds: Surveys of residential property, 3rd edition Survey level one HomeBuyer Report The surveyor will carry out a visual inspection of the grounds during a general walk around, and where necessary, from adjoining public property; the inspection should also include the inside and outside of all permanent outbuildings not attached to the main dwelling, where access is possible. Survey level two The inspection will be similar to that described above, under level one. Survey level three There is a higher level of expectation for an inspection at this level. In addition to that described for level one, surveyors should perform a thorough visual inspection of the grounds, and, where necessary, from adjoining public property. Specific defective features and other matters associated with the grounds can be costly to resolve and may affect the client’s purchasing decision. Consequently, the surveyor should fully account for these during a level-three service and follow the trail of suspected problems to a greater extent than at levels one and two. Examples include assessing retaining walls in danger of collapsing, deeply sunken paths or driveways, dilapidated boundary walls or fences, and considering the legal and insurance implications. Where the site inspection detects evidence of a problem or a perceived risk such as a structural problem to the building or other constructions, a misconnection, evidence of back-up or overspill, detection of vermin infestation or risk of root damage, the surveyor may have good reason to recommend further investigations in the report to the client or stakeholder. This will be within the client’s expectations provided it has been explained at the outset.

A word of caution Even accepting the limitations of an inspection, if there is no visible sign of anything untoward, how can the surveyor be certain that everything is as it should be below ground level? There is a strong case for every survey to include an inspection of the underground drains. R The next article in the series will concentrate on the importance of drain surveys.

Each mandatory professional statement includes a description of service, setting out to client what the surveyor will do. Survey levels one and two: RICS Condition Report and RICS HomeBuyer Report The surveyor inspects the condition of boundary walls, fences, permanent outbuildings and areas in common (shared) use. This means walking round the grounds and any neighbouring public property where access can be obtained. Survey level three: RICS Building Survey The surveyor inspects the outside of the property as in survey levels one or two. However, where there are restrictions to access, these are reported and advice given on any potential underlying risks that may require further investigation. As stated in the three mandatory professional statements in section H (Grounds): “Surveyors should perform a visual inspection only of the grounds by walking around, where necessary, from adjoining public property.” This requirement also includes shared areas for flats.

Graham Ellis MRICS is Associate Director of RICS Residential Professional Group and Martin Beattie is Vice-Chairman of the National Association of Drainage Contractors gellis@rics.org info@nadc.org.uk

Related competencies include Building pathology, Housing maintenance, repair and improvements, Inspection

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Are we forgetting something? Nick Sanderson considers a neglected area of the housing market

Audley Willicombe Park, Tunbridge Wells, Kent

t is well documented that the UK is in the midst of a housing crisis. Not a day goes by when there isn’t a news item about the pressure on an already-creaking national housing system. However, for too long the focus has been on the wrong end of the market. A Housing Learning and Improvement Network report, Viewpoint on Downsizing for older people into Specialist Accommodation (http://bit.ly/292pjKB), shows that 37% of all UK homes are thought to be underoccupied, of which half house those aged 50 to 69. Despite the fact that 58% of those aged over 60 are actively looking to downsize, as stated in the Demos report The Top of the Ladder (http://bit.ly/29c5shq), the housing market continues to be flooded 44 SEP T EMBER/OC T OBER 2016

with initiatives for first-time buyers rather than providing incentives and high-quality housing for older generations. That’s not to say it should be a case of ‘either/or’, but the other factor at play here is the increasingly ageing population. Over-65s are expected to be the fastest-growing age group by far in all regions of England: the Office for National Statistics’ long-term projections show the number of people over the age of 90 passing 500,000 in England next year and reaching one million between 2033 and 2034 (http://bit.ly/294abhQ).

A gap in the market The supply of high-quality retirement housing is not keeping up with demand. The growth potential for the retirement village sector is huge, and enabling older people to move into appropriate housing will free homes for others, creating vital movement in the property market.

In the 1980s, I founded and ran Beaumont Healthcare with Dr Andrew MacDonald. We would talk about the appalling housing options available for people in later life, many of whom were his patients, and in 1986 that led to the development of close care housing that offered independent living to older people in their own homes, adjacent to a Beaumont care home. Despite this step forward, it became increasingly apparent that there remained a significant gap in the market offering this style of living for older generations. The care home model was becoming increasingly redundant, except for the few who had a high level of dependency. Those aged over 55 wanted to live in their own homes while being safe in the knowledge that extra support could be made available easily. In 1991 Beaumont was acquired by AXA PPP, but it was from this model and

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It is now time for the government and the rest of the property sector to help turn the spotlight on the right area an understanding of the growing market need that Audley Retirement Villages was born. The villages offer aspirational and luxurious living for older people, allowing owners to live in their own homes, in control of their independence and the lifestyle that they are used to, with flexible care and support on site as needed.

The current situation It is 15 years since we welcomed the first owners to our first village, Audley Willicombe Park in Tunbridge Wells, Kent. Audley Retirement Homes now has significant backing from major investors around the world, and it is evident that the demand for providing this high-quality housing is only set to grow, providing future opportunities for investors and developers alike. As a result of this growing demand, more units and new villages are being developed and the model expanded to a broader demographic, which includes the launch of Mayfield Villages in April 2016. Mayfield properties are the result of extensive research to determine the potential for contemporary, mainstream retirement accommodation across the whole market. They respond to the needs of those who wish to continue their current lifestyles in modern, attractive and secure environments. Properties include one-bed units and two-bedroom apartments, with starting prices at £200,000. Today, Audley has a portfolio of 12 retirement villages across the country and manages two others, providing more than 1,000 properties across several regions. Over the coming five years, it plans to double this number by developing its current villages and acquiring new sites in prime locations such as London and the Home Counties. In the past few months, new owners have been welcomed to Audley Chalfont Dene in Buckinghamshire and properties are now available at Audley Ellersllie in Great Malvern, Worcestershire,, while construction is due to reach key stages

Binswood Hall, Audley Club at Audley Binswood, Leamington Spa at several other villages this year. A new scheme in Englefield Green, Surrey is expected to open in early 2019. Comprising luxury apartments, penthouses, cottages and houses, each village offers a mixture of one-, two- and three-bedroom properties for those looking to downsize from larger family homes. At the hub of each village is the Audley Club; these buildings are often restored Tudor halls, Georgian mansions or Victorian villas, and include luxury facilities such as a gym, spa, bar and restaurant, which are open to all the owners as well as the local community. This helps to reinforce the sense of community in the villages, integrates them with their surrounding areas and reduces the feelings of isolation that can too often be associated with older age.

The right way forward The All-Party Parliamentary Group on Housing and Care for Older People has called for greater incentives for the eight million people aged over 60 who are reportedly interested in downsizing (http://bit.ly/1SmUCor). Help-to-buy assistance for older buyers, exempting them from stamp duty when moving to a smaller property and encouraging councils to ensure that local plans give priority to their needs are some of the proposed reforms. While these are promising signs, the fact remains that the level of choice of suitable housing for those aged over 65 must be improved. Research by the International Longevity Centre (ILC) UK found that communal living in retirement villages can significantly reduce the risk of social isolation among those who live there, as nearly two-thirds of respondents were classified as not Images © Audley Retirement Villages

feeling at all lonely (http://bit.ly/29h8m1G). Continued investment in preventing loneliness through better options for retirement village properties will improve older people’s quality of life and support the struggling NHS. The ILC research also found that accommodation that enables independent living yet offers flexible care is associated with a lower uptake of inpatient hospital beds. A study by the University of York (http://bit.ly/2967cX8) has highlighted the fact that increased loneliness and social isolation can have a significant impact on people’s physical wellbeing and mental health, including heightening the risk of heart attacks and stroke, and increasing blood pressure. Ultimately, it is essential that people can enjoy retirement on their own terms and that there are appropriate property choices to enable this. The benefits of this model are clear. It is now time for the government and the rest of the property sector to help turn the spotlight on the right area. R

Nick Sanderson is CEO of Audley Retirement Villages nicks@audleyretirement.co.uk

Related competencies include Housing management and policy, Housing strategy and provision, Land use and diversification, Planning

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More than 200,000 homes in the UK have been unoccupied for longer than six months

Pressing the other buttons

Jeremy Blackburn continues his summary of RICS residential policy he housing deficit has resulted in huge rises in property prices. What effect has this had on the rental market? And does new-build offer the only answer?

The private rented sector It is estimated that a fifth of households will be in the UKâ&#x20AC;&#x2122;s private rented sector (PRS) by 2020, but the Build-to-Rent fund is the only supporting initiative, while lack of supply is leading to unaffordable rents. The government and the market must therefore establish a robust framework to attract continuing institutional investment in the sector. RICS recommends: bb the development of a long-term approach to the PRS by ministers, supported by all major political parties bb full engagement by ministers with the outcome of the Communities and Local 46â&#x20AC;&#x192; SEP T EMBER/OC T OBER 2016

Government Committeeâ&#x20AC;&#x2122;s inquiry into the cumulative impact of the Right-to-Buy extension, the rent cap and housing benefit reductions bb government assessment of the feasibility of a portable homeownership discount for tenants. The PRS market has been dominated by individual landlords, which has led to a fragmented system. Removal of buy-to-let mortgage relief creates an opportunity for releasing pension funds to institutional bodies, however. RICS wants institutional investors to build and let new developments; it recommends using the taxation system to encourage contributions from self-invested private pension schemes.

Public and private sector RICS believes both sectors could help increase rental supply. It proposes, jointly with the Local Government Association and the Royal Town Planning Institute, to

explore a specific planning class for the PRS and assess whether this would allow greater development of such property. National government and several local authorities are implementing initiatives to drive up standards in rented property. RICS thinks heavy-handed intervention can deter investment, while local registration schemes are further fragmenting the sector. It recommends that the UK government mandates that all letting agents join a professional body and introduces minimum standards for all residential sales and letting agents. There should be light-touch landlord registration, maintained and enforced centrally, ensuring that properties let across the UK are known to HMRC and the Home Office.

Existing properties More than 200,000 homes have been unoccupied for longer than six months and need renovating before they can be brought back into use. UK government should therefore:

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bb provide funding to encourage owner investment; RICS suggests that in areas of less demand, consideration is given under future City Deals and Growth Deals to wide-scale refit projects, along with a 5% VAT rate for repair and improvements bb ensure that owners of second homes pay full property tax; VAT should be applied to demolition work, encouraging councils to find alternative uses for stock.

Future legislation? Converting commercial property into residential units has made a contribution to housing supply. RICS agrees with government on permitted development rights; however, it argues that these need to offer further exemptions to areas without sufficient commercial premises. The Scottish Government introduced mandatory Home Reports in 2008 for all houses for sale north of the border: under this system, a chartered surveyor informs the buyer of the property’s condition, ensuring that defects are remedied at an early stage. RICS recommends a feasibility study into the implementation of Home Reports in the rest of the UK. The Energy Act 2011 introduced legally binding standards for the PRS, which could improve more than half a million properties. RICS suggests that

the Department for Business, Energy & Industrial Strategy, the property sector and banks together investigate the reasons for low take-up of the Green Deal and develop a replacement programme.

The ageing population Figures for 2014 from the Office for National Statistics suggest there are around 11.4m people aged over 65 in the UK, projected to rise to around 17.2m by 2033, while provision of homes for senior members of society is falling. Addressing this issue in the older owner-occupied, social and affordable housing markets should help release larger, underoccupied properties on to the market. RICS endorsed the All-Party Parliamentary Group on Housing and Care for Older People’s inquiry into The Affordability of Retirement Housing (http://bit.ly/1SmUCor). However, the report found that there was poor communication of housing options for older people, meaning that emerging models were not exploited. There was also an apparent disconnect between financial and housing advisors: those giving information on one topic were not fully aware of all the choices. RICS urges central and local government to work with the property

industry and financial advisors to create innovative housing solutions for older people. Acknowledging the physical difficulty and emotional dimension of moving at an older age, RICS proposes a fund to help with the costs, and suggests that local authorities and industry work together to provide accompanied visits to suitable properties.

The rural impact There is a severe shortage of both new and affordable homes in rural communities. Although more people are renting, a large-scale, institutionalised PRS is not an appropriate solution. Several factors have exacerbated this; for example, high competition for small numbers of properties, lower wages in rural areas constraining affordability, and far fewer housing association and council houses. The fair share of new affordable homes, relative to population, should be no fewer than 7,500 annually, but only 2,886 were built in 2013. RICS suggests that the government encourages landowners to develop rural affordable housing through, for example, tax incentives or nomination rights. Small rural authorities should approach major landed estates about the possibility of releasing land for at least eight affordable houses, based on long leaseholds for sites so the estate can retain an interest, and with an explanation of financial returns and social benefits. RICS further proposes a new national minimum target for provision of rural housing through the Homes and Communities Agency; this should be 13% of its national investment in proportion to settlements with a population of fewer than 3,000. Local planning authorities should require all sites to make an affordable housing contribution, reversing current government policy. RICS supports the expansion of permitted development rights in terms of agricultural buildings, which offers the opportunity for businesses to grow. This should feature in business-led neighbourhood plans in rural areas to ensure future home supply.

Construction

RICS commends the Construction 2025 strategy (http://bit.ly/1gSTfoJ) and urges the government to commit to its implementation. The skills shortage in the industry is now at its highest ever level, while the existing workforce is staying longer, which will create a ‘knowledge cliff’ when people eventually retire. These factors have exacerbated a long-term skills shortage, which many members SE P T E MBE R /OC T OBE R 2 0 1 6 4 7

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Will building more homes in the English countryside threaten the landscape? be achieved through regular secondment of planning officers throughout the UK. RICS supports groups of local planning authorities coordinating their own combined local development plans in considering housing requirements. Now the Rent Smart Wales service is in place, RICS wants reviews to ensure that registered practitioners receive regular training and are aware of best practice.

Northern Ireland

have cited as the biggest risk to their businesses. RICS calls for a construction skills investment charter to encourage companies and colleges that employ and train construction workers. RICS supports the government agenda on apprenticeships across the entire built environment sector, with an emphasis on housing and infrastructure. It suggests that professional bodies remain the main advisors on the schemes to ensure consistency across the industry. Innovative construction methods have a clear future role. Lessons can be learned from the economies achieved in the student sector, where buildings have proved efficient and cost-effective. RICS urges the government to back non-traditional forms of construction with incentives such as tax breaks and better education of lenders in valuing these methods. The government should support the Buildoffsite Property Assurance Scheme (www.bopas.org) to assure lenders that innovatively constructed properties will be sufficiently durable to enable ready sale for at least 60 years.

Scotland The Scottish government’s ambitious Joint Housing Delivery Plan for Scotland 2015–2020 contains 34 actions covering supply, planning and housing options. Estimates of Scotland’s housing gap range from 25,000 to 35,000 a year. Small builders are struggling with a lack of equity and the banks are generally reluctant to lend. As larger builders are bidding for smaller or even individual sites, SMEs risk being squeezed out of their traditional target market of self-build and the reuse of empty homes, of which there are presently 27,000. 48 SEP T EMBER/OC T OBER 2 016

RICS believes that the Scottish government’s housing policy should switch from assisting demand to assisting supply. It calls for government to create more opportunities to invest in new and regenerated housing production. Capital put towards housing should be regarded as an investment that would support building activity and accrue returns directly by increased outputs, and indirectly through tax receipts and wider economic growth opportunities. RICS also wants to see more City Deals (http://bit.ly/1ZusNdb) managed by skilled housing investment experts.

Wales Housebuilding in Wales remains at around 5,500 homes a year, far below the need for 14,000 identified by the Federation of Master Builders (http://bit.ly/18HoQ0g). Wales currently has the lowest ratio of any of the four UK nations in meeting its housing deficit. The Welsh government has followed the UK government in some policy areas, such as the Help to Buy scheme in Wales, but the Right to Buy scheme is unlikely to be extended. RICS recommends that the Welsh government commissions a new housing taskforce to report to ministers on the impact on housing provision after the changes in devolved powers and economic stance. Wales should fast-track the planning process for brownfield sites. Because of the connectivity between the Welsh and UK residential markets, RICS believes that coordination between the systems is vital. It would like to see use made of property rate relief for mixed-use schemes in Wales. Uniformity of standards across different local authorities could Image © iStock

The rate of empty homes is still rising while housing demand is increasing. Now the Urban Regeneration and Community Development Policy Framework is in place (http://bit.ly/22OJEtc), local authorities need sufficient resources to ensure efficient operation of the planning system and support housing provision. Bank finance remains constrained for small-scale housing developers, and RICS recommends that the Northern Ireland Executive (NI Executive) promotes Financial Transaction Capital as a potential funding source and encourages joint ventures between housing associations and private developers. Local authorities must ensure that current and future evidence-based needs for mixed-tenure housing and available land supply are reflected in their local development plans. The NI Executive should promote the Housing Executive’s ‘matching service’ which aims to pair owners of empty homes with potential buyers, and helps inform those who have inherited property how to bring it back into use. There need to be incentives for retrofitting residential property, possibly by allowing a temporary rate reduction. The NI Executive’s current housing strategy review of the PRS should ensure that regulation measures are introduced to enhance the rental sector. R

Jeremy Blackburn is Head of RICS UK Policy jblackburn@rics.org

The full Residential Policy is available at http://bit.ly/1TxNReo

Related competencies include Housing management and policy, Housing strategy and provision, Land use and diversification, Planning

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personal property arts + antiques

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Small print, big issues Pierre Valentin and Azmina Jasani explore the ramifications of recent consumer protection laws for the sale of fine art, antiques and collectibles

ine art, antiques and collectibles can be sold in various ways: by public auction, private sale through dealers and galleries, art fairs and online. Relatively new developments in the area of consumer protection, namely the enactment of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the regulations) and the Consumer Rights Act 2015 (the act), have significant implications for the art trade, depending on how and where the sale is concluded. Reasonable minds would agree that these laws are meant to protect consumers of goods sold on the high street, but it is more difficult to understand why consumers of fine art, antiques and collectibles – often sophisticated buyers guided by expert advisors – should be afforded the same protection. Unfortunately, consumer protection laws apply equally to washing machines and Old Masters, and as a result, art dealers and auctioneers must reconsider how they do business, in order to minimise the risk of financial loss and penalties. Compliance has forced art dealers and auctioneers to adopt new, inconvenient business models. This article describes these laws, and examines the ways in which they affect art businesses.

Statutory framework The regulations and the act collectively govern contracts relating to the sale of goods, the provision of services and the provision of digital content by a trader to a consumer (see box, right). They do not apply to contracts between traders or between consumers; neither do they apply to contracts under which a consumer sells to a trader. In this article, 50 SEP T EMBER/OC T OBER 2 016

we will only focus on the impact of consumer protection laws on contracts for trader-to-consumer sales. Before we describe the effects of the regulations and the act, we make four preliminary remarks. bb If you, as the trader, sell stock to a consumer, you must comply with the consumer protection rules because you are engaged in a trader-to-consumer sale. If you sell to a consumer as an agent for the owner, the consumer protection rules also apply, provided the owner – your principal – is also a trader. But they do not apply if the owner is a consumer, because both the buyer and the seller are consumers and the laws do not apply to a consumer-to-consumer sales contract; the fact that you invoice the buyer in your name does not change the analysis. If you as the trader sell to another trader on behalf of the owner, the consumer protection rules do not

Definitions bb A “trader” is defined as “a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf”; see section 2(2) of the Consumer Rights Act 2015. bb “A trader claiming that an individual was not acting for purposes wholly or mainly outside the individual’s trade, business, craft or profession must prove it”; again, see the act at section 2(4). bb A “consumer” is “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession” under section 2(3) of the act.

apply either, irrespective of whether the owner is a consumer or a trader, because neither a consumer-to-trader sale nor a trader-to-trader sale is covered by the consumer protection rules. It is therefore essential to consider in what capacity you are selling – as principal or agent – and whether the owner and buyer qualify as a “trader” or as a “consumer”. There is an exception that applies to live auctions, as described below. bb While this article concentrates on sales, it is important to note that the regulations and the act apply equally to the provision of services. If you sell as agent for the owner, you provide a service to them, and you typically charge them a commission. If the owner is a consumer, then you are providing a service to a consumer and the consumer protection rules apply to the provision of that service, as a trader-to-consumer contract. If your principal is another trader, the rules do not apply, as this constitutes a trader-to-trader contract. You may also provide other services such

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as valuation or collection management that are equally subject to consumer protection laws. bb Consumer protection rules similar to those contained in the regulations and the act are available and applicable throughout the EU. If you sell at art fairs in other EU countries, you should assume that these rules apply; there may be local variations, although the principles will be the same. bb While EU consumers are protected, the protections under both the regulations and the act may or may not extend to consumers beyond the EU – any such analysis is complicated, may vary from country to country and is not beyond doubt. The regulations The regulations cover different types of trader-to-consumer sales, comprising the following categories: 1. on-premises sales 2. distance sales 3. off-premises sales.

and the sale qualifies as a distance or off-premises sale.

Consumer protection laws apply equally to washing machines and Old Masters We explain below the meaning of each of these sales. Pursuant to the regulations, where a trader sells to a consumer–buyer, the trader is obliged, among other things, to: 1. provide certain information to the consumer–buyer before the conclusion of the contract 2. notify the consumer–buyer of their right to cancel where the sale qualifies as a distance or off-premises sale 3. provide the consumer–buyer with the identity and address of the consigning dealer, where a trader sells art on consignment on behalf of another dealer

The act The act consolidates many fragmented pieces of legislation that affect consumer rights, and the regulations work alongside it. With some narrow exceptions, the act applies wherever there is a written or oral trader-to-consumer contract. One of those exceptions is when the consumer buys second-hand goods at public auction, but this only applies at a live auction that the consumer can attend in person and does not extend to auctions that are only held online. Pursuant to the act, certain contract terms will be implied in a sale agreement, unless otherwise agreed by the parties. For example, where you sell a work of art on an invoice with no contractual terms, it will be implied that you have the right to transfer or sell the artwork and that the artwork is of satisfactory quality, fit for its purpose and matches the description on the invoice. If you are found in breach of these implied contract terms, you may be liable to pay damages, or the buyer may be able to successfully rescind the sale. The act also sets out the remedies available to consumers for breach of their statutory rights. A brand new statutory remedy is available in the first 30 days of the artwork being supplied. If the trader is in breach of their obligations under the act, the consumer is entitled to receive a refund and must make the goods available for collection by the trader. The trader is normally responsible for the cost of collection from the consumer, unless the contract requires the consumer to return the goods to the place where they took possession of them, or they take the artwork there voluntarily. Once the 30-day period has expired, the trader must be given the opportunity to repair or replace the non-conforming goods. If the trader does not repair or replace the goods, or – as is likely to be case with unique works of art, repair or replacement is simply impossible – the consumer has the right to reject the goods for a full refund or obtain a price reduction. It is important to point out that the consumer’s right to reject the goods under the act is distinct from the consumer’s right to cancel sales concluded at a distance or off premises, as described below. The act further consolidates the law on unfair contract terms in consumer contracts, and introduces the right for aggrieved consumers to bring n SE P T E MBE R /OC T OBE R 2 0 1 6 51

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competition infringement proceedings against traders in the courts.

Application We shall now consider the impact of the regulations on trader-to-consumer sales, depending on the location where the sale is concluded. Sales that are concluded on the trader’s premises If you sell an artwork in your own gallery or office, or in the case of a public auction the sale is concluded in the auction room at the fall of the hammer, the sale qualifies as an “on-premises sale”. That being so, you must provide certain information to the consumer–buyer before the sale is agreed: bb information regarding the main characteristics of the artwork bb your identity, your address and your telephone number bb the total price of the artwork inclusive of taxes, or – where the nature of the artwork is such that the price cannot be reasonably calculated in advance – the manner in which the price will be calculated; for example, where applicable, the percentage of buyer’s premium to be applied on the hammer price bb where applicable, any additional delivery charges, or – where such charges cannot be reasonably calculated – the fact that such additional charges may be payable 52 SEP T EMBER/OC T OBER 2016

bb where applicable, the arrangements for payment, delivery and the time by which you undertake to deliver the goods, if delivery is your responsibility bb the existence of after-sale commercial guarantees, for example an authenticity guarantee, if provided. Where sales are deemed to have been concluded on premises, you do not need to offer a consumer–buyer the right to cancel; neither do you have any obligations to disclose the identity of the seller, if you are selling on behalf of another dealer. Sales that are concluded by telephone, email or online Given the global nature of the art business, sales are more and more often being concluded virtually, and there has been a decline in face-to-face contact. Where you negotiate and conclude a sales contract with a consumer–buyer via telephone or email, or if the consumer–buyer purchases the artwork online, then such a sale contract qualifies as a “distance sale” under the regulations. A contract is not a distance contract if it is negotiated at your business premises and finally concluded by means of distance communication, or contact is first made by means of distance communication but the contract is negotiated and concluded at your business premises. Image © iStock

Pursuant to the regulations, consumer–buyers have the right to cancel distance and off-premises contracts, as described below, during the statutory cancellation period – 14 days from the day on which the consumer–buyer or their agent takes possession of the artwork – without giving any reason and without incurring any liability, except in limited circumstances. As in the act, the regulations have carved out an exemption for property offered for sale in live auctions where the consumer–buyer can attend in person, and in such instances the right to cancel need not be offered. Where the right to cancel is available and the consumer exercises it within the statutory period, the trader must reimburse the consumer for any sum received from them for the artwork. The regulations do not permit the trader to deduct from that sum any depreciation resulting from the consumer’s handling of the artwork during the cancellation period, unless the depreciation went beyond what is necessary to establish the nature, characteristics and functioning of goods, that is, beyond what would be reasonably necessary to inspect the goods in a shop. Furthermore, the trader must meet the cost of returning the artwork unless the sale contract expressly provides otherwise. Where the right to cancel applies, the regulations place the responsibility of informing the consumer of this right

P ERSO NA L PR OPE RTY CONS UM E R LAW

squarely on the trader. If the trader fails to inform the consumer of their right to cancel, the regulations extend the cancellation period by 12 months. In other words, if the trader fails to inform the consumer of their right to cancel, the consumer has a total of one year from the end of the initial 14-day period to cancel the sale and obtain a refund. Furthermore, if the artwork has been damaged during that period, the trader is not permitted to claim the depreciation in value, even if damage goes beyond that caused by reasonable inspection. Where you sell on consignment on behalf of another dealer to a buyer, it is imprudent to pay your consignor until the cancellation period has expired, as you may need to have the money in hand to refund the buyer in case they exercise the right to cancel. You may want to consider amending your form of consignment contract to extend the period in which you are bound to pay the consignor, to take the right to cancel into account. If you have failed to inform the consumer–buyer in advance that they have the right to cancel and they exercise this before the end of the extended cancellation period of 12 months and 14 days, you will most probably have paid your consignor and you may find it difficult to recover the price. Also pursuant to the regulations, where a distance or off-premises contract is concerned, you must disclose to them the identity of the seller if you are acting on behalf of another trader, as well as providing the information that a trader is obliged to give the buyer where the sale occurs on premises. This obligation can present a serious conflict for many art dealers, whose business models rest on confidentiality. To comply, some art dealers and auction houses purchase the artwork from the consignor immediately before transferring ownership to the consumer–buyer, hence doing away with the need for disclosure. Given that this information must be provided to the consumer–buyer before the contract is concluded, timing can be an issue, and any such deal structure should be carefully considered to avoid needless liability or a wider exposure to risk. The VAT implications of this deal structure should also be considered. Sales concluded face to face at venues other than a trader’s business premises A contract is said to have been concluded “off premises” if it is concluded face to

You may need to have the money in hand to refund the buyer in case they choose to exercise the right to cancel face with the consumer outside your normal place of business. Hence, if you take the consumer–buyer out for a meal, a football match or the theatre and you negotiate and conclude a contract with them at that venue, then such a contract will be deemed as an off-premises contract. A sale concluded with the consumer–buyer at their own residence also qualifies as an off-premises sale. Similarly, where you meet the consumer face to face somewhere that is not your usual place of business, they make an offer for the artwork at the meeting and a sale is concluded later, the contract will also be deemed to be an off-premises contract. Finally, a sale concluded by means of any distance communications immediately after you addressed the consumer face to face outside your usual place of business, or a sale concluded during an excursion organised by you with the intention or effect of prompting and selling a work of art to a consumer, shall also be deemed an off-premises sale. As in the case of distance contracts, where the contract is deemed to have been concluded off premises, you must give the consumer–buyer the right to cancel and inform them of such a right before concluding the sale. In addition to providing the information that a trader must give the consumer–buyer where the sale occurs on the premises, you must also disclose the identity of the seller if you are acting on behalf of another trader. Failure to do so can result in criminal sanctions. Sales concluded at art fairs The regulations define “business premises” as, among other things, “any movable retail premises where the activity of the trader is carried out on a usual basis”. It is arguable that dealers and galleries regularly conduct their business at art fairs. If so, they could claim that a sale conducted at a fair is concluded

on rather than off premises. The EU Directive on consumer protection, from which the regulations derive, seems to support this. The directive provides that: “market stalls and fair stands should be treated as business premises if they serve as a permanent or usual place of business for the trader. Retail premises where the trader carries out [their] activity on a seasonal basis, for instance during the tourist season at a ski or beach resort, should be considered as business premises as the trader carries out [their] activity in those premises on a usual basis.” In light of these remarks, provided that the dealer or gallery usually participates in art fairs, sales they make there more likely than not qualify as on-premises sales. There is no case law on the point and, depending on the particular circumstances, one cannot be certain that the courts would necessarily agree that in a given case the sale is on premises. Our view is that there are good grounds for arguing that a sale concluded by a trader at an art fair is an on-premises sale if the trader usually attends art fairs.

Conclusion Given the commercial risks associated with a failure to provide the statutory information to consumers before distance and off-premises sales, especially information on the right to cancel, art dealers are encouraged to review how they conduct their business so as to align their practices with the requirements of the regulations. In addition, art galleries, art dealers, auction houses and professional advisors should review their standard terms and conditions to ensure that they comply with the act, and, when selling fine art, antiques and collectibles, take advice on the terms the act implies in contracts with consumer–buyers. P

Pierre Valentin is Partner at Constantine Cannon LLP pvalentin@constantinecannon.co.uk Azmina Jasani is Senior Associate at Constantine Cannon LLP ajasani@constantinecannon.co.uk

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