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Summer 2009 Volume 3: Number 2
SCS
REVIEW Inflating our economy
Education: Postgraduate courses GCCC: Collateral warranties Transport: Plans for Metro North
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President’s news
A new and different world It is a tremendous honour to be elected to the office of President of the Society of Chartered Surveyors and be assured that I am committed to working diligently over the next 12 months to ensure that I repay this honour. Firstly, I would like to take this opportunity to thank Sean McCormack for his huge commitment and attention to the office of President over the last 12 months and to congratulate him on what has been a very successful year.
New economic numbers When elected to the position of Junior Vice President in May 2007 the world and indeed Society affairs were in a different place. At that stage construction output was at €38.4 billion and represented 24% of Ireland’s total GNP and property transactions exceeded €3 billion in 2006. Membership figures of the Society also showed healthy increases year on year with a choice of employment opportunities for graduates. Newly qualified surveyors were being snapped up and there was a bounce in everybody’s step. What a difference a couple of years has made. It is estimated that construction output will drop from the high of €38.4 billion just two short years ago to €17.4 billion in 2009 with a further deterioration expected in 2010, in the absence of any policy intervention or stimulus, to a level of just €12.3 billion. Property transactions have also fallen from a high of €3 billion in 2006 to a situation where there is little or no activity in 2009. As a consequence of this economic downturn, we are now witnessing a sharp fall in employment levels among Chartered Surveyors. It is expected that more than 50% of all graduate surveyors and over 14% of Chartered Surveyors will have lost their jobs by the middle of this year. These figures can only be described as a catastrophe in our profession. We need to, as much as we possibly can, support and assist those that face the harsh reality of unemployment. Initiatives that the Society has undertaken so far this year will be augmented and we are currently exploring the establishment of a scheme that encourages retention of employees and the employment of graduate surveyors. We are also establishing a database of members who are available for short-term/contract work and are going to make available a ‘Hot Desk’ facility here in Wilton Place so that these members will have access to IT facilities, work space and the availability of a meeting area if required. We need to ensure that those members who have been made redundant stay connected with their profession and are afforded every reasonable assistance that we can muster.
Contribution to current debate During difficult times such as we are experiencing at the moment, there is a need for well informed independent comment that is based on factual research and professional experience. The Society is using this opportunity to contribute to the current debate around so many issues and influence government policy such as: n Government’s decision to unilaterally apply the provisions of the Financial Emergency Act 2009 to design professionals, including building and quantity surveyors; n the need to address the infrastructural deficit; n the need to prioritise labour intensive projects within the public capital programme; n the opportunity to take advantage of the value that currently exists in construction and the corresponding opportunities;
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n the Property Services (Regulations) Bill 2009; n the need to provide suitable cost effective stimulus to protect, maintain and create employment in the construction industry; n the dispelling of the recent bizarre suggestion that valuations for the new National Asset Management Agency should be undertaken by foreignbased valuers; n advising the Government on the impact of outlawing ‘upward only’ rent review clauses; n the need and opportunity to revise government policy in relation to stamp duty on property transactions; and, n the need to stimulate the property and residential markets to encourage activity and ease the market out of its current inactive position. We have within the Society the most qualified experts to provide credible and experienced-based comment on any of these issues, and we will play our part in ensuring that the public and the Government are properly informed on policies that will have an impact in the shaping of the economy for years to come.
Relationships with other professional bodies Our relationship with the RICS remains extremely important to us and we are continuing to work with them to evolve a new basis of co-operation while ensuring that the development of the profession here in Ireland is at the core of any new arrangement. Council has recently considered proposals put forward by the RICS that include the establishment of an RICS Ireland Board, initially on a trial or shadow basis, to discharge the RICS functions of awarding the charter and regulating the profession. Such a Board would sit alongside the SCS and the SCS would continue its ongoing role providing member services and education. The detail of this proposal has yet to be worked out and members will be apprised of developments as they arise. Council as you know has also recently approved a proposal to establish a joint working party together with the IAVI to examine the issues involved in the creation of a single professional body for the property and construction sectors in the Republic of Ireland to represent the combined membership of both organisations, approximately 5,000 professionals. Whatever the outcome of this examination, members of both bodies will be fully briefed and given the opportunity to put forward their views. Ultimately, it will be a matter for the membership of both bodies to approve any proposals arising from the Joint Working Group examination. I look forward to working with Ciara, the staff and the many active and committed members throughout the Society over the coming year. I can be contacted by members at president@scs.ie.
Ken Cribbin President, Society of Chartered Surveyors
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Contents
16 The Society of Chartered Surveyors, 5 Wilton Place, Dublin 2. Tel: Fax: Email: Web:
01-676 5500 01-676 1412 info@scs.ie www.scs.ie
EDITORIAL BOARD Chairman:
John Oliver Costello
Board:
Tom Cullen John Minihane Ciara Murphy Paul O’Grady Gillian Reynolds Derry Scully
PUBLISHERS
Transport: a detailed look at the plans for Metro North.
President’s news
02
A new and different world
Transport
04
Launch of association for women in construction; Sheridan elected; diploma recipients; and, other recent news.
19
Published on behalf of SCS by Think Media Ltd Editorial:
Ann-Marie Hardiman Paul O’Grady
News Design:
Tony Byrne Tom Cullen Ruth O’Sullivan
Advertising: Pat Murray
10
Construction
Inflating our economy
16
Valuation
20
Valuation
From Donabate to St Stephen’s Green
What is it worth?
Valuation, a model of uncertainty
www.scs.ie
12
Views expressed by contributors or correspondents are not necessarily those of the Society of Chartered Surveyors or the publisher and neither the Society of Chartered Surveyors nor the publisher accept any responsibility for them.
Education
14
Warranties
24
Time to go back to school?
Legislation
Collateral warranties
Legal cases
26
New Property Services Bill
Property case reports
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News
Editorial
Making our views known There are plenty of well-articulated views on how we conduct our business in this edition.
The thorny issue of valuation has moved to centre-stage in recent months. This edition of SCS Review offers an excellent letter and two well-argued articles for members to keep fully briefed on the issue and related discussions. Whatever your views on the details, we are the professional body with the relevant knowledge and experience to provide the necessary service to Government and others, even if providing a valuation is in itself a challenging and now controversial act. Meanwhile, the Construction Industry Council, on which the SCS is actively represented, has submitted a hugely important report to Government. It outlines the benefits to be derived from investing now in Irish infrastructure. What is, perhaps, more frightening is the vista which opens up if the Government does not act on the recommendations of the Report. There is, as the Report states, a terrific opportunity for the Government to achieve real value in the building of necessary and planned infrastructure. Our leaders need to be brave and commit to making the investment now –
the Report makes it clear that there are major dividends to be gained from that investment. On other matters, there is a timely look at the postgraduate courses that are available to members who are considering using this time to improve their skills and qualifications. Denis O’Driscoll advises on collateral warranties. John Minihane looks at the new Property Services (Regulation) Bill and at recent legal cases of interest to our members. We are grateful also to Rob Leech of the Railway Procurement Agency for his excellent and detailed article on the plans for the Metro North system. The overall message from this edition of the SCS Review, though, is that our views, whether they be on valuations, or on the investment needed to keep the Irish construction industry active, are vital and informed. We hope the Government is listening carefully. John Oliver Costello, Editor.
Arbitration seminar A half-day seminar on ‘Arbitration and the Reasoned Award’ took place at the Westbury Hotel, Dublin 2, in May. The event was organised jointly by the Education Office of the Society of Chartered Surveyors and David Gill FSCS FRICS of David Gill Associates and was attended by a full house of over 60 Society members. Speakers at the seminar included Justice Frank Clarke, Judge of the High Court, who spoke about the essentials of giving judgments and/or decisions with reasons and also how the Irish courts might be expected to view the decisions of arbitrators when reasons become mandatory. Michael Carrigan, a solicitor with Eugene F Collins, presented a paper on the drafting of an award with reasons, which included a look at how one
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might approach cases with differing levels of complexity and the structure of interim and final awards. Michael Curry FRICS, MCIArb, of the Lands Tribunal for Northern Ireland, described how the Chartered Surveyor Arbitrator should approach the task of formulating a reasoned award – examine the arguments, sift the evidence and reach the decision. The seminar gave all those who attended an opportunity to discuss and develop the framework for an award in our syndicate session and an opportunity to participate in a question and answer session with the expert panel. Feedback received from the attendees was extremely positive.
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News
Accentuating the positive In these troubled times, when talk of ‘corrections’ and the dreaded ‘r’ word are all we seem to hear, a story about a positive development in the construction industry is especially welcome, and the members of the new Irish chapter of the National Association of Women in Construction (NAWIC) believe that they can provide just that. NAWIC Ireland was launched earlier this year at a meeting in the Dublin offices of Mason Hayes+Curran, and Chairperson Susan Bryson, a Partner at the firm, was overwhelmed with the response: “Over 100 women came along, which far exceeded our expectations”. Having Professor Nael Bunni of Trinity College Dublin as guest speaker was no doubt a big draw, but the turnout also indicated the depth of interest, across a wide spectrum of professional areas, in the Association. “The Association is first and foremost about building relationships,” says Susan Bryson, “particularly crossspecialty. Our first committee includes quantity surveyors, lawyers, engineers and architects, and that’s something we are anxious to continue and build on.” Originally formed in the United States over 50 years ago, NAWIC now has branches all over the world, and members in South Africa, Canada, Australia, and the US sent messages of welcome and support
At the launch of the National Association of Women in Construction in Ireland were (from left): Tara Walsh; Aisling Cullen; Elizabeth Wheeler; Susan Bryson; Collette O’Halloran; Gillian Hegarty; Rachel Kenny; and, Niamh Cronin.
to the launch, emphasising the international nature of the NAWIC network. While the Irish Association is affiliated with NAWIC UK, Susan hopes that the momentum created by the launch and the enthusiasm of everyone involved will enable NAWIC Ireland to remain a strong and independent association. An Irish web page, linked to the NAWIC UK website, will provide information on meetings and contacts for members, and plans for a wide range of follow-up meetings are already underway. On May 27, Rob Leech, Metro North Project Manager, and his
team, presented on various aspects of this major project in an event hosted by Jerry Mehigan, Chairman of Arup, at the Arup offices. The summer event in July will be hosted by Martin Maher, MD of SIAC, and will involve a bus trip along the M3 site with a presentation and reception afterwards at SIAC headquarters. Susan Bryson feels that these events reflect the multidisciplinary nature of the Association, as well as the emphasis on education in a relaxed and social atmosphere. “Our first meeting was on a legal theme, our second was a practical presentation, and our third
will be a site visit. We have received huge support; people are coming to me with suggestions for meetings, and Mason Hayes+Curran have also been extremely supportive.” Topics featured at future meetings will include construction insurance, technology, communication, and more site visits. “We want to emphasise something positive in the current horrible environment, to show people that things are still happening,” says Susan Bryson. For further information about NAWIC, and the Irish branch, go to www.NAWIC.co.uk, or contact Susan Bryson at sbryson@mhc.ie.
More than just a green cement Ecocem Ireland Limited is helping individuals, professionals and the Government to contribute to change and do their part in reducing emissions. Ecocem has been an independent, specialist producer of ground granulated blastfurnace slag (GGBS) environmentally friendly cement since its inception. By specifying Ecocem on projects, quantity surveyors, engineers and architects can expect the best quality concrete without any cost implications for the project. The carbon footprint of Ecocem is 20 to 25 times less than the carbon footprint of ordinary cement, so by using GGBS cement, you are future proofing your developments or projects and ensuring that you meet future carbon ratings/taxes that might be introduced. Ecocem is readily available all around Ireland and can be used in small jobs such as footpaths and house extensions, or very large jobs such as The Aviva
Stadium. For further information, contact David O’Flynn, Ecocem Ireland Ltd., Tel: 01-667 0900, Email: doflynn@ecocem.ie, website: www.ecocem.ie and www.lowcarbonconcrete.ie.
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News
Diploma award ceremony
Successful candidates together with the President, Director General and other officers and staff of the Society after the awards ceremony in April.
2008 was a successful year in terms of the number of candidates who undertook Final Assessment. In total, some 164 probationers sat for interview across nine dates in Dublin and Cork in the spring and autumn, and 121 were successful. The Society welcomes 69 newly elected quantity surveyors, 46 general practice surveyors, three building surveyors and three geomatic surveyors. The Society held a diploma award ceremony in April in St Stephen’s Church, Dublin 2 (popularly known as the Pepper Canister Church). The awards were presented by the Society President, Sean McCormack, and a formal welcome address was given by Society Director General, Ciara Murphy. The award ceremony was followed by a well-attended drinks reception in Fitzwilliam Hall. In his speech to the new Associates, the President congratulated them on the achievement of their professional qualification and the significant effort and commitment involved. He reminded them that the Society, like every
other voluntary organisation, derives much of its strength from the efforts of its membership and encouraged them to remain connected with, and to participate in, the policy development and decision-making of the Society. Alongside the new Associates, three DIT students received the following awards: Kevin Keating received the Austin Reddy Memorial Medal for having achieved first place in the final year of the BSc (Hons) in Construction Economics and Management; Sean McCahon received the Noel Dooley Burse for having achieved first place in the third year of the BSc (Hons) in Construction Economics; and, Clare Vallely received the David Bailey Burse for having achieved first place in the third year of the BSc (Hons) in Property Economics. The Society is grateful to the award presenters and sponsors, as well as the APC Chairpersons and divisional representatives present on the day, and is deighted to congratulate all newly elected associates.
Ongoing career support services for members coping with redundancy In recent times, a significant number of Society members have lost their job as a result of redundancy. Owing to the economic downturn in the property and construction industry, and its direct impact on members, the Society has put in place a programme to support those now out of work. Over the past four months, the Society has held a number of workshops nationwide, most recently in Cork in March and in Dublin in March and May. The Society has retained the services of Sanders & Sidney O’Shea, Career Change Specialists, to provide career transition support services. The workshop is designed to help members step quickly and successfully into their next job or career move. Through exercises and role play, it will seek to give members the know-how, confidence and energy to go out and find a new job. The Society has had an enthusiastic response and positive feedback from those in attendance at the career support services. The Society encourages affected
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members to avail of this service. It will help inform your future plans and may improve your chances of achieving both professional and personal goals. For further details regarding workshops, please contact Susan Clancy, Email: sclancy@scs.ie.
Testimonials “The career support workshop was extremely worthwhile; I benefited greatly from all issues addressed in the workshop. It was most informative and will certainly help in my job search.” Workshop attendee. “A thought-provoking insight as to how to go about the task of putting yourself forward as the right candidate for a new job.” Workshop attendee.
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News
Sheridan elected to European office
Kevin Sheridan FSCS is the newly elected President of the AEEBC – the European Association for Building Surveyors and Construction Experts. Kevin is a former President of the European Council for Building Professionals. A Fellow of the SCS and former Chairman of the Building Surveying Division, he was a signatory at the formation of the International Association for Professional Management of Construction in Washington (Washington Accord).
On the move
Andrew Carberry, a former Associate Director with Bannon, has set up a new general practice Chartered Surveying firm in
The AEEBC is a community of professionals working in the construction and property industry in 12 countries spread throughout Europe. It was established in 1990 and represents over 350,000 building surveyors and construction experts who are professionally qualified in the technological and management processes by which buildings are designed, constructed, renewed and repaired. Kevin takes over from Professor Trevor Mole who now becomes Secretary General of the AEEBC. He paid tribute to his predecessor and praised his enormous contribution to the strategic focus of the Association. He welcomed Jacob Thomsen from Denmark, who was elected Vice President. “A key objective is to secure a level playing field for professionals,” said Mr Sheridan. Professor Mole praised the incoming president’s role in the Professional Development Committee. The EurBE card is at a very advanced stage and is designed to facilitate recognition of professional qualifications and experience and to promote transparency between different education systems so as to enhance professionals’ mobility in Europe and worldwide. “The European construction environment is very challenging in the current climate and I am honoured to be chosen by my colleagues to advance the many strategic initiatives with a very talented and committed team,” he added.
Athlone. Carberry Chartered Surveyors provides commercial property consultancy services throughout the Midlands. For further details please contact: Andrew Carberry Carberry Chartered Surveyors Ardmullan Curraghboy Kiltoom Athlone Co. Roscommon Tel: 086 382 4450 Email: andrew@carberrycs.ie Web: www.carberrycs.ie
Implementing redundancies and maintaining the employer brand The Society retained the services of Sanders & Sidney O’Shea to provide support services to those organisations facing employee redundancies. An interactive presentation was held in April in the SCS offices. The presentation addressed issues such as the correct approach to redundancy, the impact of redundancy on the employee and on the organisation, and an introduction to outplacement and how it can help. The event was well attended and the Society received positive feedback from those in attendance. The Society will run additional presentations based on demand from the membership. Please contact Susan Clancy, Email: sclancy@scs.ie, for further information.
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News
Letter to the editor Dear Sir, I refer to the Director General’s letter to The Irish Times of April 15, 2009. Whereas I empathise with its contents, I write to you on one aspect in particular: how property assets can be accurately valued, which refers principally to point three of your letter as to interpreting ‘the market’. For a considerable time I have been concerned with the issue of (over) reliance on the market basis of valuation against the increasingly difficult economic background. I expressed that view in conversation at a recent luncheon of eight senior Chartered Surveyors – we were having a reunion of a JO property trip to the USA in November 1972! It was suggested at that get-together that I might give consideration to writing a ‘blog’ on my concerns to the SCS membership, and herein I so do on foot of your letter. Co-incidentally, the UK Times of April 15 reported on the recent downward revaluation of 40% in the Irish Life unit-linked property portfolio – a ‘write-off’ of some ¤1.4 billion; for the company in which I had the privilege of serving as its valuation surveyor during my 22 years in the Property Division until the end of 1994. For the following 13 years, the sustained upward thrust of ‘the market’ resulted in a yield race to the bottom as corresponding year’s-purchase figures appeared to defy gravity. Ireland’s ‘property bubble’ ensued and with it our ongoing banking and government funding crisis, aggravated by a deepening recession and similar crises in other economies, principally in the USA. My concern is directed to the international level, where there is now debate between actuaries, accountants and investment professionals, as well as surveyors and appraisers, as to the need to standardise valuation methodologies and their underlying guidelines. In London I am aware of considerable ongoing discussions and doubts about ‘valuations’. My principal area of concern relates to the Red Book’s definition of ‘market value’ and of its over-reliance on transaction prices in property valuations. The core issue is that of the time-dynamic. What happens if ‘the market’ disappears? Likewise if there are few, if any, transactions and where there is no perceptible ‘floor’? This is not just an Irish phenomenon as the Healy and Baker Graph of prime property yields over a 15-month period during 1973-1974 testified. This was the circumstance for the then much larger UK market. It resulted in the emergence of the infamous joined-up dotted line yield-graph, with the accompanying commentary to the effect that there were too few transactions to justify a continuous graph-line or to provide reliable market-based evidence. Valuation guidelines must therefore be able to provide robust advice as to best professional practice when market comparisons are not available and where forced sales, ‘carpet-bagging’ and predatory conditions prevail and, as in the present circumstances, may continue to prevail for a considerable time to come. The time-dynamic factor creates a ‘trap’ for recursive-based comparisons. This is fine if the ‘market’ is deemed to be stable or rising, but where there is a continued reliance or dependence on past or even recent ‘comparisons’ or none, is fundamentally flawed in plummeting market conditions and is speculative when no market basis exists. Also, having regard to market conditions where in very many instances prevailing rents are perceived as being ‘excessive’ with widespread requests for alleviation; where net absorption of floor space is negative and where stocks of vacant residential units are increasing. In the Red Book there are many references
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to the requirement of a valuer’s deployment of his/her professional judgement and reliance on personal ‘professional experience’. Is this an act of faith too far? What are the fundamentals that support valuations? As property professionals we are quick to emphasise the significance of location – location – location. Do we accept as important or as being relevant that modern location theory and its application should be deployed to the art/science of property valuation? Likewise, is the issue of demography considered as a fundamental starting point for end-use demand assessment? Also, there has been considerable research and related theory in our understanding of Firm, Industry and Urban Agglomeration. Since 1995 my career has provided privileged opportunities to read, to research and to lecture at the Dublin Institute of Technology. As DIT’s Urban Economics Lecturer my instructions, inter alia, have been to place emphasis on location theory and demography as being both fundamental to our understanding of property and complementary to undergraduate auctioneering and property economics, to real estate, sustainable development and spatial planning masters courses. These fundamentals also feature in my own Doctoral work, now approaching completion. It may be just co-incident that The Irish Times of April 15, 2009, also contained an article by John McManus. This focused on the recent Nobel Laureate in Economic Science, Paul Krugman’s identification of Ireland as one of two developed economies that “could follow Iceland into default because of the scale of their economic problems” – Austria being the other one. Krugman is particularly au fait with Ireland and its economy through his advisory role to the IDA for many years. He, together with Anthony Venables and Masahisa Fujita, co-authored their famous book, The Spatial Economy (2001). Through such literature, it is the emerging fusion of geography with economics that has produced revolutionary insights into spatial planning, the built environment and with it, our new understanding of property, of urban development and as to the future roles of urbanisation and of cities. All of this is fundamental to a current overview of the drivers of valuation. With the proposal to establish NAMA as the Government’s vehicle to assist the rationalisation of Ireland’s defective property banking assets and, hopefully, to restore a healthy and trustworthy banking system to enable economic recovery, I believe that the ‘traditional ways’ of appraising real estate, alone, are no longer sufficient per se, and thus I would welcome an intensive and wide-ranging debate/discussion on how our profession can embrace these and other macro-level disciplines that I believe can enhance the valuation process, especially in the absence of a market base. As to where we stand in this regard and importantly, where Chartered Surveyors should go from here if we are to play a central role in the emerging ‘new order’ also requires as many members of our profession as possible to contribute to the debate/discussion which has commenced with your letter to the Irish Times. Yours sincerely, Brian Hughes, Dip. Env. Econs., FSCS, FRICS, Faculty of the Built Environment, Dublin Institute of Technology
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News
Irish Property and Facilities Management Association
Meeting of the professions
Tom Dunne, Irish Property and Facilities Management Association (IPFMA) Chairman, and Peter Moloney, IPFMA Senior Vice Chairman, with Sean McCormack, SCS President, at a recent IFPMA function in The Mansion House, Dublin.
Edward Carey, President of the Irish Auctioneers and Valuers Institute; Turlough O’Donnell, The Bar Council; Dermot McCarthy, Department of An Taoiseach; and, Ken Cribbin, then Vice President, Society of Chartered Surveyors, attending the Irish Inter Professional Association Annual Lunch in March.
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Inflating our economy The Construction Industry Council, with the active involvement of the Society, has made a submission to Government. CIARA MURPHY reports on the work to encourage the Government to invest in a stimulus package. In March 2009, the Construction Industry Council (CIC) completed their submission to Government, with its stated aim: “to save 70,000 jobs over the next three years, maintain highly skilled productive resources in Ireland and deliver necessary infrastructure at excellent value for money for the public benefit, with minimal additional State borrowings”. Essentially, the Report proposes a plan for national economic recovery, which will deliver the necessary infrastructure for the public benefit while maintaining a highly skilled productive workforce. The report highlights the concerns of the CIC about the future prospects for construction in the absence of government policy intervention and calls on the Government to give serious consideration to the CIC plan.
Summary of the report The construction industry was a key driver of economic growth over the decade to 2007. By the end of 2007 the industry had reached a value of €38.5bn, 24% of GNP, and employed around 400,000 people. The CIC recognises that an industry of this size was unsustainable and believes that in the medium term Ireland should have a construction industry that is larger than the EU 15 average (circa 12% of GDP) because of its infrastructure
What is the Construction Industry Council? The Construction Industry Council (CIC), representing approximately 43,000 members, was established in February 1991 with the objective of dealing with issues of common interest for the construction industry in relation to overall policy issues. The Council acts only on the basis of consensus and all decisions and policy statements published are agreed by the member organisations.
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deficit. Construction output should be at least €18bn for a number of years, equivalent to 12% of 2008 GNP, in order to ensure that Ireland does not continue to fall behind the rest of the EU. The National Competitiveness Council has stated that our infrastructure deficit still places Ireland at a material disadvantage to other EU countries. The National Development Plan (NDP) 2007-2013 was designed to address this deficit; however, the serious deterioration in the Exchequer finances is now making it difficult to deliver on the NDP. Notwithstanding this deterioration, the removal of infrastructure deficits in our economy is essential in our efforts to raise competitiveness and boost economic growth. Without a Government stimulus, output in the construction industry looks set to record the biggest contraction in 30 years. Projections suggest that the industry will already be below its optimum size of €18bn by the end of 2009. The industry could shrink to €12.3bn by the end of 2010, 33% below its long-term optimum size, and to €10bn in 2011, 43% below it optimum size. The CIC believes that a decline in the industry below €18bn will result in unnecessary job losses and an erosion of essential long-term productive capacity, and further undermine our national competitiveness. Total employment in construction was down 33% by February 2009 from a
Membership of the CIC consists of: n The Society of Chartered Surveyors (SCS); n The Royal Institute of Architects in Ireland (RIAI); n Engineers Ireland; n The Association of Consulting Engineers of Ireland (ACEI); n The Construction Industry Federation (CIF); and, n The Building Materials Federation (BMF).
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year earlier. Without a Government stimulus, total employment (direct plus indirect) in construction could decline to 126,000 by the end of 2011, back to 1994 levels. According to the Society’s index, tender prices are down 20% from the peak in 2007. There is now a window of opportunity to roll out infrastructure projects, given the excellent value for money that is available combined with high productivity and an abundance of skilled resources.
€5bn per annum will save 70,000 jobs and
maintain an important skills base. Improving infrastructure generates additional benefits to competitiveness and economic growth as well as providing an important public benefit. The ESRI has calculated the positive long-run effects on GNP are that for every €1bn spent on infrastructure, GNP increases by €0.4bn per annum in the long run. The quality of infrastructure is improved for the population as a whole, while the positive effects persist in the economy long after the money is spent. From an economic point of view, investing in infrastructure makes sense as long as the return on that investment is greater than the cost of funding it.
n n n n
are employment intensive; generate an economic rate of return above their costs; add to the productive potential of the economy; and, minimise the external leakage of funds.
Stimulus Package Total Jobs Created Tax Take @ ¤15k pp Social Welfare Saved (@ ¤18.5k pp) Total Avoided cost Net Additional cost Funded by Private Pension Funds (¤2bn) & EIB
¤5 bn 70,000 ¤1.3 bn ¤1.3 bn ¤2.6 bn ¤2.4 bn ¤2.4 bn
The CIC submission recommended as a matter of urgency that the following actions be put in place immediately to progress the stimulus package: n agreement of the stimulus package in principle; n urgent prioritisation of public infrastructure projects; n consultation with pension funds; n appointment of a high level implementation group to standardise procurement and contractual arrangements; and, n fast track planning and procurement.
Investment proposed The CIC is proposing to Government that the investment of a stimulus package of €5bn per annum (in addition to the Public Capital Programme) over three years will save 70,000 jobs and maintain an important skills base. A Government stimulus will help to restore confidence to the private sector and the indirect and induced impacts will generate substantial benefits for the economy over the medium term well in excess of €5bn. The source of part of the funding suggested is a combination of private pension funds and other ‘off balance sheet’ structures. The CIC believe that the Pension Funds of Ireland may fund up to €2bn. The balance would be funded from the European Investment Bank. In terms of this €5bn stimulus package the CIC has provided an indicative list of capital projects, based on consultations with the main infrastructure spending departments, which should now be considered for funding. However, given the rapid economic downturn, the CIC is keen to ensure that the best projects are prioritised on the basis that they:
There is now a narrow window of opportunity to roll out infrastructure projects given the excellent value for money that is available combined with high productivity and an abundance of skilled resources. This would secure construction jobs and retain skills across the country. The Construction Industry Council Submission to Government is available to view under ‘Latest News’ on the homepage of the SCS website – www.scs.ie.
Ciara Murphy Ciara is Director General of the SCS.
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Education
Time to go back to school? SCS Review takes a look at some of the postgraduate study options available to members.
Continuing professional development (CPD) should always be an integral part of any career plan, and in the current economic climate, it has never been more important to ensure that you have the best possible range of skills. A wide variety of postgraduate courses exists both in Ireland and the UK in every possible aspect of built environment studies, and many are accredited by the Society of Chartered Surveyors.
DIT Bolton Street, Dublin 1 The Department of Environment and Planning, Faculty of Built Environment at DIT Bolton Street is home to a range of courses that offer a high standard of postgraduate training and education. Applications for all DIT courses should be made to the Office of Graduate Studies. The postgraduate application form can be downloaded from http://www.dit.ie/study/postgraduate/howtoapply/.
MSc in Planning & Development This two-year, part-time course in the School of Spatial Planning provides the educational requirements for practice as a planning and development surveyor. It will also broaden the knowledge and skill base of professionals working in the built environment field. Course content includes: spatial planning; planning practice; building technology; valuations; public administration and law; health and safety; urban land economics; taxation; urban design; property development; property law; construction management; property finance; and, infrastructure. The course requires attendance for eight hours weekly, plus tutorials and site visits over two academic years, concluding with the submission of a dissertation in November of the second year.
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The course is recognised by the Society of Chartered Surveyors/Royal Institution of Chartered Surveyors as fulfilling the academic requirements for membership of the Planning and Development Division of the Society and Institution.
MSc in Quantity Surveying This 21/2-year part-time programme in the School of Real Estate provides an opportunity for non-quantity surveying graduates to become educated for a career in the construction industry in quantity surveying/construction economics in Ireland and abroad. The programme’s focus is strongly oriented towards quantity surveying practice, building measurement, and the management and economics of development. Course content includes: construction technology; quantity surveying practice; building measurement; construction technology; construction economics; project management; advanced measurement or project cost and financial control; construction law; and, commercial surveying. The programme is assessed through a range of techniques including project work, group work, assignments, presentations and examinations. In addition, students will be expected to complete a dissertation. The programme has full accreditation from the Society of Chartered Surveyors and the Royal Institution of Chartered Surveyors.
MSc in Real Estate Based in the School of Real Estate, this 21/2-year part-time course provides an opportunity for non-property graduates to become educated for a range of careers in real estate and related industries in Ireland and abroad. The programme’s focus is strongly oriented to real estate valuation, appraisal and investment.
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Education
Course content includes: valuations; building appraisal; real estate law; real estate investment appraisal; planning; real estate development appraisal; urban economics; investment portfolio analysis; real estate finance; and, corporate real estate management. The programme is assessed through a range of techniques including project work, group work, assignments, presentations and examinations. In addition, students will be expected to complete a dissertation. The programme has full accreditation from the Society of Chartered Surveyors, The Royal Institution of Chartered Surveyors and the Irish Auctioneers and Valuers Institute.
MSc in Spatial Planning This 21/2-year part-time programme in the School of Spatial Planning provides an opportunity for practitioners who work in the area of the built environment in Ireland or abroad, to become professional planners by attending a part-time planning course. Course content includes: spatial planning; planning law; introduction to design; local area plan; sustainable resource management; ecology; data collection and analysis; GIS; planning theory; European planning; property development; transport and communications; environment and planning; and, urban and regional development. The student must also maintain a logbook detailing the areas in which work experience has been gained. The course is accredited by the Irish Planning Institute.
PgDip and MSc in Spatial Information Management This 21/2-year part-time programme in the Department of Spatial Information Sciences, School of Spatial Planning, provides an opportunity for professionals who use spatial information in their organisations to improve their knowledge and skills for a range of careers in the surveying and geo-information (GI) sectors in Ireland and abroad. Course content includes: GNSS and co-ordinate reference systems; geographic information science; remote sensing technologies; spatial information management; spatial databases; case studies in GI applications; organisational geo-information management strategies; and, spatial data infrastructures. The programme is assessed through a range of techniques including project work, group work, assignments, presentations and examinations. In addition, students will be expected to complete a dissertation. The programme is accredited by the Irish Institution of Surveyors and the Institution of Civil Engineering Surveyors.
UCD School of Geography, Planning and Environmental Policy Master of Regional and Urban Planning (MRUP) This two-year, full-time Master’s degree is the gold standard Master’s planning programme in the UK and Ireland. It is equivalent to mainland European and US professional planning qualifications and thus qualifies successful graduates to work in Ireland, the UK, Europe and the US. The degree offers a unique blend of lectures, studio-based learning and independent study to give planners the necessary understanding of the processes of planning and to develop in them the capacity to co-operate
with professionals in related disciplines. Emphasis is placed on the development of professional skills for identifying, analysing and solving a variety of planning problems. Course content includes: planning methodology; policy and planning; planning society and diversity; rural development and planning; planning and environmental law; transportation planning; urban and regional economics; housing policy and planning; and, quantitative methods. The MRUP will be assessed using Grade Point Average (GPA), which is a system of recording achievement based on a numerical average of the grades attained in each course. All modularised courses will be assessed by means of letter grades and grade points. The MRUP degree is fully accredited by both the Irish Planning Institute and the Royal Town Planning Institute. For information on application procedures and fee information, go to: http://www.ucd.ie/gpep/postgraduateprogrammes/mrupmastersinregionalandurbanplanning/
University of Salford School of the Built Environment The University of Salford offers opportunities to study full- or part-time on campus, or part-time via a tutor-supported virtual learning environment, in the following programmes: n Project Management in Construction;* n Construction Management; n Off-site Advanced Manufacturing in Construction; n Quantity Surveying;* n Quantity Surveying (Mechanical and Electrical);* n Digital Architectural Design; n Regeneration and Urban Renewal; n Real Estate and Property Management;* n Real Estate Development;* n Facilities Management;* n Construction Law and Practice; n Accessibility and Inclusive Design; n Healthcare Facilities Procurement; and, n Disaster Mitigation and Reconstruction. The UK’s largest built environment school, with top ratings for teaching and research, the University of Salford offers options to study full time or by internet-based distance learning, thus permitting individuals to combine career with study. The University will assess experience as an alternative to formal educational qualifications as a basis for entry. Salford also offers the opportunity to study for a professional doctorate, which is: n designed for practising professionals; n can be studied part-time; n aims to recognise work-based learning and professional expertise; and, n awards include Doctor of the Built Environment, Doctor of Real Estate and Doctor of Construction Management. For more information see www.sobe.salford.ac.uk or contact Brian Meichen, Director of Marketing, Email: b.a.meichen@salford.ac.uk.
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Warranties
Collateral warranties Surveyor and solicitor, DENIS O’DRISCOLL, advises on the place of collateral warranties in the construction business. The collateral warranty or collateral agreement, as we know it in the construction industry, came into existence 20 years ago in the wake of the English House of Lords decision in D&F Estates-v-Church Commissioners for England (1989 1AC 177). In that case, a tenant of Chelwood House sued the builder in the tort of negligence (it had no contractual relationship with the builder, the builder having contracted with the developer) for losses it incurred in rectifying defective plasterwork in its building. The tenant’s claim was unsuccessful as the House of Lords classified the loss incurred in rectifying the plasterwork as “pure economic loss”, which it held was a type of loss not recoverable in tort. Lord Bridge of Harwich stated: “It seems to me clear that the cost of replacing the defective plaster itself... was not an item of damage for which the builder of Chelwood House could possibly be made liable in negligence.... to make him so liable would be to impose on him for the benefit of those with whom
he had no contractual relationship the obligation of one who warranted the quality of the plaster as regards materials, workmanship and fitness for purpose. I am glad to reach the conclusion that this is not the law...” Once it was determined that, as a matter of law, this type of loss could only be recovered in an action for breach of contract, the collateral warranty was born. Before a construction project gets underway a number of principal contracts will be entered into between the principal parties responsible for delivering the project: employer/design team; employer/contractor; contractor/sub-contractors, etc. The collateral warranty is a separate contract which exists side-by-side (and refers to) the relevant principal contract. The beneficiary of a collateral warranty will be a party who has or may assume an interest in the completed building but who is not a party to a principal contract with one of the key players in the construction process that it may wish to sue should it suffer a loss
Funder
Design Team
Client
Contractor
Sub-Contractor
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Collateral contracts Purchaser -Tenant
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Warranties
due to that key player’s default. Collateral warranties will typically be entered into between: funding institution/contractor; funding institution/design team; design team/purchaser or tenant; contractor/purchaser or tenant; employer/nominated subcontractor, etc.
Forms of warranty A collateral warranty can take the form of an industry standard or, more commonly in recent times, a bespoke warranty. The construction industry has produced standard collateral warranties such as the contractor collateral agreement (“orange form”) and the nominated sub-contractor collateral agreement (“green form”) both published by the Royal Institute of Architects of Ireland (RIAI) in agreement with the Construction Industry Federation and the Society of Chartered Surveyors; the RIAI has its own standard collateral warranty for use by its members. Particular care and attention should be taken in reviewing and negotiating bespoke collateral warranties, i.e., warranties that have been specifically drafted by lawyers acting for the beneficiary (the employer, funding institution, purchasers, tenants), as these can be heavily weighted in their clients’ favour.
fault in the construction of the works” with liability for consequential losses and/or a loss of profit expressly excluded. A net contribution clause will also seek to limit the liability of the warrantor to that proportion of the loss for which it is just and equitable for the warrantor to have to pay having regard to the extent of the warrantor’s responsibility for the beneficiary’s loss.
Assignment Assignment refers to the right of a beneficiary to pass on the benefit of the collateral warranty to a third party. It is understandable that when a purchaser or tenant wishes to dispose of its interest in a property it would wish to make a prospective sale or assignment of lease more attractive by passing on warranties it enjoys to a subsequent purchaser or tenant. From the warrantor’s point of view an assignment of a collateral warranty may mean being sued years later by a stranger whom it has never heard of. Difficulties negotiating the assignment clause can arise in relation to the number of permitted assignments and whether the wording of the assignment has appropriate words of limitation to prevent a continuing obligation on the warrantor to enter into successive collateral warranties.
Issues that arise Some of the topical issues that can arise in relation to collateral warranties are as follows:
Is there an obligation to execute a collateral warranty? It is not uncommon that the request for a collateral warranty arises after the principal parties have already entered into contract. A party does not have to provide a collateral warranty if it is not contractually obliged to do so.
Main warranties The main warranties usually provide that the warrantor “has not broken and shall not break any express or implied terms of the contract”. The “contract” being referred to is the relevant principal contract. Accordingly, in the example given above, if the tenant of Chelwood House had entered into such a collateral warranty with the contractor, the defective plaster would give rise to a breach of the collateral warranty. In such circumstances, the tenant could have successfully sued the contractor for breach of warranty for losses it incurred in rectifying the plasterwork.
Standard of care The standard of care required by warrantors (and more importantly their professional indemnity insurers) is one of “reasonable skill and care”. Beware of warranties that prescribe a standard of care requiring “fitness for purpose” which can arise, for example, where there is a design obligation under the contract. The problem with fitness for purpose is that the beneficiary does not have to prove negligence – if it doesn’t work, it’s not fit for its purpose. Accordingly, professional indemnity policies may exclude indemnity for fitness for purpose.
Limitation of liability and net contribution clauses When negotiating a bespoke collateral warranty, the prospective warrantor will attempt to negotiate terms to limit its liability to the beneficiary under the warranty, a good example of which is clause 3 of the standard contractor collateral agreement “orange form”, where the contractor is only liable for “the reasonable costs of repairing any defect, omission or other
Step in rights of the beneficiary Step in rights by way of novation (the substitution of a new contract in place of the old one) will typically be required by a funding institution to allow it discretion on whether to step into the contractual shoes of the employer to ensure that the project is brought to practical completion in circumstances where the warrantor has a contractual right to terminate the principal contract. This will usually arise where the employer defaults in making payments to the warrantor under the principal contract. When negotiating such a clause, the prospective warrantor will be seeking to include an undertaking that the beneficiary will, on stepping in, pay the warrantor all outstanding monies due to it under the principal contract.
Duration of agreement It is good practice to expressly define in the collateral warranty the period for which the warrantor remains liable to the beneficiary under the warranty. The Statute of Limitations Act 1957 prescribes a 12-year liability period for contracts executed under seal and a six-year liability period for contracts executed under hand. It is equitable that the period of liability under the collateral warranty should be consistent with and no greater than that under the principal contract.
Wealth warning Collateral warranties should be carefully reviewed and negotiated. Particular regard should be had to exclusions under the relevant insurance policies. Before agreeing to enter into a collateral warranty, it is prudent to seek the advice of your insurer and legal adviser.
Denis O’Driscoll BSc LLB ASCS MRICS FCIArb Denis is principal of Denis O’Driscoll & Associates Solicitors.
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Transport
From Donabate to St Stephen’s Green Metro North is in advanced planning, as ROB LEECH explains. Metro North is planned to be 18km long and to operate between Belinstown, to the north of Swords, and St Stephen’s Green in the city centre. It forms the spine of a planned high capacity public transport network linking the north and south of Dublin City, integrating DART, Luas and bus, and bringing people to their destinations rapidly and efficiently. It is a commuter link connecting residential and employment districts to the city centre and serving many key destinations including the airport, universities, hospitals, town centres and Croke Park. It is designed to meet a high level of latent demand, which already exists and which cannot be catered for by other modes. Metro North will transform the commuting experience for people living and working in and visiting Dublin, initially along the corridor directly served and then over the entire Greater Dublin Area as the network envisaged in Transport 21 is delivered. The route runs largely at ground level and on elevated viaducts from Belinstown to north of the Airport, in tunnel through the Airport, and back to ground level through the lands south of the Airport, crossing over the M50 and then going underground again from north of Ballymun to its terminus at St Stephen’s Green. The Metro route at ground level will look
The proposed Airport station.
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similar to the existing Luas system, with extended 94m platforms for the longer trainsets. The route has been designed to safeguard the future possible extensions of the Metro to the south, towards the Luas Green Line and Tallaght, and to the north beyond Belinstown towards Donabate. Provision has also been made for an operating link with the proposed Metro West line. There are 17 stops planned along the route, nine underground and eight at ground level.
The concept The Metro concept allows for economic expansion of the network and will offer high capacity by running services at very frequent intervals. This would not be possible with an on-street system, particularly in the city centre, and so Metro North must have a dedicated route separated from the road network in these areas. This is achieved by running the Metro vehicles in tunnel or on elevated structures as appropriate. This segregated route also allows Metro to run at higher operational speeds than an on-street system. In the less congested outer suburban environment where less capacity is needed, Metro can operate at street level using light rail operating principles.
The proposed station for Ballymun.
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Transport
This design philosophy, common in many European countries and particularly throughout Germany, permits an economic and incremental expansion of the Metro network while maximising the utilisation of the more expensive tunnel infrastructure. In Dublin’s case, this philosophy allows Metro West to be developed largely on surface while utilising the Metro North tunnels to access the city centre and the Airport and for the future connection of the Luas Green Line to Metro North, and the running of through services all the way from Bray to the Airport and Swords, without the need for expensive alterations to the existing Luas network.
times at Metro stops. Initially, at peak times, Metro services will operate every four minutes. As demand grows, the frequency of services will be increased to every two minutes.
Connecting interchanges
Metro North will build on the success of the Luas system in realising modal shift from private car to public transport by offering commuters in its catchment area a mode of transport of real choice. The DTO Quality Bus Corridor monitoring report for November 2007 illustrates the existing problem. On the corridor served by Metro North, the average journey time from Swords to O’Connell Street by bus on the Swords Quality Bus Corridor in the morning peak is 61 minutes and the journey can take as long as 73 minutes; the time for this journey by Metro will be 25 minutes. The average journey time from Ballymun to O’Connell Street by bus on the Ballymun Quality Bus Corridor in the morning peak is 38 minutes and can take as long as 47 minutes; the time for this journey by Metro will be 12 minutes. Metro’s dedicated infrastructure will ensure that these journey times are consistently achieved and not susceptible to disruption from road traffic. Services will be regular and frequent to ensure that passengers are not suffering long waiting
Metro North will also encourage modal shift by offering efficient interchange with other high capacity transit routes. At present, Dublin has five commuter rail lines: the northern suburban rail line and DART, the Luas Red and Green Lines and the Maynooth and Kildare suburban rail lines. These lines only interchange at two points: Connolly Station and Heuston Station. The construction of Metro North will introduce three new interchanges at St Stephen’s Green, O’Connell Street and Drumcondra. This allows fast and convenient journeys to a much wider area than the Metro North catchment area, which will attract more transfers from car. The delivery of the full Transport 21 programme will result in the addition of a further 11 interchange points. Metro North also provides sufficient capacity to permit a more sustainable pattern of high density urban development and to permit the successful growth of Dublin Airport. The forecast passenger demand in the morning peak hour is approximately 6,000 passengers per hour per direction. Metro North will operate initially with a capacity of 10,000 passengers per hour per direction. Demand will grow over time, with growth in population and employment along the Metro North catchment. Metro North has been designed so that its capacity can be increased incrementally to 20,000 passengers per hour per direction over time to meet this growing demand.
A photomontage of O’Connell St after the construction of Metro North.
The proposed station at St Stephen’s Green.
Improving travel times
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Transport
Metro North has been subjected to rigorous analysis by Government and in conventional cost benefit terms the project will deliver a net economic gain to the Exchequer. On top of this positive cost benefit analysis there are other wider economic benefits.
“…InfraCo will be seeking to commence construction in an environment as free from complex interfaces as possible in order to reach commissioning and hence revenue generation in timescales that will minimise the finance costs generated within the construction period…” Huge benefits Metro North is expected to create in excess of 4,000 direct jobs during the construction period and it is likely that the majority of the construction workforce will be sourced from within Ireland. Other sectors of the regional economy will also benefit significantly such as those in the construction material supply industry. There will also be secondary spin-off impacts due to the expenditure of wages in the local economy by the construction workforce. Sectors that will benefit include accommodation and lunch and evening meal providers. During its operational phase Metro North is estimated to create 330 permanent jobs. The report “Economic Development Strategy for the Metro North Economic Corridor (MNEC)” prepared by Indecon International Economic Consultants on behalf of Fingal County Council predicts that the Metro North region from Santry to north of Swords will double its level of economic activity, increase employment to 66,700 jobs, and increase its population to 128,000 over the next 20 years. This is dependent, however, on Metro North. The strategy delivers a fundamentally changed vision for the development of the corridor as an Airport City Region, which coincides with the delivery of major infrastructure investment under Transport 21, including Metro North and the expanded Dublin Airport; incidentally, of the top 20 busiest airports in Europe only Dublin and Mallorca have no rail link. Metro North is the key to the sustainable continued expansion and economic growth of the Fingal region and Dublin as a whole. Along with a new port at Balbriggan, and new and upgraded road and rail infrastructure, it will provide access to the national airport, new land banks beyond it and a young highly educated workforce. This strategy plays a crucial role in shaping other economic development and planning strategies for Fingal in the future, including a Town Plan for Swords. The strategy is also designed to ensure that the maximum economic benefits are derived from the Government’s investment in Transport 21 and Metro North, thereby maximising value for money.
make an application under the Planning and Development Strategic Infrastructure Act 2006 to An Bord Pleanála for a railway order, which is the legal authority to implement the project. This is a different procedure from a regular planning application. An EIS accompanies the application and is prepared as part of the Environmental Impact Assessment procedure, which is governed by the EIA directive. As with any project, the EIS outlines a description of the works proposed, the effects on the environment and the alternatives studied in this regard, together with the measures to reduce and if possible remedy the adverse effects on the environment. It covers areas of the environment such as air, water, soil, architecture, heritage, human beings, flora and fauna, among other things. Government mandated the RPA to develop the Metro North project as a public private partnership (PPP). The project is being brought forward on the basis of a design, build, finance and maintain contract having a term of the construction period plus 25 years from the commencement of passenger services. The project will also include an operations contract, which will be effective from the commencement of passenger services. Under the Metro North PPP the private sector predominantly finances the construction of the project and is then repaid a service charge (availability payment) by RPA over a 25-year period from when passenger services commence.
A PPP project The ‘infrastructure gap’ and its negative impact on economic growth and job creation has been recognised for many years. Across Europe, the need to improve infrastructure, particularly in the transport sector, is seen as a necessary condition to successful economic growth. Governments, however, have limited financial resources to devote to increased capital expenditure and improving public services, and face restrictions on their ability to raise debt. In order to bridge the growing gap between the cost of the infrastructure and the resources available, and to ensure that the infrastructure is delivered as efficiently and cost-effectively as possible, PPPs are a growing element of public sector procurement across Europe. The Metro North PPP contract is due to be awarded in 2010. Within PPP procurement, InfraCo will be seeking to commence construction in an environment as free from complex interfaces as possible in order to reach commissioning and hence revenue generation in timescales that will minimise the finance costs generated within the construction period and hence increase value for money. RPA is therefore bringing forward some enabling works packages. The scope of the enabling works for the project include the construction of the station box at the Mater campus; utility diversions; heritage works; and, traffic junction reconfiguration. Details of the packages are available from the RPA but it is worth noting one point: there are four statues in O’Connell Street – Daniel O’Connell; William Smith O’Brien; Sir John Gray and Jim Larkin – that will need to be temporarily relocated. We are very pleased that the National Museum of Ireland has kindly agreed to display all four statues at Collins Barracks for the duration of the works, this means they will continue to be accessible to the public while Metro North is being constructed.
Three work streams Turning to more practical matters the Metro North project is divided into three distinct work streams. In early 2006 the Railway Procurement Agency (RPA), in consultation with the Department of Transport, decided to parallel the planning and PPP procurement process for Metro North. A decision was also taken to bring forward a series of enabling works packages. In order to construct, operate and maintain a metro or light railway, RPA has to
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Rob Leech Rob is Metro North Project Manager with the Railway Procurement Agency.
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Valuation
What is it worth? It may be matter of opinion, but it is a very important matter. SEAN McCORMACK explores the issue of value.
The valuation of real property has always been a matter of professional opinion and prone to variation from valuer to valuer. In the normal course of events, valuers will inform their opinion with evidence from the market in the form of comparative transactions, both sales and lettings. Valuation can still be a difficult and frequently subjective exercise even in the context of plenty of comparisons, particularly, commercial property and development land, which is not homogenous and is quite diverse. Consider then the valuers’ difficulty recently and at the current time. There is no functioning market at present, which is suffering from a lack of confidence and also the absence of bank funding for new deals. It is the investors and players in the market generally that make the market and not the valuers who must try to interpret what is happening. During the boom, valuers found themselves following the deals and consistently moving valuations up. Over the last year or so, valuers have had to lead the market down and mark down valuations correspondingly based primarily on sentiment and not necessarily on transaction evidence. This process is made more difficult against the backdrop where there is a price gap between what the few buyers in the market may wish to pay and what the majority of potential vendors might in theory accept. An existing owner may argue that a valuation made now is fundamentally unfair given market stagnation as he/she would not consider it worth selling. The lending institutions appreciate the difficulty with valuations taken at a point in time but may nevertheless require a figure in order to review loan covenants, particularly in relation to loan to value ratio (LTV).
for the valuer to plot recovery in end values back some way towards peak. One needs to be careful and surveyors should try not to stray too far from accepted bases of valuation and the Red Book generally.
Red Book
There has been some debate around a more medium-term approach to valuations and the idea of ‘sustainable’ values. Unfortunately, the concept of sustainable value can be argued both ways. On the positive side, a mediumterm view in prime locations may give the valuer more confidence towards recovery and potential uplift in value from his/her view of the current position based on a snapshot view in time. The argument can therefore be presented that the ‘fair’ or true value of the property now is in fact in excess of its technical assessment in accordance with the strict definition of market value. On the negative side, the notion of sustainability as a form of hedging against risk to even out cycles, would suggest a discount below market value. In effect, this is what lenders are doing with the reductions in LTV levels in the current climate.
The RICS Valuation Standards (Red Book), now re-published in its updated 6th edition format, is the bible for Chartered Surveyors undertaking valuations for secured lending. In order to comply with the mandatory practice statements contained within the Red Book, valuers must determine the basis of value that is appropriate for every valuation to be reported. The most widely used and standard approach to basis of valuation is market value (MV), which is the only appropriate basis for the purposes of secured lending. This is an internationally recognised and well settled basis; the definition now formally accepted by the RICS is that of the International Valuation Standards Committee and is defined as: “The estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. In the current market, this approach is problematic in that it can be argued that any vendors coming to the market are only doing so because of a certain compulsion. Without such compulsion (in accordance with the definition) vendors do not perceive the price they will achieve in the current market to be sufficiently high or notionally fair. Therefore, it can be argued that any market valuation assessed at the current time is more accurately a reflection of a forced sale value. The use of forced sale value as a basis valuation is not permitted under the provisions of the Red Book, which states at para 2.4 of Appendix 2.3 under the heading ‘Special Assumptions’ that: “It is a common misconception that in a poor or falling market, there are few ‘willing sellers’ and that, as a consequence, most transactions in the market are the result of ‘forced sales”. Accordingly, valuers may be asked to provide forced sale advice on this basis. This argument has little merit because it is suggested that the valuer should ignore the evidence of what is happening in the market. The question arises whether this strict interpretation can be applied to a relatively small illiquid market such as our own in a period of stagnation.
Making the call
Definitions of worth
Ultimately, the valuer, when faced with a formal valuation, will need to make the call as to which approach is most appropriate on a case by case basis. Certainly, in prime locations, there is a strong argument in favour of appraisals taking cognisance of some growth explicit calculations where it may be possible
The application of MV requires the assumption of not only a hypothetical purchaser but also a hypothetical vendor. The issue of what a property might be worth to the actual owner will depend on the circumstances of the owner. The Red Book does include a definition of ‘worth’, which is defined as:
Sustainable values
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Valuation
“The value of property to a particular investor, or class of investors for identified investment or operation objectives’’. The key difference from Market Value being the reference to a particular investor with identified and measurable objectives. Worth does provide an interesting academic excursion but is really no good to the valuer as it is not a permitted basis for lending or financial statements. The Red Book also defines ‘fair value’ but this should not be confused with ‘fair value’ under The International Financial Reporting Standards (IFRS), which is accepted as being equivalent to MV. ‘Fair value’ in the Red Book context requires both parties to the transaction to be identified and not merely hypothetical and is essentially a form of ‘special purchaser’ assessment.
Valuation, a model of uncertainty Is another model of valuation necessary in current times, asks TOM DUNNE.
Valuation uncertainty Whereas transaction evidence underpins the valuation process, the definition of market value, including the commentary including practice statement 3.2.4 requires the valuer to reflect the realities of the current market. In this context, valuers must use their market knowledge and professional judgement and more than the usual degree of professional judgement is required. This gives rise to the logical conclusion that valuations in an uncertain or stagnant market have a higher level of uncertainty associated with them. Chartered Surveyors should apply the standards set out in Guidance Note 5 (GN5) contained within the Red Book. GN5 lists market instability as one of the specific causes of valuation uncertainty. The guidance suggests that valuers provide detailed contextual commentary in relation to the causes of uncertainty and how this has been considered in the formulation of the valuation opinion. Some valuers have understandably adopted certain general assumptions in order to make the approach to valuations somewhat easier. An example is an assumption that finance would be available for the transaction on ‘normal’ terms.
Recent Guidance Note In its most recent Guidance Note published on November 26, 2008, and entitled ‘Valuation Uncertainty and Market Stability’, the RICS has endorsed the application and use of GN5 but valuers are strongly cautioned against general qualifications that devalue or question the authority of the advice given. It is suggested that caveats that indicate that the valuer has not been able to accurately assess the impact of market events should be avoided. Under the heading ‘Additional Notes’, the Guidance Note states: “However, these comments should not be linked back to infer that the market value reported is somehow incorrect or unproven”. The use of the word unproven is interesting and also perhaps something of a contradiction in terms given that fundamentally, a valuation is a matter of opinion and always remains as such whether the property is actually brought to the market or not. Clearly, therefore, the valuer cannot run for cover and must take a view but should endeavour to explain the context as much as possible and in this regard, the contents of GN5 and the supplementary Guidance Note from the RICS are helpful and should be carefully considered.
Sean McCormack Sean is immediate past President of the SCS, a Chartered Valuation Surveyor and Director of Professional Services at DTZ Sherry FitzGerald.
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Among valuers a debate is taking place about whether in a challenging market it is appropriate to, as the jargon has it, mark to market, mark to sentiment or mark to an agreed and accepted model in order to arrive at a property valuation. Against an inactive property market and discussions about the appropriate pricing for the transfer of property backed loans to NAMA, an issue clearly arises about whether another concept of value rather than open market value is required for current conditions. Other concepts such as intrinsic value or sustainable value are put forward as models that would better suit, particularly where market value is either difficult to assess or greatly discounts a perceived future value on assumptions that the market will return to more normal conditions.
Concepts of value As with market value, all these concepts have their positives and negatives, are suitable for particular purposes and can greatly assist decision making. Sustainable value is taken from the environmental movement and looks wider than market considerations. Long-term value moves business decision making from what can be seen as a damaging focus on short-term shareholder value, while true value is perhaps a subjective concept related to an assessment of worth. Fair value implies a transaction between parties where special considerations other than the open market price is taken into account. Intrinsic or fundamental value is calculated by discounting all future cash flows at a specified rate to get the net present value. This can differ from the market price on a particular date and can be used to help decide to buy or not given the available market price. Distress value normally means having to sell in a short time frame at whatever price is available on the market within that time. Selling property takes time even in a good market. In a difficult market time may not be available due to other business considerations and a vendor may have to take a price available at a point in time from those that can complete a purchase speedily and often without the necessity of raising finance. Extending beyond these concepts of value are suggestions that underlying demographic considerations and location theory should be used to develop economic models to derive underlying values. No matter what model is used all valuations will exhibit a degree of uncertainty. What lies behind the proposition that alternatives to mark to market valuation would be more appropriate is the view that the uncertainty in valuation arises from inadequate knowledge of accessible facts which could be incorporated into a well designed model to arrive at a more certain valuation. Simply put if more information can be obtained for a well designed model the valuation will be more certain or fit for purpose. But every property is unique, property markets are local and market conditions are sensitively dependent on many
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variables with a consequence that property valuation is by its nature an uncertain exercise. Conventionally property valuers mark to market using a well tried definition set out in the RICS Red Book. This definition uses assumptions about markets, sellers and buyers to allow a rational approach to valuation. In normal conditions adequate transactional evidence is available to allow a sufficient degree of confidence in a valuation using this definition. In a time of rapid transition or in market hiatus such evidence may be limited or become dated rapidly, or indeed be absent for some time, leaving valuers to rely on their own experience and feel for the market. Sentiment is, however, not regarded as scientific and in the absence of hard evidence the uncertainty of valuation is increased with a resultant reduction in confidence. As a result alternatives based on financial models using financial, economic and social statistics are often put forward as a replacement, particularly by those with a background in finance and/or economics. These models, it is suggested, can be used to identify an intrinsic, sustainable or long-term value and are suggested to be more useful than benchmarking against a market with limited or no transactional evidence. Also, where conditions in the market are so poor that a vendor would only sell if distressed, the evidence from transactions is not regarded as true value and some other benchmark is seen as more desirable. Such models are conceptually attractive but issues arise about their application to property valuation, which should give rise to caution. The economic nature of property and distinct characteristics differentiating property from other asset markets must be considered, with the result that valuation models not directly rooted in transactional evidence may prove inappropriate for forming opinions about valuation.
protection issues hinder the wide availability of information about transactions in the property market. Departing from this approach and using models relying on inputs derived from economic, demographic and financial statistics would require considerable judgement about which of those would be appropriate and for which category of property – always assuming that a suitable range of quality statistics is available.
The future is unknowable Inevitably also, some inputs would be based on assumptions about future conditions and forecasts or projections. But there is an inherent difficulty with this. The future is unknowable and once a forecast goes beyond six months or a year, reliability becomes a real problem. The final output, i.e., a valuation figure or a range of figures, would be sensitively dependent on slight changes in any input. Hence the reliability of any valuation derived from such calculations would be uncertain. During periods when transaction levels are normal, it is probable that valuations derived using such a model would not prove as accurate as traditional valuations in determining market values. It is reasonable to imagine that consequently they would not gain the confidence of decision makers. When valuation methods based on forecasts about future demographic or economic conditions are proposed I am always reminded of something J.M. Keynes said ... the only function of economic forecasting is to make astrology look respectable! What Keynes was getting at is that there is an inherent unreliability when using forecasts about the future. This needs to be kept at the forefront of the mind when using them.
Valuers should not “make the market” Property markets are distinctive Often the distinctiveness of property markets is not fully appreciated by those with a background in conventional economics and finance. The heterogeneity and immovability of individual properties, information deficits about the physical structure of particular buildings and the market together with the complexity of legal title combine to distinguish property markets from other markets. Developing valuation models other than those marking to market or sentiment may, therefore, be more difficult than envisaged and may turn out to be even more uncertain than conventional approaches. It is significant that property valuation is usually a specialist activity carried out by valuers working closely with estate agents active in the market and that valuations are normally based on comparables using direct transactional evidence available from those agents. This, it must be observed, is even more necessary in Ireland where data
In the 1980s I did a calculation which showed that valuations of office buildings in Dublin were unreasonable given that they implied a rate of rental growth that was unrealistic and could not be envisaged at that time. I wrote an article for the IAVI magazine, the Property Valuer, explaining this. At the time the reaction by many valuers was interesting. Basically, the view was that that from a valuation perspective it did not matter that the implied rate of growth was unrealistic if people in the market were willing to take a view notwithstanding this. The feedback from practising valuers was on the lines that where the limited transactional evidence from the market suggested this was the case it would be unwise not to reflect this in a valuation and rely on the supposed rationality of the mathematical analysis. The view was that valuers should not “make the market” by giving opinions of value that could not be stood up in the actual marketplace. Evidence from the market should always take priority even if this
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was limited and contradicted a more rational assessment of the figures. This is not to say that the market is always right, particularly the property market. Clearly it is not as simple as that.
The market is less efficient than others Bear in mind that property is heterogeneous and is traded at price points complicated by the specific terms and conditions of any deal. Often the actual terms and conditions that can have a significant influence on the price, are confidential to the parties. In addition, even in normal markets, transactions are somewhat infrequent relative to levels in other asset markets. Simply put, in economic terms, the market is less efficient than other asset markets and this has consequences. The market will overvalue or undervalue property relative to long-term trend levels. Sometimes exuberant purchasers, the uninformed, or indeed those with special interests, might pay too much for property and do so on such a consistent basis over an extended period of time that they make the market. It may be the case that purchasers simply take a risk that they can make something work given some other advantage or insight they might have. They can be wrong but the market price is the market price. Moreover, it seems clear that cycles in the property market are longer than those in other markets with the result that an irrational market can endure for some considerable time giving the impression that conditions existing at any given time are normal. It is clear too that at times purchasers stand off the market due, for example, to the unavailability of finance and vulture purchasers expecting to buy at a severe discount are the only buyers. At such times questions will arise about whether available transactional evidence reflects market value. Of course these are features of other asset markets but property cycles are both amplified and are longer, and it should be remembered that heretofore banks liked property as collateral and were often sanguine about ebbs and flows in market value as property is regarded as a long-term investment.
Why contradict the evidence from the market? Valuers should, of course, advise that prices paid in the marketplace at a particular point in time may appear unrealistic when assessed using calculations based on reasonable economic forecasts. But as to whether they should use these calculations to determine their opinion of market value at any given time, well that’s a completely different question. Could a valuer credibly give an opinion, based on a specified model, that a particular property is worth more or less than transaction evidence from the market suggests? Probably, if a valuer is giving investment advice or has been asked to advise on the worth of a property to a particular client for a specified purpose. But if asked for an opinion of market value at a particular point in time, why should a valuer contradict the evidence from the market? Marking to the market is more appropriate when asked for an opinion of market value at any particular point in time. Valuing to a model is fine as well but to conflate a calculation to derive a figure for the price, worth or value of a property for a specified party or purpose with a market valuation would be an error of principle. The two figures can differ significantly.
Judgement is crucial Given the nature of property markets, the best available opinion of market value will be obtained from a capable valuer working in close association with those representing buyers and sellers active in the market at a particular point in time and relying on a sophisticated analysis of transaction evidence. Where such evidence is limited or unavailable, the judgement of an experienced valuer with
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market intelligence is crucial, always remembering that the valuation will be uncertain. Using an economic or financial valuation model based on reliable statistics will certainly inform the valuation, but ultimately it is the valuer’s judgement about the market that should be relied on if it is the market price that is needed for decision making.
Values can differ substantially This is not to say that some alternative method of assessment of the worth of a property to a particular party should not be developed. Such an exercise could be carried out by NAMA and used as a formula to extract non-performing loans backed by property collateral from the banks. This might give the banks the capital they need but there can be no assurance that the value put on the collateral using such a model would then be a guide for what the particular property might achieve if sold on the market at the date of the transaction or indeed subsequently. These values could differ substantially and using a valuation based on a specified model to identify market value could mislead and be very costly if incorrectly used as a tool to achieve a desired objective. It should be borne in mind also that a valuation resulting from such an exercise, if published to the public, might influence the market through a process of “anchoring” whereby people intuitively start with this when considering what to offer and accept in the event of a sale. Given present circumstances there are great risks in all this when valuing property. What needs to be remembered is that each property is unique with its own problems requiring individual attention to resolve if it is to be presented to the market in a manner calculated to achieve the best price. In this there must be work for valuers, estate agents and lawyers who will have to be involved in whatever process is devised to resolve present difficulties in the market and in banks if overpaying for impaired loans backed by property as collateral is to be avoided.
Valuation is judgmental and open to uncertainty All in all, it is important to realise that valuation is a complex judgmental exercise open to great uncertainty, particularly when transaction evidence is sparse. Given the nature of the property market there is an inevitability about this that cannot be avoided by devising an expedient valuation model. Certainly, valuation models using demographic, economic or financial forecasts have their place but only as some of the inputs to forming an opinion and for an identified purpose. Their place is probably more in the domain of investment advice rather than as an indicator of current market value. Using such models, valuers certainly can furnish informed advice as to whether a spot valuation at a particular point in time is out of kilter with longer term trends. Whether this will reduce uncertainty or increase accuracy will always be moot. Uncertainty will always be there when buyers stand off a falling or stagnant market. In these circumstances the duty of the valuer is to form an opinion of value and then report and assess the uncertainty associated with this. The old valuation reasonableness test should always apply: after all the sums are done stand back for a while and think, will the property sell at that valuation in the market?
Tom Dunne Tom is a lecturer on valuation methods in the Dublin Institute of Technology.
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Legislation
New Property Services Bill The Property Services (Regulation) Bill 2009 is to give effect to the recommendations of an important report.
In 2004, the Auctioneering/Estate Agency Review Group was established by the Government to examine the licensing and regulatory arrangements applicable to property services providers. The express main purpose of the Bill is to give effect to key recommendations of the Review Group. The Review Group found that the majority of commercial transactions are on a business to business basis, whereas most residential property transactions, whether auctions or private treaty sales, are undertaken by private individuals. The Review Group concentrated its efforts primarily on the residential property sector. However, it recognised that many auctioneers and estate agents are active both in the residential and in other sectors of the market. The Review Group noted that this market is regulated under the Auctioneers’ and House Agents’ Act, 1947. The operation of the Act simply awards or refuses a licence. It provides no ongoing official supervisory, disciplinary or redress system. The Review Group found that the current regulatory system is inadequate for current market needs. While recognising the contribution to regulation of their members made by the representative bodies in the auctioneering profession, the Review Group concluded that there is a compelling need to establish an Auctioneers’ and Estate Agents’ Regulatory Authority in order to achieve uniformity and transparency in licensing, regulation and information provision. The Review Group was of the view that the Regulatory Authority should operate on a principles-based approach, with the objective of allowing the market to function in a dynamic way, while, at the same time, ensuring that it operates to high standards of probity. The Review Group recommended that the Auctioneers and Estate Agents Regulatory Authority should be established as a matter of urgency. Its report was published in July 2005.
Property Services Regulatory Authority The Bill establishes the Authority to perform the functions required by the Act. The promotion of the Bill applies to property services. Property service is defined in the Bill and is very broad ranging. It is any service provided in Ireland in respect of property in Ireland, or elsewhere, involving: the auction of property (other than land); the purchase, sale and letting of land; and, property management. Local authorities acting as a service provider are excluded from the provisions of the Bill.
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These functions include the issue and renewal of licences to property services providers; the establishment and maintenance of a register of licensees; the control of education and training standards; the nature and minimum levels of professional indemnity insurance; the control of standards generally to be observed in the provision of property services by licensees; the control of a Property Services Compensation Fund; the administration of a system of investigation of persons providing property services; the development of codes of practice; and, public awareness and information in respect of property services. A failure by a licensee to observe a provision of a code of practice will not of itself render the licensee liable to any civil or criminal proceedings but, where relevant, a code of practice will be admissible in evidence in proceedings under the Act. This is similar to provisions of the anti-money laundering legislation.
Licences to provide property services It will be an offence for a person who does not have any type of licence under the Act to provide a property service, or to represent or hold himself or herself out as available to provide a property service. The Authority will maintain a Property Services Register. The Bill sets out the application system for licences to provide property services. An application must be in the form specified by the Authority and must be accompanied by references as to the applicant’s character and competence (including details of education, training and experience); a certificate by an accountant that proper financial systems and controls are or will be in place for the protection of client monies; evidence in writing of the availability to the applicant of the necessary level of professional indemnity insurance, and the appropriate fee. The Authority may, if necessary, require the applicant to furnish additional information in respect of the applicant’s character, competence and financial position and may require verification of this information by affidavit. In the case of companies and partnerships, the information will be required in respect of the directors and partners as well as any manager, secretary or other similar officer of the company or partnership. A licence, which will contain a registration number and normally be valid for a period of one year, will not be issued to successful applicants until the relevant contribution has been paid to the Compensation Fund. There is a right of appeal in any case where the Authority refuses to issue a licence.
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A licensee must display its registration number in advertisements, sales brochures, business correspondence and on signs erected on land in respect of which the licensee is providing a property service.
General obligations of licensees Licensees must issue a letter of engagement in the form specified by the Authority to all clients. The letter must be issued within three working days of starting to provide, or agreeing to provide, a property service, whichever is earlier. If the client does not sign and return the letter to the licensee within seven working days following expiry of the three-day period, the licensee must cease, or not commence, provision of the property service. A letter of engagement signed by both parties becomes a property services agreement. A licensee must keep records of all property services provided by him or her for a period of six years in the form specified by the Authority. The Authority can make regulations in relation to the keeping and preservation of client accounts and records by licensees. The Regulations may deal with the kinds of bank accounts that may be opened and kept by licensees for the keeping of client monies and the rights, duties and responsibilities of licensees in relation to such monies; the circumstances in which monies other than client monies may be paid into client accounts and the circumstances in which, and the persons for whom, monies may be paid out of client accounts; the accounting records to be kept by a licensee; client entitlements, including the treatment of interest, income or profit on client monies; the circumstances in which a licensee may be required to make good monies to a client account; the examination by an auditor of accounting records maintained by a licensee; and, the examination, by or on behalf of the Authority, of the financial circumstances of a licensee insofar as such circumstances could affect the licensee’s capacity to provide property services.
It will be an offence for a person who offers land for sale by auction to bid at the auction or to procure, authorise or permit another person to bid on his or her behalf. It will also be an offence for a licensee knowingly to accept such a bid. Where it is established that a seller has bid for his or her own land, or arranged for another person to do so, the purchaser may refuse to complete the contract for sale without incurring any civil liability. Licensees must keep a record of all offers received where land is sold other than by auction. The Authority may, with the Minister’s consent, make regulations in relation to matters concerning the sale and letting of land. The Authority may investigate complaints against licensees. The Authority is required to have a complaint investigated unless it is satisfied that it is not made in good faith; is frivolous or vexatious, or without substance or foundation; or is likely to be resolved by mediation or other informal means between the parties. The Bill provides for the establishment of an independent Property Services Appeal Board to hear and determine appeals against specified decisions of the Authority. Details of the composition and operations of the Appeal Board, the decisions that can be appealed to the Board, and the procedure for handling appeals are set out in the Bill. The Bill provides for a Property Services Compensation Fund. Payment of the appropriate contributions to the Fund will be a precondition for the issue or renewal of a licence.
Review The SCS has set up a working group to review the Bill and make representations to Government, as may be appropriate. Your comments would be valued and may be sent to Paul McElearney (paul@mcelearney.ie) or John Minihane (jminhane@mhc.ie). A copy of the SCS Submission to the Seanad is available to view in the GP section of the members’ website.
Sale or letting of land A licensee who values land for sale or letting must provide the client with a statement of the “advised market value” or “advised letting value” of the land within seven working days or such longer period as may be agreed. These terms are defined and the provisions prohibit a licensee from quoting an estimated selling price of land that is less than the advised market value.
John Minihane John is a Chartered Surveyor and a partner specialising in real estate law with Mason Hayes+Curran.
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Legal cases
Property case reports Byrnes & Another v Meakstown Construction Limited High Court, [2009] IEHC 123 In September 2006 the plaintiffs entered into a contract with the defendant for the purchase of an apartment in Leixlip, Co. Kildare. The contract price was €330,000 of which €16,000 was paid as a deposit. The site did not have direct access to the public road so when the site was acquired by the defendant, the seller purported to give a right of way to the public roadway from the site across an area of land owned by Kildare County Council. The plaintiffs’ solicitors raised pre-contract enquiries concerning the right of way to the apartment being sold. The contract was signed and returned on the basis that the defendant would furnish evidence of a satisfactory right of way to the apartment. Over a number of months, correspondence continued to deal with the issue between solicitors but the matter had not been resolved by December 2007. The plaintiffs’ solicitors served a completion notice on the defendant’s solicitor in December 2007. The defendant claimed that it had provided, within the 28-day period of the completion notice, proper evidence of a satisfactory right of way and the plaintiffs were exploiting a downturn in the property market to contrive a situation where they could withdraw from the contract. The Court found that although the initial queries raised by the plaintiffs’ solicitors with regard to a satisfactory right of way were valid, these queries had been adequately addressed by the defendant during the 28-day period of the completion notice. During this time the defendants had obtained a deed from Kildare County Council confirming that a satisfactory right of way existed. The Court found that the plaintiffs were not entitled to rescind the contract nor were they entitled to the return of the deposit paid.
Dunnes Stores (Ilac Centre) Limited v Irish Life Assurance plc and Joseph O’Reilly High Court (Commercial Division), [2008] IE HC 114 This was a significant case concerning landlords’ refusal to give consent to a tenant for a proposed change of use for a unit in a city centre shopping centre.
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The unit, the subject of the tenant’s application, forms part of the Ilac Centre, which was one of the first centres of its kind in Ireland. The Court acknowledged that the parties agreed that the Centre had become somewhat “tired”. The defendants own the Centre in equal shares. The plaintiff holds the unit at issue under a long lease at a nominal rent, which was purchased for a significant capital sum. The dispute arose between the parties concerning a requirement on the part of the tenant to change the use of one of its units in the Centre for use as a “high quality food hall”. This use was inconsistent with the then existing user clause in the lease. It was agreed in evidence that the tenant was entitled, under the terms of the lease, to apply for change of use and the landlords were not entitled to unreasonably withhold their consent. Following application by the tenant, and various meetings and consultations, including the consideration of additional information provided by the tenant at the request of the landlords, a letter refusing consent issued to the tenants. The stated reason was “on the grounds of good estate management”. The case, therefore, concerned the issue as to whether the consent of the landlords had been unreasonably withheld. The tenant responded in writing, indicating that the reason given was not understood and seeking an explanation as to what was meant by “good estate management” in the circumstances of the case. The tenant did not receive a response to this letter. Subsequent to proceedings having issued, and in reply to particulars as part of the defence, the landlords advised that consent had been refused “for good and sufficient reasons relating to the management and control of the Ilac Shopping Centre”. The reason was further explained in a subsequent reply to particulars as “the exact basis of the defendants’ plea is the defendant’s opinion that the plaintiff’s proposed use would not be consistent with the defendants’ vision and image for that part of the Ilac Shopping Centre, namely as a primary retail fashion area”. The tenant’s three primary contentions in support of its case that consent had been wrongfully withheld were as follows: that the true reason for withholding the consent was not that given by the landlords (that is the fashion retail “vision and image”) but rather the refusal was to be used as a
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means for exerting leverage on the tenant to give up possession of another unit to which it also held a leasehold interest in the centre; that the reason given by the landlord was not bona fide the true reason; and, even if the “fashion” reason was the true reason, it was claimed by the tenant that such a reason was incompatible, in all the circumstances, with the text of the relevant clause of the lease. The user clause in the lease provided that the landlord should not unreasonably withhold its consent to a proposed change of user, but in considering the matter full account should “be taken of the fact that the Demised Unit forms part of the Centre in which it is necessary and desirable both for the well being and prosperity of the Centre as a whole and of the individual tenants of other units therein, that the nature of the business carried on in the Centre as a whole should be of an equally high standard, quality, tone and be as diverse as possible”. The Court found that the wording of the clause obliged the landlord to have regard to specified matters in considering whether to consent to the change of use. The lease imposed an obligation on the landlord to have regard to diversity of use as part of the landlords’ consideration of any change of use application. It held that the landlords’ refusal of the tenant’s application for change of use breached the obligation for two reasons. Firstly, the landlords did not give any consideration to diversity as part of their deliberation. Secondly, the stated position of the landlords, which involved turning a very significant portion of the shopping centre into a largely single purpose retail fashion mall, was inconsistent with the obligation of diversity. On this basis, the Court was satisfied that the tenant was entitled to a declaration that refusal of consent was unreasonably withheld. The Court went on to examine the proposition that the refusal of consent for an improper purpose, not contemplated by the lease, is not permissible. The Court accepted that there is nothing in itself at all wrong with the landlord seeking to obtain, by negotiation, possession of any property. The Court had heard evidence of pre-existing arrangements between the parties with regard to the possible exchange of units within the Centre. The Court emphasised that the terms of a lease bind both the landlord and tenant contractually to a series of terms. Among the landlords’ obligations would normally be an obligation not to unreasonably withhold consent to change of use. The landlord is obliged to act reasonably in respect of an application for change of use. The Court found that the landlord is not entitled to use such an application to obtain leverage in a strategy to regain possession of the property, even though he would be perfectly entitled to pursue any legitimate negotiation strategy to seek to achieve the same end. The reason for a landlords’ refusal must be reasonable and independent of its strategy to regain the property. However sensible, from the landlords’ point of view, a particular position may be, it cannot amount to a proper reason for refusing consent to change of use unless it is a reason contemplated by the lease. Again, on this point, the Court found that the tenant had established that at least part of the purpose behind the refusal to give consent in the case was an improper purpose. Therefore the Court found in favour of the tenant on two bases: n that the landlords improperly took into account the possibility of using a refusal of consent as leverage for the purposes of securing possession of some or all of a separate unit in which the tenant held the leasehold interest; and n even if the landlords did not take that improper factor into account, it was inconsistent with the relevant clause of the lease for the landlords to have
refused consent without having had proper regard to the need to maintain diversity in the types of business permitted to operate within the Ilac Centre as a whole.
Like it Love Products Limited v Dunlaoghaire Rathdown County Council High Court, [2008] IEHC 26 This was High Court appeal of a Circuit Court decision refusing the plaintiff’s application for a new tenancy of premises forming part of Blackrock Town Hall. The tenancy in the Town Hall building arose by way of written agreement dated January 26, 1998, subsequently extended by letter dated July 22, 1998, and stated to be for a “temporary convenience letting of the premises for the purposes of section 75 (4) of the Local Government Planning and Development Act 1963”. The landlord claimed that the tenancy had terminated on August 31, 2006 by means of a notice to quit dated June 23, 2006. The tenant claimed that the notice was not a valid notice to quit. In the alternative, the tenant claimed a new tenancy pursuant to Part II of the Landlord and Tenant (Amendment Act) 1980. This was based on the fact that in the five years preceding August 31, 2006, the premises was bona fide used by the tenant for the purposes of carrying on a business. The landlord denied the tenant’s entitlement. It relied on the intention of the parties that the letting was a temporary convenience letting and in the alternative, that the landlord required vacant possession for the purposes of carrying out a scheme of development, which included the premises and in respect of which planning permission existed. The Court accepted the submission on behalf of the landlord that the Court must decide what the intention of the parties was having regard to the language used in the contract itself and the surrounding circumstances. The Court held that the tenant could not contend that the letting of the premises was anything other than a temporary convenience letting. The Court so held on the basis of the express written terms of the letting and the letter extending the letting and also because in evidence the principal of the tenant company said he had read and signed the agreement, having taken independent legal advice. Therefore the premises were not a tenement within the meaning of section 5 of the Landlord and Tenant (Amendment Act) 1980 as the letting was expressly made for temporary convenience. The Court also found that section 75 (4) of the Local Government Planning and Development Act 1963 gives power to the Authority, among other things, to lease property where the Authority considers that it will not require the use of the property for the period of the lease. It found that Section 75 (4) (b) provides that neither the Landlord and Tenants Act 1931 – 1958 nor the Landlord and Tenant (Amendment) Act 1980 shall apply in relation to a lease granted for the purposes of the section.
John Minihane John is a Chartered Surveyor and a partner specialising in real estate law with Mason Hayes+Curran.
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