Valuing for fair rents The law and valuation of regulated residential tenancies Authors: Dr Tim Dixon, Director of Research Gaye Pottinger, Senior Research Officer Andrew Marston, Research Officer

Valuing for Fair Rents The law and valuation of regulated residential tenancies June 2001 2nd Edition October 2001

ISBN 1 899769 390

© The College of Estate Management 2001

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this publication can be accepted.

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ACKNOWLEDGEMENTS This research report has been produced independently by the authors, and the views expressed are our own.

The research team would like to thank the following for their help and support:

The British Property Federation for sponsoring the project, in particular Richard Lambert who chaired the project steering group.

Members of the project steering group:

David Ramsell, Cadogan Estates;

Julian Briant, Surveyor to the Eyre Estate;

Simon Cockshutt, Coudert Bros, solicitors; and,

Prof Neil Crosby, Department of Land Management, University of Reading, whose contributions to the pilot study have been included in Section 3 on housing sub–markets and Section 5, the review of the valuation process. He also had intellectual input into the review of valuation practice in Section 7 and the subsequent conclusions concerning the assessment of scarcity within the valuation process.

Those who contributed information and material to this research and to the prior pilot study:

Roland Cullum and Nicholas Baynes of Messrs Cluttons Daniel Smith;

Denis Downe, Rob Miles and Graham Herbert of DETR;

Alan Corcoran, Director, Southern Region, The Rent Service; and,

PN di C Willan, Willan Bootland White, solicitors.

Members of the Rent Service and Rent Assessment Panels in the three regions (London, South West and South East) who provided data for the case studies and who were interviewed for the project.

Gordon Fogg MA (Oxon) MSc DipTP (Tutor in Economics, The College of Estate Management) who provided the summary of the fair rent economics literature in section 3.2 of the report.

Meaveen Brennan, former member of the research team at the College of Estate Management.

Dr Tim Dixon Director of Research The College of Estate Management Whiteknights Reading RG6 6AW Tel: 0118 9861101 Fax: 01189 755344 Email: t.j.dixon@reading.ac.uk

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CONTENTS

Acknowledgements ________________________________________________________I

Executive summary_______________________________________________________ VII

1. Introduction ___________________________________________________________ 1

1.1 Purpose of the research .............................................................................................1

1.2 Background..................................................................................................................1

1.3 Aims ..............................................................................................................................2

1.4 Methodology ................................................................................................................3

1.4.1 Selection of case studies......................................................................................3

1.4.2 Interviews .............................................................................................................3

1.5 Report format...............................................................................................................4

2. Evolution of the fair rent system __________________________________________ 5

2.1 Introduction..................................................................................................................5

2.2 The Rent Act 1965 .......................................................................................................5

2.3 Early Operation of the Fair Rent System ..................................................................6

2.3.1 Assessment of scarcity.........................................................................................7

2.3.2 Evidence of scarcity..............................................................................................7

2.3.3 Effect of scarcity on the rent of a subject dwelling ...............................................7

2.3.4 Amenity, locality and scarcity ...............................................................................8

2.3.5 Summary of Francis Committee findings .............................................................8

2.4 The determination of fair rents ..................................................................................9

2.5 Limiting Fair Rents ....................................................................................................11

2.6 Summary of issues....................................................................................................14

3. Economic context of fair rents __________________________________________ 15

3.1 Introduction................................................................................................................15

3.2 The theoretical basis of housing markets ..............................................................15

3.2.1 Scarcity and the market adjustment process .....................................................15

3.2.2 Housing Submarkets ..........................................................................................19

3.3 Market indicators of scarcity?..................................................................................20

3.4 Implications for this study........................................................................................23

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4. Review of case law and legal framework __________________________________ 25

4.1 Introduction................................................................................................................25

4.2 Background................................................................................................................25

4.3 What is to be regarded and disregarded? ..............................................................27

4.4 The assumption of ‘no scarcity’...............................................................................28

4.5 Market rent basis .......................................................................................................31

4.6 Increasing the fair rent..............................................................................................32

4.7 Overview of legal framework....................................................................................33

4.8 Summary ....................................................................................................................35

5. The valuation process _________________________________________________ 37

5.1 Introduction................................................................................................................37

5.2 Valuation practice......................................................................................................37

5.3 The rent assessment panel process .......................................................................40

5.4 Summary ....................................................................................................................44

6. Fair rent determination in practice _______________________________________ 46

6.1 Introduction................................................................................................................46

6.2 Rent statistics – regional comparisons ..................................................................46

6.2.1 Summary ............................................................................................................47

6.2.2 Further questions for the case studies ...............................................................47

6.3 Regional case studies...............................................................................................48

6.4 The fair rent appeal ...................................................................................................48

6.5 The valuation process...............................................................................................50

6.5.1 Valuation evidence and unadjusted rents ..........................................................50

6.5.2 Valuation adjustments ........................................................................................54

6.6 Scarcity.......................................................................................................................56

6.7 Overall deductions ....................................................................................................57

6.8 Summary and conclusions.......................................................................................57

7. Valuation practice reviewed ____________________________________________ 59

7.1 Introduction................................................................................................................59

7.2 Adjusting comparable evidence for scarcity..........................................................59

7.3 A discount for voids?................................................................................................62

7.4 The incentive for repairs and improvements? .......................................................63

7.5 Implications for the rent capping order ..................................................................64

7.6 Summary and conclusions.......................................................................................66

IV

8. Conclusions and recommendations______________________________________ 69

9. Bibliography _________________________________________________________ 72

Appendix 1 Residential rent statistics _______________________________________ 75

Appendix 2 Case studies - tables of results ___________________________________ 82

Appendix 3 Case study valuations __________________________________________ 86

Figures

Figure 2.1 Greater London: Mean Registered Rents 1985–95 (adapted and extended from LRC (1997)) ....................................................................................................11

Figure 3.1 A simple model of fair rents (Cooper and Stafford (1975)) ....................................16

Figure 3.2 Fair rents and scarcity factors .................................................................................18

Figure 3.3 Components of residential return 1999 by region...................................................21

Figure 3.4 FPDSavills latent demand model ............................................................................21

Figure 3.5 Regional distribution of properties in low demand (from report by the Unpopular Housing Team, DETR 1999)...................................................................................22

Figure 5.1 Valuation approaches .............................................................................................38

Figure 6.1 Private tenancies by type in England......................................................................46

Figure 6.2 Original objection to rent officer registration ...........................................................49

Figure 6.3 Hearing held ............................................................................................................49

Figure 6.4 RAC registered fair rent ..........................................................................................49

Figure 6.5 Direction of change in fair rent on appeal ...............................................................51

Figure 6.6 Percentage change in fair rent on appeal ...............................................................51

Figure 6.7 RAC unadjusted market rent...................................................................................51

Figure 6.8 RAC valuation deductions (excluding scarcity).......................................................55

Figure 6.9 RAC Scarcity deductions ........................................................................................55

Figure 6.10 RAC overall reduction market rent to fair rent.......................................................55

Figure 7.1 Analysis of comparables for scarcity – rational approach.......................................60

Figure 7.2 Analysis of comparables for scarcity – current approach .......................................61

Figure 7.3 The effect of landlords improvements on the fair rent ............................................63

Figure 7.4 Valuation case studies ............................................................................................67

Tables

Table 1.1 Sample of RAC fair rent appeal decisions ................................................................4

Table 2.1 Timescale for the introduction of the Rent Acts (Maximum Fair Rents) Order 1999 ........................................................................................................................14

Table 3.1 Indicators of low demand housing (DETR, 1999) ...................................................22

Table 5.1 Pattern of Appeals, Regulated Tenancies and Registered Tenancies (source: DETR, 2000) ...........................................................................................................42

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Table 5.2 Fair rent appeals received in 1998 and 1999 (source: DETR, 2000) ......................42

Table 5.3 Breakdown of Panels caseload in 1998 and 1999 (source: DETR, 2000)...............43

Table 6.1 Sample of RAC fair rent appeal decisions ...............................................................48

Table 6.2 Market evidence relied on ........................................................................................52

Table 6.3 Market evidence by original objection ......................................................................52

Table 6.4 RAC unadjusted market rent compared to landord and tenant submissions ..........52

Table 9.1 Original objection to rent officer registration.............................................................83

Table 9.2 Hearing held .............................................................................................................83

Table 9.3 RAC Registered Fair Rent........................................................................................83

Table 9.4 Direction of change in fair rent .................................................................................83

Table 9.5 % Change in fair rent................................................................................................83

Table 9.6 RAC unadjusted market rent ....................................................................................84

Table 9.7 Valuation deductions (excluding scarcity) ................................................................84

Table 9.8 Scarcity deductions ..................................................................................................85

Table 9.9 % reduction RAC unadjusted market rent to fair rent ..............................................85

Cases

Anglo Italian Properties Ltd v London R.A.C. (1969) .............................................................29

Batt v London, City & Westcliff Properties Ltd (1967) ............................................................28

BTE Ltd v Merseyside and Cheshire Rent Assessment Committee (1991) ..........................26

Castle Court Investment Co. (Southampton) v Southern Rent Assessment Panel (1994)30, 39

Curtis v Chairwoman of London Rent Assessment Committee (1997)....................................

.............................................................................. 2, 11, 26, 27, 30, 31, 32, 33, 34, 35, 36

Laufer case (1974) .................................................................................................................31

Learmouth Property Investment Co. Ltd. v Aitken (1970) ......................................................29

Mason v Skilling (1974) ........................................................................................26, 27, 30, 34

Metropolitan Property Holdings Ltd v Finegold (1975).....................................8, 27, 28, 29, 35

Mountview Court Properties Ltd. v Devlin (1970)...................................................................31

Northumberland and Durham Property Trust Ltd v Chairman of London RAC and RAC (1998).............................................................................................................................29, 31, 32

Palmer v Peabody Trust (1975) .............................................................................................27

Palser v Grimling (1948).........................................................................................................28

Queensway Housing Assoication Limited v Chiltern, Thames and Eastern Rent Assessment Committee (1999) ......................................................................................................28, 36

R v West Sussex rent officer, ex parte Haysport Properties Ltd ([2001] EGCS16) ...32, 36, 65, 73

Spath Holme Ltd v Chairman of the North Western Rent Assessment Committee and another [2001] 30 EG 113 (CS)...............................................................................................33, 63

Spath Holme Ltd. v Chairman of the Greater Manchester and Lancashire Rent Assessment Committee (1995) ............................... 2, 11, 13, 14, 26, 27, 30, 31, 33, 34, 35, 36, 48, 73

Stephens v Rowlands (1974) .................................................................................................27

Stulrosan and Co v Mauroux (1988) ......................................................................................27

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Tormes Property Co v Landau (1971)....................................................................................34

Waring v White (1984)............................................................................................................31

Western Heritable v Husband (1983))....................................................................................28

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EXECUTIVE SUMMARY

Since 1988 the availability of market rental evidence in the residential sector has provided the basis for a more logical approach to valuing fair rents on property regulated by the Rent Acts. However, the fact that fair rents have remained below market rents since 1988 suggests a market in constant disequilibrium, valuations that are too low or poor quality of regulated property. Research by the College of Estate Management, funded through the British Property Federation, is based on a comprehensive review of the legal framework and valuation practice and challenges the usually accepted valuation approach. The research found:

Rent Assessment Committees (RACs) dealing with fair rent appeal cases are operating in line with current case law in taking the open market rent of comparable property as their valuation start point. However, the calculation to arrive at the fair rent is not always fully set out in decision notices and in many cases deductions were not separately itemised.

Scarcity is the most difficult factor to assess and the least well understood. The concept is insufficiently grounded in theory and the absence of defined criteria has led to practices that are confused and in some cases misguided.

Valuation practice is being applied incorrectly and irrationally to valuing fair rents and practices vary in different parts of the country.

Where scarcity is a factor, added rental value attributed to landlords’ improvements is discounted, denying landlords a market return on additional investment. This discourages the up–grading of property and runs counter to valuation rationale.

The Maximum Fair Rents Order has introduced an additional level of complexity into the valuation process and demands greater consistency between successive rental valuations. In many cases, landlords and tenants may be unaware of the scope for fair rent increases of 15% or more by the landlord implementing improvements, because they did not obtain a reasoned decision on rent registration or appeal.

The research recommends:

the implementation of a more rational and defensible approach to valuing for fair rents; or,

that the scarcity discount be scrapped and rent increases controlled through existing or modified capping provisions.

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The basis of fair rents ‘Fair rents’ were first introduced in the Rent Act 1965, to provide a system of rent regulation and residential security of tenure. The original objective was to prevent rents being forced up by scarce supply in the market and require rents to be set assuming supply and demand were roughly in balance.

The theory underpinning the requirement to eliminate ‘scarcity’ from a fair rent remains obscure. Like many statutorily based value concepts, the determination of a fair rent therefore requires the identification of a price that does not accord with precise reality.

A tribunal system for setting rents was preferred, drawing on the advice of property valuers as expert witnesses. Rents could be registered by application to local rent officers and appealed to regional Rent Assessment Committees (RACs).

Impact of the fair rent system The fair rent system resulted in the decline of the private rented sector, reversed after 1988 by the introduction of assured and assured shorthold tenancies. Since then, the number of regulated tenancies has continued downwards to about 200,000 or 6% of the UK private rented sector, while the assured market has grown to 67% of the sector.

Estimates for the UK indicate that the private rented sector will need to more than double by 2021 from 1.2 to 3.8m dwellings, suggesting an on–going excess of demand over supply. However, the position can vary greatly at the local level. For example, rapid growth in the buy–to–let market since 1996 has led to rising voids and static rents in some areas.

Overall, re–establishing the link to market rents after 1988 resulted in rapid rises in fair rents and several court cases were brought against the way fair rents are determined. The government response to tenants’ difficulties was to curb increases

via the Rent Acts (Maximum Fair Rents) Order 1999, which used a formula approach of the kind the original legislation had sought to avoid. However, to encourage landlords to improve poor accommodation the rent would not be capped if an increase of 15% or more were due to landlords’ improvements.

Regional variations National averages for fair rents disguise regional differences and wide variations in individual cases. London stands out from the rest of England – between 1993 and 2000, fair rent increases on appeal were less likely and lower than elsewhere and average weekly rents were highest. The reduction from assured to fair rents was also greatest in London at 57%, but was also relatively high in the two other case study regions, that is the South West (48%) and North West (56%). In the research sample the highest London rent (£484 pw) was over ten times the lowest, but in the North West (£81 pw) and South West (£188 pw) it was about double.

The market basis of valuation As evidenced by appeal decisions, RACs in the three case study regions were taking open market rental evidence from assured lettings as their valuation start point. Generally the market for unimproved / unfurnished lettings was non–existent and little or no evidence was available.

On average RAC market valuations were 7–9% below figures submitted by the landlord, but differences of opinion varied widely and were greatest in London, ranging from –67% to +28%.

Some differences in approach also occurred between RAC regions and panel members, for example in attitudes to the use of amortised cost information to assess the value of improvements and to making allowances for void costs between assured and regulated tenancies.

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Standards of evidence The standard of valuation evidence presented on appeal varied more by the parties than by the nature of the local market. Landlords were more often professionally represented and 67% presented valuation evidence, as against 19% of tenants. Higher value cases tended to be better argued because there was more at stake and the parties were better informed. Professionals more often took the role of advising their client rather than assisting the RAC as independent experts. Often they were not present at hearings to be cross–examined, limiting the ability of RACs to challenge or verify evidence.

Valuation deductions Most deductions from the market rent (scarcity aside) were for ‘quality’ factors, mainly lack of modernisation, disrepair, lack of furnishing and tenants’ improvements. Deductions were highest in the London sample, averaging 41.7%, but showed the greatest range in the North West at 15% to 64%.

In the North West and South West a greater part of the deductions were for landlords’ neglect of the property and several interviewees referred to accommodation in very poor condition, for example lacking full internal sanitation.

London cases more often made specific reference to adjustments for tenancy terms, but in deducting for quality differences many appeal notices did not clearly distinguish between tenants’ improvements and landlords’ lack of repair. This could be important if landlords are to be encouraged to improve physically substandard property.

Scarcity Although nil scarcity was regarded as rare, any imbalance in supply and demand was generally found to be so low in the North West and South West that in the majority of cases RACs made no deduction. In

London the scarcity deduction averaged 32.5% and ranged between 15% and 55%.

In assessing scarcity RACs generally relied on their own knowledge and experience and were aware of the case law requiring a relatively wide area to be taken into account. The view was also taken that ‘to make a deduction you have to have very positive evidence’.

Scarcity was usually deducted at the end of the valuation, after deductions for tenancy terms and property condition. However, it was not clear from appeal decisions whether the scarcity assessment was based on the regulated submarket of property that is unfurnished and unimproved, or the comparables’ submarket of improved or modern property let on assured tenancies. This approach to scarcity is irrational and undermines the integrity of fair rent valuations.

Valuation practice challenged The art of valuation is to adjust market evidence from comparables to the terms and conditions of the subject property. The focus for scarcity deductions should therefore be on the market comparables, not the subject property, before other deductions are made to arrive at a fair rent. By adjusting comparable evidence first, where scarcity in this submarket exceeds that of regulated property, fair rents will fall. The reverse will also be true. The sequence of deductions affects the outcome because scarcity is deducted as a percentage.

Scarcity aside, fair rents will be below market rents if the regulated property is in poorer condition than market comparables. Where this is down to landlord’s neglect, he can close the gap with market rents by implementing repairs and improvements. Unlike the current valuation approach, his additional investment will not be discounted by the

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scarcity factor, which is consistent with rational valuation practice.

Implications for the capping order It appears that in about 40–45% of the appeal cases studied landlords may have scope to increase the fair rent by 15% or more by carrying out repairs and improvements, and thus avoid the Maximum Fair Rent Order. Worked valuation examples and case studies are contained in the report.

The Order makes it important to have a consistent valuation basis between the successive rent registrations. Switching to a more rational valuation approach to scarcity now would produce a more correct valuation but would complicate the issue of calculating by how much the rent had increased since the last registration. Since the valuation basis is poorly understood, it seems unlikely that landlords and tenants will be any better at arguing their case under more complex rules.

Conclusions and recommendations Having highlighted the incorrect application of valuation methods to fair rents, valuation professionals and rent assessment committees will need to re-examine their approach. How rent levels might be affected by a change in practice is not predictable from this research and further work would be needed. Two propositions are put forward to rationalise and provide greater consistency in the valuation, that is for the government to:

(1) Provide a clearer definition of scarcity, its assessment and quantification for the purpose of the Rent Act, accompanied by valuation guidance and a training programme for rent officers and rent panel members; or

(2) Scrap the scarcity provision and control rent increases using the Maximum Fair Rents Order or a modified version for the period until regulated tenancies come to an end.

The researchers recommend the second proposition for the following reasons:

Regulated tenancies are dying out and implementing valuation reform is likely to be relatively expensive.

Rent increases are already controlled by the capping order. Fair rents would still be adjusted for differences in property condition and tenancy terms compared to the assured market. A modified capping order could also be used to provide greater certainty to tenants, landlords and the government by a planned phasing out of fair rents.

Scarcity is a very difficult concept and while the research recommends factors that might be taken as indicators of market demand and supply, it is unable to offer a viable benchmark for scarcity.

The market basis of valuation is better understood and rehearsed in case law and valuation practice.

About the research The research comprised a comprehensive literature review covering statute, case law and the economic context of fair rents. A sample of 148 fair rent appeal decisions were examined, drawn from three regions, that is, London, the South West and North West. Telephone interviews were undertaken with two panel members from each region and a rent officer from two of the regions. One interviewee preferred to reply in writing.

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1. INTRODUCTION

1.1 Purpose of the research The purpose of this research is to explain current practice in valuing for fair rents in the UK and examine the need for a more rational approach.

There is a long tradition of valuers being asked to set exchange prices for property that are divorced from the real market in order to deliver government policy. This happened with the introduction of regulated tenancies in 1965, designed to provide residential security of tenure and a system of ‘fair rents’.

This research follows the evolution of the valuation process for setting fair rents from their inception through to the present. The project provides a case study of a statutory valuation framework, its intended and unintended consequences and the difficulties of conducting valuations based on a notional market whilst maintaining a rational approach.

In particular the research examines the challenge to valuers to set fair rents assuming that the supply and demand of property to let is roughly in balance. The paradox of the fair rent system is that it was accompanied by such a reduction in residential lettings that new lettings after 1988 were de–regulated to stimulate supply. Newly available market evidence highlighted disparities between fair rents and the market, resulting in a round of re–adjustments that was followed by further government intervention to cap fair rent increases via the Maximum Fair Rents Order in 1999.

Although regulated tenancies are gradually dying out, shrinking from 60% to 6% of the private rented sector between 1988 and 2000 (DETR, 2000), there are still about 200,000 tenancies remaining across the UK, from the poorest regions to some of the most sought after areas of central London. For the landlords and tenants of these properties, the way the system operates is therefore still vitally important.

1.2 Background The concept of ‘fair rents’ was first introduced by the Labour government in the Rent Act 1965, following a period of decontrol of rents under the previous Conservative government’s Rent Act 1957. Building on the findings of the Milner Holland Committee Report of 1965, the intention of the Rent Act 1965 was to introduce a system of rent regulation and security of tenure for the private rented sector. Whereas rent control was designed to freeze a market, thus eventually depriving its prices of any systematic or constructive meaning, rent regulation was designed to recreate a market in which the overall pattern of prices responded to changes in supply, while the local impact of severe and abnormal scarcities was kept in check (Donnison (1967)).

At the heart of the Rent Act 1965 was a system of ‘fair rents’, devised by the Labour government’s Minister for Housing and Local Government, Richard Crossman. Rent control had previously been based on a series of strict formulae related to the rateable value of the premises, but these schemes were found to be too mechanistic and unfair. ‘Fair rents’ were therefore introduced to avoid both rigid control and decontrol.

The Rent Act 1965 introduced a scheme for regulating unfurnished tenancies and for rent control through the registration of fair rents. The Rent Act 1974 extended this to include

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furnished tenancies, and Parts III and IV contain the statutory scheme operating for ‘regulated tenancies’.

Today, with the exception of long leaseholders, private sector residential tenancies are generally governed by either the Rent Act 1977 or the Housing Act 1988 (as amended by the Housing Act 1996). There are also tenants who hold under a Rent Act 1977 statutory (or regulated) tenancy (ie. one created prior to 15 January 1989) who occupy properties at fair rents, as well as those holding under a long lease who have protected statutory tenancies at fair rents under Pt I of the Landlord and Tenant Act 1954. However, the majority of residential property is now governed by the 1988 Act and so is subject to assured or assured shorthold tenancies at ‘market rents’.

As with the 1965 Act, the 1977 Act does not define a ‘fair rent’, but s70 of the 1977 Act describes how it is to be determined. Like many statutorily based value concepts, the determination of fair rent produces the need to identify a price in the property market place which does not accord with precise reality. Property valuers have often been required to undertake hypothetical valuation exercises and a body of technique, often reinforced by judicial proceedings acting on advice from property valuation expert witnesses, has been established. Fair rents have evolved within that tradition.

Between 1965 and 1988, the private rented market lacked any market evidence of unrestrained rental values (apart from a few lettings in high value houses with rateable values which put them outside the Rent Acts). The introduction of assured tenancies after 1988 produced market rents in this sector so providing an additional source of data to help in the determination of fair rents.

The Spath Holme and Curtis cases were important decisions as to how that additional evidence was to be used in the fair rent determination. The resulting spate of rent increases led Karen Buck (MP for Regent’s Park and Kensington, North) to table a parliamentary question on 26 January 1998. Nick Raynsford (Minister for London and Construction) replied that the government was examining the possibility of secondary legislation to limit the size of fair rent increase which could be imposed by rent officers and Rent Assessment Committees (RACs). Following a consultation period a system of rent capping was introduced on 1 February 1999 in the form of The Rent Acts (Maximum Fair Rent) Order 1999.

In addition, the government has created a unified national structure for rent officers in England by establishing The Rent Service, a ‘next steps agency’ of the DETR. Consideration has also been given, following the Nolan report and code of practice for public appointments, to the issue of the composition of RACs and the procedures for appointing members.

1.3 Aims The aims of this research were therefore to:

Undertake a comprehensive review of statute and case law since the inception of fair rents to the present day.

Examine the economic basis for fair rents, in particular:

the theoretical basis for taking account of ‘scarcity’ within the fair rent valuation; and,

the identification of a benchmark or indicators for scarcity.

Undertake a critical examination of valuation practice, based on case studies of appeals made to Rent Assessment Committees.

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Examine the implications of the Maximum Fair Rent Order for valuation practice in relation to fair rents.

1.4 Methodology The literature review of statute and case law and economic theory undertaken for a pilot study in 1998 formed the basis of the research and was updated through to May 2001. Contextual information on the UK lettings market and operation of the Rent Service was also added.

Case studies of appeals to Rent Assessment Committees were used to explore how the valuation process works in practice and to examine the implications of the Maximum Fair Rent Order.

1.4.1 Selection of case studies Three regions were chosen for the case studies, London, South West and North West. Samples of decisions appealed to the Rent Assessment Committee were acquired for cases where:

a rent fair had been registered in the previous two years, ie between 1998 and 2000;

the property was in a main urban area;

the landlord or tenant was professionally represented;

but was an otherwise random selection.

The distribution of the sample is shown in Table 1.1. We took a second sample from the South West to include more cases from the main urban areas. This is because we had hoped to source further data from local agents, which could enable us to analyse implied investment returns based on adjusted market rents compared to the capital value of unimproved property. In the event this proved so difficult as to be impossible within the timescale of the project.

A number of the cases we examined covered more than one property for which individual rents were set. Our data was therefore constructed on a by–property basis, covering 148 properties.

Information on each case was summarised in a standard format and examples are given in Appendix 2, alongside properties for which case study valuations were undertaken. Data on rents, valuation deductions and presentation of evidence at appeals was also tabulated for analysis using SPSS (Statistical Package for the Social Sciences) software.

1.4.2 Interviews To provide context and background to analysis of the case data we sought interviews with a rent officer and two panel members from each of the three areas, one of whom was a valuer member. Unfortunately for one area we were unable to speak with a rent officer. The interviews were mainly conducted by telephone with the interviewee having been sent an interview guide in advance. One interviewee preferred to reply in writing.

The interviews revolved largely around the approach to the fair rent valuation and interviewees were invited to comment on any changes they would like to see or recommend to the process for determining fair rents. Information from the interviews is incorporated in the analysis of findings and text in italics is quoted from interview transcripts, but individuals are not identified for reasons of confidentiality.

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Table 1.1 Sample of RAC fair rent appeal decisions

Region Number of properties in sample

% of sample

London: 63 42.6

– Kensington & Chelsea 35 23.6

– Westminster 4 2.7

– Southwark 15 10.1

– Camden 9 6.1

North West 35 23.6

South West 50 33.8

Total 148 100.0

1.5 Report format Section 2 comprises a discussion of the evolution of the fair rent system from

inception to the introduction of the Rent Acts (Maximum Fair Rents) Order 1999.

Section 3 examines the economic context of fair rents and the implications for the current study.

Section 4 reviews existing case law and the legal framework for fair rents.

Section 5 discusses valuation practice and the rent assessment panel process.

Section 6 examines fair rent determination in practice, including case studies from appeals to Rent Assessment Committees in three regions of the UK and the implications for the valuation of the Maximum Fair Rents order.

Section 7 reviews valuation practice and makes the case for a more rational approach to valuation.

Section 8 provides conclusions and recommendations.

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2. EVOLUTION OF THE FAIR RENT SYSTEM

2.1 Introduction This section follows the evolution of the fair rent system from its inception in the Rent Act 1965 through to the introduction of the Rent Acts (Maximum Fair Rent) Order 1999. Particular attention is paid to the concept of ‘scarcity’, that is the requirement to assess fair rents assuming market equilibrium that has proved so difficult to define and implement in practice.

2.2 The Rent Act 1965 In 1965 the Labour government published a White Paper on ‘Rents and Security of Tenure: The Rent Bill’ for the private rented sector. It is instructive to summarise the justification for fair rents, but also the potential problems the government foresaw. This is encapsulated in para. 19 of the White Paper:

‘Full scarcity requires rent regulation. In drawing up a new scheme for regulating rents the government have sought to avoid the rigidity and anomalies of the old control and have aimed at a method of rent–fixing which, given security of tenure, will result in rents which are fair to both landlord and tenant and will enable rents to be reviewed from time to time. The definition of a fair rent where the normal process of free negotiations is inhibited by scarcity is obviously a difficult matter. The government considered relating rents to the new gross values for rating, but rejected this because the gross values do not give an accurate indication of the rent appropriate for particular tenancies and cannot be kept up–to–date. It would not be satisfactory simply to relate permitted rents to the general level of rents passing in the area since this would perpetrate high rents which have been inflated by scarcity. Accordingly, the government have decided to rely on a formula designed to enable a fair rent to be settled without regard to the effect of scarcity on existing rent levels.’

This position became enshrined in the Rent Act 1965 which, although not defining a ‘fair rent’, gave certain directions as to what must be regarded, assumed or disregarded in assessing a fair rent, S27 provided that:

(1) … [in deciding] what rent is or would be a fair rent under a negotiated tenancy of a dwelling–house, regard shall be had to all the circumstances (other than personal circumstances) and in particular to the age, character and locality of the dwelling house and to its state of repair.

(2) For the purpose of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling–houses in the locality on the terms (other than those relating to rent) of the regulated tenancy is not substantially greater than the number of such dwelling houses in the locality which are available for letting on such terms.

(3) There shall be disregarded–

(a) any disrepair or other defect attributable to a failure by the tenant under the regulated tenancy or any predecessor in title of his to comply with any terms thereof, and

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(b) any improvement carried out, otherwise than in pursuance of the terms of the tenancy, by the tenant under the regulated tenancy or any predecessor in title of his.

During the debate in the House of Commons on the Rent Bill which gave rise to this Act, Richard Crossman (the Labour government’s Minister for Housing and Local Government) was continually questioned on two key issues:

the concepts of ‘locality’ and ‘amenity’ in Section 27(1); and,

the concept of ‘scarcity’ in Section 27(2).

It was conceded by the government that the definition of fair rents included a circular definition: to paraphrase, ‘fair rents shall be those which are considered fair’. The concept itself was derived from C.D. Pilcher, a valuer, past president of the RICS and a member of the Milner Holland Committee. As Richard Crossman stated, aiming at a fair rent is a difficult process, but the government saw the choice as one between a mathematical formula or a tribunal, and adopted the latter approach (based on rent officers plus Rent Assessment Committees (RACs)). Opposition members considered the proposal to be an ‘economist’s dream, but a lawyer’s nightmare’.

Pressed on the issue of ‘scarcity’, Richard Crossman replied:

‘By scarcity, I mean the situation in which an article is in scarce supply, which means that there is not a freedom of choice, and in which a person may be forced to take something which he would not otherwise choose … to get fair rents we must rely on people more than a legal or mathematical formulae… . These people will know very well what scarcity is and what the difference is between the price one pays for a house in a non–scarcity area and the price one pays for an identical house in a scarcity area’ (Hansard: Rent Bill – Second Reading 5 April 1965:47).

To further justify the clause determining fair rents, Crossman referred to the case of Kay v Kay (1951). In this case, Jenkins L.J., referring to a ‘fair’ rent (or a ‘reasonable rent’ under the Leasehold Property Act 1951), stated that:

‘..in conditions of scarcity the open market value may be forced up to a point which does exceed all reason…It is essential that the Tribunal…should be able to discount contemporary market values to…arrive at a fair rent.’

In short, as Aughton and Malpass (1994) state, rent officers were to ignore the personal circumstances of the tenant but have regard to the age, size, character, locality and state of repair of the dwelling. They would be required to set a rent which would be fair to both landlord and tenant, as if supply and demand were roughly balanced: in fact a fair rent, ignoring any scarcity element.

2.3 Early Operation of the Fair Rent System The Report of the Francis Committee (1971) on the Rent Acts provided the first, and subsequently only, detailed assessment of how the fair rent system was operating in practice. In general, the Committee felt the system was working well, although not without criticism. Chapter 7 of their report focuses on ‘The Assessment of Fair Rent’ and the following discussion summarises their findings.

7

2.3.1 Assessment of scarcity The evidence submitted to the Committee suggested that the assessment of the scarcity element in the rent is an extremely difficult task (op. cit.: 58):

‘Scarcity is incapable of measurement except by way of an intelligent guess … certainly it is now generally, if not universally, accepted that it is not possible to quantify the scarcity element directly.’

The Institute of rent officers submitted evidence to the same Committee stating:

‘Essentially it is a matter of opinion whether a rent is inflated by an excess of demand, and if so to what extent.’

The Committee found that early attempts at estimating scarcity as a percentage of market rent had been abandoned. Fair rents appeared to be determined by an amalgam of three approaches:

comparables (ie. registered rents);

market rents recently negotiated where there is no scarcity; and,

calculating a reasonable rent on the basis of various conventional valuation criteria (eg. fair return on capital value, economic cost, gross value).

2.3.2 Evidence of scarcity The Committee argued that although rent officers and Rent Assessment Committees did not attempt to quantify scarcity directly, they should still decide as a preliminary matter whether or not the market rent for accommodation similar to the subject property was affected by scarcity. Evidence relevant to such an enquiry would include:

direct evidence of the demand for the subject dwelling, or for similar accommodation offered for letting on the same terms (except as to rent);

movement of population into a locality due to new business/industries;

availability of local authority housing – this would be strong evidence of the absence of scarcity in the case of comparable accommodation;

evidence of overcrowding or multi–occupation, which would also suggest scarcity.

The Committee was somewhat cautious of the first type of evidence, however, and pointed out that the level of demand was not a reliable yardstick for measuring scarcity because the extent of the demand was affected by the level of the rent.

2.3.3 Effect of scarcity on the rent of a subject dwelling The Committee also pointed out that the rent officer had to determine whether the fair rent of the subject property was affected by any scarcity in the relevant locality. Scarcity was thus only relevant if it was related to the type of accommodation to which the subject dwelling belonged.

In fact, the Committee pointed out, s46(2) of the 1965 Act had nothing to do with the assessment of scarcity; it was concerned with the method of assessing fair rent. The existence and extent of scarcity were matters of fact which must be determined in the light of evidence of the actual circumstances of the particular case. The concern was not with

8

notional demand but with actual demand, although usually the existence and extent of excess demand would be a matter of ‘inference from circumstantial evidence’ (op.cit.:61). This view was also later supported by Prophet (1979).

2.3.4 Amenity, locality and scarcity The Francis Committee felt that one of the most difficult aspects of the scarcity problem was to identify excess demand attributable to amenity, as distinct from excess demand generated by shortage of rented accommodation.

Section 46(2) of 1965 Act (now s70(2) of the 1977 Act) was designed to eliminate scarcity but s46(1) (s70(1) of the 1977 Act) was designed to include value arising from the character of location of the dwelling house.

Part of the difficulty lies in the use of the term ‘locality’ in paragraphs (1) and (2) of the Act. The Francis Committee and subsequent authoritative texts (Megarry, 1988) took locality in para (1) to be the immediate or fairly close vicinity, in contrast with the wider concept of ‘locality’ in relation to scarcity.

Amenities such as proximity to school, zoo or theatre can be taken into account therefore, but scarcity in the wider area, or ‘really substantial area’ must be disregarded (Finegold Case (1975)). In England and Wales this has been accepted as the registration area, but not in Scotland where the ‘locality’ for scarcity purposes may be smaller than the registration area (Megarry, 1988: 560–61). Indeed, the parliamentary debate on the Rent Bill of 1965 also suggests that the government’s intention was for rent officers to interpret the term ‘locality’ more widely for scarcity purposes.

The Francis Committee pointed out that with increasing commuting over greater distances the assessment of demand became more difficult as ‘localities’ widened in their scope.

2.3.5 Summary of Francis Committee findings The Francis Committee’s report concluded that s46(2) of the 1965 Act had produced a significant effect on both registered and unregistered rent levels. In particular,

registered rents were 20% lower than related market rents;

other witnesses said the scarcity section of the Act had reduced registered rent levels ‘substantially’ in areas of scarcity; and,

only 11% of agents and landlords in a survey carried out for the committee felt the scarcity basis produced problems.

The Francis Committee went on to argue that:

‘Since all the objective circumstances, except scarcity, are considered, the fair rent is in effect what the market value would be if there were no scarcity (since the market reflects all objective circumstances).’

(Committee on the Rent Acts, 1971:5).

The Committee, however, has been criticised in a number of respects. Beirne (1977) and Samuels (1973) felt that the Committee was illogical in arguing that ‘market rent minus scarcity value = fair rent’. Samuels (1973:721) argued that the test provided was subjective and Beirne (op. cit.) that the general effect of the ‘scarcity’ section was to equate fair rents with market rents if no scarcity existed.

9

2.4 The determination of fair rents Until recently, property valuation practice in the UK has tended to develop from within the practising professional community rather than from an academic theoretical base. As already discussed, there is a long tradition of valuers being asked to develop hypothetical valuations of what exchange prices would have been under a set of circumstances that are divorced from markets. It is therefore not surprising that the response to the Francis Committee was that there was no problem in assessing fair rents in practice, despite it being almost ‘impossible to measure’. This confidence can be ascribed to the adoption of one or more of the usual property valuation methods. These five methods are (Adair, et al. 1996):

comparison;

investment;

profits based;

cost based; and,

residual.

In Adair (op cit) Discounted Cash Flow is given as a sixth method, but this is usually placed within the investment method. It would appear that initially fair rent cases looked at the return on capital approach to establish the early levels but that these linkages were lost during the 1970s and 1980s.

Prophet (1979) points to the difficulties of assessing scarcity objectively. He adds that it is not hard to discover the existence of scarcity, particularly within the rent officer, Rent Assessment Committee framework, but much more difficult to assess the degree of scarcity. As Prophet (1979: 123) states:

‘ … even the most experienced valuers are reluctant to ascribe any percentage to scarcity and thus the rent officer of the rent assessment committee must try to gauge by evidence submitted, and by experience, a level of rent which would probably exist if there was no shortage. Probably the best approach is to check that the rent level reached does not include anything which might reasonably be regarded as caused solely by scarcity’.

It is simplistic to argue that merely reducing a market rent by scarcity will produce a fair rent. A market rent will include items that are to be disregarded: eg tenants’ improvements and changes in amenities. Prophet suggests the method is prone to subjectivity, especially regarding scarcity.

For the assessment of exchange price, comparison with other similar assets has been backed by numerous courts and authorities as the primary method: therefore it would be expected that valuers charged with the task of implementing the fair rent system in 1965 would look to this method for the solution. However, Prophet (1979) describes six possible approaches:

the comparables method – with reference to other fair rents. In 1965 there were no similar comparables of other fair rents;

‘experience of the members’ method (or rent officers);

market rent less scarcity method;

return on capital value method;

outgoings plus profit method; and,

10

gross value comparison method.

Despite this number of opportunities, given the historical context within which valuations were carried out, it would be expected that once a number of comparables had been determined by rent officers and rent assessment committees, fair rents would be based on other recent fair rent transactions in similar properties and locations. This is confirmed by the DETR (1997). As with other comparisons in other property markets, intuitive adjustments need to be made for time differences between comparables but this might be assumed to be easier in balanced markets than in unbalanced markets. The expectation is that, in nominal terms, there would be a closer linkage between rents and retail prices (representing goods which are more elastic than housing) in a housing market not subject to fluctuations caused by imbalances in supply and demand, as compared to other housing markets. Geltner (1993) found that valuations tended to under–estimate market changes between comparable dates and the date of valuation, and this represented rational behaviour by valuers.

The determination of fair rent is a highly controlled process and there is other evidence from commercial property markets that procedures can have a significant effect on rental levels. Crosby and Murdoch (1997) found that market rents determined between existing landlords and tenants (at rent review) lagged open market lettings by as much as 10%; behind in rising markets, higher in falling markets. Virtually all market rents are the product of negotiation between existing landlords and tenants and a number of reviews take place in the assured tenancy sector. It is also possible that they may also exhibit the same characteristics as the commercial market.

The combination of a lack of market evidence, adherence to the valuation concept of comparables and the lagging of markets by valuers using these techniques would tend to lead to fair rents not just falling behind the market level, but falling behind any notion of fair rent which could then be tested in the market. If this were true, then re–establishing the link between fair rents and market rents should be followed by a period of re–adjustment. This appears to have happened.

The introduction of market rents in 1988 prompted comparisons with fair rent levels (London Research Centre, 1997), evidenced by representations from landlords and tenants in response to a DoE Consultation Paper in 1992 (‘Rent Act Tenants – Rent Increases’). rent officer statistics showed that fair rents remained below market rents and in 1992 the national average fair rent (£1739 pa) was 60% of the average market rent (£2885). However, the rate of increase in registered rents exceeded inflationary growth, reaching a peak in 1992 at 25%. The Institute of rent officers Annual Report (1992) cites the much publicised case in Church Street, Kensington. Here the RAC increased the rent officer’s figure from £2800 pa to £7800 pa, even though the landlord had proposed a rent of £3500 pa for the unmodernised ground floor and first floor maisonette.

The effect of increases was compounded by the fact that fair rents are registered every two years. Above inflation increases were therefore to be particularly expected during a period of catching up. A similar effect occurred in the business sector in 1990, with the first business rates re–valuation for 17 years, when retail rateable values increased substantially. Occupiers were more concerned by the level of increases and the government attempted to allay fears with transitional relief. It is therefore not surprising that residential regulated tenants focused on the level of increase rather than the payments they might have been asked for if the post 1988 position had existed before.

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Following tenants complaints in 1997 the DETR (1997) expressed concern about the level of fair rent increases during the 1990s and a year later set in train government measures to curb increases, as discussed in the next section.

Figure 2.1: Greater London: Mean Registered Rents 1985–95 (adapted and extended from LRC (1997)

2.5 Limiting Fair Rents The issue of rapid, disproportionate rent increases was raised in an adjournment debate secured by Karen Buck MP on 26 January 1998. In the debate Ms Buck outlined the problems faced by some of her constituents in Kensington who were facing huge increases in rent following the Spath Holme and Curtis cases. In his response the Minister for London and Construction, Nick Raynsford MP, announced that the government was considering intervening to moderate rent increases under regulated tenancies:

‘We have in mind linking rent increases to the retail prices index, as a well–established measure of affordability, by way of an “RPI plus X” formula. However, there are some tricky issues to be resolved. We would need to ensure that we got the right balance between the interests of tenants and the interests of landlords. Another issue is that we do not want to discourage landlords from carrying out necessary improvements to their property; but, equally, we must be sure that any mechanism that allows rent increases to reflect those improvements does not simply provide the landlord with the loopholes for circumventing the new limit.

There are difficult and detailed technical and legal issues which still need further study, but assuming that we can overcome these to our satisfaction, we shall issue a public consultation document setting out our proposals and seeking comments on the details.’

0

50

100

150

200

250

300

350

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Year

Inde

x

0

10

20

30

40

50

60

70

Mea

n %

rent

incr

ease

% Increase on re-registration

Registered rent index

RPI index

12

In May 1998, the government published the promised consultation paper (DETR, 1998) and proposed introducing secondary legislation using reserve powers in section 31 of the Landlord and Tenant Act 1985. A maximum limit applied to the rent increase registered by a rent officer was proposed. It would be linked to the Retail Price Index (RPI) as a measure of affordability. The proposed limits were RPI plus 10% for first time re–registrations and RPI plus 5% for subsequent re–registrations.

The proposals faced some opposition, in particular from some Conservative MPs and freeholders. There were fears that the government intervention would, at some point in the future, spread over into the assured market, despite repeated assurances by ministers that this would definitely not happen. This was one of the concerns brought out in a survey of institutional investors for the British Property Federation (1998) conducted by the Department of Land Economy at Cambridge University, which revealed a mixed response to the government’s proposals.

The Cambridge researchers conducted interviews with 27 institutions that control about a third of the UK commercial property market or £70 billion in assets. Eight companies already had funds in the private rented sector, 16 were looking to invest more and 11 were not. Overall the 16 companies looking to invest more were less concerned about the government’s proposals – six took a positive view and seven were negative, whereas of the 11 not looking to invest, eight were negative. Some that were positive felt that an RPI + x% formula could be attractive, provided rent levels started from a high enough point, because it would provide an inflation adjusted return. Those that took a negative view were against any form of government intervention. Some were concerned that the proposals could deter investment and thereby increase liquidity problems in the sector.

Following the consultation period a system of rent capping was introduced on 1 February 1999 in the form of The Rent Acts (Maximum Fair Rent) Order 1999. The Order requires rent officers and Rent Assessment Committees to calculate the maximum fair rent that can be registered according to the rules set out in the Order, as well as their existing requirement to determine a fair rent. The fair rent that is then determined is the lower of the two figures.

The Order defines the maximum fair rent (MFR) as:

⎥⎦

⎤⎢⎣

⎡+

−+= P

yyxLRMFR )(1

where:

LR is the existing registered rent for the property;

y

yx )( − is the percentage change in RPI since the rent was last registered;

P is an additional amount dependent on whether the case is the first or a subsequent rent registration for the property. The additional amounts suggested in the government’s consultation paper were changed by the time the Order came into force. For first time registrations after the Order has come into effect 7.5% is added. For second and subsequent registrations 5% is added.

For example, take a fair rent of £70 per week that was last registered two years ago. According to the Order the new registered rent would be the lower of:

The new fair rent determined by the rent officer, say £85; or,

13

The maximum fair rent calculated using the Order : £70 per week plus £70 multiplied by 12.5% (assuming an RPI increase for the period of 5%) = £78.75 per week1

The equation does not apply to properties where there is no existing fair rent registration, i.e. the Order only affects fair rents that are being re–registered. It also does not apply in situations where the fair rent determined for the property is at least 15% more than the existing registered rent due to repairs or improvements carried out by the landlord or superior landlord. This is because the government does not wish to discourage landlords from improving sub–standard property

Since the Order came into effect it has been the subject of a legal challenge in the Court of Appeal (Regina v Secretary of State for the Environment, Transport and the Regions and another, ex parte Spath Holme Ltd [2000] EGCS 10). The case was only resolved in the House of Lords on 7 December 2000. The basis of the challenge was that the Order exceeded the scope of the powers in section 31 of the Landlord and Tenant Act 1985. The applicants argued that the scope of section 31 was unclear and the Court of Appeal agreed (Murdoch, 2000). Examination of the legislative background of section 31 showed that its origins lay in section 11 of the Counter–Inflation Act 1973. This section was re–enacted firstly in the Rents and Subsidies Act 1975 and then in the 1985 Act. Stuart Smith L.J. was satisfied that the section 31 was in effect for counter–inflationary purposes. Since the consultation exercise for the Order specifically stated that it was designed to alleviate hardship and unfairness, it meant that the Order was made outside the powers under which it had been made. The Order was therefore quashed.

Following the Court of Appeal case the issue was once again raised in the House of Commons by Karen Buck MP, in an effort to restore the rent cap:

‘The ramifications of the judgement are extremely serious. Many protected tenants who were saved by the order find themselves yet again faced with the risk of losing their homes.’

On 19 June 2000 the government was granted provisional leave to appeal by the House of Lords and on the 7 December 2000 the Law Lords have their judgement. The views of all their lordships differed from the Court of Appeal, and they agreed that the previous statutory uses of section 31 did not limit it to counter–inflationary purposes. This was because its immediate forerunner was section 11 of the Housing Rents and Subsidies Act 1975 which was not targeted exclusively at inflation control (Murdoch, 2001). The Law Lords therefore unanimously held that the 1999 Order was legally effective, and therefore quashed the Court of Appeal judgement.

1 Example adapted from DETR consultation paper (1998).

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Table 2.1 Timescale for the introduction of the Rent Acts (Maximum Fair Rents) Order 1999

Date Event

26 January 1998 House of Commons adjournment debate (Karen Buck MP)

21 May 1998 Limiting Fair Rent Increases – consultation paper

June 1998 BPF Report

22 June 1998 House of Commons Library Research Paper 98/69

1 February 1999 The Rent Acts (Maximum Fair Rent) Order 1999

9 March 1999 House of Commons Standing Committee on Delegate Legislation

20 January 2000 Court of Appeal case – Order quashed

2 March 2000 House of Commons adjournment debate (Karen Buck MP)

12 April 2000 House of Commons

19 June 2000 House of Lords grant leave of appeal in Spath Holme case

7 December 2000 House of Lords quashes Court of Appeal Judgement

2.6 Summary of issues The original objective of the fair rent system was to prevent rents being forced up as the result of scarce supply in the market and to require rents to be set assuming supply and demand were roughly in balance. A tribunal system for setting rents was preferred, using rent officers and Rent Assessment Committees, that is, relying ‘on people more than on mathematical formulae’ (Crossman, Hansard: Rent Bill – Second Reading 5 April 1965:47). The system resulted in a loss of private rented accommodation, but once the linkage to market rents was re–established after 1988, rapid rises in fair rents were perceived to cause financial hardship for tenants. The government response was to introduce the Maximum Fair Rents Order to cap increases and use a formula approach of the kind the original legislation had sought to avoid.

This brief review of the evolution of fair rents has raised a number of issues that are examined in the following sections of the report, as follows:

What is the economic context of fair rents? (Section 3)

What has been the judicial approach to the application of s70(2) of the Rent Act 1977 to valuing for fair rents and how has the legal framework evolved? (Section 4)

What valuation principles are appropriate to fair rent determination and how does the rent assessment panel process operate? (Section 5).

How does the rent setting process operate in practice and what are the implications of the Maximum Fair Rent Order? (Section 6)

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3. ECONOMIC CONTEXT OF FAIR RENTS

3.1 Introduction Following the discussion of the evolution of fair rents in the previous section, this section examines the economic context and covers:

The theoretical basis of housing markets, in particular:

Scarcity and the market adjustment process; and,

The operation of housing sub–markets.

Information sources about supply and demand in the private rented sector that could suggest indicators or a ‘benchmark’ for the scarcity factor.

The overall implications for this study.

3.2 The theoretical basis of housing markets

3.2.1 Scarcity and the market adjustment process Scarcity has been defined in an economic sense as ‘a condition where there is less of something than people would like to have if it cost nothing to buy’ (Bannock, et al. 1972). In economics the term is therefore used in a relative sense, and is important because it gives rise to a need to allocate available resources among alternative uses. Since the Rent Act 1965, economists have struggled to conceptualise what exactly the original draftsmen of the legislation had in mind.

This has been compounded by the fact that most theoretical models of rent controls are based either on the foundation of perfectly competitive markets with representative landlords, or in relation to well–behaved markets with known supply and demand curves. In practice, however, the supply curve may only be deducible ex post and may be unstable. Nonetheless, economists have attempted to present theoretical frameworks of rent control and their effect on private rental supply.

Cooper and Stafford (1975) point out, for example, that although the concept of a fair rent was a central element in British housing policy its theoretical underpinning remains obscure. They define a fair rent as a rent where, in the absence of ‘abnormal’ scarcity, need would be equated to supply with neither landlord or tenant penalised. This view is supported by Robinson (1978), who also believes the draftsmen of the relevant section in the 1965 Act had in their minds the concept of housing ‘need’: that is, ‘the quantity of housing required to supply a given population with a minimum standard of accommodation, disregarding their ability to pay for it’.

Cooper and Stafford’s model is shown in Figure 3.1. Given a stock of relevant property to rent (AA), all housing units are assumed to be homogenous and have the same site values. AA is a perfectly inelastic short run supply line, and SS– is the long run supply line allowing for entries and exits from the market in response to changes in rents, assuming increasing cost conditions. The supply OA would, in a free market, be available at rent P– but demand is OT and so excess aggregate demand of AT is created. Normal market forces would allow landlords to charge a rent of P– and exploit scarcity by rationing OA houses among OT

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families. At P– those willing and able to rent will equal the supply. But fair rents are set at P– which is ‘fair’ to both landlord and tenant.

Figure 3.1: A simple model of fair rents (Cooper and Stafford (1975))

P2

P1

A

A

S

O

S1D

D1

T

Maclennan (1982) points out that the broad intention of the fair rent system is to establish long–run equilibrium rents in a competitive market. Where markets are in equilibrium, the fair rent and the market rent would be the same. Fair (1972) defines equilibrium as ‘if at the existing set of prices, the quantity of houses demanded is equal to the available supply less the normal level of vacancies’. However, identifying when housing markets are in equilibrium is a difficult task and there are some who query whether long run equilibrium is achievable. Indeed Robinson (op. cit) argues that in practice it is ‘most unlikely’ that the fair rent will correspond to a long–run equilibrium rent particularly in ‘stress areas’ of housing where income levels are low.

Stahl (1985) reviews economic theories of the market adjustment process. He suggests that the concept of equilibrium is where, in the short run, price adjustments clear sub–market imbalances of supply and demand and, in the long run, supply adjustments absorb any rents generated either side of the equilibrium rent. This implies that a long run equilibrium rent can be either side of the market rent at any one point in time. Field–Fisher et al. (1967:106) suggest that, where an artificial interference (eg. through legislation) is imposed on demand and supply, equilibrium will still result, but normally at a lower level. This assumption that statutory intervention will normally produce a lower level appears out of line with equilibrium theory.

Stahl (1985) also sets out alternative views; for example, that long run equilibrium is never or very rarely achieved (see, for example, Whitehead and Odling–Smee, (1975)). Other theories suggest that short run adjustment of prices are rigid and short run equilibrium of demand and supply is affected by demand spillovers into or from other sub–markets. However, Hahn (1973) suggests that markets are in equilibrium when agents are no longer learning in the market or are no longer revising their intentions or plans.

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Whitehead and Odling–Smee (1975) therefore suggest that alternative models should include a detailed analysis of the mechanics of how markets operate, including the effect of transaction and information costs, and the time lags involved. De Leeau and Ekanem (1973) investigate the time lags involved in householders moving from one housing unit to another in response to increased income levels, landlords putting rents up in response to increased demand and landlords providing new housing units in response to rent increases. The delay means that a supply response is related to demand in a different era. Both De Leeau and Ekanem (1973) and Smith (1974) concentrate on the importance of the vacancy rate in how quickly markets are cleared and rents adjusted.

Maclennan (1982) suggests several features of housing as a commodity which make it unlikely that markets will ever achieve long run equilibrium:

Individuals transact infrequently and so information is imperfect.

Changes in the housing market are frequent during non–moving periods. Property characteristics, prices and vacancy rates change over different market periods.

Spatial dispersion of housing vacancies.

Fixity of secondhand housing stock and slow rate of turnover means submarket demands change more rapidly than supply. Disequilibrium may be pervasive.

He then proceeds to develop a ‘mover–stayer’ model which can be applied to housing tenure/choice. In particular, the model incorporates the assumption that it is important to understand not only how individuals acquire new information but also how the information is used to revise housing consumption strategies. There is in fact a complex series of adjustments if a price bid fails, in terms of price bid, location, neighbourhood, quality and size, etc. occurring. This implies that, if the market is not cleared ‘backlogging’ can occur in private rented markets.

In reviewing the literature on the economic interpretation of fair rents, a number of ideas seem to arise, thus:

Fair rents are meant to be fair to the landlord and to the tenant.

Fairness to the tenant relates to the idea of housing need.

Fairness to the landlord relates to the necessity of him receiving a minimum acceptable return.

Fair rents diverge from market rents because normal market conditions do not always prevail — hence the notion of abnormal scarcity.

In setting fair rents a scarcity factor should be deducted from market rents (or possibly a glut factor would be added).

To state the obvious, meeting housing need would only be achieved if supply were at least as large as that need. The hypothetical market rent that would prevail under such conditions would be one sufficiently low to achieve market saturation. A fair rent at this level would be fair to tenants in the sense that all would–be tenants would be able to afford it — presumably with the help of some form of real income subsidy. In Figure 3 this idea of a fair rent is shown at R– (based on Robinson, 1979; and, Cooper and Stafford 1975).

According to basic market theory, highly competitive conditions would tend to drive market prices down to a long run equilibrium level at which suppliers are only earning normal (in its technical sense) returns — ie the minimum that is acceptable to those suppliers. Thus the

18

rent that would be arguably fair to landlords would be ‘the long run equilibrium rent emerging in a competitive market’ (Maclennan, op. cit: 211).

Figure 3.2: Fair rents and scarcity factors

0

Quantity traded per time period

RentSSR

SLR

SLRCC

DBOOM

DSLUMP

DNORMAL

RSR

RLR

RF2

RF1

MAXNEED

X

YZ

G

SN

Economists may disagree over what precisely constitutes a competitive market, but rented accommodation is likely to be an increasing cost industry. Even in the long run, higher rents are required to entice more supply on to the market. In Figure 3.2 this is reflected in the upward sloping long run supply curve SLR. If perfect competition were assumed, then factor supply would be perfectly elastic and long run constant costs would prevail. The long run supply curve would be horizontal like SLRCC in Figure 3.2 Although this is a purely hypothetical construct it does make the Maclennan notion of fair rent more clear cut. It would become independent of any demand shifts in the market. Its level (RF2) would be determined by costs (opportunity costs) on the supply side. With the more realistic curve SLR the fair rent would become dependent, not only on costs, but also on the strength of demand.

In Figure 3.2 it is assumed that the short run supply SSR was the long run equilibrium supply when normal demand conditions existed. However, demand has now increased to boom conditions (this could be a local development rather than a national cyclical boom). Short run

19

rents are driven up to RSR but, other things being equal, they will fall back to a long run level of RLR as new suppliers seek the enhanced returns. What is the fair rent in this situation? And, by extension, what are the appropriate scarcity factors to deduct to arrive at fair rent levels?

There are three fair rents on this model; the ‘tenant need’ fair rent (RF1), the ‘perfect market long run equilibrium’ fair rent (RF2), and the ‘realistic long run equilibrium’ fair rent (RLR). In a perfect market with all people in housing need being adequately funded they would tend to converge. As it is they are likely to be different — possibly substantially different!

The gaps X, Y and Z show possible scarcity factors that may be estimated and deducted from market rents to arrive at fair rents. X would be an allowance for the fact that the market had not fully adjusted to the stronger demand conditions. Y would be an allowance for the inelasticity of factor supply in the market or (in this model) an allowance for the abnormally strong demand itself. Z would be an allowance for the fact that costs and private profit motivations constrain long run supply well below that which would match need (ie a hypothetical SN). All three of these can legitimately be termed scarcity discounts.

Moreover, according to the adjustment implicit in gap Y, a reverse adjustment would be necessary if demand were to slump into recessionary conditions. Such a reverse gap — a glut supplement — is shown in Figure 3.2 labelled G.

3.2.2 Housing Submarkets Maclennan (1982) suggests a progression from economic models of housing based on residential location and access–space relationships to more dynamic models based on succession and filtering. Filtering models assume the existence of housing submarkets and are concerned with the link between new and secondhand housing markets, by focusing on the movement of households in relation to existing housing.

Although urban economists agree that housing submarkets can be adopted as a working hypothesis there is disagreement as to whether such submarkets can be empirically defined in spatial terms, or according to dwelling characteristics.

Rothenberg et al. (1991) argue that submarkets are based on housing quality. A submarket is defined as a collection of all dwellings in a metropolitan area whose varied attributes are evaluated as a whole by demanders and suppliers as closely equivalent, whereas quality is taken as the basis for arranging the housing stock in an urban area in a spectrum of submarkets ranging from highest to lowest quality levels.

Defining housing market areas is therefore difficult. Munro (1986) found the market to be more segmented by population characteristics than by geography. Definitions of boundaries or neighbourhoods also pose problems. For example, Munro and Lamont (1988) found that concepts and definition of neighbourhoods, amenity and accessibility interacted with varying familiarity and knowledge of different parts of the city and produced patterns of residential mobility and housing market search behaviour. This suggested disequilibrium in geographical and structural terms. Moreover, all these forms are dynamic and change constantly in relation to supply and demand.

Adair et al. (1994) showed that in Belfast stratified housing markets do occur over wider parts of the urban area and are not spatially confined to small neighbourhoods. Comparables could therefore be taken over a wider spatial area than the immediate vicinity of the subject property. However, it is important to note that the locality for determining a market rent under s70(1) of the Act is narrower in definition than the concept of locality in s70(2).

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3.3 Market indicators of scarcity? Evidence of imbalance in the supply and demand of rented residential property, the so–called ‘scarcity’ factor can be drawn from other studies.

Research for DETR into the supply responsiveness of private sector housing (Bramley et al 1998) found the UK private rented sector stock elasticity to be very small, at less than 0.1 for transfers from owner occupation, and unlikely to exceed 0.3 if new build and conversion are taken into account. In other words, the increase in the private rented stock in response to a 10% rise in rents would generally be less than one percent and was unlikely to exceed 3%. The researchers concluded that decline in the UK private rented sector is not inevitable but it is unlikely new supply could be induced without specific tax subsidies. Compared with other countries the UK has a thinner private rental market, with demand being quite niche specific. The UK also has relatively old, poor quality stock and a tax regime unfavourable to private renting. In this respect the UK is more similar to France than it is to Germany, Netherlands, USA and Australia (Bramley et al., op cit.).

Research from the UK residential investment sector (FPD Savills, 2000) into the causes of low demand housing (DETR, 1999) suggests various indicators for scarcity, but falls short of providing a ready benchmark that could assist in the assessment of scarcity when valuing fair rents. FPD Savills (UK Residential Investment Report, Spring 2000) identified ‘clear and unsatisfied demand for privately rented residential property in the UK’. Of the projected 3.8m new households between 1996 and 2021, the proportion that would rent if they were able was calculated at 37% (1.4m). Given that the private rented sector is just 5% of the housing stock, or 1.2m dwellings, the sector would need to double by 2021.

Overall the figures suggest an on–going situation of excess demand over supply in the private rented sector (PRS) leading to ‘scarcity’. However, the position can vary greatly at the local level. For example, growth in the buy–to–let market resulted in an estimated 62,000 properties being brought into the rental market since 1996, but the increased supply was not evenly spread and led to problems of rising voids and static rents in some areas. Evidence suggests that buy–to–let landlords acquire with an owner–occupier mentality, that is, where they would like to live or perceive capital growth was strongest, rather than by looking at the fundamentals of rental demand.

Investing in areas of high capital growth brings lower income returns (Figure 3.3) and by the autumn of 1999 London yields had reached an all–time low of 4.3%. Although historically such a low level of return would have prompted investors to withdraw from the market, FPD Savills suggest that a general downshift in returns from all investment classes may have reduced the level at which withdrawal would start.

With investors in mind, FPD Savills were led to develop a ‘latent demand model’ to help identify areas where underlying tenant demand is strong and where there are prospects for above average rental growth (see Figure 3.4). The model measures the propensity of a given population to rent, independent of whether stock is available or not, based on socio–demographic factors for each local authority district in Great Britain. This latent demand score has then been plotted against the true size of the private rented sector for each district. This model has interesting implications for the assessment of fair rents, through potentially identifying areas where:

supply and demand are in equilibrium, or nil scarcity; and,

areas where demand exceeds supply and ‘scarcity’ exists.

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Figure 3.3 Components of residential return 1999 by region

Source: FPD Savills UK Residential Investment Report, Spring 2000

Figure 3.4 FPDSavills latent demand model

Source: FPDSavills UK Residential Investment Report, Spring 2000

For the purpose of grading residential investment portfolios, FPD Savills (2000b) went on to develop a model that incorporates a rental demand score for every post code area in Great Britain, to try to reflect the demand and amenity characteristics of small geographic areas. However, the information is commercially sensitive and could not be made available to this research project.

The level and causes of low demand and unpopular housing were also investigated by the Unpopular Housing Action Team (DETR, 1999) between October 1998 and November 1999.

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A postal survey of local authorities and registered social landlords (RSLs) collected information on housing practitioners’ perceptions of the nature and scale of the problem in their areas. A broad range of indicators was used to define low demand and unpopular housing as shown in Table 3.1.

Table 3.1 Indicators of low demand housing (DETR, 1999)

Social sector indicators Private sector indicators:

a small or non–existent waiting list particularly low and/or falling property values

tenancy offers frequently refused high numbers of empty properties

high numbers of empty properties available for letting

a visibly high number of properties for sale or let

high tenancy turnover high tenancy turnover

many long–term or abandoned properties

Figure 3.5 Regional distribution of properties in low demand (from report by the Unpopular Housing Team, DETR 1999)

0% 5% 10% 15% 20% 25% 30% 35% 40%

North East

North West

Yorkshire and Humberside

East Midlands

West Midlands

East Anglia

South West

South East

London

% of stock in low demand

Local authority RSL Private sector

The research found that private sector low demand is concentrated in the North and Midlands, where the problem had worsened in the previous three years. Of the 22% of local authorities that reported problems in the private sector, 83% also had unpopular local authority housing. The phenomenon of competition between landlords in the North was almost unknown in other parts of the country. Seriously unpopular areas also exhibited the following characteristics:

low household growth;

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net out–migration;

low or negative job growth;

high unemployment / non–employment; and,

low incomes and greater poverty.

At the neighbourhood level, the most important causes of unpopular private housing were poor quality environments, poor condition of housing, financial risk and the behaviour of private landlords. In areas where underlying demand for housing was high, factors associated with design and condition of stock were more important.

The Bradford and Bingley Residential Lettings Report (Spring, 2001), based on research through 75 branches nationwide, also found that the average re–letting period for private rented housing was longest in northern England at 6 weeks and shortest in the southern home counties at 3 weeks.

3.4 Implications for this study This very brief review of housing market theory and the UK private rented sector has a number of implications for the current study.

First, a fair rent has the characteristics of long run equilibrium rent in a competitive market (Maclennan, 1982). Market rents have the characteristics of short run equilibrium rents. In theory, the short run equilbrium rent should be higher than the long run equilibrium rent when demand exceeds existing supply and lower when supply exceeds demand.

When rents increase because of demand excesses and/or supply shortages, the scarcity element is the portion that has increased. The opposite is also true. Rents at less than long run equilibrium produce a position where the scarcity element has a negative effect. The rental level should therefore be a product of demand factors only with the assumption of elastic supply. Market price fluctuations should be smoothed by the lack of supply side constraints, and the relationship between fair rent and market rent is therefore based on market rent fluctuations around the fair rent, caused by the supply–side variations.

Second, the vacancy rate is an important indicator of the demand/supply balance but there are serious difficulties in establishing the precise state of markets at any particular point in time. There are time lags and restrictions involved in market responses to various events. Theoretically, at particular points in the market cycle, market rents will be in equilibrium with fair rents at the point at which they cross each other. In practice, identification of this point will be very difficult due to the time lags and restrictions that mean that different data may indicate different points. An examination of data sources for this research has found that published information, for example from research by DETR, various letting and investment agents, tends to be too general to be of assistance, while information that might be more useful has restricted availability because of its commercial value.

Third, the discussion of housing sub–markets raises the difficulty of defining localities. Housing markets can be disaggregated by population and by physical characteristics as well as by location. Excess demand could be a product of income changes in a population group physically divorced from the area in which a property is situated. The level of scarcity of a particular property type could also be spread over a number of geographical locations but be bound by a building type or quality feature. The defining of the spatial area of a locality by an administrative boundary may have little meaning as localities may operate across these

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boundaries. The FPD Savills ‘latent demand model’ may make best use of available data, but as a tool for measuring scarcity is still caught by these constraints (FPD Savills, 2000b).

There is another possible distortion. This project aims to examine the fair rent determination process. The determination of fair rents has been characterised by the hypothetical nature of the task and the lack of verifiable market information to support that task. The fact that fair rents have never exceeded market rents since they were introduced in 1988 suggests that:

the rented housing markets have been in disequilibrium for the whole of the period; or

the overall level of fair rents has been too low; or,

the quality of fair rented property is generally worse than property let in the open market; or,

a combination of the above.

The valuation process gives little optimism that the assessed fair rents will be an objective measure of market rents in long run equilibrium state markets. This would lead to further distortions, low rents would create an excess demand for these housing units and may suggest a higher scarcity discount than truly warranted.

However, the aims of this research are to resolve this problem as the theoretical assumption that fair rent and market rent are long and short term equilibrium rents, and therefore that supply in the fair rent market matches demand, focuses attention on the introduction of market rents. If, theoretically, fair rent is market rent plus or minus a scarcity/excess factor, market rents form the basis for the valuation of fair rents.

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4. REVIEW OF CASE LAW AND LEGAL FRAMEWORK

4.1 Introduction This section reviews the development of case law, and covers in particular:

the factors to be regarded and disregarded when valuing for fair rents;

the assumption of no scarcity; and,

the market rent basis of valuation.

4.2 Background The Rent Act 1977 does not define the term ‘fair rent’ directly, but s70 does give certain directions as to how it is to be determined, as follows:

‘(1) In determining, for the purposes of this Part of this Act, what rent is or would be a fair rent under a regulated tenancy of a dwelling–house, regard shall be had to all the circumstances (other than personal circumstances) and in particular to:

a) the age, character, locality and state of repair of the dwelling–house,

b) if any furniture is provided for use under the tenancy, the quantity, quality and condition of the furniture, and

c) any premium, or sum in the nature of a premium, which has been or may be lawfully required or received on the grant, renewal, continuance or assignment of the tenancy.

(2) For the purposes of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling–houses in the locality on the terms (other than those relating to rent) of the regulated tenancy is not substantially greater than the number of such dwelling–houses in the locality which are available for letting on such terms.

(3) There shall be disregarded:

a) any disrepair or other defect attributed to a failure by the tenant under the regulated tenancy or any predecessor in title of his to comply with any terms thereof;

b) any improvement carried out, otherwise than in pursuance of the terms of the tenancy, by the tenant under the regulated tenancy or any predecessor in title of his;

c) if any furniture is provided for use under the regulated tenancy, any improvement to the furniture by the tenant under the regulated tenancy or any predecessor in title of his or, as the case may be, any deterioration in the condition of the furniture due to any ill–treatment by the tenant, any person residing or lodging with him, or any sub–tenant of his.’

The judicial decisions which relate to this section of the Act, and which are discussed below, provide guidance on determining a fair rent. However, these High Court decisions have been made against the backdrop of a changing pattern of rental evidence: in particular, the

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creation of new assured (periodic and shorthold) tenancies at open market rents, introduced by the Housing Act 1988, and the phasing out of post–1988 Act regulated tenancies let at fair rents.

Today there are therefore two systems of statutory control of tenancies and rents:

a substantial but dwindling number of pre–1989 regulated tenancies for which fair rents may be registered; and,

a growing number of assured tenancies at market rents.

The increasingly available evidence of market rents is therefore affecting fair rents as more and more tenancies under the Housing Act 1988 are created. In practice landlords frequently use this evidence in submitting applications for rent increases to rent officers and rent assessment committees, who have to consider the full impact of s70. Indeed there is a secondary aspect to the creation of assured tenancies and a school of thought which argues that the greater availability of lettings and the early 1990s property slump reduced scarcity to nil in many parts of England.

As Auld AJ stated in Curtis v Chairwoman of London Rent Assessment Committee (1997):

‘Before 1989, rent officers and rent assessment committees, when determining fair rents for registration under the 1977 Act, most commonly looked to other registered rents as comparables. There were then relatively few market rent comparables. Since that time, market rents of assured tenancies of similar dwellings have become increasingly available as comparables and starting points for determination of 1977 Act fair rents.’

Clearly this has important implications for the issue of what is a ‘fair’ rent. What, though, does the term ‘fair’ mean? Megarry (1988) suggests fair is used in the sense of ‘just’, and is the outcome of a decision by a rent–fixing agency, a rent officer or a rent assessment committee in proceedings inter partes, in which the rules of natural justice are observed. For example, in the case of Mason v Skilling (1974) ‘fair’ was held as being fair to both parties. However, Spath Holme (1995) made it clear that ‘fair’ is not fair in the sense of reasonable, and it is clear that the greater availability of market evidence has shifted the emphasis of judgements.

For example, in BTE Ltd v Merseyside and Cheshire Rent Assessment Committee (1991), where no scarcity existed the fair rent was held to be a market rent. Moreover, following this decision there was considerable pressure on rent officers and RACs to have regard to market comparables. Some committees were apparently ‘… overwhelmed by the pressure from landlords and made decisions which increased rents by considerable amounts above the rents determined by the rent officer (which was of course already an increase on the previous rent)’ (IRO, 1992).

This issue was also considered three years later in Spath Holme Ltd. v Chairman of the Greater Manchester and Lancashire Rent Assessment Committee (1995). It was held that a fair rent under the 1977 Act is the same as a ‘market rent’ under the 1988 Act, with the exception of the assumption of no scarcity and allowing for statutory disregards. As Merritt LJ said:

‘The fair rent to be determined is a market rent less the disregards and discounted for scarcity. Thus … if there is no scarcity and no disregards then the rents should be the same whether the tenancy is regulated … or … assured’.

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Building on this, in the Curtis case (1997) Auld LJ stated that a fair rent is ‘a market rent adjusted for scarcity or disregards’. In the same case, Auld LJ suggested that the effect of s70 of the 1977 Act is:

‘..to take as its starting point the market rent for the premises in their current state, assuming a hypothetical absence of scarcity of similar properties available for letting in the locality and disregarding the personal circumstances of the landlord and tenant and certain other matters, including disrepair of defects for which the tenant is responsible or improvements made by him.’

It is against this changing pattern of evidence that judicial judgement has been made. The summary below is based on Megarry (1988) updated with recent court decisions including Spath Holme and Curtis.

4.3 What is to be regarded and disregarded? Sub–section (1) of s70 lists certain factors to be regarded:

circumstances generally

‘All the circumstances’ means all those relevant to the determination of a fair rent (Palmer v Peabody Trust (1975) and Mason v Skilling (1974)). Indeed, in Metropolitan Property Holdings Ltd v Finegold (1975) it was stated ‘one must have regard to the sort of factors which tend to push rents up or down in the market’. Megarry (op. cit.) suggests the following are important although they are not itemised in the Act:

terms of lease/tenancy agreement;

services provided by the landlord;

statutory obligations as to fitness and repair.

age, character, locality

The actual use of the dwelling house at the time must be considered, and not, for example, a possible reversion to future business use (Stephens v Rowlands (1974)). A present business use that does not exclude the tenancy from the Acts should be taken into account, however. ‘Locality’ in s70 would appear to mean the immediate locality or fairly close vicinity, in contrast to the wider concept of locality in relation to scarcity in subsection (2). In either event, the fixing of the locality is largely a matter for the judgement of the court officer or committee (Palmer v Peabody Trust (1975).

state of repair

In Stulrosan and Co v Mauroux (1988) it was held that the actual state of repair in which the dwelling–house stands must be taken into account at the effective date of registration.

In addition, the following must also be regarded under subsection (1)

quantity, quality and condition of furniture; and

premium or sum in the nature of a premium.

By the same token, subsection (3) lists five factors which must be disregarded:

personal circumstances (eg poverty of landlord/tenant, or security of tenure of tenant);

tenant’s disrepair;

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tenant’s improvements

furniture: improvements or deterioration; and,

phasing of rent increases and capital appreciation.

4.4 The assumption of ‘no scarcity’ Subsection (2) provides the assumption that ‘the number of persons seeking to become tenants of similar dwelling–houses in the locality on the terms (other than those relating to rent) of the regulated tenancy is not substantially greater than the number of such dwelling–houses in the locality which are available for letting on such terms’.

The key elements of this subsection are as follows:

No scarcity or glut

The provision in this section requires the elimination of ‘scarcity value’ or the ‘scarcity element’ (Batt v London, City & Westcliff Properties Ltd (1967)). This requires an assumption of a neutral market – ‘we must assume neither glut nor scarcity of houses’ (ie houses of a similar nature to be let (Western Heritable v Husband (1983))). In essence, as was pointed out in Palmer v Peabody (1975):

‘… the subsection requires rents to be determined on the hypothetical basis that the house–letting market in the locality is in a state or equilibrium, in respect that the number of comparable homes available for letting does not substantially exceed the number of persons seeking to become tenants.’

This gives legal authority to the basic economic assumption of a long run equilibrium rent.

‘Not substantially’

This has been taken to mean that the ‘relationship of supply and demand for the class of dwelling under consideration was in approximate balance’ (Francis Committee (op. cit: 57). Megarry (op. cit.) refers to the decision in Palser v Grimling (1948) to suggest that the words are a recognition that valuation is not an exact science and that the assumed equation of demand and supply can only be approximate. In effect the words mean ‘not greater by an amount which a skilled valuer would regard as likely to have a measurable effect on rental value’ (Megarry (op. cit: 559)). This does not mean ‘de minimis’, however and there is a similar assumption (‘an appreciable scarcity’) in the Agricultural Holdings Act 1986 (Sched. 2). It should also be borne in mind that supply can exceed demand (ie a ‘glut’) which would mean that no statutory assumption would be made under the head of ‘scarcity’: nonetheless a ‘fair’ rent must still be established.

Amenity

As was pointed out in Metropolitan Holdings Ltd v Finegold (1975), the ‘amenities’ of a property may be reflected in determining a fair rent, and this was Parliament’s intention in formulating in the Rent Act 1965. Therefore amenities such as accessibility to a school, zoo or theatre can be taken into account in fixing a fair rent.

In the Queensway case (1999) case the High Court further considered the conditions under which a deduction should be made from the market rent on account of scarcity relating to amenity. The court held that one approach was to look at what reasonable alternatives were available to potential tenants of the property. No deduction should be made if demand exceeded supply because of the relatively high amenity of the locality of the subject property, but where there was no scarcity in the wider area. Tenants could then reasonably be

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expected to take alternative accommodation. However, if there was a shortage of property throughout the wider area, then a deduction should be made even though the scarcity was attributable to the area’s amenity advantages.

Locality

In contrast to the meaning of the term ‘locality’ in s70 (1) of the Act as the ‘near vicinity’, locality for eliminating scarcity in s70(2) has been taken to be ‘a really substantial area’ or a ‘really large area’ (Finegold case). In the same case it was suggested that in practice this would mean rent assessment committees deciding that the most appropriate locality is closely based on the area in which they regularly work. In Scotland2, however, this idea has been rejected and it has been pointed out that a rent officer’s normal area may be much smaller than a committee’s catchment area (Learmouth Property Investment Co. Ltd. v Aitken (1970)).

As the Francis Committee (1971) pointed out, one of the most difficult aspects of the problem of scarcity is to identify excess demand that is attributable to ‘amenity’, as distinct from excess demand generated by a shortage of rented accommodation. s70(2) is designed to eliminate the latter form of scarcity, but not the extra value attributable to matters mentioned in s70(1), such as the character or locality of the dwelling house.

For example, there may be high demand for the subject dwelling and similar dwellings nearby because of their proximity to a park, which will increase market rent. This element is not affected by s70(2), however, even though the word ‘locality’ is used in both subsection (1) and (2).

The word ‘locality’ in s70(2), however, has been interpreted in a much wider way than s70(1): s70(1) has been taken to mean the immediate locality, whereas s70(2) is the locality in a more extensive sense.

At the time of the Francis Committee, the then London panel interpreted locality in s70(2) as ‘the area within which persons likely to occupy this class of accommodation, having regard to their requirements and work, would be able to dwell’. The Committee also explored the idea of a ‘reasonable commuter test’ – if s70(2) was construed as defining locality in this way, then demand would have to be judged in the context of the availability of similar accommodation for renting over the whole area. In such circumstances the impact of s70(2) would be lessened. This argument was used, but dismissed by the judge, in Northumberland and Durham Property Trust Ltd v Chairman of London RAC and RAC (1998).

Quantification of scarcity

Megarry (op. cit.:561) points out that usually no direct evidence of scarcity is given, and where it is given is usually inconclusive. If registered rents are cited as comparable evidence then they clearly already reflect scarcity. Indeed, following the Laufer case and Anglo Italian Properties Ltd v London R.A.C. (1969), rent assessment committees have not been required to quantify any element of scarcity, though if they do, and thereby disclose error, their decision will be set aside. Moreover the assessment of scarcity is dependent on ‘personal professional opinion and experience’ (Laufer case, 1974).

2 In Scotland the Rent (Scotland) Act 1984 uses a slightly different wording. RACs must '…have regard to all the circumstances (other than personal circumstances) and in particular to apply their knowledge and experience of current rents of comparable property in the area as well as having regard..'. It has been pointed out to the authors that this additional wording creates particular difficulties in Scotland.

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However, in the case of Curtis v Chairman of London Rent Assessment Committee (1997), Auld L.J. cited Morritt L.J. in the Spath Holme (1994) case, who suggested that previous cases should be interpreted as relating only to the facts of those cases. Morritt L.J. said:

‘In this connection it was also objected that … the Rent Assessment Committee were required to give detailed reasons that might necessitate giving detailed arithmetical workings or quantifying the degree of scarcity involved contrary to statements in Guppy’s [case] and .. [the] Laufer [case] … but those statements were made in relation to the facts of those cases. It does not follow that there will not be cases in which the duty to give reasons will require such workings or quantification to be afforded.’

Where comparables, or adjustments to market rent to reflect scarcity, are used to determine fair rent, an explanation will require some ‘working through’. Indeed, in the Curtis case Auld LJ suggested:

‘It is trite law that rent assessment committees, like other tribunals, are not required to articulate their reasons to the exacting standards and with the accuracy and precision required of a court ... in cases where their assessment of fair rent differs significantly from that, on the face of it, indicated by market rent comparables, that exercise, if rational, must involve some sums …. It should have been no great burden for them to have indicated their thought process by a brief indication of their arithmetic.’

The judge quoted practical examples from the Southern and South Western Assessment panels which provided such workings.

Interestingly, Scotland appears to have insisted on quantification from an earlier date (Laufer (1974)).

Finally, the selection of evidence to quantify scarcity needs careful consideration. In Castle Court Investment Co. (Southampton) v Southern Rent Assessment Panel (1994) it was held that it was not possible to say that homeless persons or those on the Council’s waiting list were entirely irrelevant to the scarcity issue. There may well be some amongst them who are genuine seekers of accommodation within the private rented sector, or would be, if the rent excluded the scarcity element. However, the Committee should only take into account those persons who come into that category: to do otherwise would be to include those seeking public sector accommodation. In other words, only genuine ‘seekers’ of the type of accommodation in question should be considered.

Security of tenure

Although prima facie security of tenure is relevant as one of the circumstance to be considered in fixing the fair rent (Palmer v Peabody (1975)), discounting scarcity cancels out the potential increase in rent due to security. If there is no scarcity of similar homes to let, no tenant would pay significantly more for obtaining security. However, security of tenure for a tenant is, in any case, a personal circumstance that must be disregarded, so in cases where it does exist it should be disregarded (Mason v Skilling (1974)).

Nonetheless, in Spath Holme (1995) it was held that, although the Rent Assessment Committee were entitled to conclude that tenancies with security of tenure commanded higher rents than those without, they were wrong in law to hold that rents for assured tenancies should be discounted on that ground because regulated tenancies also have the same degree of security of tenure. In this sense, it is not a personal circumstance to be disregarded. The judge contrasted the case of Mason v Skilling which involved a sitting

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tenancy which was a ‘personal circumstance’ to be excluded, where the fair rent was based on ‘capital value/fair yield’.

Inflation

In principle, inflation is a factor that may be taken into account as a relevant circumstance (Mountview Court Properties Ltd. v Devlin (1970)). For fair rents no rules are laid down for quantification: it is a question of valuation in the facts of each case. There is no obligation to tie a fair rent to the Retail Price Index (RPI) or any index (Laufer case (1974)), although regard may be had to it (Waring v White (1984)).

4.5 Market rent basis Several court cases have now made it very clear that rent assessment committees must not use registered fair rents as comparables where market rent comparables exist. Some believed the same point had been clarified in Spath Holme Ltd v Chairman of the Greater Manchester and Lancashire Rent Assessment Committee (1995) 2EGLR 80. In this case the landlord successfully argued that, as the company was offering similar properties in the same block at much higher assured tenancy rents, those of regulated fair rent tenants should rise to levels higher than allowed by the RAC. The Court of Appeal held that the tenancies were similar and that scarcity of rental accommodation was not a factor in this case. In short the case established that rent officers should set fair rents by looking at market rents, including rents under assured tenancies, discounted for scarcity. However, some RACs felt that this case left them with sufficient flexibility to rely on registered fair rents rather than market rents, without giving detailed reasons for doing so. Others appeared to be fixing fair rents on the basis of market rents but failed to identify the adjustments.

It was against this background that Curtis v Chairman of London Rent Assessment Committee (1998) 15EG 120 was taken to the Court of Appeal. Subsequently the Northumberland and Durham Property Trust Ltd used the ruling in the Curtis case in a series of challenges.

In the original Curtis case the landlord (Curtis) had taken the rent officer’s determination of rent for two flats in a block to the local RAC. The rents registered of £3900 and £3640 were much lower than the £5720 and £5200 applied for, despite evidence that rents obtainable for flats let on assured tenancies in the same and similar blocks were in the range £5720 to £6240. The RAC accepted the landlord’s assured shorthold comparables as market evidence, but although the landlord argued there was no scarcity, this was rejected by the RAC partly on the grounds that the previous registered fair rents (which did not reflect scarcity) had not been shown to be unsound. The RAC confirmed the rent officer’s registration but did not provide any detailed calculations, even though it reported it had made ‘appropriate deductions … as well as a discount for scarcity’.

The landlord appealed to the High Court on a number of grounds but won the case only on a procedural point. He then took the case to the Court of Appeal because he maintained that the judge had wrongly rejected the substance of his appeal and that the RAC had failed to apply Spath Holme principles.

The Court of Appeal emphatically reconfirmed that a fair rent is a ‘market rent adjusted for scarcity and disregards’. In cases where there is market evidence available, therefore, ‘there is normally no need to refer to registered fair rent comparables at all. It follows that to rely in such a circumstance on registered fair rents, whether generally or particularly, unless one or other party can dislodge them as sustainable comparables, is wrong’.

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The court also argued that the committee’s reasoning in the case had been inadequate:

‘In those cases where a committee’s determination is close to the market rent, indicated by good market comparables, and there is no actual scarcity, little or no arithmetic explanation may be necessary. But where a committee’s assessment of a fair rent differs significantly from the market rent indicated by the market rent comparables, …they must have good reasons for it and they must explain them … it will require some use of figures to demonstrate the committee’s workings towards, or calculation of, the final fair rent figure.'

Following the Curtis case there were three appeals brought by Northumberland and Durham Property Trust ([1998] 24EG 128, [1998] EGCS 42 and [1998] EGCS 56). In all three the committee conceded that, in the light of Curtis, its determinations should be quashed and remitted for reconsideration.

Murdoch and Murdoch (1998) sum up the key points highlighted by the three Northumberland and Durham appeals as follows:

there is no initial burden on a landlord to show that the market comparables used are compelling.

a committee should not decline to use market comparables just because they require adjustment to bring them onto the same basis as the subject property. This applies to both fair rents and market rents.

in dealing with scarcity the committee should identify the area under consideration and should be over a sufficiently broad area and not concentrated in one where the shortage of housing is related to core amenities. The analysis of scarcity should also be explained and the discount justified.

4.6 Increasing the fair rent Once a fair rent is registered, normally no further application may be considered within two years of the effective registration date. However, the landlord or tenant may apply for the rent to be reconsidered within the two year period under any of four circumstances set out in s67(3), that is, where there has been any change in:

(a) the condition of the dwelling house, including the making of any improvements;

(b) the terms of the tenancy;

(c) the quantity, quality or condition of any furniture provided; or,

(d) any other circumstances taken into consideration when the rent was last registered or confirmed.

If a case is made for reconsideration of the rent, all the relevant circumstances may be taken into account, not just the change in condition that allowed the reconsideration.

This provision was put to the test in R v West Sussex rent officer, ex parte Haysport Properties Ltd ([2001] EGCS16). In this case the fair rent had been reduced by the RAC on appeal by the tenant in 1998 due to the poor repair and condition of the property. Meanwhile the local council served a repair notice on the landlord who carried out the substantial repairs required and then made a further application to register a fair rent in 1999. The rent officer refused the application and the landlord sought judicial review of that decision, saying that it was unreasonable.

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The rent officer argued that the definition of improvement in s67(3)(a) was governed by s75(1), which excluded ‘anything done by way of decoration or repair’. Further, the work done by the landlord was pursuant to a repair notice or his contractual obligation and the benefit of those obligations was already reflected in the rent the tenant was obliged to pay. There was not therefore an improvement for the purpose of s67(3). The judge dismissed the application and the landlord appealed. The appeal was allowed for two main reasons:

repairs could constitute a change in condition and the wording of s75(1) did not have to read into the definition of improvement in s67(3); and,

while the benefit of the landlord’s repairing obligation had to be taken into account, it did not follow that the fair rent of a property out of repair would be at the same level as one in repair. Indeed, unless it was virtually certain that repairs were about to be carried out, it was probable the fair rent would be less for a property out of repair.

Fair rent increases are now limited by the Maximum Fair Rent Order (1999) as discussed in section 2.5. The application of the capping order was challenged in the case of Spath Holme Ltd v Chairman of the North Western Rent Assessment Committee and another [2001] 30 EG 113 (CS). The second respondent was a regulated tenant in a block of flats and had transferred from an upper floor to an identical ground floor flat in 1990. No rent was registered in her name for the ground floor flat until August 2000, when a joint application was made with the landlord. The appellant landlord then appealed against the rent assessment committee’s decision to apply the capping order to the rent determination and against a deduction to reflect ‘voids’ occurring in the block.

The court decided that in respect of applying the capping order the rent assessment committee had not erred in law. Since the appellant had been landlord at the time of the previous registration the committee was entitled to infer that it had the previous figures. In any event, the figures used for the capping calculation were in the public domain. The committee had properly drawn the landlord’s attention to the House of Lords decision and invited comments, but none were forthcoming. The appellant had only its self to blame for not registering the rent sooner and there was no reason to ignore the capping provisions in this case.

However, on the ‘voids’ issue the committee had erred in law, because it had assumed an absence of voids and letting costs in the hypothetical market of regulated tenancies. Whereas, in the ‘hypothetical’ market a landlord would face voids to a similar extent to that occurring in the market for assured tenancies and there was no evidence that a landlord took account of voids when fixing rents under assured or assured shorthold tenancies. The committee was therefore wrong to make the deductions it did and the decision was therefore quashed and remitted.

4.7 Overview of legal framework In Spath Holme (1995) it was recognised that there were various methods of assessing fair rents and that the method(s) adopted by a rent assessment committee may vary according to the circumstances of each case. Auld L.J. also acknowledged this point in the Curtis case (1997) but stressed that the changed nature of the evidence available in the lettings market over the last 10 years suggested the starting point for each approach should be market rent rather than comparable registered rents:

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‘Although I agree with the judgement of Harrison J endorsed by the Court in Spath Holme that, depending on the material available, there may be more than one route to determine a fair rent, every route must have that starting point. That is so, whether reliance is placed on market or fair rent comparables or on return of capital.’

Auld L.J. went on to suggest that because market rents were the ‘natural successors’ to the declining regime of registered fair rents, where close market rent comparables were available they should be treated as the best evidence for the purpose. Using market rent as the starting point is ‘not a change in law or principle; it is consistent with that of the Courts to registered fair rent comparables before the 1988 Act. Only the material has changed’. Earlier judicial observations of combining one or more methods of assessment (eg. Mason v Skilling (1974)) are inapplicable in cases where there are market rent comparables on which a fair rent assessment may be based. The best evidence of the starting point for assessment of fair rents should be market rent comparables where they are available.

Furthermore, if this market evidence is available there is no need to refer to registered fair rent comparables. As Auld L.J. states:

‘In my view, where there are good market rent comparables upon which a committee can act in identifying market rent of the subject premises it can only cause confusion to attempt to use the two regimes of market and fair rent comparables, calibrating one against the other, to determine a fair rent. …to rely in such a circumstance on registered fair rents is wrong. Such an approach would freeze the fair rents by reference to precedent rather than achieve what is intended by the legislation, an exercise of valuation, and assessment of current fair rents by knowledgeable and experienced committees responsive to the particular characteristics of the subject property and to changing market levels.’

As Good (1998) has pointed out, the judgement in the Curtis case provides a ‘definition’ of fair rent as being ‘market rent less scarcity’, which parallels a previous judgement (Tormes Property Co v Landau (1971)). From this, it appears that the starting point is the market rent for the property and its locality, eliminating any scarcity value together with other adjustments3 in arriving at a fair rent. However, despite the fact that the approach to the actual valuation may appear to have some consistent legal basis, the actual methodology to be adopted may be subject to debate. In Palmer v Peabody (1975), the focus was on the elimination of scarcity from the rental evidence in the open market, rather than the determination of a market rent from the property and then adjusting for scarcity in the subject property:

‘If the actual state of affairs is that the market is imbalanced, in respect that the demand for houses to let substantially exceeds the supply, then the rents actually paid in the market will reflect the imbalance, being higher than they would be in a balanced market. In that situation it will be necessary for the rent officer and the rent assessment committee, in so far as striking a fair rent they rely on the rents actually being paid in the market, to apply to these rents a discounting procedure in order to eliminate form them the element which is attributable to the relative scarcity of houses available for letting.’

3 The ‘market rent less scarcity’ concept should be understood subject to some qualification as tenants’ improvements will enter into a market rent but not a fair rent. Bryant (1998) points out there may be a difference of 5–20% between fair and market rents before even scarcity is considered, due to state of repair, central heating provision and repair liability differences. Prichard (1995) also points out that housing benefit may distort open market comparables.

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Although there is now a consistent legal framework pointing to the predominance of comparables from the open market, the valuation approach to the elimination of the scarcity element requires more examination (see Section 3.2).

In addition to the debate on the method to be adopted, the Curtis case placed much emphasis on the need to explain and prove the process of assessment. As Good (op. cit.) concludes:

‘Any rent officer who cannot show how he worked through from the market rent to the fair rent by the use of sums will be open to the accusation that he or she has not adopted a rational way of giving effect to the scheme of assessment set out in s70.’

The need to explain the reasoning behind decisions should be a natural consequence of a system that requires those acting as expert witnesses to give impartial advice to tribunals and other judicial proceedings. A surveyor is acting as an expert witness whenever oral or written evidence is given to any judicial or quasi–judicial body in the UK, which the RICS guidance note defines as before any ‘Courts, Tribunals, Committees, Inspectors, Adjudicators, Arbitrators and Independent Experts...., but not Mediators’. (RICS, 1997:9). A fair rent hearing is such an occasion.

It is clear from a new RICS guidance note on expert witnesses and from other sources such as Rees (1994) that the role of the expert witness is to impartially advise the court irrespective of the client who instructed the expert. Where evidence is given objectively, tribunals, whether or not they also include experts, should be expected in their judgments to discuss all aspects of the evidence offered and give reasons why they have attached different weightings to various parts of the evidence. In other hearings, it is normal for judges and arbitrators to give reasoned awards.

Where experts have obviously been partial, judges have regularly cast doubt upon the usefulness of expert witness testimony and have sometimes ignored the advice or treated it with scepticism. Evidence dismissed for partiality is perfectly reasonable; evidence ignored under the pretext of phrases like ‘in our experience’ (a recent London Rent Assessment Committee decision) is not compatible with clarity and transparency. Good’s analysis of the situation quoted above therefore appears to be accurate. Accordingly, where comparables are not exact and/or where there is a need to adjust for lack of scarcity or for disregards, a reasoned basis must be provided and set out in the decision.

4.8 Summary Although the Rent Act 1977 explains how a fair rent is to be determined, it does not define the term ‘fair rent’ directly. The expression ‘fair’ is used in the sense of ‘just’ and the requirement to fix the rent observing the rules of natural justice (Megarry, 1988), but fair does not necessarily mean ‘reasonable’ (Spath Holme case, 1995).

The greater availability of market evidence has shifted the emphasis of judgements toward the use of market comparables as the basis for assessing fair rents. A fair rent is a market rent less the statutory disregards and a discount for scarcity, but a fair rent can be the same as a market rent where there are no disregards and no scarcity.

Scarcity requires the assumption of a neutral or balanced market, and legal authority to the basic economic assumption of a long run equilibrium rent (discussed in Section 3) is provided by Palmer v Peabody (1975). Scarcity is also required to be considered over a relatively wide area (Finegold case, 1975) and is designed to eliminate excess demand generated by a

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shortage of rented accommodation, but not excess demand attributable to the ‘amenity’ of a particular locality (the Queensway case, 1999). This distinction is one of the most difficult aspects to assess and apply in practice.

The quantification of scarcity is left to ‘personal professional opinion and experience’ (Laufer case, 1974), but a ‘rational’ exercise must still involve the provision of workings, sums and arithmetic to demonstrate the thought processes behind the adjustments made to market rents (Curtis case, 1997 and Spath Holme case, 1994). The need to explain reasoning behind decisions should also be a natural consequence of a system that requires those acting as expert witnesses to give impartial advice to RACs as independent tribunals.

This section has therefore shown that there is a consistent legal framework pointing to the use of comparables from the open market as the valuation start point and comparables should not be ignored because they require adjustment to bring them into line with fair rents or other market rents.

Finally, a fair rent can be reconsidered in less than two years where there has been a change in the condition of the property, which can include repairs to the property (Haysport case, 2001). This is important in relation to the rent capping provisions introduced by the Maximum Fair Rents Order 1999, discussed in Section 2 and again in the review of the valuation process in Section 7 of this report.

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5. THE VALUATION PROCESS

5.1 Introduction The general discussion of the evolution of the application of valuation methods to fair rents was outlined in Section 2, followed by consideration of the economic context (Section 3), case law and the legal framework (Section 4). Fair rent determination is now considered in more detail through an examination of valuation practice and a review of the rent assessment panel process.

5.2 Valuation practice The actual process of determining fair rents has appeared to follow the principles set out in section 4, with the assessment of the market rent for the subject property followed by an assessment of the scarcity element. At first sight, this appears to accord with valuation practice in other markets. For example, in the assessment of market rents in the commercial property market, the process would proceed as follows:

identify comparable properties;

adjust the rent of each individual comparable to the basis of the normal circumstances concerning property specific issues such as lease structures and physical characteristics of properties of this type (for example, a 20 year lease with 5 year reviews on full repairing and insuring terms);

assess the price per unit of comparison on these normal terms;

adjust for characteristics external to each comparison (for example, location) to determine the price per unit of comparison to be applied to the subject property to determine rental value under the standard terms; and,

adjust for specific differences between standard terms and terms of the subject property as well as other inducements to enter into leases (e.g. rent free periods, fitting out, premiums and reverse premiums).

In the case of fair rents, an additional difference is the scarcity factor that is introduced after the market rent is determined. In diagrammatic form, the process is as shown in Figure 5.1 Approach A. An alternative approach would be to determine the equilibrium rental value for the comparable before transferring this evidence across to the subject property as shown in Approach B.

At first sight this may appear a semantic difference. However, consider the position of a valuation using comparables from a different sub–market, for example where the open market rental value (OMR) is based upon an improved property and the fair rent is to be of an unimproved property. If demand for improved property exceeds that for unimproved and supply also differs, they are in different sub–markets and scarcity levels may differ.4 Assuming

4 A particular difficulty here may be that all properties are improved so if they are treated as being in a different sub–market then even if the properties are standing empty they could not be used as evidence of scarcity for the purposes of the subject property. RACs have often argued that there is a consequent great scarcity of unimproved property such as the subject property.

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Figure 5.1: Valuation approaches

Approach A

Approach B the scarcity factor in the improved sector is assessed at 50% (a 100% increase) but demand in the unimproved sector is in balance with supply, there is no scarcity.

Using Approach A, it might be argued that a letting at £5,000 per annum of the comparable could be used to assess the open market rental value of the subject property. Scarcity could then be considered in the market for the property in question and deemed to be zero, i.e. no deduction. The fair rent would then be adjusted for the difference between improved and

Comparable Property Rent

Comparable Property Rent

Subject Property

Subject Property

Open Market Rent on Standard Terms

Open Market Rent on Standard Terms

Open Market Rental of Subject Property

Fair Rent after Deduction of Scarcity

and Other Items

Fair Rent of Subject Property after Deduction

of Other Items

Equilibrium Rent of Comparable Property after

Deduction of Scarcity

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unimproved. In the absence of direct evidence to the contrary5 (i.e.no unimproved lettings), this deduction may or may not consider the two issues required, a return for the cost and inconvenience of undertaking the improvement and an element for the different scarcity levels of the improved and unimproved markets. A deduction of 25% for the return on cost issue implies that a further deduction for the scarcity issue attached to improved against unimproved properties has been ignored6.

If the second element is ignored, the valuation becomes:

Approach A Open market rent of comparable property £5,000 Open market rent of subject property assuming improved £5,000 Less for scarcity (nil) £0 Fair rent improved £5,000 Less for unimproved (25%) £1,250 Unimproved Fair Rental Value of subject property £3,750 However, if Approach B is implemented, the valuation should proceed as follows:

Approach B Open market rent of comparable property £5,000 Less 50% for scarcity £2,500 Equilibrium rent of comparable assuming improved £2,500 Less for unimproved (25%) £625 Unimproved fair rental value of comparable and subject property £1,875 The outcome is that the 100% increase in fair rent to market rent in the comparable due to scarcity has been transferred directly into the fair rent of the subject property. Without proper adjustment, Approach A may distort the fair rent and yet accords with the basic ‘market rent less scarcity’ model.

The above raises some doubts about the application of comparable valuation methodology in this area of practice. If valuations are approached on the basis of the former, with scarcity being applied to the subject property, there is a danger that the fair rent valuation will include scarcity within it. This applies where comparables are drawn from different sub–markets than the subject property. Identifying scarcity for each comparable to assess the fair rent before applying to the subject property would give a more defensible answer.

It may have practical advantages as well. For each new letting, the possibility exists that there is more detailed information on the number of applicants and the number of similar properties for that property than for the sub–market of the subject property, where there may be no market activity. The practical down side is that each comparable property must have an independent assessment of the scarcity level at the time of the letting.

The implications for landlords and tenants of regulated tenancies are important. Where it is assessed that scarcity in the sub–market of the subject property is less than in the sub–

5 The Castle Court case made it clear that valuers should value ‘like with like’ where evidence permits. In that case, the RAC was criticised by the judge for using an ‘unimproved’ comparable when valuing an ‘improved’ house. Indeed , rent officers have often highlighted this as a problem, in that ‘typical’ regulated tenancies may suffer from ‘pot sink’ syndrome whilst assured tenancies often benefit from improvements (IRO (1994:35)). See also IRO (1997). 6 Anecdotal evidence suggests landlords frequently adjust for differences in repairs and improvements by using a capital value approach coupled with amortisation. However, RACs have generally used a more 'intuitive' approach, based on the hypothetical tenant’s bid/landlord acceptance.

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market of the comparable, the fair rent will be increased. Where the opposite is true, it will be lower. Only where comparables are drawn from sub–markets with identical scarcity characteristics will the valuations remain the same.

5.3 The rent assessment panel process Rent assessment panels (RAPs) deal with matters arising from legislation regulating the private rented sector. For these purposes, they are constituted as:

Rent Assessment Committees to determine the fair rent for a regulated tenancy where one of the parties has objected to the rent fixed by the rent officer (this is subject to The Rent Acts (Maximum Fair Rent) Order 1999, which imposes a limit on fair rents by reference to a formula based on the variation in the RPI); and to determine a rent in the open market and under an assured tenancy, on application from a tenant.

Rent Tribunals to determine rent where a restricted contract exists between a resident landlord and tenant on application from either party or the local authority.

Leasehold Valuation Tribunals to adjudicate in disputes about valuation in houses or flats where enfranchisement of the freehold or a lease renewal is sought; to approve estate management schemes under the Leasehold Reform, Housing and Urban Development Act 1993; to adjudicate in disputes about the right of first refusal procedure and the compulsory acquisition of the landlord’s interest in blocks of flats; to adjudicate, since 1 September 1997, in disputes about service charges, insurance and the appointment of managers.

The Committees and Tribunals comprise lawyers, valuers and lay persons and normally consider cases at hearings held locally for the convenience of the parties. In most cases they will inspect the subject property, usually on the same day of the hearing. Members are appointed by the Secretary of State, while the Lord Chancellor appoints chairmen.

There are currently 8 RAPs in England, each of which operates under the direction of a part–time President assisted by at least one part–time Vice–President.

A recent report on the rent assessment panels in England, Financial Management and Policy Review of Rent Assessment Panels in England (DETR, 2000) recommended improvements to the quality and effectiveness of the service provided to tenants, landlords and leaseholders. The report is summarised in Housing Research Summary, Number 125 (www.housing.detr.gov.uk/hrs/hrs125.htm)

Between September 1999 and March 2000, DETR carried out a Financial Management and Policy Review (FMPR) of the rent assessment panels in England. Key findings from the review were:

There is scope for the Panels to adopt a more flexible approach to dispute resolution. The review proposes that, where appropriate, the tribunal uses the pre–trial review to explore with the parties the possibility of resolving the matters before them without a hearing. The options to be explored should include determination by a single member of the tribunal and, in the more straightforward single–issue cases, the possibility of the dispute being dealt with on a documents only basis.

The RAPs operate as largely autonomous units and the lack of cohesion between them gives rise to differing management practices, organisational arrangements and levels of performance. The review identifies the need for a single authority responsible for giving

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overall management direction to the Panels and for ensuring consistency in procedure and approach.

Panel users are concerned about the impartiality and competence of members, and the lack of consistency in approach within and between RAPs. The Panels have looked to address these concerns by making a register of members’ interests available for inspection by parties and their representatives, and by developing a more systematic and planned approach to the training of members. Training is increasingly being organised on a Panel–wide basis to help spread best practice and achieve greater consistency. Proposals are made for raising standards through the production of comprehensive guidance manuals and tighter monitoring of members’ performance.

The RAPs have made some progress in reducing the time taken for cases to reach a hearing but delays remain much too long. A significant factor affecting the turnaround time is the failure of parties to comply with the directions of a tribunal. There is some evidence of parties adopting delaying tactics and acting unreasonably at the hearing to cause further delay. The arrangements for the payment of fees are cumbersome and contribute to the delays, and much time is wasted in returning application forms and seeking missing information.

The review makes a number of proposals for speeding up the RAP process:

the setting of service standards to be met by the Panels to serve as a focus for improvement.

giving the tribunals discretionary powers to exclude late representations and to award costs in certain circumstances, so as to deter parties intent on not co–operating with the tribunal and delaying the hearing of a case.

enabling applicants to pay fees with their application, and amending the application forms to make clearer the information required by the tribunal.

There is some evidence to suggest that the fee payable with certain applications may deter some people, particularly where the sum in dispute is small and the likely financial gain minimal. The review proposes changing the fee structure so that reduced fees are payable for matters in dispute of low value. This should make the tribunals more accessible in the future.

The caseload of the Panels has historically been heavily dominated by objections against fair rents registered by rent officers. Although deregulation of private rented housing was introduced in the late 1980s and applied to all new tenancies, there were still an estimated 1 million tenancies regulated by the Rent Act 1977 (DETR, 2000). Some 400,000 of these tenancies had a registered fair rent, and this was the source of the 23,000 appeals in 1991 to the then 13 Panels. The number of regulated tenancies has since fallen to less than 200,000 in 1998–19997, together with the number of registered fair rent and the volume of fair rent appeals.

As the table below indicates, the reduction has, other than in 1999, been fairly gradual in recent years, tending to fluctuate biennially as applications are made for re–registration every two years. The table suggests that the appeal rate has increased during the period. This may reflect the impact of changes in the property rental market over the period and the trend for fair rents to move closer to market rents. Decisions by the Courts on appeals against RAC decisions have influenced the approach to the determination of fair rents, and this too may

7 Source: 1998/99 Survey of English Housing: Preliminary results

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have encouraged some landlords to object to the rent officers’ registered rent as a matter of routine.

Table 5.1 Pattern of Appeals, Regulated Tenancies and Registered Tenancies (source: DETR, 2000)

Number of Fair Rent appeals

Estimated number of regulated tenancies

Estimated number of rent registered tenancies

1993 15400 1993–94 371000 1993–94 224000

1994 13001 1994–95 311000 1994–95 172000

1995 10639 1995–96 272000 1995–96 167000

1996 11584 1996–97 242000 1996–97 128000

1997 12304 1997–98 205000 1997–98 121000

1998 10770 1998–99 188000 1998–99 107000

1999 6041

Table 5.2 Fair rent appeals received in 1998 and 1999 (source: DETR, 2000)

Panel 1998 1999 % Change on 1998

LONDON 4211 2476 –41% MERSEYSIDE 1423 439 –69% N WESTERN 1222 748 –39% MIDLAND 1067 807 –24% N EASTERN 1013 503 –50% C, T & E 705 464 –34% S& S EASTERN 875 433 –51% S WESTERN 254 174 –31% TOTAL 10,770 6,044 –44%

The DETR (2000) report also suggests that the fair rent appeal work of the Panels sharply declined in 1999, when the number of appeals received fell by 44% compared to 1998. In part this reflected the continued reduction in the number of regulated tenancies but more significantly the effect of the introduction of The Rent Acts (Maximum Fair Order) 1999 on 1 February 1999. The Order, which imposed a limit on fair rents by reference to a formula based on the variation in the RPI, was introduced to deal with the otherwise high fair rent increases faced by regulated tenants.

As Table 5.2 indicates, the rate of reduction in the number of appeals varied markedly between Panels, reflecting in part the property rental market in each region and the rental policies of housing associations and other landlord companies in the Panel area.

The Panels’ caseload in respect of its other jurisdictions did not increase over the same period to offset this reduction, as the table below shows. For example, ‘market rent’ cases brought under the Housing Act 1988 remained steady at about the 1998 level, while pre– Housing Act 1996 cases (principally disputes over leasehold enfranchisement and lease renewal) fell by over 20% compared to 1998. The focus of the Panels’ work in future is likely

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increasingly to be disputes about service charges, insurance and the appointment of managers, which came within the LVTs’ jurisdiction in September 1997.

Table 5.3 Breakdown of Panels caseload in 1998 and 1999 (source: DETR, 2000)

Panel jurisdiction 1998 1999 % Change on 1998

RAC FAIR RENT APPEALS 10770 6044 –44%

RAC MARKET RENT CASES 1210 1166 –4%

LVT PRE–HOUSING ACT 96 902 707 –22%

LVT HOUSING ACT 96 601 697 16%

OTHER 89 91 2%

TOTAL 13572 8705 –36%

Within each jurisdiction, the volume of cases received by each Panel varied markedly. The London Panel alone received about one–third of market rent cases in 1999, with the balance fairly evenly distributed around the regions. The exception was the North West area where the market rent cases received in the North Western and Merseyside & Cheshire Panels together accounted for just 9% of the total caseload. The pre–Housing Act 1996 LVT caseload was heavily concentrated in the London and Midland Panels; together they accounted for some 87% of the Panels’ caseload in 1999. As for the newer LVT jurisdictions, these were similarly concentrated in a few Panels; the London Panel received about 58% of the total caseload in 1999, the Southern and South Eastern (13%) and Midland (11%). At the other end of the spectrum, the newer LVT caseload in the northernmost Panels (Merseyside & Cheshire, North Eastern and North Western) amounted to less than 5% of the overall total.

The review has also been supported by a study by Blandy, Cole et al (2000) of the experiences of parties in disputes over service charges, insurance and the appointment of managers before the Panels. The study was carried out between January 1999 and July 2000 with a sample of the early LVT cases using the extended jurisdiction of the 1996 Act, which investigated:

the factors that encouraged or inhibited an application being made to a LVT;

the factors affecting progress;

the influence of professional representatives on the process and conduct of Pre–Trial Reviews (PTRs) and hearings; and,

the satisfaction of various parties with the LVT process.

The views and experiences of over 400 leaseholders, freeholders and professional representatives involved in the process, stakeholder groups and LVT staff and Panel members were analysed, using postal and telephone survey techniques and in–depth, face–to–face discussions.

The key findings were:

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Most respondents felt that the LVT process carried several advantages over County Court procedures, especially in its capacity to pull together professionals to sit together as an expert panel in judgement on the reasonableness of actions or events. LVTs were also recognised as holding the potential to provide speedier case processing, cost savings and a simplified path to dispute resolution, but some reform was often considered necessary in order to secure these gains.

Relatively few leaseholders or freeholders experiencing problems relevant to the new jurisdiction (covering service charges, the appointment of a manager or insurance arrangements) appeared to be applying to a LVT to seek a resolution to a dispute. The main reasons given for not applying to a LVT were cost concerns and the perceived complexities of the process.

The most troublesome aspect of LVT performance was the slow progress of cases toward resolution, whether due to the exclusion or dismissal of cases from the LVT or to the slowness of LVT procedures at different stages. Cases were found to be taking, on average, between 10 and 12 months from application to determination.

Several respondents were frustrated by the apparent inability of the LVT to direct proceedings at the PTR and the hearing. Of even greater potential significance was the perception that LVTs had only limited ability to force compliance with determinations.

In certain cases the PTR had proved a useful device. Leaseholders, in particular, were grateful for the opportunity provided by the PTR to put forward their case. However, PTR practice seemed to vary between regions and their potential was restricted by uncertainties about their function.

Many suggestions were made about how the hearing could be improved – including adopting a more formal approach, more forceful control of applicants’ and respondents’ behaviour, compulsory representation and consideration of alternative for resolving disputes – such as mediation, arbitration and paper submissions to a panel of experts.

Not surprisingly, attitudes to determinations varied according to the outcome. The main concern expressed by all interests was the apparent variation and inconsistency between determinations, often related to the confused situation regarding the extent of LVT jurisdiction.

There was a wide range of views – positive and negative – about the degree of professionalism among Panel members, their understanding and experience of relevant issues, and the judgement reached.

5.4 Summary Rent assessment panels have faced a variable work–load of fair rent cases, affected by the biennial review pattern, market differences between the regions and the varying impact of the Maximum Fair Rent Order. A DETR review has suggested scope for improved performance and measures to improve consistency of approach and cohesion between rent assessment panels.

The actual valuation process of determining fair rents appears to follow the principles established in case law and at first sight appears to accord with practice in other markets. However, in the case of fair rents an additional difference is the scarcity factor that is introduced after the market rent is determined. This section has argued that a more defensible approach to eliminating scarcity would be to identify scarcity for each comparable

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to assess the equilibrium rent, before applying the evidence to the subject property. There are therefore two basic questions to be answered from the case studies.

What is the overall basis of valuation being adopted in respect of market rent less scarcity?

What is the detail of the valuation process as it applies to the adjustment of open market evidence from comparables to the subject property?

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6. FAIR RENT DETERMINATION IN PRACTICE

6.1 Introduction This section starts with a brief overview of rent statistics compiled by the DETR as an introduction to the regional case studies of fair rent appeal decisions undertaken for this research. The case studies address the questions posed at the end of the previous section, that is:

What is the overall basis of valuation being adopted in respect of market rent less scarcity?

What is the detail of the valuation process as it applies to the adjustment of open market evidence from comparables to the subject property?

6.2 Rent statistics – regional comparisons Housing Statistics (DETR, 2000b) compiled by the DETR show how the proportion of Regulated tenancies has shrunk from nearly 60% of the UK residential rented sector in 1988 to only 6% in 1999/2000 (Figure 6.1). Meanwhile assured and assured shorthold tenancies have grown to 67% of the sector. In terms of scale the regulated sector is therefore becoming less important, while at the same time increased market evidence is becoming available on which to base rent assessments.

Figure 6.1 Private tenancies by type in England

Source: DETR Housing Statistics 2000 (DETR, 2000b) Viewed on a regional basis, London stands out from the rest of England. Average weekly rents are highest in London and the average percentage reduction from assured rents to regulated (or fair) rents is also greatest at 57% (tables and figures showing regional comparisons can be found in Appendix 1). However two other regions included in our study also showed a relatively high and increased percentage difference, that is, the South West (48%) and North West (56%).

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Since 1993, appeals in Greater London against rent officer decisions on fair rents have more often resulted in an increase and less often in a decrease than in other parts of England. However, while in the rest of England the proportion of appeals resulting in a rent increase has grown since 1993, in London the proportion has fallen.

The mean percentage change in rent on appeal shows a similar difference in pattern between the rest of England and Greater London. In the rest of England a positive mean percentage change gradually increased between 1993 and 1998. In London the percentage change was still positive and generally higher, but started at a higher level in 1993 and fell back in 1996, before peaking in 1998. Figures for the first quarter of 1999 suggest a quite drastic reduction in the level of rent increases awarded at London appeals, following introduction of the Rent Acts (Maximum Fair Rent) Order on 1 February 1999. However, because data was not available for the whole year it should perhaps be treated with some caution.

6.2.1 Summary In summary, the rent statistics for previous years indicate that:

fair rents in London were more likely to be increased than decreased on appeal than in the rest of England;

until 1998, rent increases awarded on appeal in London were on average greater than in the rest of England; but,

overall the percentage reduction of assured rents to fair rents is greater in London than the rest of England.

Aside from differences for tenancy terms, the reduction from assured to fair rents comes from two main sources:

to reflect ‘quality’ differences between property in terms of furnishing, repair / improvements by the landlord and / or tenant; and,

to reflect an imbalance in the demand over supply for rented property – the ‘scarcity’ factor.

Higher proportionate deductions in some areas than others therefore imply:

a greater ‘quality’ difference between fair rented and market rented property; and/or

a greater excess of demand over supply for rented housing – that is the ‘scarcity’ factor; and / or,

other factors that could vary by region, for example:

variations in the amount and quality of available valuation evidence;

the extent to which landlords and tenants are professionally represented; and,

differences in approach on the part of rent officers and RACs in different areas.

6.2.2 Further questions for the case studies Further questions to be addressed through the case studies were therefore:

What is actually happening at the local level – what can fair rent appeal cases tell us about the level of deductions being made from market rents and the apportionment between the ‘quality’ factors and the ‘scarcity’ factor?

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Could the differences be due to other factors, such as quality of evidence, professional representation or differences of approach by RACs?

These questions are addressed in the rest of this section.

6.3 Regional case studies Three regions were chosen for the case studies, London, South West and North West, from which samples of decision notices were obtained for appeals to the Rent Assessment Committees between 1998 and 2000. The sampling and analysis methodology is explained in Section 1 of the report and the distribution of the sample is shown in Table 6.1.

Information from interviews with two RAC panel members from each region and rent officers from two of the regions is incorporated in the analysis of findings that follows. Text in italics is quoted from interview transcripts, but individuals are not identified for reasons of confidentiality.

For findings shown by graphs, the tabulated information can be found in Appendix 2.

Table 6.1 Sample of RAC fair rent appeal decisions

Region Number of properties in sample

% of sample

London: 63 42.6

– Kensington & Chelsea 35 23.6

– Westminster 4 2.7

– Southwark 15 10.1

– Camden 9 6.1

North West 35 23.6

South West 50 33.8

Total 148 100.0

6.4 The fair rent appeal In 65% of all cases from the three regions the fair rent appeal sprang from an objection by the landlord to the rent officer’s rent registration (Figure 6.2). A number of appeals had come about after the Spath Holme case declared the government’s capping order void, resulting in an earlier determination reverting to the uncapped figure. The proportion of appeals made by landlords was highest in the North West at 74.3% of cases. A hearing was requested in over three–quarters of London cases, but in only about a third of cases in the South West and North West (Figure 6.3).

The average of rents registered on appeal for the case study sample was generally higher than the national averages published by the DETR Housing Statistics 2000, particularly for London (Figure 6.4). This is most likely because the London cases in our sample were weighted towards more expensive areas in Kensington & Chelsea and Westminster. However, our analysis shows the range of rents involved that are disguised by national averages. In London the highest fair rent at £25,200 pa (£484 pw) was more than ten times the lowest. In the South West the highest rent was £9,780 pa (£188 pw) and in the North West £4,200 (£81 pw) – in each case around double the lowest rent.

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Figure 6.2 Original objection to rent officer registration

Figure 6.3 Hearing held

Figure 6.4 RAC registered fair rent

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

All

Original objection (% of cases)

Landlord Tenant Landlord and Tenant

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

All

Hearing held (%)

Hearing No hearing Not stated

0 50 100 150 200 250 300 350 400 450 500

London

South West

North West

RAC Fair rent (£ pw)

Mean Median Minimum Maximum

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As a result of the appeals the rent was more often increased by the Rent Assessment Committee (60% of cases) than held or reduced (Figure 6.5). The proportion reduced was greatest in the North West (37%) and least in London (6.4%). Only the London sample contained first registrations. The latest DETR figures available, for 1999 Q1, indicated the national average was for about two thirds of appeals to result in an increase (DETR Housing Statistics 2000).

In our case study, the percentage change in fair rent on appeal was highest in London, with an average 12.6% increase and lowest in the North West, where rents on average reduced (Figure 6.6). These averages disguise an enormous range, for example in the South West the largest increase was 61% and in the North West the greatest decrease was –22% on the figure set by the rent officer.

6.5 The valuation process The usual approach by RACs to arriving at a fair rent, as evidenced by the decision notices, was to:

consider evidence from comparable property let in the open market, usually let on assured or assured shorthold tenancies and generally improved property, and allow for any difference in locality, to arrive at the ‘unadjusted market rent’ of the subject property;

adjust the rent for differences in tenancy terms and ‘quality’ factors by making deductions for such items as lack of furnishing, lack of improvements and disrepair, to arrive at the ‘adjusted market rent’ of the subject property on the terms of the regulated tenancy; and,

assess whether demand exceeds supply in the market and, if it does, make a deduction for the ‘scarcity’ factor.

The practice adopted at these three stages is now examined in more detail by reference to the case studies.

6.5.1 Valuation evidence and unadjusted rents The findings show that Rent Assessment Committees (RACs) were operating in line with current case law and taking as their valuation start point the open market rent of comparable property. Most evidence was therefore drawn from lettings on assured or assured shorthold tenancies and was almost entirely improved or modern property (Table 6.2). However, while the decision notices from the North West and South West more often summarised the deductions item by item in a tabulated calculation, in London cases figures were more usually contained within a written report and the deductions were not necessarily separately itemised.

The level of evidence submitted by the parties was very variable (Table 6.2). Although our sample was weighted to cases where professional representatives were involved, it still demonstrates regional differences. In London, where cases more often went to a hearing, more landlords were professionally represented and a higher proportion (81%) submitted market evidence in support of their case than in the other two areas.

Amongst tenants in London, just under a third put forward rental evidence. In the other two regions tenants for the most part were not represented and made no submission of evidence. Amongst landlords, evidence of improved property was put forward by 42% in the South West and 51% in the North West, but the proportions were greater where the landlord had raised the original objection (50% and 65% respectively) (Table 6.3).

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Figure 6.5 Direction of change in fair rent on appeal

Figure 6.6 Percentage change in fair rent on appeal

Figure 6.7 RAC unadjusted market rent

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

All

Direction of change in rent (% of cases)

Confirmed or held Increased Reduced No previous registration

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

London

South West

North West

RAC unadjusted market rent (£ pw)

Mean Median Minimum Maximum

-30 -20 -10 0 10 20 30 40 50 60 70

London

South West

North West

All

% Change in fair rent

Mean Median Maximum Minimum

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Table 6.2 Market evidence relied on

London

%

South West

%

North West

%

All

% T L RAC T L RAC T L RAC T L RAC

None submitted 61.9 7.9 86.0 58.0 77.1 42.9 73.6 33.1 0.7

Improved property 30.2 81.0 95.2 14.0 42.0 98.0 5.7 51.4 100 18.9 62.1 97.3

Improved and unimproved property

5.7 1.4

Unimproved property

1.6 6.3 4.8 .7 2.8 2.0

Total count 59 60 63 50 50 49 29 35 35 138 145 148

Total % 93.7 95.2 100 100 100 98.0 82.9 100 100 93.2 98.0 100

Table 6.3 Market evidence by original objection

London

%

South West

%

North West

%

All

% Tenant

objected Landlord objected

Tenant objected

Landlord objected

Tenant objected

Landlord objected

Tenant objected

Landlord objected

None submitted 35.7 8.1 88.9 50.0 100 26.9 73.2 27.4

Improved property 64.3 81.1 11.1 50.0 0 65.4 26.8 66.3

Improved and unimproved property

7.7 2.1

Unimproved property

10.8 4.2

Total count 14 37 18 32 9 26 41 95

Total % 100 97.4 100 100 100 100 100 99.0

Table 6.4 RAC unadjusted market rent compared to landord and tenant submissions

London

%

South West

%

North West

%

All

% T L T L T L T L

Mean –1.7 –7.0 18.6 –9.2 –9.25 1.0 –6.0

Median –3.3 0 18.6 –12.4 0 –1.6 0

Mode 0 0 4.0 –17.0 0 0 0

Range 74.0 95.0 29.0 18.0 54.0 74.0 95.0

Minimum –28.0 –67.0 4.0 –17.0 –34.0 –28.0 –67.0

Maximum 46.0 28.0 33.0 1.0 20.0 46.0 28.0

Total count 13 18 2 10 0 18 15 46

Total % 26 28.6 4.0 20.0 0 51.4 10.1 31.1

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The average unadjusted rents as assessed by the RACs for the London sample were somewhat higher than the national averages for assured and assured shorthold lettings (DETR Housing Statistics 2000) as compared with the other two case study areas (Figure 6.7). As with the level of fair rents, this is most likely because the London sample was weighted toward higher value areas of the capital.

Our analysis shows that in the 31% of cases where we have information that the landlord put forward evidence as to the unadjusted market rent, the RAC assessment was on average 7%–9% less (Table 6.4). However, the difference between the RAC and landlord figures varied substantially and was greatest in London cases at from –67% to +28%. Quite significant differences of opinion could therefore occur as to the valuation before tackling deductions for differences in tenancy terms, quality and scarcity as between assured lettings and regulated tenancies.

The interviewees confirmed that quality of evidence put forward varied more according to the parties than by the nature of the local market and ‘the best evidence comes from landlords’ professional representatives in the main’. Cases involving higher value property tended to be better argued because there was more at stake in money terms and the parties were generally better informed.

Tenants in particular showed poor understanding of the process and tended to ‘look upon [the RAC] as an advisory body, almost like the Citizens Advice Bureau, to help them and often it backfires on them’. Some tenants clearly needed help, but while the RAC could ‘adopt an inquisitorial role and make sure that their side is put’, the panel could not make the tenants‘ case for them. Occasionally tenants turned to tenants’ rights associations or to the local housing office to provide representation.

Rent Assessment panels were often presented with information about asking rents or ‘hearsay’ information that could be difficult to verify. Panels were not able to inspect comparables and had limited powers to require verification. They therefore had to rely on written statements and their own knowledge and experience. Even in instances where the landlord had obtained professional valuation advice, the professional expert was often not present at a hearing to be cross–examined.

Amongst the few panel members we spoke to it was generally their experience that where professionals were involved they took the stance of representing their client rather than acting as an expert witness to assist the tribunal. Evidence presented was ‘cherry picked’ to help the client’s case, rather than being all the evidence that might be available to assist a decision.

Panel members who had experience of tribunals that dealt with commercial property and rating issues felt that the standard of evidence was somewhat lower in fair rent cases. Some felt that ‘the onus should be on the landlord and tenant to produce better evidence’ and ‘they should be capable of being required to come and speak to it’, although ‘it’s the complicated cases where it’s best to have evidence from both sides’.

The amount of information provided in individual cases by rent officers to RAC panel members was also quite variable and not all rent officers provided their case working sheet to the panel. Whilst the independence of the RAC from the Rent Service was seen by interviewees as an advantage, panel members welcomed the provision of information by the Rent Service, both on a by–case basis and general background market information. Some panel members found that market data that used to be provided by the Rent Service had ceased to be available. This was attributed to internal reorganisations and the increasing pressure of work within the Rent Service.

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Equally rent officers felt that feedback on RAC decisions would assist them, but this information had not always been readily available and they were not able to call for a reasoned decisions – only landlords or tenants could make a request for reasons.

6.5.2 Valuation adjustments Most of the deductions itemised in the RAC decision notices to get from the unadjusted market rent to the adjusted market rent were for ‘quality’ factors, mainly lack of modernisation, disrepair, lack of furnishings and tenants’ improvements. Specific reference to adjustments for tenancy terms was more common in the London cases and several cases in the North West where a deduction was also made to reflect the greater level of voids associated with managing assured lettings as against regulated tenancies. However, one valuer interviewed found ‘there tends to be a general difference of opinion between valuers as to whether a deduction for voids should be made or not. I tend to the view that it shouldn’t be. A voids deduction is more appropriate if you’re valuing a property subject to a tenancy for capital value’.

Average deductions were highest in the London sample at 41.7% as compared with the South West (21.8%) and the North West (38.5%) (Figure 6.8). However, deductions in the North West started at a higher level and showed the greatest range of between 15% to 64%. The adjustments were usually expressed in appeal decision notices in terms of pounds per week or month, reflecting the usual method of analysing comparable evidence for differences in value according to the level of amenity or improvements at individual properties.

Decision notices from the North West and South West more often set out the deductions item by item within a tabulated calculation, whereas in the London cases the deductions were more often expressed as a global sum within the RAC report. In many London cases it was therefore less clear from the decision notice what proportion of the deductions related to improvements by the tenant and how much reflected lack of repair / modernisation by the landlord. This could be important if landlords are to be encouraged to improve property that is physically substandard.

Overall, there were more cases in London where tenants had carried out fairly substantial improvements, such as refitted kitchens, bathrooms and central heating. This was often in cases where tenants were holding over on regulated tenancies following the expiry of long leases. Tenant improvements in the North West and South West cases were generally relatively minor or non–existent.

In cases where the property was in very poor condition several interviewees said their panel would take a view on a global deduction from the unadjusted market rent. Those from the North West and South West in particular referred to dealing with completely unmodernised turn of century terraces with outside WCs. One panel member went so far as to say

‘I feel very strongly, with what I’ve seen of the standard of houses, that there ought to be a minimum standard required before you can let a property. Because there are some very poor properties still out there. Very poor conditions in which people are living. I think that’s perhaps more of a social or political question.’

For the most part RACs resisted the use of the amortised cost method of adjusting rents for differences in repair and improvement although ‘the landlords would like us to use that as the only criteria, because it would be to their benefit’. Most interviewees took the view that the comparables approach was to be preferred, because cost is not necessarily a guide to value, although amortised cost might well be used as a crosscheck. However, one panel valuer

55

generally assessed deductions on a cost basis and then converted to a rental amount, because of the difficulty of obtaining comparable evidence for the effect of improvements on value. For the purpose of our analysis, all deductions were converted to a percentage of the unadjusted market rent.

Figure 6.8 RAC valuation deductions (excluding scarcity)

Figure 6.9 RAC Scarcity deductions

Figure 6.10 RAC overall reduction market rent to fair rent

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

RAC overall reduction market rent to fair rent (%)

Mean Median Minimum Maximum

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

RAC % deductions

Mean Median Minimum Maximum

0 10 20 30 40 50 60 70 80 90 100

London

South West

North West

RAC % scarcity deductions

Mean Median Minimum Maximum

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6.6 Scarcity Scarcity was much less of a factor in the South West and North West – particularly in the South West where the RAC made no deduction in 86% of cases, whereas in London this deduction averaged 32.5% and ranged between 15% and 55% amongst the sample (Figure 6.9).

All interviewees indentified scarcity as the most difficult factor to quantify. As one panel member found:

‘Assessing scarcity is a nightmare. In fact I would go so far as to say it is impossible. Because whilst there may be some statistics about how many properties are let, there are really no statistics as far as I know about how many people might be out there looking for property to rent.’

The RACs generally relied on their own knowledge and experience and panel members were aware of the need to consider a relatively wide area for the purpose of scarcity. Regard was had to local sub–markets and perceived excess demand over supply in particular localities or for particular types of property. Information from local agents about supply in the market and void levels was also considered. Local housing waiting lists were not usually taken as an indicator, but might be used as a crosscheck, because social housing was viewed as a quite different sector of subsidised housing.

A situation of nil scarcity was regarded as rare, but in many parts of the North West and South West RACs found any imbalance in supply and demand to be so low as to warrant no deduction. The view was also taken that ‘to make a deduction you have to have very positive evidence’.

In our search for a benchmark for scarcity interviewees were asked how they would characterise a situation of nil scarcity. The examples given included:

where properties closely equivalent to the subject property were available to let at the time of the rent determination; and,

the subject property was in such poor condition that there would be no demand for it;

very high value property that would be taken up by company lets.

These responses are a symptom of the fact that the concept of scarcity is insufficiently grounded in theory and the lack of defined criteria has led to practices that are confused and in some cases misguided.

In all three case study areas interviewees found the letting market for unimproved / unfurnished property was virtually non–existent, although there was demand for low cost / affordable rented property. When landlords regained possession, unimproved property would be sold or improved prior to re–letting on the open market because they have ‘to provide the standard of accommodation tenants expect, otherwise they wont re–let’. In some areas, but not London, lack of supply of unimproved property to let was taken to imply low or no demand and in some instances equated with nil scarcity.

Overall, it was not clear from the decision notices whether the focus when considering scarcity was on the sub–market of the subject property and its characteristics, that is, unfurnished and unimproved, or on the comparables from the assured lettings market that provided the start point for the valuation. However, in practice scarcity was the last factor to be deducted in the valuation and one interviewee suggested this was ‘because traditionally the way scarcity comes in the valuation and legislation, it comes at the end’, although ‘you

57

should look at your market and say “is there scarcity in that evidence?” which you should make a deduction for’.

6.7 Overall deductions In the North West and South West cases, where scarcity was less of a factor, a greater part of the difference between the unadjusted and fair rents was due to deductions for the poorer standard of repair and improvement by landlords. National statistics (DETR, 2000) for average differences between assured and fair rents in these two areas was also greater than differences between unadjusted and fair rents in our sample. While this comparison has to be treated with some caution (because of sampling differences), the finding is consistent with the thesis that there is a greater proportion of better quality rented property in the assured market than in the regulated sector. This finding appears to be borne out in comments from interviewees and by other studies which show the North West region had:

the highest proportion of private sector housing in low demand at 38% of stock (Unpopular Housing Team, 1999);

the highest proportion of privately rented dwellings requiring addition of modern amenities at 48% (English Housing Condition Survey, 1996); and,

30% of households in poor housing privately renting (English Housing Condition Survey, 1996).

6.8 Summary and conclusions From analysing the sample of appeal cases and interviews we have found:

National averages for fair rent increases and differences between regulated and assured rents disguise wide variations that occur in individual cases.

RACs were operating in line with current case law and taking the open market rent of comparable property as their valuation start point. However, the calculation to arrive at the adjusted market rent was not always set out in the decision notice and in many cases deductions were not separately itemised.

The standard of evidence presented to RACs by landlords and tenants was very variable. In many cases no evidence was presented, particularly by tenants and in the North West and South West. Much evidence was ‘hearsay’ and difficult to verify.

Where professionals were involved they more usually took the role of advising their client rather than assisting the tribunal as independent experts. Very often professionals would not be present at the hearing to be cross–examined, limiting the ability of the RAC to challenge or verify evidence.

Quite significant differences of opinion could occur as to the open market valuation before tackling deductions for differences in tenancy terms, quality and scarcity as between assured lettings and regulated tenancies. The difference between the RAC and landlord figures was greatest in London from –67% to +28%.

Scarcity was the most difficult factor to assess and the least well understood. The usual practice was to deduct scarcity at the end of the valuation after all other deductions had been made. It was not necessarily clear from the decision notices whether the assessment of scarcity was based on the sub–market of the subject property, that, unfurnished and unimproved property, or on the sub–market from which comparables

58

were drawn, that is, assured lettings of improved or modern property. This approach to scarcity is irrational and undermines the integrity of fair rent valuations.

Although nil scarcity was regarded as rare, any imbalance in supply and demand was found to be so low in parts of the North West and South West that in the majority of appeal cases RACs made no deduction.

In the North West and South West cases a greater part of the difference between the unadjusted and fair rents was due to deductions for the poorer standard of repair and improvement by landlords.

Some differences in approach occurred between the RAC regions and panel members in such matters as attitudes to the use of amortised cost information to assess deductions and making allowances for void costs between regulated and assured tenancies.

Overall, the greatest cause for concern is that current practice when valuing for fair rents is irrational as regards the scarcity element and that there is insufficient understanding of the theory of the task amongst rent panel members. This issue is discussed in more detail in a review of valuation practice in Section 7 that follows.

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7. VALUATION PRACTICE REVIEWED

7.1 Introduction Findings from the case studies reported in section 6 indicate that current practice when valuing for fair rents is irrational and that there is insufficient understanding of the theory of the task amongst rent panel members. The main stumbling block is the way in which comparable evidence is analysed, particularly the treatment of scarcity within the calculation.

Current practice also creates a greater disincentive to improve property in poor condition than would be the case if a rational approach were followed. This has important implications for the latest legislation that is designed to cap rent increases unless the landlord has implemented major improvements.

These statements are now discussed in more detail with reference to re–worked valuation examples taken from the case studies.

7.2 Adjusting comparable evidence for scarcity The discussion of the economic and legal context of fair rents in sections 3 and 4 of the report clearly establishes open market rents as the starting point for the valuation of fair rents. That much is not in dispute and rent panels are giving preference to open market rents over other forms of valuation evidence.

In Section 5 of the report we set out two approaches to the fair rent valuation to illustrate the argument that each comparable market letting should be adjusted for scarcity before this evidence is applied to the subject regulated property. Fair rents could be lower using this method rather than the traditional approach – if market scarcity is high and regulated property is in poorer condition than open market lettings.

Whereas trying to assess what scarcity might be for regulated property as if it were offered to let is an entirely hypothetical exercise, it is possible, although difficult, to collect evidence about the supply and demand for actual market lettings. Since the courts require market evidence to be taken as the valuation start point, it follows that usual valuation practice be adopted in adjusting the evidence. The logical sequence of deductions is particularly important for fair rent cases because scarcity is deducted as a percentage and the order of the deductions can therefore make a significant difference to the valuation outcome.

So why has traditional practice grown up? Anecdotal evidence suggests two reasons:

because the assessment of scarcity was so poorly understood and so difficult, valuers made all the adjustments that were familiar to them, leaving scarcity until last and letting rent assessment panels decide; and,

because from the landlords point of view making the scarcity deduction last resulted in a higher fair rent.

What follows is a more technical explanation of the rational valuation approach, based on worked examples.

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Figure 7.1 Analysis of comparables for scarcity – rational approach

Valuation Adjustments

Comparable 1

3bed 1930s semi, improved, two streets from subject property. Let January 2001, Assured Shorthold, furnished.

Comparable 2

3bed 1930s semi, improved, several miles away where demand is higher for the available supply due to greater amenity of the locality. Let June 2001, Assured tenancy, unfurnished.

Subject property

3bed 1930s semi, unimproved, unfurnished. Regulated tenancy. Appeal to rent panel June 2001.

£pa £pa £pa

Market rent at time of letting

£10,000 £12,000

Adjust rent to June 2001 levels, say annual rent inflation 10%

+5% +£500

Current market rent £10,500 £12,000

Adjusted to unfurnished

–£500

Current market rent unfurnished

£10,000 £12,000

Adjusted to assured terms

+£500

Current market rent, unfurnished, assured terms

£10,500 £12,000

Adjust for location of subject property

–£1,000

Current market rent, unfurnished, assured terms, subject property location

£10,500 £11,000

Less scarcity 30% £3,150 35% £3,850

Equilibrium rent at June 2001

£7,350 £7,150 say £7,350

Subject property, adjust for:

regulated tenancy terms

–£500

lack of repair / improvement

–£4,000

Fair rent of subject property, June 2001

£2,850

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The example in Figure 7.1 shows two comparables, one from let assured shorthold with furnishing and the other let assured unfurnished. Each comparable is adjusted to the current market terms that most closely mirror the fair rented subject property, that is, to an unfurnished assured letting in the location of the subject property. The current market rent for each comparable is then adjusted for ‘scarcity’, that is, the effect of excess demand over supply in the submarket of the comparable. This gives the ‘equilibrium’ rent or the ‘fair rent’ of the comparable on assured terms. This evidence is used to assess an equilibrium rent of the subject property, from which deductions are made to reflect the regulated tenancy terms and the poorer condition of repair and improvement, to arrive at the fair rent for the subject property.

This approach is consistent with case law and the legal framework for the valuation discussed in section 4 and also has practical advantages, in that:

it meets the requirement to examine scarcity across a wide area, while making explicit adjustments for differences between different localities;

it uses workings, sums and arithmetic to demonstrate thought processes;

comparables are not ignored because they require adjustment to bring them into line with market rents and fair rent; and,

for the purpose of assessing scarcity, information about vacancy rates and the number of people looking to rent at the time that comparables were on the market to let is more likely to be readily obtainable.

The approach taken by rent assessment panels as evidenced from appeal decision notices is shown in Figure 7.2, and shows how the current approach to valuation produces a higher fair rent than the rational approach. The example is reasonably realistic in the light of cases examined for this research. In the example comparable evidence is used to arrive at an ‘unadjusted’ rent for the subject property, that is, an open market rent as if the subject property were improved / modernised and let in the assured market. Deductions are made to reflect the difference in tenancy terms and lack of improvements to arrive at an adjusted rent. Finally a deduction is made for scarcity to arrive at the fair rent.

Not all decision notices set out the valuation in a tabulated format and most did not contain an analysis of comparables. It was also not necessarily clear whether the assessment of scarcity was based on an assessment of supply and demand in the sub–market of the subject property or of the comparables.

In these examples relatively high levels of scarcity have been assumed in the open market for improved property let on assured tenancies. In this situation the rational approach to the valuation produces a lower fair rent than the approach currently used by rent panels. However, where the assured market is in balance then fair rents would be higher.

Figure 7.2 Analysis of comparables for scarcity – current approach

Valuation Adjustments

Comparable 1

3bed 1930s semi, improved, two streets from subject property. Let January 2001, Assured Shorthold, furnished.

Comparable 2

3bed 1930s semi, improved, several miles away where demand is higher for the available supply due to greater amenity of the

Subject property

3bed 1930s semi, unimproved, unfurnished. Regulated tenancy. Appeal to rent panel June 2001.

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locality. Let June 2001, Assured tenancy, unfurnished.

£pa £pa £pa

Market rent at time of letting

£10,000 £12,000

Adjust rent to

June 2001 levels, say annual rent inflation 10%

+5%

+£500

–

Location, Assured Shorthold terms

–£1000

furnished +£1000

Unadjusted market rent, furnished, at June 2001

£10,500 £12, 000 say £10,500

Subject property:

lack of furnishing, tenancy terms

–£1,000

lack of repair / improvement

–£4,000

Adjusted market rent £5,500

Less scarcity 30% £1,650

Fair rent of subject property, June 2001

£3,850

7.3 A discount for voids? In some of the appeal cases examined, a discount of 10% was made to reflect the greater level of voids associated with assured lettings as against fair rented property. This practice occurred in some areas but not others. There seem to be two arguments for this adjustment:

the cost to the landlord of managing fair rented property is less because there are no voids and therefore the tenant should get a discount on the rent; or,

tenants renewing tenancies in the assured market generally obtain rents about 10% below rents achieved on new lettings because they are able to negotiate a share of the landlord’s saving on lack of void, and this benefit should therefore be reflected fair rents for regulated tenants.

Both these arguments are spurious. The first has nothing to do with a rental valuation. Landlords letting in the assured market are not able to demand higher rents to cover voids – the rent is set in response to supply and demand at the time. However, the cost of managing property subject to voids is greater, which is the landlord’s risk, and would reduce an investment valuation if the freehold were sold subject to the tenancy. In other words, risk of voids is reflected in capitalisation rates and not rents.

The second argument relates to the use of rental evidence generated on review or renewal of a tenancy, which has been well rehearsed in the commercial sector. There is evidence to

63

suggest that tenants who renew leases in the commercial sector, or are subject to review, are able to negotiate lower levels of rent than those taking new leases but; Crosby and Murdoch (2000) attribute this to the process by which reviews and renewals are undertaken. A third party determination is available and the reliance on comparables by those determining rents leads to rents that lag the true market level. Behavioural valuation evidence (Baum, et al, 2000) supports this interpretation. As fair rents are also subjected to a third party determination, the same phenomenon may be occurring. Another deduction by the third party determining the rent would appear to be spurious in these circumstances.

Additionally, a fair rent determination is a form of review, not a renewal, and in the commercial market rent free periods and other rent holidays and voids are not factored into the rental determination.

From whatever conceptual basis this issue is addressed, it has no validity. The decision in the Spath Holme case (2001) has since confirmed that a discount for voids is not valid (see Section 4.6).

7.4 The incentive for repairs and improvements? The rational approach to valuing fair rents provides greater incentive to implement repairs and improvements and does not mean that fair rent levels would be higher than under the current approach to valuation.

This statement is explained by reference to the valuation example in Figure 7.3, which shows the effect on the fair rent of the landlord carrying out repairs and improvements according to whether the valuation is conducted by the rational or current approach.

The example follows on from the valuation examples in Figures 7.1 and 7.2 and assumes the property has been completely modernised. The previous deduction of £4,000 for repairs and improvements is therefore reduced to £0.

Under the rational approach the starting point is the equilibrium rent, unfurnished (see Figure 7.1). The scarcity element has already been taken into account and the only deduction is £500 to reflect differences in tenancy terms. The whole of the £4,000 improvement in rental value attributed to the modernisation therefore feeds through into the fair rent, which goes up from £2,850 to £6,850 pa, an increase of 140%.

Using the current approach to valuing fair rents, the start point is the unadjusted or open market rent, furnished (see Figure 7.2). A deduction of £1,000 is made for lack of furnishings and the difference in tenancy terms, and then the scarcity deduction of 30% is made. The effect is that the fair rent goes up from £3,850 to £6,650, an increase of 73%. Therefore, although the proportionate rent increase is much lower (about half) using current practice, the rent payable is only marginally less (£200pa) than under the rational approach to valuation. Further, under the current approach the return to the landlord of implementing improvements is much lower because it is reduced by the scarcity factor. The current approach is therefore irrational because it denies the landlord a market return on further investment and acts as a disincentive to improving property in poor condition.

Figure 7.3 The effect of landlord’s improvements on the fair rent

Rational valuation approach

(carried forward from Figure 7.1)

Traditional valuation approach

(carried forward from Figure 7.2)

£pa £pa

64

Equilibrium rent, unfurnished

£7,350 Unadjusted market rent, furnished

£10,500

Adjustments: Adjustments:

Tenancy terms –£500 lack of furnishing, tenancy terms

–£1,000

lack of repair / improvement

£0 lack of repair / improvement

–£0

Adjusted market rent

£9,500

Less scarcity 30% £2,850

Fair rent £6,850 £6,650

Previous fair rent £2,850 £3,850

Increase on previous rent

140% £4,000 73% £2,800

7.5 Implications for the rent capping order The Rent Acts (Maximum Fair Rent Order) 1999 now limits fair rent increases on re–registrations to RPI plus 7.5% (see section 2.5 for full details). However, the rent is not restricted where an increase of 15% or more can be shown to relate to landlords’ repairs or improvements.

Analysis of our sample suggests that in about 40–45% of these appeal cases landlords may, in theory, have scope to increase the fair rent by 15% or more by carrying out repairs and improvements. The proportion is difficult to gauge accurately because the deductions made by RACs for landlord’s lack of repair and improvement are not always separately itemised in the rent calculation. Some reasoned assumptions were therefore applied to arrive at the estimated proportion.

In practice the incentive to the landlord to undertake modernisation depends on a number of factors, including:

the aspirations of the landlord to improve rental income versus his assessment of the likelihood of vacant possession and the extent to which he considers the improvement works would increase the value of the property on future sale or re–letting in the open market;

the cost of the repairs and improvements and whether the fair rent increase would provide the landlord sufficient return on the capital cost (including the cost of borrowing), particularly in low rent areas;

the co–operation of the tenant in allowing the improvement works to go ahead, bearing in mind the tenant will face a rent increase as a result; and,

the landlord being able to demonstrate on re–registration that more than 15% increase in the fair rent was due to his improvements – this will largely depend on whether the earlier valuation by the rent officer or RAC gave a breakdown of the deductions and can be used in evidence as the start point or baseline for the calculation.

65

To show the implications of the capping order for fair rent valuations we have re–worked several cases drawn from our sample shown in Figure 7.4. For this exercise we have used the current approach to the valuation to illustrate the effect of the capping order under the current regime. Valuations have been undertaken on two basic assumptions:

A steady state market assumption, which provides the ‘baseline’ for calculating whether the landlord’s improvements could increase the fair rent by 15% or more; and,

A market growth assumption, which shows the increase in fair rent assuming that open market values grow by 10% over a two year period to the next rent registration.8

Further reworked examples assuming a steady state market can be found in Appendix 2.

In a steady state market the cases drawn from our sample show potential for fair rent increases between 15% and 100%. The calculation would have to be reworked using open market values current at the time of re–registration to arrive at the actual fair rent.

In the 10% growth assumption we have assumed that the 15% capping threshold is still based on the prior registered rent and takes no account of market growth. This accords with the capping order provisions and makes for ease of comparison with the calculation in the steady state market assumption. This approach could be realistic if the landlord’s improvement works were carried out shortly after the prior registration. However, if improvement works were carried out just before the new registration there might be an argument that the before and after valuation should be undertaken as at the new valuation date, so that the market growth is taken into account in arriving at the 15% threshold figure.

Within the current valuation approach, the revised deduction for landlord’s lack of repair / improvement needed to produce a 15% increase in rent on re-registration can be calculated as follows:

( )sLRdd mm −

−=1

15.0 112

Where:

dm1 = amount deducted for landlord’s lack of repair / improvements on previous registration;

dm2 = amount deducted for landlord’s lack of repair / improvements on new registration;

LR1 = the previous registered fair rent;

s = the percentage reduction due to scarcity.

The valuation could become further complicated if the rent officer or RAC panel valuers took the view that in the new market conditions, on re–registration, the proportionate change in the value of landlords’ improvements was not in a straight line with market growth. In other words, if the items of deduction would not be in the same proportion relative to one another as in the baseline valuation. This is possible because in practice deductions are usually assessed individually as a market rent adjustments per week or month, rather than as percentages.

In conclusion, the capping order has introduced an additional level of complexity and uncertainty into fair rent valuations. Landlords and tenants would be advised to obtain a reasoned valuation for the prior registration to discover the scope for rent increases as the result of improvement works. Since the valuation basis under previous rules was poorly

8 NB where a property is improved, application for a new fair rent can be made within the two year period. See Haysport Properties case discussed in 4.6.

66

understood, it seems unlikely that most landlords and tenants will be any better at arguing their case under the new more complicated rules.

7.6 Summary and conclusions This section has explained the need for a more rational approach to valuing for fair rents, which focuses the adjustments for scarcity on the open market comparables, not on the subject property.

Our examples indicate that where scarcity in the open market is relatively high, the rational valuation approach would tend to produce a lower fair rent than the current approach to valuation. However, we are unable to predict the actual impact on the level of fair rents of switching to a rational valuation basis. This is because we cannot tell from the appeal decision notices whether rent officers’ and rent panels’ view of the relevant scarcity discount would remain the same or change once the focus is clearly shifted to the comparables evidence.

Switching to a rational valuation approach would also make the application of the Maximum Fair Rent Order more complex, because the cap relates to a percentage increase on the previous registered rent. If the cap is to be applied fairly, consistency of valuation basis between the previous rent and the new registered rent is important in order to determine whether and by how much any increase in rent is due to:

a change in market rents; and / or,

landlord’s improvements.

This leads to something of a dilemma, because, while retaining the current valuation approach would provide consistency between the basis of previous and new fair rent registrations and in that sense make the cap calculation easier, it would perpetuate irrational valuation practice.

The exercise conducted through this research has shown the extent to which valuing for fair rents has parted company with the real world, because of the difficulties of implementing a hypothetical valuation basis.

Possible solutions to resolve the issue are discussed in the final conclusions and recommendations in Section 8.

67

Figure 7.4 Valuation case studies

56 Pinehurst Court, London, W11 – Steady state market assumption

2nd floor flat in 7 storey block, c.1890.2 rooms (1 with Kitchen area), bathroom/WC.Lift

Previous registration Feb 2000

Re–registration Feb 2002 after work by landlord, 15% fair rent increase

Re–registration Feb 2002, after completely modernised by landlord

Unadjusted market rent (open market rent)

£13,000 £13,000 £13,000

Deductions:

Tenant’s repairing liabilities and improvements

10% £1,300 10% £1,300 10% £1,300

Lack of furnishings 10% £1,300 10% £1,300 10% £1,300

Lack of central heating and lack of modernisation (landlord)

20% £2,600 11% £1,430 0%

Total deductions 40% £5,200 31% £4,030 20% £2,600

Adjusted market rent £7,800 £8,970 £10,400

Less scarcity 33% £2,574 33% £2,960 33% £3,432

Fair rent £5,226 £6,010 £6,968

Fair rent increase 15% £783.90 33% £1,742

56 Pinehurst Court, London, W11 – 10% market growth assumption

Previous registration Jan 2000

Re–registration Jan 2002. Work by landlord results in 15% fair rent increase. 10% market growth.

Re–registration Jan 2002, property completely modernised by landlord

Unadjusted market rent (open market rent)

£13,000 £14,300 £14,300

Deductions:

Tenant’s repairing liabilities and improvements

10% £1,300 10% £1,430 10% £1,430

Lack of furnishings 10% £1,300 10% £1,430 10% £1,430

Lack of central heating and lack of modernisation (landlord)

20% £2,600 10% £1,412 0%

Total deductions 40% £5,200 30% £4,272 20% £2,860

Adjusted market rent £7,800 £10,028 £11,440

Less scarcity 33% £2,574 33% £3,309 33% £3,775

Fair rent £5,226 £6,719 £7,665

Fair rent increase 28% £1,492.58 47% £2,439

Increase due to landlord’s improvements

15% £783.90 37% £1,935

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4 Linden Grove, London, SE15 – Steady state market assumption

1st & 2nd floor maisonette in 3 storey house. c.1860. 4 rooms, kitchen/diner, bathroom, wc.

Previous registration Feb 1999

Re–registration Feb 2001 after work by landlord. 15% fair rent increase

Re–registration Feb 2001, property completely modernised by landlord

Unadjusted market rent (open market rent)

£8,400 £8,400 £8,400

Deductions:

Tenant’s repairing liabilities and improvements

10% £840 10% £840

Lack of furnishings 10% £840 10% £840

Lack of repair / modernisation/ central heating (landlord)

18% £1,504 0%

Total deductions 46% £3,864 38% £3,184 20% £1,680

Adjusted market rent £4,536 £5,216 £6,720

Less scarcity 30% £1,361 30% £1,565 30% £2,016

Fair rent £3,175 £3,651 £4,704

Fair rent increase 15% £476.28 48% £1,529

4 Linden Grove, London, SE15 – 10% market growth assumption Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration Feb 1999

Re–registration Feb 2001 after work by landlord, 15% fair rent increase. 10% rent growth

Re–registration Feb 2001, property completely modernised by landlord. 10% rent growth.

Unadjusted market rent (open market rent)

£8,400 £9,240 £9,240

Deductions

Tenant’s repairing liabilities and improvements

10% £840 10% £924 10% £924

Lack of furnishings 10% £840 10% £924 10% £924

Lack of central heating and lack of modernisation (landlord)

26% £2,184 18% £1,663.20 0%

Total deductions 46% £3,864 38% £3,511 20% £1,848

Adjusted market rent £4,536 £5,729 £7,392

Less scarcity 30% £1,361 30% £1,719 30% £2,218

Fair rent £3,175 £4,010 £5,174

Fair rent increase 26% £834.96 63% £1,999

Increase due to landlord’s improvements

15% £529.20 51% £1,625.87

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8. CONCLUSIONS AND RECOMMENDATIONS

This research challenges the usually accepted method of valuing for fair rents and has come to the conclusion that the current approach, particularly to discounting market rents for scarcity, is irrational.

To give an analogy, the fair rent system is a bit like a long standing game where everybody believes that they are playing by the correct rules, but they are not and slightly different rules are being used in different parts of the country. Then someone spots that the rules are being applied incorrectly and in ways that can be adverse to both tenants and landlords. The correct rules are very complex to implement and there are two possible solutions to the problem:

Provide a better definition of the rules and implement a training programme – which is likely to be very time consuming and expensive; or

Introduce simplified rules such that no one is worse off and the rules are easier to comprehend and implement.

Put another way, two possible solutions to valuing for fair rents as a result of this research are for the government to:

Provide a clearer definition of the way scarcity is to be assessed and quantified for the purpose of the Rent Act, accompanied by guidance on the rational approach to valuing for fair rents and a programme of training for rent officers and rent panel members charged with operating the fair rent system; or

Scrap the scarcity provision, simplify the valuation process and use the Maximum Fair Rents Order or a modified version to control rent increases up to a market level, that is effectively phasing-in market rents over a relatively long period.

Doing nothing is unlikely to mean no change. Valuation professionals that become aware of these research findings will need to re-examine their approach to the valuation of fair rents and the presentation of appeal cases to rent assessment panels. How rent levels might be affected is not predictable from the current research. One outcome is that the working of the Maximum Fair Rent Order could also be made more complex. Further investigation would be needed to understand these effects.

Overall the researchers recommend the second proposition, that is scrapping scarcity and implementing a simplified process, for the following reasons:

Regulated tenancies are dying out

Since the introduction of assured lettings in 1988 the number of regulated tenancies has declined to about 200,000 or 6% of the UK private rented sector, while the assured market has grown to 67% of the sector. The number of regulated tenancies will continue to decline, because their existence is limited by rules of succession, although some could continue for a relatively long time. Implementing a programme of valuation reform and maintaining a rent determination framework for a small and declining market sector is likely to be relatively expensive. The DETR is already looking for measures that could improve consistency of approach and cohesion between rent panels, as well as bringing about savings within the Rent Service.

70

Scrapping scarcity would not mean massive rent increases

Rent increases would still be controlled using the Maximum Fair Rent Order or a modified version. Simplifying the valuation by abolishing scarcity would not therefore mean massive increases for regulated tenants. The base rent for properties currently subject to large scarcity discounts would rise, but in areas where scarcity is low (for example in the South West 86% of recent appeals was decided on the basis of no scarcity), scrapping this factor have low impact.

Adjustments other than scarcity to arrive at the fair rent would still apply – the same adjustments that apply in open market lettings, which are for differences in condition, furnishing and tenancy terms. The incentive to landlords to improve property in poor condition would also become more transparent.

As things stand all properties currently subject to regulated tenancies will eventually end up in the open market – either subject to market rents or owner occupied. How long this might take is currently uncertain and meanwhile the mechanisms for determining fair rents must be maintained. A planned convergence of fair rents and market rents using the capping order to phase rent increases over a relatively long but known maximum time period would therefore provide greater certainty to tenants, landlords and government.

Scarcity is difficult conceptually and in practice

The case studies confirmed that scarcity, or the assumption of a balanced market, is difficult to assess and poorly understood. The concept is insufficiently grounded in theory and the lack of defined criteria has led to practices that are confused and in some cases misguided.

This research has suggested factors that might be used as indicators of supply and demand in the market, but has been unable to offer a viable benchmark. However, there are serious difficulties in establishing the precise nature of housing markets at any particular point in time, because of time lags and restrictions involved in market responses to various events. Such data as is published tends to be too general to be of assistance, while information that might be more useful has restricted availability because of its commercial value.

If the assessment of scarcity is correctly focused on the sub–markets from which comparables are drawn, then this should make it easier to collect supply and demand evidence relating to recent lettings. However, the exercise is protracted and implementing reformed practice would still require a clearer definition of the basis for assessing scarcity, accompanied by valuation guidance and a programme of training.

Valuation consistency is important

The Maximum Fair Rents Order not only provides for rent increases to be controlled, but also makes it more important for fair rent valuations to be:

on a consistent basis for the same property between successive rent assessments; and,

clearly set out, particularly distinguishing between deductions for lack of landlords repair and tenants improvements.

Applying the ‘rational’ valuation approach, incorporating scarcity, alongside the existing capping order will make rent assessments even more complicated and uncertain, because the valuation basis would have changed since previous fair rent registrations. In particular, calculating the impact on rent of landlords’ improvements since prior registration becomes extremely difficult. This is because scarcity is deducted as a percentage of rent and changing the sequence of this deduction affects the valuation outcome. Further rent panels’

71

assessment of scarcity could change once the focus for this adjustment is shifted to the comparables evidence.

Scrapping scarcity would also change the valuation basis, but the opportunity could then be taken to amend the phasing of increases to produce a result that is more manageable, easier to comprehend and equitable to the parties.

The appeal decisions studied for this research contained insufficient information to assess the possible impact on fair rent levels of using the rational valuation approach and / or scraping the scarcity provision. More work would therefore be needed to assess the impact and recommend a phasing method.

The market basis of valuation is better understood

Many landlords and tenants, particularly outside London, have poor understanding of the valuation process as it applies to fair rents, particularly in relation to the scarcity factor. By comparison the market valuation process is very much better understood, now that a base of market transactions has grown up since the introduction of assured tenancies after 1988.

The courts have confirmed the market approach to valuation for fair rents, with the latest decisions requiring the tribunals to give reasons why they depart from market evidence where it is set before the hearing by expert witnesses. In less controlled markets, the courts have also confirmed that the market valuation process should be based on transaction evidence with the open market letting at the head of the hierarchy of evidence.

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APPENDIX 1 RESIDENTIAL RENT STATISTICS

The tables and graphs in the Appendix are from published statistics produced by the DETR in Housing Statistics 2000.

82

APPENDIX 2 CASE STUDIES – TABLES OF RESULTS

Tables of results given are for data shown by graph in Section 6.

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Table 9.1 Original objection to rent officer registration

London

%

South West

%

North West

%

All

% Landlord 60.3 64 74.3 64.9

Tenant 22.2 36 25.7 27.7

Landlord and Tenant 1.6 0.7

Total count 53 50 35 138

Total % 84.1 100 100 93.2

Table 9.2 Hearing held

London

%

South West

%

North West

%

All

% Hearing 77.8 38.0 31.4 53.4

No hearing 22.2 60.0 68.6 45.9

Not stated 2.0 .7

Total count 63 50 35 148

Total % 100 100 100 100

Table 9.3 RAC Registered Fair Rent

London South West North West £ pa £ pw £ pa £ pw £ pa £ pw

Mean 8,598 165 4,460 86 2,270 43

Median 7,000 134 4,004 77 2,236 43

Range 22,800 438 7,248 139 3,160 61

Minimum 2,400 46 2,496 48 1,040 20

Maximum 25,200 484 9,780 188 4,200 81

Total count 63 50 35

Table 9.4 Direction of change in fair rent

London

%

South West

%

North West

%

All

% Confirmed or held 11.1 26.0 22.9 18.9

Increased 58.7 56.0 40.0 53.4

Reduced 4.8 18.0 37.1 10.8

No previous registration

25.4 16.9

Total count 63 50 35 148

Total % 100 100 100 100

Table 9.5 % Change in fair rent

London

%

South West

%

North West

%

All

%

84

Mean 12.6 11.3 –.003 8.0

Median 1.0 1.0 0 6.0

Mode 0 0 0 0

Range 61.0 80.0 36.0 83.0

Minimum –15.0 –19.0 –22.0 –22.0

Maximum 46.0 61.0 14.0 61.0

Total count 47 50 35 132

Total % 74.6 100 100 89.0

Table 9.6 RAC unadjusted market rent

London South West North West £ pa £ pw £ pa £ pw £ pa £ pw

Mean 24,580 473 5,891 108 3,711 71

Median 20,800 400 5,580 105 3,640 70

Range 49,400 950 10,560 176 4,000 77

Minimum 7,800 150 2,640 25 2,600 50

Maximum 57,200 1100 13,200 202 6,600 127

Total count 29 50 35

Table 9.7 Valuation deductions (excluding scarcity)

London % South West % North West % All % T L RAC T L RAC T L RAC T L RAC

Mean 58.1 21.7 41.7 22.0 21.8 13.0 38.5 58.1 19.4 31.9

Median 59.5 16.9 45.0 22.0 20.0 14.0 34.0 59.5 14.5 32.0

Mode 60.0 2.0 55.0 13.0 0 14.0 64.0 60.0 14.0 55.0

Range 60.0 56.0 45.0 20.0 54.0 10.0 49.0 60.0 56.0 64.0

Minimum 25.0 2.0 10.0 13.0 0 7.0 15.0 25.0 2.0 0

Maximum 85.0 58.0 55.0 33.0 54.0 16.0 64.0 85.0 58.0 64.0

Total count 16 16 27 0 3 49 0 7 35 16 26 111

Total % 25.4 25.4 42.9 0 6.0 98.0 0 20.0 100 10.8 17.6 75.0

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Table 9.8 Scarcity deductions

Scarcity London % South West % North West % All % T L RAC T L RAC T L RAC T L RAC

Mean 38.8 18.7 32.5 0 .02 14.4 .04 38.8 17.5 15.0

Median 35.0 20.0 30.0 0 0 15.0 0 35.0 15.0 10.0

Mode 35.0 30.0 30.0 0 0 15.0 0 35.0 0 0

Range 20.0 50.0 40.0 0 20.0 25.0 20.0 50.0 50.0 55.0

Minimum 30.0 0 15.0 0 0 0 0 0 0 0

Maximum 50.0 50.0 55.0 0 20.0 25.0 20.0 50.0 50.0 55.0

Total count 23 35 57 0 1 49 0 8 35 23 44 141

Total % 36.5 55.6 90.5 0 2.0 98.0 0 22.9 100 15.5 29.7 95.3

Cases where RAC determined nil scarcity

Count 0 42 20 62

% 0 85.7 57.0 44.0

Table 9.9 % reduction RAC unadjusted market rent to fair rent

London % South West % North West % Mean 58.21 23.44 38.37

Median 64.00 23.50 36.00

Range 54.00 57.00 49.00

Minimum 18.00 0 15.00

Maximum 72.00 57.00 64.00

Total count 29 50 35

Total % 46 100 100

National average reduction assured rents to fair rents 1998–99 and 1999–00 combined % (DETR Housing Statistics 2000)

57.00 48.00 56.00

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APPENDIX 3 CASE STUDY VALUATIONS

The case study valuations are drawn from the sample of appeal cases examined for this study and give examples where in theory there is scope for landlord’s improvements that could increase the fair rent by 15% or more, thus avoiding the capping order. The valuations follow current practice and assume a steady state market. For a discussion and critique of the valuation approach see sections 5 and 7.

The percentage figures for the amount of deductions have been calculated for the purpose of this research and are rounded to the nearest 1%. Generally the only deduction given as a percentage in rent appeal decision notices is the scarcity factor.

Within the valuations, the revised deduction for landlord’s lack of repair / improvement needed to produce a 15% increase in rent on re-registration (so avoiding the capping order) can be calculated as follows:

( )sLRdd mm −

−=1

15.0 112

Where:

dm1 = amount deducted for landlord’s lack of repair / improvements on previous registration;

dm2 = amount deducted for landlord’s lack of repair / improvements on new registration;

LR1 = the previous registered fair rent;

s = the percentage reduction due to scarcity.

86

7 Oakley Gardens, London, SW34 storey house; c.1860; unfurnished.

Unadjusted market rent (open market rent) £37,700 £37,700 £37,700

DeductionsLack of furnishing, tenancy terms 10% £3,770 10% £3,700 10% £3,700

Lack of repair / improvement 45% £16,965 38% £14,490 0% £0

Total deductions 55% £20,735 48% £18,190 10% £3,700

Adjusted market rent £16,965 £19,510 £34,000

Less scarcity 30% £5,090 30% £5,853 30% £10,200

Fair rent £11,876 £13,657 £23,800

Fair rent increase 15% £1,781.33 100% £11,925

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration Jan 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

87

56 Pinehurst Court, London, W112nd floor flat in 7 storey block, c.1890. 2 rooms (1 with Kitchen area), bathroom/WC.Lift

Unadjusted market rent (open market rent) £13,000 £13,000 £13,000

DeductionsTenant's repairing liabilities and improvements 10% £1,300 10% £1,300 10% £1,300

Lack of furnishings 10% £1,300 10% £1,300 10% £1,300Lack of central heating and lack of modernisation 20% £2,600 11% £1,430 0%

Total deductions 40% £5,200 31% £4,030 20% £2,600

Adjusted market rent £7,800 £8,970 £10,400

Less scarcity 33% £2,574 33% £2,960 33% £3,432

Fair rent £5,226 £6,010 £6,968

Fair rent increase 15% £783.90 33% £1,742

Previous registration Feb 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

88

19 Clarendon Road, London, W11Ground floor flat in 4 storey converted house. c.1850. 2 rooms, kitchenette, bathroom/WC, balcony.

Unadjusted market rent (open market rent) £15,600 £15,600 £15,600

Deductions Tenant's repairing liabilities and improvements 10% £1,560 10% £1,560

Lack of furnishings 10% £1,560 10% £1,560

Lack of modernisation 11% £1,716 0%

Total deductions 40% £6,240 31% £4,836 20% £3,120

Adjusted market rent £9,360 £10,764 £12,480

Less scarcity 35% £3,276 35% £3,767 35% £4,368

Fair rent £6,084 £6,997 £8,112

Fair rent increase 15% £912.60 33% £2,028

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration Feb 1999

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

89

3 Ilchester Mansions, Abingdon Road, W8Ground floor flat in 6 storey block.c.1895. 4 rooms, kitchen, bathroom, wc.

Unadjusted market rent (open market rent) £26,000 £26,000 £26,000

DeductionsTenant's repairing liabilities and improvements 10% £2,600 10% £2,600

Lack of furnishings 10% £2,600 10% £2,600

Lack of repair / modernisation 27% £7,000 0%

Total deductions 54% £14,000 47% £12,200 20% £5,200

Adjusted market rent £12,000 £13,800 £20,800

Less scarcity 40% £4,800 40% £5,520 40% £8,320

Fair rent £7,200 £8,280 £12,480

Fair rent increase 15% £1,080.00 73% £5,280

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration Sep 1998

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

90

4 Linden Grove, London, SE151st & 2nd floor maisonette in 3 storey house. c.1860. 4 rooms, kitchen/diner, bathroom, wc.

Unadjusted market rent (open market rent) £8,400 £8,400 £8,400

DeductionsTenant's repairing liabilities and improvements 10% £840 10% £840

Lack of furnishings 10% £840 10% £840Lack of repair / modernisation/ central heating 18% £1,504 0%

Total deductions 46% £3,864 38% £3,184 20% £1,680

Adjusted market rent £4,536 £5,216 £6,720

Less scarcity 30% £1,361 30% £1,565 30% £2,016

Fair rent £3,175 £3,651 £4,704

Fair rent increase 15% £476.28 48% £1,529

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration Feb 1999

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

91

16 Byron Avenue, Levenhulme, Manchester3bed semi c1916. Two receps, kitchen, store, wash house, bath/wc. Rewired but otherwise unmodernised, no central heating. Neglected. Unadjusted market rent (open market rent) £3,380 £3,380 £3,380

DeductionsTenant's repairing liabilities and improvements

Lack of furnishings 10% £338 10% £338 10% £338Lack of repair / modernisation/ central heating 45% £1,521 38% £1,293 0%

Total deductions 55% £1,859 48% £1,631 10% £338

Adjusted market rent £1,521 £1,749 £3,042

Less scarcity 0% £0 0% £0 0% £0

Fair rent £1,521 £1,749 £3,042

Fair rent increase 15% £228.15 100% £1,521

Previous registration July 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

92

29 Dodney Drive, Lea, Preston3bed semi-detached house c1947. 2 reception rooms, kitchen, bathroom/wc. UPVC double glazing. No central heating, unmodernised. Convenient to local amenities. Unadjusted market rent (open market rent) £4,680 £4,680 £4,680

DeductionsTenant's repairing liabilities and improvements

Lack of furnishings 7% £312 7% £312 7% £312

Voids / letting costs 9% £416 9% £416 9% £416Lack of repair / modernisation/ central heating 22% £1,040 13% £603 0%

Total deductions 38% £1,768 28% £1,331 16% £728

Adjusted market rent £2,912 £3,349 £3,952

Less scarcity 10% £291 10% £335 10% £395

Fair rent £2,621 £3,014 £3,557

Fair rent increase 15% £393.12 36% £936

Previous registration June 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

93

6 Bobs Lane, Cadishead, Salford2bed terrace house. Sitting room, kitchen, bathroom. Last modernised 1978. Bobs Lane adjoins chemical works.

Unadjusted market rent (open market rent) - unfurnished £2,600 £2,600 £2,600

Deductions

Smaller (than adjoining houses) 2% £52 2% £52 2% £52Lack of repair / modernisation/ central heating 34% £884 24% £634 0%

Total deductions 36% £936 26% £686 2% £52

Adjusted market rent £1,664 £1,914 £2,548

Less scarcity 0% £0 0% £0 0% £0

Fair rent £1,664 £1,914 £2,548

Fair rent increase 15% £249.60 53% £884

Previous registration November 1998

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

94

93 Boscombe Grove Road, BournemouthSemi-detached house. 3bed, 2recep, kit, bath (gf) wc (outside). Garden. Car space. Close to centre of Boscombe. No central heating. Unadjusted market rent (open market rent) £5,408 £5,408 £5,408

DeductionsTenant's repairing liabilities and improvements 11% £572 11% £572 11% £572

No off road car space 3% £156 3% £156 3% £156

Lack of furnishings 9% £468 9% £468 9% £468Lack of repair / modernisation/ central heating 32% £1,716 25% £1,342 0%

Total deductions 54% £2,912 47% £2,538 22% £1,196

Adjusted market rent £2,496 £2,870 £4,212

Less scarcity 0% £0 0% £0 0% £0

Fair rent £2,496 £2,870 £4,212

Fair rent increase 15% £374.40 69% £1,716

Previous registration August 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

95

56 Portland Road, Winton, BournmouthSemi-detached house. 2bed, 2recep, kitchen, bath/wc, ground floor wc. 2 car spaces. Garden.

Unadjusted market rent (open market rent) £6,604 £6,604 £6,604

DeductionsTenant's repairing liabilities and improvements 23% £1,500 23% £1,500

Lack of furnishings 7% £462 7% £462

Lack of central heating 11% £755 0%

Total deductions 49% £3,224 41% £2,717 30% £1,962

Adjusted market rent £3,380 £3,887 £4,642

Less scarcity 0% £0 0% £0 0% £0

Fair rent £3,380 £3,887 £4,642

Fair rent increase 15% £507.00 37% £1,262

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration August 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord

96

6 Cambridge Park, Redland, BristolFirst floor flat in large Victorian house. 3beds, one recep, shower room/wc, hallway. Parking space. Use of garden. Easy access to city.

Unadjusted market rent (open market rent) £7,800 £7,800 £7,800

Deductions

Services £60 £60 £60Tenant's repairing liabilities and improvements 7% £572 7% £572

Lack of furnishings 9% £682 9% £682Lack of repair / modernisation/ central heating 0% £0 0%

Total deductions 28% £2,160 17% £1,314 17% £1,314

Adjusted market rent £5,640 £6,486 £6,486

Less scarcity 0% £0 0% £0 0% £0

Fair rent £5,640 £6,486 £6,486

Fair rent increase 15% £846.00 15% £846

Note: The RAC decision notice did not separately itemise the deductions. An assumed apportionment has therefore been made for the purpose of the valuation.

Previous registration June 2000

New registration following work by landlord, 15% fair rent increase

New registration, property completely modernised by landlord