by Jen Lemen
Hot Topic Highlight - Arbitrator vs. Independent Expert
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What is today's blog about?
In our experience, many RICS APC candidates find it difficult to get to grips with the differences between an Arbitrator and an Independent Expert and why an Expert Witness is not the same as an Independent Expert. This week's blog article seeks to dispel any confusion and equip you with the knowledge to ace your RICS APC final assessment interview.
As well as forming part of the mandatory Conflict avoidance, management and dispute resolution procedures RICS APC competency, this will be relevant for any commercial, valuation or residential RICS APC candidates who deal with leases.
In particular, in this article we will focus on dispute resolution for rent review instructions. We will look at lease renewals and PACT in a future article.
We have already considered dispute resolution in general in a previous blog article, so this article will be a great place to continue furthering your knowledge of dispute resolution.
What is dispute resolution?
Dispute resolution is simply a procedure to resolve conflicts between parties.
Alternative Dispute Resolution (ADR) differs slightly in that it is a procedure to avoid litigation.
The benefits of ADR are:
- It is typically cheaper and quicker than litigation
- It is a more flexible process than Court proceedings governed by the Civil Procedure Rules
- It can be a confidential process
- Specialists/experts may be involved rather than lay judges (who may or may not have an understanding of property)
What is litigation?
This is the process of parties taking legal action through the Courts, defined by the Civil Procedure Rules. Litigation is a public process so it is not possible to preserve confidentiality.
Out of Court settlements may be agreed at the last minute to avoid further costs, based on the relative risks of the dispute.
How does dispute resolution work for rent reviews?
If a landlord and tenant are unable to agree the revised rent at a commercial rent review, the lease should include a dispute resolution clause. This enables the parties to appoint a third party dispute resolver, typically an Arbitrator or an Independent Expert, to set the new level of rent.
The lease should set out whether an Arbitrator or Independent Expert is to be appointed, or in some cases there may be the ability for one or both parties to make an election for either an Arbitrator or Independent Expert to be appointed.
Who can make the appointment?
The lease will generally set out which party (or parties) can request an appointment and how this can be made. Sometimes, this may be limited to just the landlord or the tenant, or there may be time limits or requirements around when and how an application can be submitted.
How is an appointment made?
RICS estimate that 99% of leases make reference to the RICS Dispute Resolution Service as the elected body for appointments, although in some cases the Law Society, for example, may be mentioned.
To make an application for the appointment of an Arbitrator or Independent Expert, one of the parties should submit a DRS1 form to the RICS.
As of 1 March 2017, this costs £425 incl. VAT and is non-refundable. This means that Chartered Surveyors should secure their client's approval before submitting a DRS1 form.
What is included on a DRS1 form?
- Authority to appoint
- Property information
- Lease information, including special restrictions set out in the dispute resolution clause
- Information about the parties and their representatives
- Conflicts of interest relating to potential appointees
What happens after a DRS1 form is submitted?
The RICS will appoint a dispute resolver who is free from any conflicts of interest and meets the specific requirements of the lease. The appointed third party will write to both parties to agree their terms of appointment, procedural requirements and fee basis.
How does the third party process work?
At third party, the role of each surveyor representing the landlord and the tenant switches to being an Expert Witness. This means that they have a primary duty of care to the Court and cannot act on an incentivised or contingency fee basis.
They must each include a statement of truth with their Expert Witness evidence, which must be independent and unbiased and within their scope of experience and knowledge.
They also must state the main facts and assumptions they rely on, without omitting material facts relevant to their conclusions. Essentially, this means that their representations must be impartial and uninfluenced by their client.
The full requirements of the role are set out in the RICS guidance, Surveyors Acting as Expert Witnesses (4th Edition).
When acting as Expert Witnesses, the parties typically submit a joint Statement of Agreed Facts to the appointed Arbitrator or Independent Expert. This sets out the agreed facts relating to any key comparable evidence and lease terms, for example.
Each party then submits their representations to the third party. These are then swapped and each party writes a counter representation in response. Each parties' representations and replies are then considered by the third party who will then issue their final Award or Determination.
There is then the issue of costs to be dealt with, which we will discuss in a future blog article. These can be put 'at risk' by either or both parties by a carefully considered Calderbank offer, which will be labelled 'without prejudice save as to costs'.
How does an Expert Witness differ from an Independent Expert?
We often see candidates confuse the two terms; Independent Expert and Expert Witness. This is perhaps because both are sometimes referred to as an Expert in practice.
An Expert Witness is the role that the landlord or tenant's surveyor will adopt at third party. They submit their expert witness evidence to the appointed third party, who will either be acting as an Independent Expert or an Arbitrator.
An Independent Expert, in contrast, is the role that the appointed third party may act as during the dispute resolution process. They will determine the level of new rent.
Both roles will be fulfilled by Chartered Surveyors, with sufficient training, qualification, knowledge and experience to fulfil the requirements of the relevant role.
What is the role of an Arbitrator?
Arbitrators are governed by the Arbitration Act 1996, which sets out the requirements for their role and proceedings.
The contractual provisions of the lease will also dictate how proceedings are managed, although the 1996 Act takes precedence.
The RICS also publishes guidance for Arbitrators; Surveyors Acting as Arbitrators in Commercial Property Rent Reviews (9th Edition).
What is the role of an Independent Expert?
There is no legislation governing the role of an Independent Expert. The role is instead governed by the lease, together with the RICS guidance; Independent Expert Determination (1st Edition).
Depending on the terms of the lease, the Independent Expert may be required to consider evidence from the parties’ representatives, may have to give a reasoned determination and may have power to determine part or all costs.
How does the terminology used differ between the two roles?
This is another common area of confusion. Make sure you refer to an Arbitrator and their Award and an Independent Expert and their Determination.
This makes it clear that you understand the differences between the two dispute resolution roles to your RICS APC assessment panel.
What are the differences between the role of an Arbitrator and an Independent Expert?
Act only on evidence submitted by parties, but can draw attention to matters that the parties may not be aware of. They can also take initiative to ascertain facts and law.
‘Duty of investigation’ to discover all relevant evidence.
Must refer to parties’ evidence and apportion weight to relevance and quality.
Determination based on expert knowledge so submissions are not always required unless specified by the lease or agreed between the parties that they will be provided.
Award must lie between parties’ submitted rents.
Determination can be outside of the parties' submitted rents.
Can order disclosure and witness attendance.
No statutory power of disclosure.
Discretion over all costs, even if the lease states a specific apportionment basis.
Power on costs if expressly stated in the lease or agreed between the parties.
The parties can appeal under Sections 67-69 of the 1996 Act within 28 days of date of Award. There are three grounds for doing so, which are if the Award was outside the Arbitrator's jurisdiction, there was a serious irregularity or on a point of law. The parties cannot just appeal because they are unhappy with the valuation figure.
There is no right of appeal, although the Court may set aside the Determination in limited circumstances, e.g. fraud or manifest error.
Not liable for negligence if acted in good faith.
Can be found liable in damages (i.e. can be sued) for any losses sustained by a party through the Independent Expert’s negligence. However, the Court will not interfere with a final and binding determination.
Reasoned unless otherwise agreed.
No requirement for reasons unless required by the lease or agreed between parties.
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Stay tuned for our next blog post to help build a better you
N.b. nothing in this article constitutes legal or financial advice.