Real Estate Concepts

The essential reference tool for all real estate, property, planning and construction students.
Edited by Professor Ernie Jowsey of Northumbria University, Real Estate Concepts provides built
environment students with an easy-to-use guide to the essential concepts they need to understand in
order to succeed in their university courses and future professional careers.
Key concepts are arranged, defined and explained by experts in the field to provide the student
with a quick and reliable reference throughout their university studies. The subjects are conveniently
divided to reflect the key modules studied in most property, real estate, planning and construction
courses.
Subject areas covered include:

• Planning
• Building surveying
• Valuation
• Law
• Economics, investment and finance
• Quantity surveying
• Construction and regeneration
• Sustainability
• Property management

Over the 18 alphabetically arranged subject specific chapters, the expert contributors explain and
illustrate more than 250 fully cross-referenced concepts. The book is packed full of relevant examples
and illustrations and after each concept further reading is suggested to encourage a deeper understanding.
This book is an ideal reference when writing essays and assignments, and revising for exams.

Ernie Jowsey is Professor of Property and Real Estate at Northumbria University. He is the author of
a number of books including Real Estate Economics and Modern Economics with Jack Harvey.
This page intentionally left blank
Real Estate Concepts
A handbook

Edited by Ernie Jowsey

with contributions from staff at
Northumbria University
First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2015 Ernie Jowsey, selection and editorial material, individual chapters, the contributors
The right of the editor to be identified as the author of the editorial material, and of the
authors for their individual chapters, has been asserted in accordance with sections 77 and
78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any
form or by any electronic, mechanical, or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage or retrieval system,
without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Real estate concepts : a handbook / edited by Ernie Jowsey with contributions from staff
at Northumbria University.
pages cm
Includes bibliographical references and index.
1. Real estate business--Great Britain . 2. Real property--Great Britain. 3. Real estate
development--Great Britain. 4. Commercial real estate--Great Britain. I. Jowsey, Ernie.
HD596.R43 2014
333.330941--dc23
2013050184

ISBN: 978-0-415-85741-3 (hbk)

ISBN: 978-0-415-85742-0 (pbk)
ISBN: 978-0-203-79764-8 (ebk)

Typeset in Bembo
by GreenGate Publishing Services, Tonbridge, Kent
Contents

List of figures xiv

List of tables xvi
List of contributors xviii
Preface xx
List of abbreviations xxi

1 Agency 1
ANDY DUNHILL, JANE STONEHOUSE AND RACHEL WILLIAMS

1.1 The inspection 1

1.2 Reporting to the client 2
1.3 Terms of engagement 5
1.4 Types of agency – the basis of instruction for disposal 6
1.5 The marketing plan 8
1.6 The marketing brochure 12
1.7 Information technology in marketing 14
1.8 Energy performance certificates 16
1.9 Methods of disposal – private treaty 18
1.10 Methods of disposal – tender 21
1.11 Methods of disposal – auction 22
1.12 Marketing a property – freehold sale 25
1.13 Marketing a property by way of an assignment 26
1.14 Marketing a property by assignment of a long ground lease 28
1.15 Marketing a property to let on a new lease 31
1.16 Marketing a property by way of a sublease 35
1.17 The marketing process 38
1.18 Negotiating 40
1.19 Occupation costs 41
1.20 Heads of terms 43
1.21 Money laundering 45
1.22 Safety and security in agency 48
vi Contents
2 Building surveying 51
STUART EVE, MINNIE FRASER AND CARA HATCHER

2.1 Building surveying in an estate management context 51

2.2 Building pathology 53
2.3 Building surveys 57
2.4 Dampness in buildings 60
2.5 Timber defects 62
2.6 Movement in buildings 64
2.7 Concrete defects 67
2.8 Structural frames and floors 69
2.9 Roofs and cladding 72
2.10 Asbestos in buildings 75

3 Commercial property 79
ANDY DUNHILL, DOM FEARON, JOHN HOLMES AND BECKY THOMSON

3.1 Commercial property 79

3.2 Private investors 80
3.3 Private finance initiatives 81
3.4 Office market 84
3.5 Industrial market 86
3.6 Retail market 88
3.7 Leisure market 90
3.8 The health care market 91
3.9 Student accommodation 93
3.10 Building information modelling and commercial property 95

4 Construction 97
GRAHAM CAPPER, BARRY GLEDSON, RICHARD HUMPHREY, ERIC JOHANSEN, ERNIE JOWSEY,
MARK KIRK, CARA HATCHER AND JOHN WEIRS

4.1 Building Cost Information Service 97

4.2 Building control in England and Wales 99
4.3 Construction firms 102
4.4 Competitive tendering 103
4.5 Design and build 105
4.6 Modern methods of construction (off-site manufacture) 106
4.7 Managing construction 108
4.8 Planning and organising construction 109
4.9 Managing building services 111
4.10 Sick building syndrome 112
4.11 Sustainable construction 114
4.12 Fraud in construction 117
 Contents vii
5 Development 119
HANNAH FURNESS, ERNIE JOWSEY AND SIMON ROBSON

5.1 Developers 119

5.2 Development 120
5.3 Development costs 122
5.4 Development finance and funding 125
5.5 Site assembly and acquisition 127
5.6 Evaluation and appraisal methods 129
5.7 Intensity of site use 132
5.8 Public sector development 134
5.9 Redevelopment 134
5.10 Refurbishment 136
5.11 Residual value 138
5.12 Local asset-backed vehicles 139

6 Economics 141
ERNIE JOWSEY

6.1 Allocation of resources 141

6.2 Supply and demand 142
6.3 Pareto optimality 144
6.4 Economic efficiency 145
6.5 Market, command and mixed economies 147
6.6 Externalities 148
6.7 Market failure 150
6.8 Cost–benefit analysis 51
6.9 Perfect competition 153
6.10 Imperfect competition 154
6.11 Oligopoly 155
6.12 Monopoly 156
6.13 Economies of scale 158
6.14 Mobility of labour 159
6.15 Property rights 160
6.16 Economic rent 161
6.17 Gross domestic product 162
6.18 Economic growth 163
6.19 The multiplier 165
6.20 Fiscal policy 166
6.21 Property cycles 167
6.22 Globalisation 169
6.23 The credit crunch 170
6.24 Currencies and exchange rates 171
viii Contents
7 Finance 173
ERNIE JOWSEY AND HANNAH FURNESS

7.1 Banks 173

7.2 Bridging loan 174
7.3 Company accounts 174
7.4 Debentures 176
7.5 Depreciation 177
7.6 Financial gearing 177
7.7 Liquidity 179
7.8 Freehold ground rent 179
7.9 Reverse yield gap 180
7.10 Sale and leaseback 181
7.11 Mortgages 182
7.12 Sources of finance 183

8 Investment 185
ERNIE JOWSEY AND HANNAH FURNESS

8.1 Investors 185

8.2 The property investment market 186
8.3 Commercial property investment 187
8.4 Portfolio strategy 189
8.5 Modern portfolio theory 190
8.6 Capital asset pricing model 193
8.7 Risk and return 194
8.8 Real estate investment trusts 196
8.9 Property unit trusts 196
8.10 Active fund management 197
8.11 Residential property investment and buy-to-let 199
8.12 Mortgage-backed securities 200
8.13 Land banking 201
8.14 Property indices 202
8.15 Discounting and discount rates 204
8.16 International property investment 206
8.17 Transparency index 207
8.18 Corporate real estate asset management 208

9 Land management 211

DOM FEARON AND ERNIE JOWSEY

9.1 Archaeological sites 211

9.2 Coastal and marine heritage 212
9.3 Farm buildings 213
9.4 Fishing and fishing rights 215
9.5 Trees and forestry 216
 Contents ix
9.6 Historic parkland 218
9.7 Protected landscapes 219
9.8 Religious buildings 220
9.9 Waste disposal sites 222
9.10 UK National Parks 225

10 Law 227
RACHEL WILLIAMS AND SIMON ROBSON

10.1 Contracts 227

10.2 Legal definition of land 228
10.3 Fixtures and chattels 229
10.4 Ownership of land 230
10.5 Trusts and co-ownership of land 232
10.6 The lease/licence distinction 234
10.7 Land registration 235
10.8 Freehold covenants 236
10.9 Easements and profits à prendre 238
10.10 Easements – rights to light 240
10.11 Manorial land and chancel repair liability 242
10.12 Wayleaves 242
10.13 Common land and town and village greens 243
10.14 Highways 244
10.15 Option agreements 245
10.16 Conditional contracts 246
10.17 Promotion agreements 247
10.18 Overage/clawback 248
10.19 Pre-emption rights 249
10.20 False statements and misleading omissions 250

11 Planning 252
ANDY DUNHILL, HANNAH FURNESS, PAUL GREENHALGH, CAROL LUDWIG, DAVID MCGUINNESS
AND RACHEL WILLIAMS

11.1 Legislation and planning policy 252

11.2 Strategic planning 257
11.3 Green belt 258
11.4 Planning decision making 259
11.5 Listed buildings and conservation areas 264
11.6 Neighbourhood planning 267
11.7 Transport and infrastructure planning 269
11.8 Minerals planning 270
11.9 Settlement hierarchy 273
11.10 Planning obligations 275
11.11 Community infrastructure levy 276
11.12 Planning appeals 278
x Contents
12 Property asset management 281
CHERYL WILLIAMSON, DOM FEARON AND KENNETH KELLY

12.1 Property asset management 281

12.2 Leases in commercial property 282
12.3 Breach of covenant 284
12.4 Commercial service charges 285
12.5 Rent 286
12.6 Rent reviews 288
12.7 Proactive management to recover rent 289
12.8 Landlord and Tenant Act 1954 part 2 291
12.9 Squatters and adverse possession 292
12.10 Alienation 293
12.11 Exit strategies 295
12.12 Health and safety 297
12.13 Dilapidations 298
12.14 Insolvency 299
12.15 Facilities management 300

13 Quantity surveying 303

GLENN STEEL

13.1 Measurement and quantification 303

13.2 New Rules of Measurement 305
13.3 Cost planning and cost control 306
13.4 Life cycle costing 310
13.5 Construction law 311
13.6 Alternative methods of dispute resolution 312
13.7 Standard forms of contract 316
13.8 Bespoke contracts 318
13.9 Contractual claims 319
13.10 Project management 322
13.11 Partnering 324
13.12 Procurement methods 326
13.13 Contract administration 330
13.14 Cost value reconciliation 333
13.15 Cash flow 335
13.16 Benchmarking 337
13.17 Value management 339
13.18 Risk management 341
13.19 5D building information modelling 344
13.20 Expert witnesses 346
 Contents xi
14 Regeneration 349
JULIE CLARKE, HANNAH FURNESS, PAUL GREENHALGH, RACHEL KIRK AND DAVID MCGUINNESS

14.1 Defining urban regeneration 349

14.2 Development corporations and regeneration agencies 350
14.3 Neoliberal urban policy 352
14.4 Compact cities and urban sprawl 354
14.5 Shrinking cities 356
14.6 The urban renaissance 357
14.7 Enterprise Zones 359
14.8 Partnership working 361
14.9 Funding and finance for regeneration 362
14.10 Brownfield land 365
14.11 Contaminated land 366
14.12 Gap funding 367
14.13 Community engagement 369
14.14 Gentrification and abandonment 370
14.15 Social enterprise 372
14.16 Area-based initiatives 374
14.17 Tax increment financing 375

15 Residential property 377

JULIE CLARKE, RACHEL KIRK AND CARA HATCHER

15.1 The private rented sector 377

15.2 The social housing sector 379
15.3 Owner occupation 380
15.4 Housing tenure – other forms of ownership 382
15.5 Affordability in housing 384
15.6 Homelessness 385
15.7 Housing management – allocating property (social housing) 386
15.8 Housing management – rent collection and recovery (social housing) 388
15.9 Housing management – repairing property (social housing) 390
15.10 Housing management – managing tenancies (social housing) 391
15.11 Housing management – allocating property (private rented sector) 393
15.12 Housing management – rent collection and recovery (private rented sector) 394
15.13 Housing management – repairing property (private rented sector) 395
15.14 Housing management – managing tenancies (private rented sector) 396
15.15 Housing support – independent living 398
15.16 Housing support – specialist supported housing 399
15.17 Housing an older population 400
xii Contents
16 Sustainability 402
GRAHAM CAPPER, JOHN HOLMES, ERNIE JOWSEY, SARA LILLEY, DAVID MCGUINNESS
AND SIMON ROBSON

16.1 Sustainable development 402

16.2 Biomass 403
16.3 Building Research Establishment Environmental Assessment Method 405
16.4 Code for Sustainable Homes 407
16.5 Combined heat and power 408
16.6 Electric vehicles and electric vehicle infrastructure 409
16.7 Energy policy and the built environment 412
16.8 Environmental impact assessment 415
16.9 Ground/air source heat pumps 417
16.10 Life cycle assessment of buildings 418
16.11 Retrofit 419
16.12 Sustainability appraisal 421
16.13 Sustainable urban drainage systems 422
16.14 Solar power photovoltaics 424
16.15 Solar water heating 426
16.16 Wind turbines 428

17 Taxation 430
ERNIE JOWSEY AND RACHEL WILLIAMS

17.1 Direct taxes 430

17.2 Income tax 431
17.3 Corporation tax 432
17.4 Inheritance tax 433
17.5 Indirect taxes 434
17.6 Value Added Tax 434
17.7 Stamp Duty 436
17.8 Mansion tax and annual tax on enveloped dwellings 437
17.9 Council tax 438
17.10 Rating and uniform business rates 439
17.11 Land value tax 440

18 Valuation 444
LYNN JOHNSON AND BECKY THOMSON

18.1 Income cash flows 444

18.2 Term and reversion 447
18.3 Hardcore/layer method 448
18.4 The all-risks yield 452
18.5 Over-rented property 453
18.6 Analysing tenant incentives 457
 Contents xiii
18.7 The discounted cash flow approach to valuing property investments 462
18.8 Valuing vacant property 465
18.9 Valuation and sustainability 469
18.10 The Valuer Registration Scheme 470
18.11 The comparative method 471
18.12 Valuation accuracy 473
18.13 Depreciated replacement cost 474
18.14 Valuing leasehold interests 477
18.15 Asset valuations 480
18.16 Valuing trading properties 482

Index 485
Figures

1.9.1 Overview of the private treaty process 20

2.2.1 Damp meter with condensation analysis capability 54
2.2.2 Dampness to window jamb 55
2.2.3 Thermal image indicating cold spots around windows 55
2.2.4 Wall construction revealed 55
2.2.5 No insulation to jamb 55
2.2.6 Window detail as existing 56
2.2.7 Proposed remedial works 56
2.4.1 The process of rising dampness 61
2.10.1 The asbestos family tree 76
3.3.1 PFI structure 82
3.4.1 Brise soleil on the south elevation of the Museum of London 85
3.4.2 Mesh solar shading perforated by oval feature windows 85
3.8.1 UK population 92
3.9.1 1970s student accommodation 94
3.9.2 Modern student accommodation 94
5.2.1 The 14 phases of development 122
5.4.1 Property development 125
5.7.1 Applying capital to a fixed site 132
5.7.2 Intensity of site use 133
5.9.1 The value of the cleared site 135
5.9.2 The timing of redevelopment 136
5.10.1 Refurbishment delays redevelopment 137
5.12.1 Local asset-backed vehicles 139
6.1.1 A (straight line) production possibilities curve 142
6.2.1 Equilibrium price and quantity 143
6.3.1 Pareto improvements 144
6.4.1 A production possibility curve 146
6.6.1 Additional marginal social costs of development 149
6.9.1 Long-run equilibrium in perfect competition 153
6.10.1 Long-run equilibrium in imperfect competition 155
6.11.1 The kinked demand curve in oligopoly 156
6.12.1 The long-run situation in monopoly 157
6.13.1 Economies of scale in industrialised building 159
6.16.1 Economic rent 162
6.18.1 Production possibility frontier 164
6.19.1 The circular flow of income 165
6.21.1 The business cycle 167
6.21.2 Links between the property cycle, the economy and the monetary sector 168
 Figures xv
7.6.1 The capital gearing effect 178
8.5.1 The efficient frontier 192
8.7.1 The risk–return trade off 195
10.5.1 Trustee holding 232
10.17.1 Main terms of a promotion agreement 247
11.1.1 Local plan-making process 255
11.1.2 Demystifying the local policy context 256
11.4.1 The planning application process 263
11.9.1 Settlement hierarchies in action 275
11.12.1 Assessment of appeals 279
13.1.1 Design information 304
13.6.1 Resolution of disputes 313
13.9.1 Prolongation 321
13.9.2 Acceleration 322
13.10.1 Project plan 323
13.16.1 The benchmarking process 338
13.18.1 Enterprise risk management 342
13.18.2 Quantification of risk 344
14.13.1 The participation continuum 369
15.1.1 Changes in the tenure of dwellings 1919–2009 378
15.2.1 Changes in the tenure of dwellings 1919–2011 380
15.3.1 The rise and fall of owner occupation 381
15.3.2 First time buyer activity versus growth in private renting 382
15.4.1 Shared equity scheme 383
16.8.1 The environmental impact assessment process 416
16.13.1 A sedum roof 423
16.13.2 Open jointed concrete paving 423
16.14.1 Retrofit photovoltaic panels and solar water panels 426
16.14.2 Thin film PV 426
16.14.3 Interior view thin film PV 426
16.15.1 Large-scale evacuated tube installation 428
17.2.1 Regressive, proportional and progressive taxes 431
17.11.1 The effect of a land value tax 441
17.11.2 Comparison of the incidence of NAV, capital value and LVT on buildings and land 442
17.11.3 The incidence of land value tax or site-value rating 442
18.1.1 Unit 3, Metro Riverside, Gateshead 444
18.1.2 Lease cash flow 445
18.1.3 Under-rented property 446
18.1.4 Over-rented property 446
18.2.1 Term and reversion 447
18.3.1 Cash flow 1 449
18.3.2 Dean Street, Newcastle upon Tyne 450
18.3.3 Cash flow 2 450
18.5.1 Overage/topslice 454
18.5.2 Market rent increases 455
18.5.3 The breakthrough 456
18.7.1 Cash flow analysis 463
18.8.1 Unit 1 Morton Palms, Darlington 465
18.8.2 Cash flow graph 466
18.15.1 Industrial Estate, Eaglescliffe 481
Tables

1.20.1 Suggested format for a new leasing arrangement 44

2.2.1 Defects and further investigations 54
3.1.1 Ownership of UK commercial property 80
4.1.1 Construction costs 98
4.1.2 Building costs 2013–2018 98
4.11.1 Embodied energy 116
5.4.1 The eight main ways of funding property development 125
6.1.1 Production possibilities for housing 142
7.12.1 Advantages and disadvantages of sources of finance 184
8.5.1 A two-asset portfolio 191
8.7.1 Risk-adjusted return 195
8.14.1 IPD indices 203
8.14.2 IPD indices – capital growth of all property 2010 203
8.14.3 IPD indices – income growth of all property 2010 203
8.14.4 IPD indices – total return of all property 2010 203
8.17.1 2012 Transparency Index 207
8.18.1 Alternative real estate strategies 209
8.18.2 Sale and leaseback 209
9.10.1 National Park expenditure (£) 225
10.5.1 Joint tenancy (1) 233
10.5.2 Joint tenancy (2) 233
10.5.3 Tenants in common (1) 233
10.5.4 Tenants in comon (2) 233
10.8.1 Dominant and servient land 237
10.8.2 Positive and negative covenants 237
10.8.3 Covenants ‘running with the land’ 237
10.9.1 Example of an easement 239
11.4.1 Considerations in planning decision making 260
12.5.1 Stepped rent 287
13.3.1 Cost planning procedure 307
13.13.1 Valuation of variations 333
14.2.1 Urban Development Corporations and Urban Regeneration Companies 351
14.3.1 1980s policy initiatives 353
14.4.1 UK residential density gradient 355
14.6.1 Population change in UK conurbations 1991–2001 358
15.7.1 Local authority waiting lists in England 387
15.7.2 Allocations of social housing 2011–12 388
 Tables xvii
15.8.1 Housing benefit recipients and average weekly payment in England 389
16.12.1 Environmental assessment techniques 421
17.6.1 Value Added Tax rates 435
17.6.2 Input and output tax 435
17.7.1 Stamp Duty Land Tax rates 436
18.6.1 Scenario B summary – Assuming breakthrough at year 10 461
18.6.2 Scenario B modified summary – Assuming breakthrough at year 15 462
18.7.1 Discounted cash flow analysis 464
18.14.1 Rental cash flow 479
18.14.2 Present value of cash flow 479
Contributors

All contributors are from the Department of Architecture and Built Environment at Northumbria
University, Newcastle upon Tyne, UK.
Graham Capper BSc MSc MRICS CEnv
Julie Clarke BA (Hons) PGCED
Andy Dunhill BSc Hons MRICS
Stuart Eve BSc (Hons) MSc PCAPL MRICS
Dom Fearon MRICS
Minnie Fraser BSc MRICS AHEA
Hannah Furness MRICS
Barry J. Gledson BSc(Hons) PGCert FHEA
Paul Greenhalgh BSc (Hons) PhD MRICS FHEA PGCED
Cara Hatcher BSc (Hons) MRICS LLM
John Holmes BA MA MBEng CEnv
Richard Humphrey FCIOB CRSA FCMI FIoD MAPM PGCertAPL FHEA
Eric Johansen MCIOB MAPM
Lynn E. Johnson BSc (Hons) MRICS
Ernie Jowsey PhD MA BA (Econ) PGCE FHEA
Kenneth Kelly BSc (Hons) MRICS
Mark Kirk BSc (Hons) PGCE
Rachel Kirk DPhil FHEA
Sara Lilley BSc MSc PGHEP
Carol Ludwig PhD MRTPI MSc BSc (Hons) PGCert
David McGuinness BA (Hons) MSc PGDip FHEA MeRSA
Simon Robson DBA MBA PCAP BSc (Hons) FHEA FRICS
Glenn Steel BSc MRICS MBA
 Contributors xix
Jane Stonehouse BSc (Hons) MRICS
Becky Thomson BA (Hons) DipSurv MRICS
John Weirs MCIOB MA PGCE
Rachel Williams LLB (Hons) PGCert PGDip
Cheryl H. Williamson MBA PCAP MRICS
Preface

This book is intended to be of use to undergraduate and professional students of real estate, survey-
ing, land management, estate management, housing, planning and all property-related courses. It may
also be of interest to anyone working in the broad fields of real estate, property management, building
surveying, construction management, property investment and property development.
One of the questions that university lecturers in these subjects are often asked is: ‘Is there one book
we can buy that covers everything?’ Of course there is no such book, because there are far too many
component subjects and vast quantities of further reading in the form of books, academic journal arti-
cles, web pages, law reports and professional journal articles. Real Estate Concepts should be invaluable,
however, in providing an introduction to the most important subjects in all land and property fields.
The structure of the book is very straightforward: there are eighteen chapters, covering all of the
major subjects studied on real estate surveying courses by focusing on the most relevant concepts to
understand in each subject. Each concept identifies key terms and further reading so that more in-
depth understanding can be achieved. The concepts have been chosen and written by staff from the
Department of Architecture and Built Environment at Northumbria University, all of whom are
experts in their field and most of whom have considerable professional experience.
My thanks are due to all twenty-eight contributors, who delivered the concepts with admirable
good humour while under considerable pressure from their day jobs and their students! My thanks
must also go to Ed Needle from Routledge for his patience throughout this project. While there are
many contributors to Real Estate Concepts, responsibility for any errors remains with myself.

Ernie Jowsey
Professor of Property and Real Estate
University of Northumbria
Abbreviations

AAP Area Action Plan

ABC Acceptable Behaviour Contract
ABI area-based initiative
ABS asset-backed security
AC average cost
ACCC Australian Competition and Consumer Commission
ACM asbestos-containing materials
ADR alternative dispute resolution
AGA authorised guarantee agreement
AIB asbestos insulation board
ALMO arm’s-length management organisation
AONB Area of Outstanding Natural Beauty
AR average revenue
ARPT annual residential property tax
ARY all-risks yield
ASB anti-social behaviour
ASBO Anti-Social Behaviour Order
ASR alkali–silica reaction
B&ES Building and Engineering Services Association
BCIS Building Cost Information Service
BCO British Council of Offices
BGS British Geological Survey
BIM building information modelling
BIS Department for Business, Innovation and Skills
BOOT build-own-operate-transfer
BoQ Bill of Quantities
BOT build-operate-transfer
BPF British Property Federation
BPR Business Protection Regulations
BRE Building Research Establishment
BREEAM Building Research Establishment Environmental Assessment Method
BRI building-related illness
BSRIA Building Services Research and Information Association
CABE Commission for Architecture and the Built Environment
CAD computer-aided design
CAPM capital asset pricing model
CASBEE Comprehensive Assessment System for Building Environmental Efficiency
xxii Abbreviations
CBA cost–benefit analysis
CBD central business district
CBL choice-based lettings
CCA Climate Change Agreement
CCS Considerate Constructors Scheme
CDM Construction Design and Management Regulations
CDO collateralised debt obligation
CGT capital gains tax
CHP combined heat and power
CIBSE Chartered Institution of Building Services Engineers
CIC community interest company
CIL Community Infrastructure Levy
CIOB Chartered Institute of Building
CIRIA Construction Industry Research and Information Association
CIS Cooperative Insurance Services
CLG company limited by guarantee
CLT community land trust
CM construction manager
CMBS commercial mortgage-backed security
CoP coefficient of performance
CP contractor’s proposal
CPD continuing professional development
CPO compulsory purchase order
CPR Consumer Protection Regulations
CPRE Campaign for the Protection of Rural England
CPSE Commercial Property Standard Enquiries
CRAR Commercial Rent Arrears Recovery
CRC Carbon Reduction Scheme
CSR corporate social responsibility
CVA company voluntary arrangement
CVR cost value reconciliation
CWP combined heat and power
DAB dispute adjudication board
D&B design and build
DCF discounted cash flow
DCLG Department for Communities and Local Government
DCMS Department for Culture, Media and Sport
DEC Display of Energy Certificates
DECC Department of Energy and Climate Change
Defra Department for Environment, Food and Rural Affairs
DES Department for Education and Skills
DETR Department for Environment Transport and Regions
DFMA Design for Manufacture and Assembly
Dft Department for Transport
DPC damp-proof course
DPD development plan document
DPM damp-proof membrane
DRB dispute review board
DRC depreciated replacement cost
 Abbreviations xxiii
DSS Department of Social Security
DTI Department of Trade and Industry
DV development value
EA Environment Agency
ECO Energy Company Obligation
EIA environmental impact assessment
EiP examination in public
EH English Heritage
EMS environmental management system
EPBD Energy Performance of Buildings Directive
EPC Energy Performance Certificate
ER employer’s requirement
ERM enterprise risk management
E(Rm) expected return on the market portfolio
E(Rp) expected risk premium
ESCO energy supply company
EST Energy Saving Trust
EUETS EU Emissions Trading System
EUQ element unit quantity
EUR element unit rate
EUV existing use value
EV electric vehicle
EW expert witness
EZ enterprise zone
FGR freehold ground rent
FiT Feed-in Tariff
FM facilities management
FMOP fair maintainable operating profit
FRI full repairing and insuring
FRS Financial Reporting Standard
FSA Financial Services Authority
GDP gross domestic product
GGBS ground granulated blast furnace slag
GIA gross internal area
GNP gross national product
GPDO General Permitted Development Order
GPF Growing Places Fund
GSHP ground source heat pump
HAC high alumina cement
HAWT horizontal-axis wind turbine
HCA Homes and Communities Agency
HER Historic Environment Records
HMRC Her Majesty’s Revenue & Customs
HPA Health Protection Agency
HPR Heritage Protection Reform
HSE Health and Safety Executive
HV hope value
HVAC heating, ventilation and air conditioning
IAQ indoor air quality
xxiv Abbreviations
IFC Industry Foundation Class
IHD in-home display
IPD Investment Property Databank
IPO Interim Possession Order
IPS Industrial Provident Society
IRI internal repairing and insuring
IRR internal rate of return
IUCN International Union for Conservation of Nature
IVA individual voluntary arrangement
JCT Joint ContractsTribunal
JESSICA Joint European Support for Sustainable Investment in City Areas
JLL Jones Lang LaSalle
JVC joint venture company
KPI key performance indicator
LABV local asset-backed vehicles
LCA life cycle assessment
LCC life cycle costing
LCI life cycle inventory
LDF Local Development Framework
LEP local enterprise partnership
LIBOR London Inter-Bank Offered Rate
LPA local planning authority
LTV loan to value
LVT land value tax
MBS mortgage-backed security
MC marginal cost
MCS multiple chemical sensitivity
MES minimum efficient scale
MIRAS mortgage interest relief at source
MLR Money Laundering Regulations 2007
MLRO money laundering reporting officer
MMC modern methods of construction
MMO Marine Management Organisation
MPA mineral planning authority
MPC marginal private cost
MPP marginal physical product
MPS Mineral Policy Statement
MPT modern portfolio theory
MR market rent
MRP marginal revenue product
MSA Mineral Safeguarding Area
MSB marginal social benefit
MSC marginal social cost
MSW manufactured solid waste
MV market value
NAEA National Association of Estate Agents
NAR net annual return
NAV net annual value
NCIS National Criminal Intelligence Service
 Abbreviations xxv
NDC New Deal for Communities
NEC New Engineering Contract
NEPA National Environmental Policy Act
NIA net internal area
NLUD National Land Use Database
NPPF National Planning Policy Framework
NPV net present value
NRM New Rules of Measurement
NSIP nationally significant infrastructure projects
OFT Office of Fair Trading
OLEV Office of Low Emission Vehicles
OMV open market valuation
OPC Ordinary Portland Cement
OPEC Organization of Petroleum Exporting Countries
OSM off-site manufacture
PBP period by period
PDL previously developed land
PDR permitted development rights
PFI private finance initiative
PHEV plug-in hybrid electric vehicle
PINS Planning Inspectorate
PIP Partership Investment Programme
PMA Property Misdescriptions Act 1991
POCA Proceeds of Crime Act 2002
PPC production possibilities curve
PPE personal protective equipment
PPG Planning Policy Guidance
PPP public–private partnership
PPS Planning Policy Statements
PSBR public sector borrowing requirement
PUT property unit trust
PV present value
QUANGO quasi-autonomous non-governmental organisation
QS quantity surveyor
R&D research and development
RAR risk-adjusted return
RDA regional development agency
REIT real estate investment trust
RFR risk-free rate of return
RHI Renewable Heat Incentive
RIBA Royal Institute of British Architects
RICS Royal Institution of Chartered Surveyors
RO Renewable Obligation
ROC Renewable Obligation Certificate
RPI Retail Price Index
RSL registered social landlord
RSS Regional Spatial Strategies
RV rateable value
SA sustainability appraisal
xxvi Abbreviations
SAR suspicious active report
SBS sick building syndrome
SCG Statement of Common Ground
SCI Statement of Community Involvement
SDLT Stamp Duty Land Tax
SDRT Stamp Duty Reserve Tax
SEA strategic environmental assessment
SME small and medium enterprise
SMM standard method of measurement
SMR Sites and Monuments Record
SOCA Serious Organised Crime Agency
SPD Supplementary Planning Document
SRB single regeneration budget
SSAP Statement of Standard Accountancy Practice
SUDS sustainable urban drainage system
SVR standard variable rate
TAGC transfer as a going concern
TCC Technology and Construction Court
TDC total development cost
TDS Tenancy Deposit Scheme
TIF tax incremental financing
TLATA Trusts of Land and Appointment of Trustees Act 1996
TPI tender price index
TPO Tree Preservation Order
TVG town and village green
UBR uniform business rate
UDC Urban Development Corporation
UK GAAP UK General Accepted Accounting Principles
UKAS United Kingdom Accreditation Service
UKHCA UK Homecare Association
UKVS UK Valuation Statement
ULEV ultra-low emission vehicles
URC Urban Regeneration Company
UTF Urban Task Force
UWP Urban White Paper
VAT Value Added Tax
VAWT vertical-axis wind turbine
VM value management
VOA Valuation Office Agency
VR virtual reality
VRS Valuer’s Registration Scheme
YP year’s purchase
1 Agency
Andy Dunhill, Jane Stonehouse and Rachel Williams

1.1 The inspection

Key terms: inspection; valuing; marketing; measure; confidentiality
It is crucial that agents inspect a property before valuing it or advising on marketing and they must
understand what they have looked at. Make sure you take everything with you to carry out the inspec-
tion (e.g. a measuring device, camera, location plan, floor plans if available, appropriate clothes, and
keys). When inspecting property always take care (see Concept 1.22).
The following is a suggested general checklist for inspecting property for marketing purposes:

● Address – be exact
● Date and time of inspection for future reference
● Weather
● Location
● Surrounding area
● Access by vehicles/pedestrians/public transport etc.
● Check architects floor plans if available
● Draw sketch plan if you do not have one
● Measure to RICS Code of Measuring Practice or appropriate local standard
● Exterior of the building – form of construction etc.
● Interior of the building – entrance, common areas, specification etc.
● Repair – general state
● Contamination – be aware of this and know when to involve an expert
● Services – what is available (gas, electricity etc.)
● User – what is it or could it be used for
● Town and Country Planning – what use is permitted or what could be obtained

All of this information will help you to advise your client on the best marketing strategy, enable you
to prepare accurate letting or sales details and all other marketing information. If you make an error in
your inspection this will flow through the whole marketing process and result in an error in the final
transaction. Most organisations have a standard format for taking inspections notes depending on the
type of property. The main thing is to adopt a logical and consistent approach to property inspections.
You will need to consider different factors depending on the type of building being inspected.
The main categories are office, retail, industrial and residential; however, you may have cause to be
involved with others, such as leisure (pubs, bars, restaurants), medical (hospitals, doctors surgeries), etc.
Before the visit make sure you know where you are going – which sounds simple and obvious but
many surveyors have set off ill prepared. Establish whether the property is vacant or occupied. If it is
vacant take the usual safety precautions and lock up afterwards. If it is occupied be clear as to why a
2 Andy Dunhill, Jane Stonehouse and Rachel Williams
report on marketing is required. There is nothing worse than going to a property, introducing yourself
and explaining the reason for the visit only to find that the people on the ground know nothing about
the plans of the owners of the business. It is OK if a relocation is planned but if that part of the business
is to close the reception may be hostile. Confidentiality is crucial.
If acting for a receiver/liquidator, special care must be taken, especially where the business has not
publicly gone into administration, or whatever is proposed, at the time of inspection. An agent may
have to pretend to be there for a different purpose such as fire insurance valuation. There is little more
sobering than to carry out an inspection of a property with a full workforce when you know they will
most likely be redundant in the very near future, but they do not know.
Research the local market before the visit to see what deals have been done recently and what is
currently on the market. An agent should have a reasonable idea of the market for that kind of prop-
erty in that location because the occupying client will have – or at least in some cases think they have.
Be certain of exactly what is to be included in the marketing report (boundaries, parking etc.) and
the tenure of the property. Drive around the area to get an up-to-date feel for it.
Even if architects’ floor plans have been provided check them carefully. Buildings are often altered
during their life. Plans are often for the original design, which may have changed during construction
but ‘as built plans’ were never done or not made available.
It is not always possible to inspect all parts or aspects of a building. Some internal areas may be
locked or otherwise inaccessible; make a note of this and refer to it in the report. If a building has had
the water drained down for winter to avoid burst pipes that is sensible, but means it is not possible to
check whether the supply is working. A property inspection for marketing purposes is not a structural
building survey; however, it is crucial that an agent understands when to recommend that a detailed
survey is needed.
An agent needs to take note of what repairs or other action should be done in order to best prepare the
building for marketing. Sometimes simple and inexpensive redecoration can make a significant improve-
ment and on the basis that first impressions count; a small level of investment can make a big difference.
Be very much aware of potential for alternative use to increase value; however, consider whether
planning consent, if required, can realistically be obtained. Sometimes the interest of the owner is best
served by splitting the property into two or more separate packages to be sold or let separately, and this
should be spotted during the inspection.

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.3.
www.isurv.com (accessed 02/12/2013).
www.rics.org/uk (accessed 02/12/2013).

1.2 Reporting to the client

Key terms: report; client; market; valuation; marketing plan; Energy Performance Certificate
The following is a suggested format of the main areas to be covered when reporting to a client. Most
firms will have their own standard format to follow.

Introduction
Set out clearly what you understand your instructions are and the client’s objectives in the marketing of the
property concerned. This is to avoid future confusion or dispute. There will be occasions where your client
needs to sell or let quickly. A common example is where a company goes bankrupt and you are instructed
by the administrators/receivers to dispose of the surplus property assets/liabilities of the company.
 Agency 3
Description
Describe the building and detail the areas. The amount of detail required will depend to some extent
on the nature of the client you are reporting to. Some will want full details, others less so. You may
be reporting to a client that either has never seen the property or has not done so for some time and
is located a long way from the property.
If what you are looking at is part of a multi-occupied building you should make it clear what is and
is not included in your client’s interest, and hence your report. You should identify, for example, loca-
tion, the form of construction, specification, areas in need of repair etc. This should be supplemented
by a suitable location plan and photos where appropriate.

Strengths and weaknesses

Identify the strengths of the building that you will be able to focus on in your marketing. You should
also identify the weaknesses but try to suggest appropriate solutions. For example, a lack of car parking
in a city centre office building can be helped by acquiring some long term contract spaces in a nearby
public car park, but you need to do some research. A client does not simply want to be told that they
have a poor building. You need to be proactive, focus on the strengths and provide constructive solu-
tions for the weaknesses. You will certainly need this when responding to enquiries about the property
during marketing.

Recommendations
Following your appraisal of the building you may consider it appropriate to make some recommen-
dations before marketing commences. This may include undertaking repairs to make it ready for
occupation. Some simple but effective cleaning and decoration can have a significant effect especially
with residential and office property. The first impressions of tenants/buyers can be crucial.
In some cases it may be worth considering obtaining planning consent for a different use or the carrying
out of alterations in order to maximise value. If you are dealing with secondary property you may wish to
consider recommending that your client uses one of the standard short form leases. The Law Society has
one, as does the Royal Institution of Chartered Surveyors (RICS). Check their respective websites for the
latest version. These should keep costs down for all concerned.

The market generally

You should be able to give a good indication of the strength, or otherwise, of the market for that
type of property in that location at that point in time and where you see it heading during the mar-
keting period. This will influence the potential time needed to secure a transaction, the strategy to
be adopted, the likely terms of any deal etc. If the market is improving time is on your side and you
should be able to generate a high level of interest and negotiate a good deal for your client. If, how-
ever, the market is in decline you need to be realistic and ensure that your client appreciates this. If
you ask too high a price/rent you may miss the market and end up following it down, but never quite
reaching a low enough level to do a deal.

Valuation – rent or capital

You must give a very clear recommendation of an appropriate asking price/rent/premium in the case
of a leasehold interest allowing for a negotiating margin. In most cases buyers/tenants like to feel they
got a reduction or negotiated you down. There are times when quoting an asking price/rent at a
relatively low level (but not in a misleading way) can be a very effective tactic. The aim is to generate
4 Andy Dunhill, Jane Stonehouse and Rachel Williams
a high level of interest and then seek best offers. This is likely to work with a property where you
anticipate a high level of interest, and sometimes where the market is uncertain and it is difficult to
value. It can also work in a slow market where the low starting price suggests a good deal can be had.
This tactic can generate the interest, which is key. Any valuation recommendations must be realistic
and not inflated as a tactic to secure an instruction.

Marketing plan
It is good practice to provide full details and costs of your marketing plan at the reporting stage. If,
however, you are not certain to receive the instruction then it may be more appropriate to be brief
and provide full details later. It is not always sensible to give away all your ideas until you have got the
job. This will include your strategy, advertising proposals, draft marketing particulars etc. All of this
must be agreed with your client before marketing commences.

Energy Performance Certificate

You must explain the legal requirement to obtain one of these before an agent is permitted to market
a property. It is the responsibility of the landlord/client to obtain the Energy Performance Certificate
(EPC), but most agents will have contacts with suitable assessors to do the work.

Fees
You should set these out clearly. Fees may be:

● a fixed sum;
● a percentage of the rent/ price;
● a minimum fee;
● incentive-based to encourage the agent to secure a higher rent/price, i.e. the percentage may
increase above a certain level.

Other costs
Depending on the marketing plan there are normally other costs that an agent will wish to incur and
which they will intend to charge to the client on top of their fee for negotiating the transaction. Such
costs may be advertising in magazines, boards etc. If any such costs are to be incurred by the agent and
then recharged to the client, it is a legal requirement in the UK for the agent to obtain approval first,
and it is good practice to set out these costs fully in advance and obtain client approval for costs, dates
and all detail proposed.

Reservations
It is advisable to make it clear to your client what you have not done. For example you are unlikely to
have carried out a full building or structural survey. You may well not have tested any of the services
or used the lift if the power was off.

Conclusion
It is good practice to end the report advising your client that no further action will be taken until you
receive their written instructions to proceed, and again this is a legal requirement in the UK.
 Agency 5
Terms of agency
In the UK there are different bases of agency agreement (joint, sole etc.) and these must be set out
clearly to the client. Many firms will detail this in a separate letter from the marketing report relating
to the property concerned (see Concept 1.4).

Other
It is helpful to include an Ordnance Survey-based location plan and photographs where appropriate.

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, sections 2.3, 2.4 and 3.2–3.4.
www.isurv.com (accessed 02/12/2013).
www.rics.org/uk (accessed 02/12/2013).

1.3 Terms of engagement

Key terms: instructions; fees; calculation; disbursements; Consumer Protection Regulations; Business
Protection Regulations
The basis of the instruction should be clearly set out with your client before any action is taken. This
is beneficial to both parties. If it is agreed in writing there is little room for dispute. The issues to be
agreed are clear confirmation of your instruction, i.e. what you should and perhaps should not do,
together with fees. It is normal for this information to be provided in or supplementary to the initial
marketing report to the client.
An agent has a statutory responsibility to set out and agree the terms of agency in writing with a client
before proceeding with any work. This was introduced by the Estate Agents Act 1979 and supplemented
by subsequent Estate Agents Regulations in 1991 (Provision of Information; Undesirable Practices and
Specified Offences). In 2008 the Consumer and Business Protection Regulations were introduced (CPR/
BPR). These are general regulations and were only effectively applied to the property sector in 2012 with
publication of the Office of Fair Trading (OFT) guidance on property sales, OFT 1364 September 2012.
It is suggested you should agree:

1 The amount of the fee or a method by which it is to be calculated. This should be set out clearly.
Fees may be:
● A fixed sum.
● A percentage of the rent. In the UK it is normally based on a full year’s rent or the average
over a period of years if, for example, a rising rent is agreed. In the USA it is common to relate
the fee to the length of lease agreed.
● A percentage of the price.
● A minimum fee to cover the costs of dealing with lower value properties where it may
not otherwise be cost effective to accept the instruction. In the UK this is a variable figure
depending on location and the size of firm. Few firms will take an instruction at less than
£1,000 and in many cases this will be substantially higher.
● Incentive based to encourage the agent to secure a higher rent/price, i.e. the percentage may
increase above a certain level.
● Subject to the market. There used to be fixed percentage fees in the UK in the 1970s, but this
is now illegal.
6 Andy Dunhill, Jane Stonehouse and Rachel Williams
2 When the fee is to be paid, which would normally be at the point where an unconditional legal
contract is signed. It may also be at completion.
3 Any additional costs over and above the fee and which are to be charged to the client for disburse-
ments. This would include marketing costs, e.g. advertising, travel costs, brochures etc. In some
instances it may be appropriate to agree a total maximum sum to be incurred but this leaves it
open to dispute when the fee is submitted. It is advisable to be specific about these costs in advance
of the money being spent. It is good practice to suggest a total budget but then seek approval for
a detailed schedule of costs to avoid doubt. This would include dates of proposed advertisements,
sizes, publications etc.
Where the marketing campaign will take some time it is prudent to provide for such market-
ing costs to be invoiced to the client on a regular basis, perhaps monthly. Where high costs are to
be incurred (e.g. an expensive brochure) it is normal to arrange that the client procure this direct
with the company that is to produce it. This avoids any financial liability falling on the agent.
4 Provision for further agreement in writing to be sought should any of these fees change or espe-
cially increase. An example would be an additional advertising campaign if the initial one did not
secure a disposal. In any such agreement it is important that your client knows at the outset exactly
what costs they are to pay and when. The client’s approval should be obtained in writing for all
fees and costs before any action is taken or costs are incurred.
Any errors in this information might be construed as failing to give material information to a client,
thus potentially rendering the contract void. See section 4.9 of the OFT guidance.
A key component of the OFT guidance is that the terms of the agency agreement must be fair and
reasonable because the client will make the decision as to who to instruct based on these terms. This
is considered to be a transactional decision – see section 3.4 of OFT guidance.
A client falls into the category of a ‘consumer’ in these regulations as they are potentially consuming
your agency services. An agent must not engage in any unfair commercial practices in this relationship.
This is before or after a client instructs an agent. So if the client seeks the advice of two potential agents
and decides to instruct one but considers that the activities of the other were unfair, an action could
still be taken. See section 3.2 of OFT guidance.

Further reading
Murdoch, J. (2009) Law of Estate Agency, 5th edn, Estates Gazette, London, chs. 1, 3 and 7.
OFT, ‘Guidance on property sales’, September 2012 (OFT1364).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 2.3, 2.4 and 5.2.
www.isurv.com (accessed 02/12/2013).
www.rics.org/uk (accessed 02/12/2013).

1.4 Types of agency – the basis of instruction for disposal

Key terms: sole agency; joint agency; multiple agency; introductory fee
The Estate Agents Act 1979 places a statutory requirement upon an agent to set out and agree their
terms of agency with all clients in writing before doing any work on an agency instruction. One aspect
of this is that there is a specific form of wording (see below) that should be used. Any changes to this
wording must be fully justified.
The wording in the Act relates to the sale of property which is fine for the residential estate agency
sector. The commercial property sector is different as other legal interests in property form the majority
of agency instructions. The commercial agent will need to amend this wording to allow for a letting,
subletting, assignment of an occupational lease, assignment/sale of a long ground lease or surrender. The
 Agency 7
client may therefore be a vendor, lessor, lessee, assignor etc. The party to whom you have disposed of
the property may therefore be a purchaser; tenant; assignee; landlord (in the case of a surrender).
The key types that you must be familiar with are set out below and taken from the RICS UK
Commercial Real Estate Agency Standards November 2011. The wording refers to a sale so if the
instruction relates to a leasehold transaction the wording would need to be amended appropriately.

Sole selling rights – standard wording

You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, in
each of the following circumstances:
if [unconditional contracts for the sale of the property are exchanged or, in Scotland, substitute with
unconditional missives for the sale of the property are concluded] in the period during which we have
sole selling rights, even if the purchaser was not found by us but by another agent or by any other
person, including yourself; and
if [unconditional contracts for the sale of the property are exchanged or, in Scotland, substitute with
unconditional missives for the sale of the property are concluded] after the expiry of the period during
which we have sole selling rights but to a purchaser who was introduced to you during that period
or with whom we had negotiations about the property during that period.

This right may apply whether the basis of instruction is on a sole or joint agency basis. It may appear to
be very much in the estate agent’s favour; however, it serves as a protection to them. When an agent puts
a property openly on the market the advertisements will ask interested parties to contact them for further
information and viewings etc. A potential buyer could in some circumstances see this and approach the
vendor/client direct to agree a transaction, thereby cutting out the agent. This would be inequitable where
such a buyer only became aware of the availability of the property as a result of the marketing actions of the
agent. However, a client may not want to pay a fee where they identify the buyer/tenant themselves. It is
usual for this right to have a time limit of, say, six months, but that is a matter for the two parties to agree.

Sole agency – standard wording

You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, if
at any time [unconditional contracts for the sale of the property are exchanged or, in Scotland, substitute
with unconditional missives for the sale of the property are concluded]:
with a purchaser introduced by us during the period of our sole agency, or with whom we had
negotiations about the property during that period; or with a purchaser introduced by another
agent during that period.

This is the normal basis of instruction in the UK where a vendor enters into a contractual agency rela-
tionship with the client. The two parties will work together to effect a suitable transaction. It allows a
good working relationship to develop between client and agent.

Joint agency or joint sole agency – standard wording

This is in effect the same as sole agency except that there may be two or more agents involved, all hav-
ing specific instructions to market the property. This is usually the case on a larger instruction where
there may be both a local and a national/international demand for the property or part of it where
there are a lot of options, for example the building of a new shopping centre. The locally based agent
would target the local market, undertaking viewings etc. The inclusion of a national agent may help
to attract the national or sometimes international occupiers.
8 Andy Dunhill, Jane Stonehouse and Rachel Williams
The basis of fees and split of fees on completion of a satisfactory letting will be a matter for the par-
ties involved to agree at the outset. It is often an equal split, but the introducing agent may sometimes
receive a larger proportion of the fee.

Multiple agency
If there is no reference to the basis of agency the presumption is that the instruction is on a multiple
agency basis. This means that the agent who does the successful introduction receives the fee and no
others do. It is not uncommon for some property owners to ask all local agents to market their prop-
erty on this basis. This generally does not work to anyone’s advantage. As an agent it is hard to take
such an ‘instruction’ seriously because you can put in a lot of work for no reward. It is a clear lack of
commitment on the part of the client who does not get the job done properly. Such instructions are
generally best declined.
Another form of this is an introductory fee where a property owner offers to pay a fee to an agent
for the mere introduction of a buyer or tenant. In this case the agent would not normally actively
market such property but when talking to companies looking for space might match it to such avail-
able property and make an introduction. This may only be an attractive option where you do not have
a suitable property on your books to meet the requirement. It is best to register this introduction in
writing as soon as is practical and obtain written confirmation.

Further reading
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) ‘UK Commercial Real Estate Agency Standards’, RICS, Coventry, section 2.4.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.

1.5 The marketing plan

Key terms: marketing; advertising; board; reception; mail shot
There are many ways of marketing property, depending on the nature of each; the following is
intended as a starting point. The crucial issue is to apply any plan effectively to the property. The most
important factor is to decide where the market is for the specific property – local, regional, national
or international. Plans may include:

Marketing brochure – see Concept 1.6

Board
Size – In the UK an agent may erect a temporary board without planning consent providing it is within
a certain maximum size range. Larger boards are costly and need planning consent. Most Local Planning
Authorities are agreeable to putting a board up at the same time as the application for consent, but ask first.
Position – Give the contractor clear instructions about where the board is to be erected so that it is
most effective. Sometimes it may be best to have a flat board if the building is at a major road T junc-
tion. On a normal two-way road a V angle board would be best. This relatively simple method is still
one of the most cost effective for a majority of buildings.
Send the contractor a plan and very specific instructions or meet them on site to discuss options.
Ensure they take appropriate care not to damage the client’s building especially if it is listed. Make sure
it is put on the correct building. It is guaranteed that at some point a board will be put on the wrong
building resulting in an angry call from the owner.
 Agency 9
It must say the correct words, i.e. to let/for sale etc. Boards are normally hired rather than bought
and there is an annual charge. Contractors will have the firm’s standard style in permitted sizes. A floor
mounted board can be put in the ground floor entrance of an office. Most agents have standard to
let/for sale etc. posters. These can be put in the windows to supplement a board or where one is not
possible.
Clients can be secretive and not want a board. They expect an agent to sell/let the property without
publicising it in this way. This does make the job a lot more difficult.
When a deal is done amend the board to say under offer/sold subject to contract etc., then sold/let
by, then remove but do so only when definite, as it does not pay to presume a deal will complete. In
fact the opposite is the case; the chances are that if a deal is publicised as done before it is then it will
fall apart.

Banner
If the building is in a prominent position, e.g. an industrial unit visible from a major road, consider
a banner attached to the outside of the building. These are normally canvas, but beware if it is in an
exposed windy position. Planning consent must be secured. The increased size makes them more eas-
ily visible from a distance.

Advertising
This is costly, however, some is usually justified. With higher-value properties, e.g. a new develop-
ment, a substantial programme may be needed. But advertising is not a substitute for good agency.
Is any really necessary? Do not let costs get out of hand. Agree detailed schedule with the client, but
always remember that they have not given the instruction simply for the agent to spend lots of their
money on newspaper advertisements. It is the agent’s skill that is required.
Most agents arrange this through an advertising agency who will book the space, design the adver-
tisement and ensure that the correct copy is sent to the publications chosen.

National publications
The main national publications are Estates Gazettes and Property Week but others may be relevant
depending on the property, e.g. Retail Weekly for retail property.
It is generally very expensive. The agent should decide whether to use colour or simply black and
white. It may be effective to take a whole page and include 2–4 properties, thus spreading the cost.
Repeating the same advertisement over a few pages can create recognition but will be expensive. The
national property press have a programme of focuses – regional/property type throughout the year.
This is often the most effective way of using the national property press.

Local publications
Determine the appropriate regional paper and which day(s) it has a property section. The same com-
ments as national adverts apply. Many regional agents opt to take out an annual contract for a block
advertisement in a specific location in the paper each week/month.
It is a good idea to check print quality for errors etc. to avoid paying for something that does
not appear or if the quality of printing is poor. It is crucial to keep to the schedule agreed with the
client. Link ads with other marketing, i.e. make sure marketing brochures are ready. Recover costs
regularly from the client. For a large programme in one newspaper ask them to bill the client direct.
10 Andy Dunhill, Jane Stonehouse and Rachel Williams
Check where and when enquirers saw an advertisement, if that is why they have made contact. The
sector does not actively monitor the effectiveness of marketing actions. Keep a copy of all ads placed
with cost and apportionment between properties.
Below are some simple suggestions on writing advertisements:

• Does it need a reference on it, i.e. someone’s initials?

• Not too much detail – be clear and concise
• State the type of building, location and size
• Does it justify a photo – probably!
• Is there a specific selling point
• Price/rent
• Clients invariably check – send them copies

The aim is that the advertisement should make those reading it decide to ring for further information
or look for it on the firm’s website.

Marketing suite
This involves the fitting out of an area within a new development/refurbishment. It is usual to do one
part of a floor, probably the best and maybe a corner area with good views. It should be carpeted and
furnished with a desk and chairs, and separated from the main area by floor standing dividers rather
than partitioning that needs to be built.
This area can serve as a good one to sit down with those who view the building. In some instances
a computer with floor plans of the scheme or web access may be beneficial. This can be expensive but
sometimes it may be possible to persuade an office furniture company to provide the furniture at low
cost in the hope that whoever takes the building would instruct them to fit out the whole building.
The analogy in the residential sector is a show house.

Reception
This can be very cost effective in a new or refurbished building. It is complimented by a marketing
suite and gets the building known in the local, or perhaps a wider market. They are normally held at
the building or perhaps at a local hotel if, say, a topping out ceremony.
The cost – price per head is not usually exceptionally high and can be very good value for money.
The client should be billed direct.
An invitation list would include:

● other agents;
● appropriate businessmen e.g. local solicitors for their clients;
● media for press release;
● potential occupiers.

The following suggestions may be useful:

1 Circulate around everyone – network.

2 Have all information about the building available, e.g. plans, brochures etc.
3 Ensure good mix of food, wine, soft drinks. Note special diets. Have plenty of soft drinks if those
coming must drive. Get quotes from local caterer.
4 Cost is not great but only worthwhile if there is something to show.
 Agency 11
5 Do not mix other agents with possible occupiers!
6 Hold an automatic raffle for those who attend or give a present to them. In bigger developments
inducements can be offered to encourage people to attend.

Mailing list/mail shot

All firms keep in-house lists onto which all enquiries received should be added in a logical way, per-
haps by size/type/geographic location etc. These requirements lists should be updated regularly by
phone, letter or (increasingly) email. Many large firms link from a regional office to a company-wide
database. The mixing and matching of new instructions to a current requirements list can be a very
effective marketing action.
In addition to current requirements most firms will either keep in-house contact lists for potential target
groups that include all companies that could/should be interested or buy in a suitable mailing list for each
property as necessary. Addresses can be taken from Yellow Pages or trade magazines, normally web based. It
is best to ring up to get the property person’s name. Send details, then follow up – a time-consuming but
vital job. Some firms use a mailing house that specialises in producing such up-to-date contact lists. This
may be cheaper and easier. In either case the client should pay. Other target groups include:

● public sector;
● local authority lists of vacant space – make sure all properties are on their lists;
● business links organisations for smaller companies;
● any organisation that promotes the region that may have details of available property or is involved
in discussing inward investment opportunities with such companies;
● suppliers to major employers setting up or expanding in the area (target their suppliers – this is
especially useful in the industrial market);
● surrounding occupiers in the same building/surrounding area/estate/next door;
● recent buyers of similar buildings e.g. for refurbishment/investment;
● agents (those in the same locality and a wider area if appropriate).

The cost of a substantial mailshot would normally be re-charged to the client providing it is included
in agreed marketing costs.

Occupier presentations
Following on from the targeted marketing aspect of the mailshot, a follow-up opportunity of meeting
a specific potential occupier and giving them a presentation on the scheme may arise. This might ini-
tially be to the property people within the company and then perhaps to those who make the decision,
possibly the director responsible for the property.
This will normally only be for larger requirements competing with other developments in the region
or often with other regions of the country if it is a footloose enquiry or occasionally developments in other
countries. It is crucial to determine exactly what the position is and tailor the presentation accordingly.

Press release
This is free advertising, but it needs to identify an angle, such as client expanding and moving to bigger
building, therefore vacating space. Is the client’s move/action increasing jobs? Refurbishment of der-
elict old building, perhaps one that is well known or listed with some history to it. It’s best to include
a photo. Give some background information on both the client and the building. Use paid advertising
as a lever to get editorial space.
12 Andy Dunhill, Jane Stonehouse and Rachel Williams
Internet
See Concept 1.7. All property must be on the firm’s website.

Specification guides
In a major new scheme an agent may provide a detailed specification guide for serious potential
occupiers to aid their fit-out works and to make the decision in the first instance that this is the best
property for them. These will be prepared by the other relevant advisers to the scheme, for example,
a building services engineering consultant will produce a specification for all of the services. This may
be pivotal for an occupier in deciding whether to take space in the scheme. These guides will be sup-
plemental to the marketing brochures. (See Building information modelling, Concept 3.10.)

Newsletter
When dealing with a major new development especially, where there is a need to market the location
as well as the property and where the development of the scheme has a long life span, some developers
and their agents will publish a newsletter on a regular basis to update both those taking space in the
scheme, potential targeted occupiers and the region or city as a whole, simply to get the message out
that this is a development of importance.

TV/radio
Generally expensive but some schemes may be suitable. It would normally be at a local level and prob-
ably be used for ‘brand awareness’.

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.6.
www.isurv.com (accessed 02/12/2013).
www.rics.org/uk (accessed 02/12/2013).

1.6 The marketing brochure

Key terms: marketing brochure; letting/sales particulars; desktop; glossy brochure
A marketing brochure is a fundamental part of the marketing of property. This Concept provides an
outline of suggested headings of what to include. The ideas must be adapted to the type of property
and the legal interest that is offered – freehold, new lease, sublease, assignment or ground leasehold
interest. All are different.
The lettings or sales brochure is a crucial part of any property marketing campaign. These may be
done in two main formats depending on the value of the property and the level of quality required by
the client:

1 Desktop publishing – these are prepared in house but the production is outsourced, normally,
using a pre-agreed template. There is therefore no individual design work needed but the final
production is a ‘glossy brochure’. Almost all low/medium-value properties have this standard of
brochure. Most organisations will use this as a minimum.
2 Printed brochure – although much of the content will be prepared by the agent, the bulk of the
work is outsourced and done by a design company. Each will be individual and can range from a
relatively simple A4 card to a multi-page booklet at significant cost.
 Agency 13
The following suggestions may be useful:

● simple A4/A3/booklet style with insertions for different parts, e.g. small/large buildings/blocks;
● agent prepares draft wording/photos;
● design agency does draft/amendments/redraft until finalised;
● content must be correct – if using written material or photos from someone else make sure con-
sent and copyright has been obtained;
● client’s approval – print;
● change is difficult without re-run and high cost;
● tend to contain less detail – often do not have prices/rents to allow a longer shelf life;
● insertions should be removed as let/sold;
● electronic files can be amended easily to show changes and sent by email.

Brochures can take a long time to do but they must be correct.

The decision on what to produce will be down to the agent’s recommendation and how much
the client is prepared to pay. There is a clear move towards digital production and mailing rather than
printing paper copies. It is far more efficient to email a pdf of a brochure than post paper copies. There
are instances where it may be appropriate to link the identity of the client to your marketing, for
example, stating ‘On the instructions of….’ at the top of the brochure. This is common in disposals by
the public sector.
The essential format and contents of marketing particulars is fairly standard but there are variations
depending upon the tenure of property that is being marketed. Content will also vary depending upon
the nature of each building and the view taken by those doing the marketing. The following is a sug-
gested format for commercial property:

Heading – address, type of property, to let, for sale etc. Be clear, so a prospective occupier can see
exactly what you are offering; a colour photograph is crucial.
Situation and description – cover the main factors.
Accommodation – size NIA/GIA/retail frontage etc. Include a detailed breakdown of the various areas
if practical and always use the RICS Code of Measuring Practice.
Services – state what services are supplied to the property – gas, electricity etc. and the type of heating
system.
Planning – what consent exists and whether there is any potential for a change of use, but then qualify
the statement to make it clear that it is subject to obtaining consent.
Car parking – if there are spaces state how many, where they are and the cost; comment on public
parking nearby.
Lease terms – what lease terms are on offer including length of lease, repairing liability, rent reviews etc.
Sublease – make it clear what is available within the existing lease.
Assignment of existing lease – state the terms of the lease.
Freehold – be certain it is.
Service charge – if in a multi-occupied building one is payable – what costs are included; is it full recov-
ery or to be capped? The ideal is to state a figure per sq. m/ft but it must be correct based on
payments in previous years. Usually this information would be provided in subsequent discussions.
Conditions – any that might apply, e.g. liability to fence a boundary where part of a freehold is to be
sold.
14 Andy Dunhill, Jane Stonehouse and Rachel Williams
Rating – A key cost. Include where known:
RV = rateable value
UBR = uniform business rate
Detail on costs is best left to subsequent discussions.
Floor plans – if available say so. An indicative floor plan can often be incorporated into the marketing
details and is very helpful. The availability of computer-aided design (CAD) plans to aid internal
office design and layout can help marketing, especially in a new office development. An indicative
plan showing the general shape can be helpful.
Rent – asking rent (normally per annum).
Assignment – state existing rent and premium if relevant.
Ground lease – state ground rent if any plus premium sum for the legal interest.
Price – if freehold.
Costs – if the lessor/vendor expects the lessee/buyer to pay its legal and/or surveyors’ costs make it clear.
EPC – the rating must be included.
VAT – it is advisable to state that the lessee or buyer is responsible for VAT if payable.
Viewing – what the arrangements are (normally by contacting the agents office).
Plan – a marketing brochure must have a location plan showing where the property is and the extent
of what is available where relevant. Usually an Ordnance Survey plan is used at an appropriate
scale e.g. 1/1250 site plan, 1/10,000 or greater as a location plan. Where it is a retail property the
norm is a GOAD plan.
A good clear plan is very important. Interested parties must be able to find the property from the
details. Make it easy for them. Clearly mark the property on the plan and include a scale and north
sign.
Disclaimer – All marketing brochures should include a disclaimer in relation to the Misrepresentation
Act 1967 and make it clear that the brochure is not part of a contract.

Additional notes
Code for Leasing Business Premises – RICS would like to see all marketing brochures making a clear
statement that the landlord will negotiate within the Code and that alternative flexible lease terms are
available on request. This depends on the view of the client.

Further reading
OFT ‘Guidance on property sales’, September 2012 (OFT1364).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.6.
www.isurv.com (accessed 02/12/2013).
www.rics.org/uk (accessed 02/12/2013).

1.7 Information technology in marketing

Key terms: IT; cloud computing; social media; virtual reality; internet
We live in a world that is becoming increasingly digital. All surveyors must keep up to date with
developments in information technology (IT), as it can benefit our professional lives. Despite the enor-
mous amount of change we have seen over the last 20 years, IT is still in its infancy and the working
world will be a very different place again in another 10 or 20 years’ time.
 Agency 15
Regardless of the computing equipment you feel most comfortable using, we can now under-
take tasks that were beyond us in the past. Writing letters and emails, maintaining and using mailing
lists, storing data, drafting marketing particulars, mapping, creating presentations for clients and using
comparable evidence databases are all commonplace tasks for agents in today’s world. It is possible to
purchase agency management software to help record the marketing of a property, avoiding the need
for paper-based files.
Everything from initial inspection notes to actioning the marketing plan to recording enquiries,
viewings and offers can be monitored and managed. Storage of these data is retained within the office
in most cases. The advent of cloud computing means that individual firms do not need to have any
hard data storage, as it can be provided by a data storage company via the internet. The data storage
company will have huge backup capacity gained from the economies of scale of mass storage.
Digital files can be set up to be accessed by all parties involved in the transaction, but with restric-
tions placed on access depending on individual need. A client should be able to see all data if the agency
function is to be wholly transparent. Parties enquiring about a property could see a brochure and other
associated marketing information, and have access to direct communication with the agent. A solicitor
would only need access to relevant legal information to enable them to finalise the transaction.
The extent of marketing material that can be made available will depend on the nature of the
property to be marketed and the costs of what can be done. This may simply be a brochure and EPC
for a lower-value property. At the other end of the scale, there might be a virtual ‘walkthrough’ of a
building combined with computer-generated imagery of the surrounding area.
The government is encouraging the property industry to make the whole property transaction
process digital including online searches, conveyancing, Land Registry registration, the EPC database,
rating information etc.
A website is a must for any surveying firm providing agency services, and it has to be effective and
easy to use – a poor website is worse than not having one! The site must be simple to navigate and
respond quickly. All properties being marketed should have a brochure (usually as a pdf), an EPC,
and a clear location plan with a link through to one of the online mapping facilities with both map
and satellite imagery. Indicative floor plans can also be useful and there are software packages that will
produce floor plans from inspection notes very quickly. Such floor plans would only give an indication
of layout rather than detailed measurements, as accurate architects’ floor plans are not always available.
For larger multi-occupied property, the web-based file can include schedules of floor areas updated as
sections are let, photos or a video of all floors. Some use 360° panoramic photos allowing a wider image
of the property. In addition to a website, there are also the internet portals that firms can pay to upload
the properties they are marketing to reach a wider audience (e.g. Rightmove, Costar and Egi).
One significant development is the use of virtual reality (VR), which is defined as:

A user interface that allows humans to visualise and interact with computer generated environ-
ments through human sensory channels in real time.
(IT Construction Forum, 2013)

This technology can be used in conjunction with 3D modelling software to create an interactive 3D
walkthrough, allowing the user to navigate a building which can be supplemented by animations, the
opening of doors and windows etc. to give a more realistic feeling to the visualisation. This type of VR
can also be enhanced with commentary or music. At this level VR can be expensive, but as technology
improves it is starting to be used by developers on major new development schemes.
Around the world there are more than one thousand virtual city models developed by various
techniques such as detailed aerial photogrammetry. This can be a useful addition to a planning appli-
cation demonstrating suitable scale and massing within the urban environment. These technologies
used together can provide a very powerful tool to both the developer and their agent. All of this
16 Andy Dunhill, Jane Stonehouse and Rachel Williams
information can be made available on an agent’s website. In addition a package can be put onto a
CD/DVD or USB drive to be given to those enquiring about the property. The laser scanning of
an existing building will produce a very accurate 3D image. This can be useful when dealing with
listed buildings and especially where alterations are proposed as it can assist in obtaining appropriate
consents.
Many firms and marketing portals use mobile phone applications (apps) to enable access to informa-
tion on property on the market. Some do this using QR codes, which bring up details of the property
from the agent’s website. Others use a GPS system to provide information of all property within a
certain radius. The advent of tablet technology provides a larger screen within a lightweight device and
this is much more powerful in terms of app technology. Standard reporting packages can be uploaded
allowing the ‘mobile surveyor’ to carry out an inspection, search for comparables, prepare a marketing
report and email it to the client.
Facebook, LinkedIn, Twitter and many more social networks seem to be taking the world by
storm. Will it be a short-lived phenomenon that will disappear in a few years or is it the way forward?
These are extremely powerful ways of communicating with clients that must be embraced by the
property industry.

Further reading
IT Construction Forum (2013) Available at construct-it.org.uk (accessed 02/06/2013).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.6.
Waller, A. and Thompson, R. (2009) ‘The role of social media in commercial property’. RICS, available at:
www.publicpropertyforum.ca/library/social_media_RICS-26pp.pdf (accessed 02/12/2013).

1.8 Energy performance certificates

Key terms: EPC; energy performance; green retrofit; sustainability; Energy Performance of Buildings
Directive
The issue of energy use and sustainability has moved significantly up the ladder of importance within
the property industry but still has a long way to go. The cost of energy used in our buildings is increas-
ing at a relatively high rate, to the extent that occupiers are now beginning to consider this as a major
cost in the occupation of property. This is an issue that has begun to affect the agent in their marketing
of property.
Around 40 per cent of carbon emissions come from energy used in buildings split between com-
mercial and residential. A substantial proportion of the buildings that will be here in 50 years’ time
already exist so a key issue is the retro-fit of such property to try to improve energy performance. It
is relatively straightforward to build more efficient buildings from new – but dealing with the existing
stock is a bigger problem.
Green buildings, sustainability and the energy performance of buildings are very topical currently
and will remain so. These issues will have an increasing effect on value and the marketability of prop-
erty as the UK Government raises the levels of energy performance that the property sector must
achieve.
This issue is being driven by directives produced by the European Union, which member states
are required to apply, as a minimum, in their respective countries. The legislation for the Energy
Performance of Buildings Directive (EPBD), which provided for the introduction of an Energy
Performance Certificate (EPC), was laid before Parliament in March 2007, and came into force in a
phased manner as outlined below.
The key points taken from the Department for Communities and Local Government (DCLG)
guidance are:
 Agency 17
● the requirement for non-dwellings to have an EPC on construction, sale or rent, was introduced
using a phased approach from 6 April 2008;
● the EPC shows the energy efficiency rating (relating to running costs) of a non-dwelling (the rating
is shown on an A–G rating scale similar to those used for fridges and other electrical appliances);
● the EPC includes recommendations on how to improve energy efficiency;
● there is no statutory requirement to carry out any of the recommended energy efficiency measures
stated;
● the EPC may also include information showing which of these measures would be eligible for
finance under the Green Deal scheme, if required;
● EPCs for non-dwellings must be produced by an accredited non-domestic energy assessor, who is
a member of a government-approved accreditation scheme;
● the seller or landlord must provide an EPC free of charge to a prospective buyer or tenant at the
earliest opportunity;
● a copy of the EPC must also be provided to the successful buyer or the person who takes up the
tenancy;
● estate agents and other third parties must ensure that an EPC has been commissioned before they
can market a property for sale or rent;
● in addition, all advertisements in the commercial media must clearly show the energy rating of the
building (where available);
● EPCs are valid for 10 years and can be reused as required within that period – a new EPC is not
required each time there is a change of tenancy, or the property is sold, provided it is no more
than 10 years old (where more than one is produced, the most recent EPC is the valid one);
● EPCs have to be displayed in commercial premises larger than 500m² that are frequently visited
by the public, and where one has previously been produced for the sale, construction or renting
out of the building.

The likely effects

The Energy Act 2011 indicated that from 2018, owners and agents will not be able to offer for sale or
to let any property with an EPC rating of less than E. The aim is to force owners to improve the two
lowest ratings of F and G. There are likely to be exemptions for Listed Buildings and those with no
useable heat source that are clearly to be fully refurbished or redeveloped. This change is essentially
aimed at buildings in, or ready for, occupation but which are considered to be very inefficient.
Although this rating system is relatively simplistic it can easily be made more demanding for prop-
erty owners. The minimum rating at which a property can be offered for sale or to let could be moved
to E or higher. The rating scale could be enhanced so that A is not the highest by introducing, for
example, A1, A2 etc.
Government hopes that owners will improve their property either by direct investment or through
the Green Deal whereby the cost of improvement is paid back through reduced energy costs. It should
be relatively straightforward to carry out improvements made in the EPC to take the property to the
next level. Government may choose to make this mandatory at some point in the future although
there is no indication of this at present.
There is some concern that such assessments work well for buildings with a standard form of
construction; however, the standard software used is not designed for many older buildings with, for
example, solid walls. This is probably a bigger issue in the residential sector as the software used for
commercial property is more robust. It is argued that an EPC assessment is a useful measure of com-
parison rather than a good absolute measure of performance.
It is the owner’s responsibility to obtain an EPC. An agent must explain this requirement and most
will have contacts with suitable assessors to refer the client to. It must be made clear that an agent
18 Andy Dunhill, Jane Stonehouse and Rachel Williams
cannot market a property until the EPC has been commissioned. However, in practice no advertise-
ments can be made or marketing details sent out without the EPC rating so it is advisable to have it in
place when marketing starts or very shortly after.
At the time of writing, business in general does not have this as a high priority and it is to some
extent considered to be a box-ticking exercise, but this will change. If the public sector states that
it will not acquire additional space below a certain EPC rating, then landlords must take note as the
marketplace for such buildings will be limited resulting in a drop in value. This would be bolstered if
the larger corporate organisations took the same stance within a corporate social responsibility (CSR)
policy. Any such benchmark could easily be increased over time.
Mixed use and multi-occupied buildings will present difficulties. The need for an EPC is essentially
based on the heat source in the building, or a part of one. A building with more than one heat source
will in general need one for each. For example, a building with shops on the ground floor and residen-
tial flats above will probably need a separate EPC for each unit of accommodation, as it is likely that
each shop and each residential unit will have individual heating systems. In contrast a multi-occupied
office block with one form of central heating system should only need one EPC. In the latter case a
tenant seeking to dispose of a leasehold interest and a landlord seeking to let vacant space should be
able to use the same one.
An EPC must be done by an accredited assessor. All EPCs must be registered on a central database
before they are valid and this register can be checked at www.ndepcregister.com.
Any complaints regarding the availability of an EPC are to be made to and investigated by Trading
Standards. The penalty is based on a percentage of the rateable value of the building (12.5% in 2013)
and between £500 and £5,000 maximum.

Further reading
DCLG (2012) ‘Improving the energy efficiency of our buildings – A guide to energy performance certificates for the
construction, sale and let of non-dwellings’, December 2012, available at: www.gov.uk/government/organisations/
department-for-communities-and-local-government (accessed 03/12/2013).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, sections 2.4.3.8 and 3.7.2.1.

1.9 Methods of disposal – private treaty

Key terms: private treaty; invitation to treat; subject to contract; best offer
There are three principal methods of offering property to let or for sale: private treaty, tender (for-
mal and informal) and auction. Part of an agent’s role is to advise the seller/landlord which method
to follow to achieve the best result for them. It is important that prospective purchasers and tenants
understand the difference between these techniques and in particular that they are aware of what stage
in the process they are contractually bound to proceed with the lease or purchase.

Private treaty
This is the most common method used in property sales in England and Wales and is generally the
cheapest option.
A property is advertised to let or for sale inviting people to make offers to buy or lease the property.
Legally the marketing of the property is classed as an invitation to treat (see Chapter 10). The price/
rent on marketing details is not an offer to sell/let at that price/rent, it is an invitation to interested
parties to negotiate and make an offer. It is important that the asking price/rent is set at a realistic level.
If it is too high prospective purchasers may be dissuaded from enquiring about the property. Some
 Agency 19
may put in a low offer thinking they have managed to negotiate a substantial discount. Setting a low
price can attract a lot of interested parties for the agent to negotiate with or go to best offers. The agent
should advise on the best course of action depending on the property, the client’s needs and the market
at that point in time.
The vendor/agent enters into negotiations with interested parties on a ‘subject to contract’ basis.
Where there is significant demand best offers might be invited by a certain date. This will not be
contractually binding. It is normal to require all conditions attached to the offer to be clearly stated
and the client will reserve the right to accept the highest or any offer and not to accept any, should
they choose. The agent needs to be certain that they will receive at least one offer before pursuing this
option otherwise this may prejudice future marketing of it.
Once agreement is reached on the principal terms of the deal, heads of terms are normally drawn up
by the agent and circulated to all parties and their professional advisers. There is no contract in place at
this time – Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires that certain
formalities are observed for contracts for the sale of land.
Once the heads of terms are drawn up the buyer and their solicitor will investigate the property
further. These investigations and searches generally consist of:

● An investigation of title – checking the seller has the power to sell, the extent of the property and
any rights the property has the benefit or burden of.
● A survey, depending on the nature of the property this might be a valuation, Homebuyers Report
or full survey.
● Raising enquiries of the seller – this includes matters relating to the condition of the property
(flooding, subsidence etc.), relations with neighbours, work carried out to the property and
responsibility for boundaries. In most transactions a standard form is used, for commercial prop-
erty Commercial Property Standard Enquiries (CPSE) and for residential the Sellers Property
Information Form.
● Searches – these include the Local Search (planning and building regulation history, public pro-
posals in the vicinity of the property, highways and other public matters), Water and Drainage
Search, an environmental report (this is a desktop search which advises whether or not there is
considered to be a risk of contamination or flooding) and can also include a Commons Search and
Coal Authority Search where appropriate.

During this period the buyer will also be ensuring that they have their finances in place and their
solicitor will be agreeing the content of the contract with the seller’s solicitor. The contract can be
conditional or unconditional. If the transaction is on a leasehold basis then contracts would be based
on an agreement for lease, to which a copy of the draft lease would be appended. At this point of the
transaction either party can withdraw from the transaction.
The agreement only becomes legally binding when contracts are exchanged. On exchange of the
contracts the buyer will normally pay a deposit, which is generally 10 per cent of the purchase price.
At exchange the completion date will be agreed. The completion date is the date at which the trans-
action is complete – the balance of the purchase price is paid, title and possession of the property are
transferred to the buyer. Completion can occur on the same day as exchange or there may be a delay
between exchange and completion of a week or two. If the property is being sold with vacant posses-
sion then on completion the keys of the property will be released to the buyer. If the subject of the
transaction is an investment property then on completion the buyer will receive a rent authority letter
directing the tenant(s) to make future payments of rent to the new owner.
An overview of the process is set out in Figure 1.9.1:
 • Once the seller has accepted an offer from the buyer heads
of terms are circulated containing the parties’ contact details
and the principal terms of the proposed sale and purchase
including the price.
Heads of terms

• In the lead up to exchange the buyer and their legal advisor

and surveyor need to investigate the property to ensure that
it is worth the price agreed and fit for the purchaser’s needs.

Pre-exchange

• The contract is normally signed in two separate parts

(one by the buyer and one by the seller).
• Exchange normally takes place over the telephone by
the buyer’s and seller’s solicitors agreeing that exchange
has taken place.
Exchange • A deposit is payable on exchange (normally 10 per cent of
the purchase price) and the date for completion is agreed.

• On completion the balance of the purchase price is paid

and the transfer of the legal title to the property and the
mortgage deed (if any) are dated.
• Control of the property passes to the buyer.

Completion

• Discharges are obtained for any previous mortgages, the

buyer or more commonly the buyer's solicitor completes a
return in relation to Stamp Duty Land Tax and the
transaction is registered with the Land Registry.

Post-completion

Figure 1.9.1 Overview of the private treaty process.

 Agency 21
There are many pitfalls in the process. In a weak market it is not uncommon for a prospective buyer
to agree a deal then shortly before exchange try to negotiate a lower price on the basis that the vendor
will not want to run the risk of having to find another buyer. This is an unpopular tactic with agents
but is quite legal as there is no firm deal until exchange occurs. This is referred to as gazundering.
In a strong market the opposite can occur. Between the point of agreeing a deal (when the prop-
erty is put ‘under offer’) and legal exchange of contracts another party may enter the process and
offer a higher price. An agent has a legal duty to report all offers to a client. If the vendor chooses to
accept this higher offer and instructs solicitors accordingly the first party is considered to have been
‘gazumped’. The vendor may choose to create a contract race between the parties such that the first
to exchange is the successful buyer. In this case all parties should be made aware that they are in a
contract race. In 2007 Home Information Packs were introduced as a way of trying to speed up the
conveyancing process and provide some protection for buyers from the risk of being gazumped. HIPs
were paid for by the seller and included evidence of title, replies to enquiries and search results. They
did not however include a survey. The requirement to have a HIP was suspended in 2010.

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.

1.10 Methods of disposal – tender

Key terms: offer; exchange of contract; conditional exchange; planning constraints
Informal/non-binding tender
This method of sale is very similar to sale by private treaty except that from the outset of marketing a
deadline is given by which offers have to be made. All marketing details, advertising etc. should refer
to this date. The agent will need to put together the majority of information about the property prior
to marketing so that interested parties are in a position to make a realistic offer by the due date. Offers
should be received on or before the date and time in sealed envelopes. The offer should contain all
conditions attached to it and the process is then essentially the same as a disposal by private treaty.
All offers must be reported to the seller with a recommendation. The seller then makes a decision that
forms the basis of the heads of terms. The transaction then proceeds in the same manner as a sale by pri-
vate treaty which means that either party can normally pull out any time up to the exchange of contracts.
This is a suitable methodology where you anticipate a reasonable level of interest and are certain, from
the start, of receiving some offers. It provides more flexibility than a formal tender for both the seller
and the bidders but should give some certainty compared to an ordinary sale by private treaty. It can be
effective where the property or site has complications that might require a conditional exchange.

Formal/binding tender
A formal tender is very different to an informal tender as once a seller has accepted an offer in a formal
tender a contract is formed and neither party can withdraw from the transaction. Once a decision to
sell a property by formal tender has been made, the vendor’s solicitors will need to prepare a ‘legal
pack’ containing evidence of title, replies to pre-contract enquiries, search results, form of the draft
transfer of the property and any other supporting documentation. The costs of the searches commis-
sioned as part of the legal pack are normally paid by the successful bidder in addition to the purchase
22 Andy Dunhill, Jane Stonehouse and Rachel Williams
price. Any prospective buyers will need to study the legal pack and also consider having a survey/
valuation carried out and ensure their finances are in place prior to making an offer.
When making an offer all bidders must include a 10 per cent deposit, normally by way of a guar-
anteed bank cheque. All offers are to be made in a sealed envelope and may not be opened until the
time and date for receipt of offers has passed. The offers should be kept in a safe and normally most are
delivered to the agent’s office during the last couple of hours before the deadline.
Shortly after the deadline for offers it is normal to meet with the client and their solicitors where
the offers are opened and a decision is made. On acceptance of an offer a legally binding contract is
created. The parties will normally be required to proceed to completion within a specified period, say
4 weeks. Cheques are returned to the unsuccessful parties.
This is a very useful method but you must ensure there is going to be a reasonable level of interest
otherwise you may be wasting time and money. It can produce some very good results. It is often used
for sale of development sites or refurbishment opportunities. In such a case it is advisable to explore the
planning position prior to marketing and wherever possible agree a planning brief with the local planning
authority. This should indicate what uses are likely to be acceptable and any key planning constraints.

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
Mackmin, D. (2008) Valuation and Sale of Residential Property, 3rd edn, Estates Gazette, London.
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) Residential Estate Agency Standards, 5th edn, RICS, Coventry.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.

1.11 Methods of disposal – auction

Key terms: guide price; reserve; auctioneer; bidder
This is a public sale where anyone can make a bid in the auction room, by telephone or sometimes
online (this is likely to increase).
The key aim of an auction is to create a legally binding contract on the auction day and in the
room. As with sales by formal tender, the buyer will have to have fully researched the property before
going to the auction, as if they are the successful bidder they will be contractually obliged to complete
the purchase. Also in common with sales by formal tender the seller/their solicitor will prepare a legal
pack. The costs of the searches commissioned as part of the legal pack are normally paid by the suc-
cessful bidder in addition to the purchase price.
They will be held on a specified published date at a time the auctioneer chooses. Many auction
houses have regular sales to provide consistency for buyers and sellers. This might, for example, be
the first Monday of the month. The larger London-based practices often have sales lasting a full day,
or even longer sometimes, whereas for the smaller provincial firms auctions may be an afternoon or
sometimes an evening event.
An auction may be held anywhere – sometimes at the property, but often at a hotel, providing it
is permissible in the premises proposed (some properties have restrictive covenants against use for an
auction). Many properties in the provinces are sold by auction houses in London. The choice between
using a regional or national auction house is a constant source of debate. The internet has enabled all
to have potentially the same level of marketing coverage. One argument is that the London auctions
attract speculators who are looking for a discount on value, whereas the local firms attract the occupier
market as well and so achieve nearer to market value. The London firms, however, will attract a larger
pool of potential buyers.
 Agency 23
A guide price may be given but must not be misleading. It will be a guide only and should be less
than the reserve, which is the minimum price at which the auctioneer may sell (if bids do not reach
the reserve price then the property will be withdrawn from the auction). The reasoning is that if you
indicate a guide price and bidders make offers at that level but the property is withdrawn because it
does not make the reserve those bidders will feel they have wasted their time and this is not the envi-
ronment an auctioneer wants to generate.
The reserve may be disclosed or undisclosed, although it is usually not disclosed either prior to the day
of the auction or at the auction itself.
The property is not strictly for sale until bids have reached the reserve price. This figure is agreed
between the auctioneer and the vendor in the days before the auction. It will be influenced by the
level of interest shown in the property. There is a strong feeling that reserves must be realistic, espe-
cially in a slower market. If a vendor insists on an unrealistic price most auctioneers would decline the
instruction. If offered without reserve the property will be sold regardless of the level of offer, provid-
ing there is an offer. It is not normally recommended to offer a property without reserve unless it is of
very low value, perhaps zero or even negative.
There is a practice known as ‘taking bids off the wall’ or ‘out of the air’, under which the seller,
his/her agent and the auctioneer can all bid for the property up to the reserve price provided that the
conditions of the auction permit this to happen. Surprisingly, this practice is legal (see the Sale of Land
by Auction Act 1867) and permitted under RICS Common Auction Conditions Edition 3.
The highest bidder will be the successful buyer providing they bid above the reserve price, if
there is one. The auctioneer’s final, usually third, knock of the hammer indicates a sale has occurred.
The auctioneer will sign the contract on behalf of the vendor. The buyer will be required to sign it
immediately bidding has finished on the lot bid for. The purchaser must pay a 10 per cent deposit
immediately after the sale and the balance by a specified date.
Why sell by auction? There are three key reasons: certainty for the vendor; quick and clean; public
and open. This method avoids the extended period of uncertainty over whether the sale will complete
or not providing that there is a successful bidder. It is effective where there is a legal need to show
that a sale is fully open and transparent so that all interested parties at that point in time had an equal
opportunity to bid for it. This may be where a sale is on behalf of the public sector, a charity, trustees,
mortgagees etc. It is considered as evidence that every effort has been made to achieve the best price.
An auctioneer owes the vendor a duty of care. They must:

● do as instructed providing it is legal;

● not act contrary to their client’s instructions;
● obtain the best price, i.e. not miss bids;
● be certain the purchaser can buy. Some auction firms require bidders to register with the firm
before the sale and to substantiate that they have the funds. Note that the Money Laundering
Regulations apply to the sale of property by auction.

The process
● The vendor instructs the auctioneer.
● The auctioneer agrees fees and disbursement costs.
● The vendor is to pay fees if property is sold before or after the auction by private treaty.
● The auctioneer inspects and values the property then reports to client.
● Any issues to be clarified are identified and the best course of action decided.
● The vendor confirms agreement to fees etc. in writing.
● The auctioneer markets – prepares page for auction brochure and website entry, advertising, sale
board, targets potential buyers.
24 Andy Dunhill, Jane Stonehouse and Rachel Williams
● The solicitor provides/makes available legal documentation.
● The auctioneer responds to enquiries.
● The auctioneer arranges viewings.
● The auctioneer manages the day of the auction.

The auctioneer has a duty, where a property is sold before the auction, then all parties that expressed
an interest in it must be contacted and advised. They must encourage potential purchasers to check
the day before the auction that the property will still be offered. If a bidder arrives on the day of the
auction to bid for a property that has already been sold they would justifiably be annoyed, especially
if they have travelled some distance.
On the day of the auction, normally many properties will be offered. The auctioneer will seek
to create a vibrant atmosphere where properties are selling fast – a full room is best. The auctioneer
reads out any last minute amendments before bidding commences. Details will be issued to all those
attending – important! The auctioneer seeks an initial bid often stating a possible opening price and
bidding begins.
If there are no bids or the reserve is not reached the property will be withdrawn and the next one
offered. If this occurs too many times it will affect the atmosphere in the room. The highest bid is the
purchaser who signs the contract and pays 10 per cent deposit.
There are a number of firms offering properties for sale on a conditional basis. The successful bidder
will secure the right to a pre-agreed period – say 4 weeks – to exchange contracts. They must pay a
non-refundable sum, usually a few thousand pounds, and the sale will proceed in the usual way.
It is normal for the vendor to pay the auctioneer’s fees; however, some firms auction property
on the basis of a ‘buyer’s premium’. This means that the successful bidder must pay the auction-
eer’s fee based on a percentage of the price or a fixed or minimum fee in addition to the purchase
price. This must be clearly stated prior to the auction so that bidders know exactly how much
they must pay.
The sale of property by auction is subject to the laws relating to misdescription; therefore, if a prob-
lem arises the purchaser may be able to withdraw from the transaction (see section 10.20 on the CPR/
BPR Regulations). All types of property can be and are sold by auction – residential, commercial,
rural, retail, leisure, investment, land etc. Auctions are likely to continue to be a popular method of
sale. Internet bidding is being looked at seriously. This needs to be in real time and linked by video. It
also offers the option to develop an international market place for auctioneers.
The role of an auctioneer is different to that of a normal agent as the auctioneer actually sells the
property and will normally have express authority to sign the Memorandum of Sale. In the case of
Greenglade Estates Ltd v Chana and another (2012) 3 EGLR 99 a third party fraudulently claimed they
owned a property and instructed Strettons to offer it for sale at auction. After the auction it became
clear that the original vendor did not own the property. The true owner refused to complete the sale
and the auctioneer was held liable for damages to the buyer, defined as ‘the value of the property less
the agreed sale price’. An auctioneer must be certain that a client is the legal owner of any property
they are to offer for sale.

Further reading
Estate Gazette Weekly Auction News
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.
RICS (2011) Residential Estate Agency Standards, RICS, Coventry.
RICS guidance notes: ‘Common Auction Conditions’, available at: www.rics.org (accessed 15/11/2013).
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
 Agency 25
1.12 Marketing a property – freehold sale
Key terms: land; development potential; freehold; exchange of contracts
When instructed to offer a property for sale an agent should have reference to the various methods of
disposal and make an appropriate recommendation as to which they consider is the most suitable. This
will depend on the type of property, the market and to some extent the client; for example, public
sector organisations have a responsibility to get best value and to fully explore the marketplace for all
possible buyers at that point in time. Auction and tender can be preferred methods but not always.
Many different types of property are offered for sale freehold, including land, buildings for refur-
bishment, vacant property ready for occupation, investments and a variety of one-off buildings such as
an old lighthouse, a garage for parking one car, a redundant toilet block etc.
The client vendor may be the owner that no longer wants it, trustees where someone has died, a
receiver where a company has been put into liquidation etc. The property to be offered may be the
whole of the client’s ownership or part where they have surplus land or buildings. Each will have dif-
ferent requirements.

Land
First it is important to establish whether there is any development potential by considering what the
market might want and crucially what planning consents may be available. It is usually best to offer
development opportunities subject to planning consent and enter into a conditional contract as dis-
cussed in Concept 1.4.
The agent must look into the availability of services to the site to establish whether they are avail-
able and whether there are likely to be any significant costs in securing a supply of gas, electricity,
telephone, water and drainage.
Ensure the land has road access; that there are no restrictive covenants; look for overhead power
lines that might restrict the height of any new development; check whether it is in a conservation area;
is all or part of it green belt – if so what are the chances of it being taken out of that category? Is there
any government or EU grant assistance for job creation? In short make sure the options for the site are
fully understood. Be clear what the boundaries are.

Land with a building requiring a major refurbishment

All of the comments about land above are relevant. In addition if the building is listed it cannot be
demolished without listed building consent which is not usually an option. Consider alternative uses
as well as its existing use. Be clear about the grade of listing – could part be demolished or perhaps all
behind a listed façade?

Building ready for occupation

This might be office, industrial, retail, leisure, mixed use etc. Always check out the potential for alter-
native use and understand what the market might want so as not to miss out any options.

Investment property
There is a good market for investment grade property but the length of lease remaining and strength
of covenant (the tenant) is crucial. Most lenders will not lend on short-term arrangements.
There is a wide range of property of institutional grade that may be of interest to the pension
funds etc. There is a good market, at the right price, for investment property with an angle, e.g.
26 Andy Dunhill, Jane Stonehouse and Rachel Williams
refurbishment to let vacant space, general upgrade, renegotiating leases to increase value etc. The sec-
ondary market was quiet during the recession but as the market slowly starts to move so will this part
of the market.

General
There are many things to consider including the following: Should the property be sold as a whole
or might the client’s returns be maximised by splitting the holding into smaller parts? Care needs to
be taken to ensure the good bits are not disposed of first leaving a difficult bit that takes a long time
to resolve. The ideal is to put together parallel deals on the basis that they will be interdependent and
exchange at the same time. Make sure that all parties are committed to undertake necessary works to
ensure the split will work, especially in respect of a split of services and responsibility for boundaries.
The decision here will rest on suitability for division, availability of planning consent for different uses
and the practicality of splitting it.
Where the client wishes to sell only part of their property and retain the remainder, be clear on
who will be responsible for services, boundaries and access in order to ensure that the client is not
prejudiced. Always be aware that the availability of a freehold property can attract potential purchasers
who would not otherwise be in the market for the property in question if it was only available to let.
If it proves difficult to secure a sale, always consider the possibility of letting it to create an investment
which can either be retained or sold.

Further reading
Murdoch, J. (2009) Law of Estate Agency, 5th edn, Estates Gazette, London, ch. 4.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, sections 3 and 4.
RICS (2011) Residential Estate Agency Standards, RICS, London, ch. 3
Rodell, A. (2013) Commercial Property, College of Law, Guildford, ch. 3.

1.13 Marketing a property by way of an assignment

Key terms: assignment; term of lease; occupational lease; premium
This will normally relate to the whole of the demised area for the remainder of the term. When a deal
is agreed the whole leasehold interest including the physical lease will transfer to the assignee. The
assignor will not be responsible for collection of rent or any other management issues. It is essential to
have regard to the issue of Privity of Contract and the Landlord and Tenant Covenants Act 1995, i.e.
is it an old or a new lease and if it is a new lease is an authorised guarantee agreement (AGA) required?
When business is good the demand for property is high and it is often acquired without due regard
to the long-term implications of that property. Business tends to be driven by short-term needs. It can
then become a significant problem a few years later when the economic climate is weak. The agent is
then very much in the firing line when the holding costs are high but the property market is weak and
it is very difficult, sometimes impossible, to secure a disposal.
Regardless of the tenure of the property a factor to take into account will be the vendor’s operational
needs for its on-going business. It may be necessary to tie in the disposal with the acquisition of new
space. Efforts should be made to avoid the period of time where the company must cover the costs of
holding two properties but there will normally be some need to overlap to allow time to relocate.
The first thing to do is obtain a copy of the lease with all additional attachments, e.g. Rent Review
Memoranda, Deeds of Variation etc. It is not uncommon to be given incomplete paperwork. Plans will
normally be colour coded but copies are invariably only in black and white. Read the paperwork and
understand what it means for the lessee. All marketing will be constrained by the terms of the lease.
 Agency 27
A factor to bear in mind is that taking over a lease from another occupier is always going to be less
attractive than taking out a new lease because then you can have some influence on the terms of the lease.
When disposing of a lease for an occupier it is advisable to involve the landlord at the start of the
process which should make it easier, and various consents will be required from them, not least the
consent to dispose of the leasehold interest. There are normally statutory requirements placed on land-
lords to ensure they act in a timely manner. Intransigence is not however uncommon!

Lease details
Confirm the main details of the client’s lease (e.g. next rent review, etc.) and any additional papers
received to prepare an abstract. This should include as a minimum:

● lease term
● commencement and date of expiry
● rent reviews and break clause
● current passing rent
● repairing liability – full repairing and insuring (FRI) or internal repairing and insuring (IRI)
● rights to sub-let
● user clause.

Any restrictions; for example, is an AGA required on assignment if it is a new lease under the Landlord
and Tenant Covenants Act 1996? If yes, are any specific tests to be met by an assignee? Or is the lease
contracted out of Security of Tenure Provisions of the Landlord and Tenant Act 1954?

Terms of the lease

In view of the lease terms and market conditions, what can be recommended?
If there is an imminent or outstanding rent review the job will be much more difficult because
it will not be possible to say what the rent is going to be for very long into the future. This is an
unknown and makes it more difficult for a potential occupier to prepare an accurate business plan.
If the lease is due to expire in the near future, i.e. it’s a ‘fag-end-lease’, establish whether the land-
lord would be prepared to take a surrender of the surplus area and grant a new lease to any organisation
you find that wishes to occupy it.
Negotiating a surrender of the lease, especially in a poor market, is often the best course of action.
To assess the potential reverse premium to offer the landlord you would need to take into account and
capitalise the costs of rent, rates, service charge up to the termination of the lease or the next break
clause. There may also be dilapidations costs to account for.
In a good market the landlord may be keen to take the space back on the expectation of re-letting it at
a higher level of rent which then has a knock-on effect for their investment where it is multi occupied. It
may be possible to secure a positive premium from the landlord. Some leases have a pre-emption clause
providing that the lessee must first offer the landlord a surrender but they do not have to take it.
If the lease contains an AGA the client must be advised that the lease will revert to them if the
assignee goes bankrupt. Also there may be some constraints placed on the assignee by the AGA, e.g.
their profit must be at least three times the company’s total rent bill for the last 3 years.

Rent review and break clause

If there is an outstanding or imminent rent review it is preferable to settle it so that a potential assignee
can be provided with clearer costs. If there is a break clause before the lease terminates you must take
28 Andy Dunhill, Jane Stonehouse and Rachel Williams
great care in assigning the lease to avoid the situation where the assignee remains in occupation until
after the break but then goes out of business. The lease will generally revert to the previous lessee
which must then either occupy it or find another assignee. Depending on the circumstances it may be
better to seek a sublet until the break.

Rental valuation
Over-rented – the current rent payable is higher than the market rent in which case the client may need
to offer an incentive to induce an assignee to take over the lease. This may be a reverse premium,
i.e. a capital sum to reflect this negative value. A rent-free period cannot be offered in an assignment;
however, some deals have been done on the basis that the assignor will reimburse the assignee for rent
paid on production of proof of payment. This will be for an agreed period. It is an alternative to paying
a reverse premium and is especially useful if there are any doubts about the assignee. Avoid a situation
where a capital sum is paid following which the assignee company disappears, which has happened.
Profit rent – the market rent is higher than the rent passing in which case it may be possible to nego-
tiate a premium, i.e. a capital sum to reflect the lower level of rent payable until the next rent review
or lease renewal. Normally this only occurs in the retail sector.
There are some instances where a tenant has done some approved capital improvements to the
property that they have paid for and for which they are not required to rent. It may be possible to
secure a premium to reflect this value
Key money – there are examples, mainly in the retail sector, where a capital sum is paid by an
assignee which does not reflect rental values but means that a particular retailer wants to trade in that
location and is prepared to pay over the odds to do so.

Other restrictions
The lease is as written and is not subject to negotiation in contrast to a company agreeing a completely
new lease. If it is on an FRI basis or if there are restrictions on use then those constraints will remain
and will influence recommendations and marketing.
You should check that the lease provides for the lessee to assign the lease. This should be subject
to landlord’s consent. This is normally subject to a test of reasonableness but if not one is statutorily
implied by the Landlord & Tenant Act 1927, S19.
The issue of who pays legal and surveyors’ costs is a key issue. It is normally the responsibility of the
lessee but the state of the market will determine who is to pay. There may be a chain of legal interests in
a property all of whom will want their costs paying so be aware that these can mount up significantly!

Further reading
‘Code of Leasing Business Premises’, available at www.leasingbusinesspremises.co.uk (accessed 27/11/2013).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, London, section 3.
Rodell, A. (2013) Commercial Property, College of Law, Guildford, ch. 27.
www.isurv.com (accessed 27/11/2013).
www.rics.org/uk (accessed 27/11/2013).

1.14 Marketing a property by assignment of a long ground lease

Key terms: ground lease; assignment; term and reversion; ground rent
This will normally relate to the whole of the demised area for the remainder of the term. When a deal is
agreed the whole leasehold interest including the physical ground lease will transfer to the assignee. Your
 Agency 29
client will not be responsible for collection of rent or any other management issues. Technically this is
the assignment of a ground leasehold interest but is often referred to as the sale of the relevant interest.
As an agent you will want a capital sum for the benefit of the interest being marketed in the
same way as a freehold sale. In valuation terms there will often be little or no difference in the value
regardless of the interest being freehold or a long ground lease. But sometimes the difference will be
substantial. The ground lease may be subject to payment of ground rent with rent reviews, a geared
rent or a peppercorn.
Such interests are common with industrial property and less so with other property types. Often
found where a local authority or large landowner has permitted a development programme but wished
to retain its long-term interest in the land holding and control over use; such an interest will almost
always be for a whole building rather than an individual floor.
This will normally be for the whole of the demised area for the remainder of the term. It may be
for part of the demised area where a developer whose interest is a long ground lease wants to dispose
of individual buildings in a scheme.
The first thing that must be done is to obtain a copy of the ground lease with all additional attach-
ments, e.g. Rent Review Memoranda, Deeds of Variation etc. It is not uncommon to be given
incomplete paperwork. Plans will normally be colour coded but copies are invariably only in black and
white. Make sure you can make sense of them. You must then read the paperwork and understand
what it means for the ground lessee. The whole of your marketing will be constrained by the terms of
the ground lease.
A factor to bear in mind is that taking over a ground lease from another occupier is always going to
be less attractive than taking out a new ground lease because then you can have some influence on the
terms of it. It is also less attractive than acquiring a freehold interest which can be a significant issue in
some cases.
When disposing of a ground lease for an occupier it is advisable to involve the landlord, usually
freeholder, at the start of the process which should make it easier as various consents will be required
from them, not least the consent to dispose of the leasehold interest. There are normally statutory
requirements placed on landlords to ensure they act in a timely manner. Intransigence is not uncom-
mon, however!
The crucial issue is to establish what land is included. In almost all cases it will have been granted
with a covenant that the ground lessee was to build something – an industrial unit(s), office etc.
Occasionally the original demise may have included some buildings. Next you must establish whether
there is a ground rent payable or whether this was dealt with by a single premium payment at the start
of the ground lease.

Valuation – rental by researching the market for comparable land and property
If there is a ground rent payable you must establish what the market ground rent is at the date you
are valuing it. You must then establish a value for whatever building has been built on it. The ground
rent must then be deducted from the overall rent before capitalising it. Where there are ground rent
reviews you will need to account for this – probably by using the term and reversion method. You
should only value to the end of the ground lease because at that point the value of the buildings revert
to the freeholder. If there is no ground rent payable you simply value the land and buildings together
until expiry of the ground lease.
You should identify specific issues that will help in marketing and be constructive about any weak-
nesses. The key here is that it is a diminishing asset because at the end of the ground lease the buildings
revert to the freeholder. A company looking to acquire the type of property you are dealing with
would almost always prefer to acquire a freehold rather than a long ground leasehold interest as it is a
cleaner and simpler interest.
30 Andy Dunhill, Jane Stonehouse and Rachel Williams
If there is an imminent or outstanding ground rent review it would be best to resolve it quickly
but as the level of ground rent compared to premium value is often low this may be a relatively minor
issue compared to a normal occupational lease. There are, however, instances where the ground rent
as a ratio of occupational rent is high, in which case there may be a problem.
If the ground lease is due to expire in the near term the value will be severely limited. Clearly, value
will decrease as time passes and expiry of the ground lease approaches.
In general, the user clause in a long ground lease will be reasonably wide as the term is long. However,
if the lease was granted by say a local authority for employment generating purposes it is unlikely that
consent for a significant change of use would be available. This will inevitably reduce value.
If market conditions have changed significantly it may be possible and more advantageous to negotiate
a surrender of the ground lease to allow a comprehensive redevelopment.

Example:
Lease details
● 99 years commencing 49 years ago
● Rent reviews are every 20 years and the last was £2,350pa
● Site area 3,090 sq yds = 27,810 sq ft or 2,583.6 sq m
● Let’s say there’s an industrial unit of 12,000 sq ft (1,115 sq m) on it
● Market rent £5 psf £53.82 psm gives £60,000pa today
● Yield 9% no adjustment needed
● Market rental value of ground rent today say £5,000pa

Valuation
Term
Rent £60,000
Less GR £2,350
Profit rent £57,650
YP for 11 years at 9% 6.8052 £392,320
Reversion
Rent £60,000
Less GR say £5,000
Profit rent £55,000
YP for 39 years at 9% 10.7255
PV of £1 in 11 yrs at 9% 0.3875 4.1561 £228,587
Value £620,907
Round up to £621,000
Compare to freehold value
Rent £60,000
YP in perp. at 9% 11.11 £666,600
 Agency 31
Note in practice you would probably drop the yield a little for a freehold valuation. This shows the
arithmetic effect. The difference of around £45,600 is the value of the freehold today. At a freehold
yield of 8.74 per cent the value would be:

Rent £60,000
YP in perp. at 8.75% 11.43 £685,800

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 15/11/2013).
www.rics.org/uk (accessed 15/11/2013).

1.15 Marketing a property to let on a new lease

Key terms: new lease; lease terms; negotiating options
The term landlord generally means an owner of property that does not hold it for their own occupation;
however, it does include a company that has surplus space in a property that they do own and occupy.
There are a variety of different organisations and people that may be termed as a landlord and each
will have their own objectives, which may be highly variable. The main categories are:

a) investor
b) developer
c) public body
d) occupier with surplus space.

It is worth considering each in turn to explore some of the objectives that might influence strate-
gies and therefore the instructions they will give to an agent marketing their property. A lease in this
context is an occupational lease, i.e. the party that takes the lease intends to occupy it for their own
business purposes. Lease lengths (the term) range from 1 year to 15 years in most cases, although there
are some longer ones.

The process
The process detailed below is from the perspective of an agent/consultant advising a client on the let-
ting of a property. The procedure is, however, primarily the same if it is done by an in-house property
department. It is written within the framework of the UK market. Having gained an instruction to
give advice on marketing the process will normally involve:

a) inspection and measurement

b) rental valuation
c) report to the client
d) marketing plan
e) marketing period – putting the plan into action
32 Andy Dunhill, Jane Stonehouse and Rachel Williams
f) negotiating with prospective tenants
g) heads of terms agreed
h) instruction of solicitors
i) completion of the transaction.

Once the agent’s recommendations and fees are agreed the property will be placed on the market in
line with the client’s instructions. In theory a landlord offering space to let on a new lease can do so
on any terms and at whatever rent they wish but it is not that simple. There are a variety of issues that
will influence negotiations.
When acting for major developers or investors they will generally take a medium to longer term
view and the agent will be expected to maintain and enhance the asset value when letting empty space.
Often rather than taking the first tenant that comes along they would wait for the right occupier to
meet tenant mix criteria or quality of covenant.
An investor landlord will always want to maintain rent levels and hopefully improve them. In a
difficult market most would prefer to achieve existing rent levels but may need to offer incentives to
do so, e.g. rent-free periods etc. In a good market, securing a letting in a multi-occupied building at a
new rent level means that all other lettings immediately become reversionary.
In contrast, the aim of most secondary investors is to secure an income, often to meet mortgage
repayments. As an agent there will be some pressure to secure a letting to meet this requirement. In
some cases any letting may be preferable to an empty property.
The main constraints upon a developer and their agent are any controls on the quality/type of tenant,
lease terms and rental levels placed by the bank/financial institution providing finance for the scheme or
similar restrictions placed by the investor where it is forward sold. This may create significant constraints
for the agent. It is not uncommon to find that minimum lease lengths and/or rental levels must be
achieved. This can be a problem where the market weakens during the marketing period.
A developer will normally be keen to secure a pre-letting of space to minimise risk and void costs.
In some schemes, especially retail, a developer may be prepared to offer an anchor or larger first tenant
a lower level of rent to generate some life in the scheme and attract more occupiers. In a rising market
some developers may decide to hang on until completion of the scheme to maximise rental income
and hence capital value but this can be a risky strategy.
An imponderable question in larger office blocks is whether to let floor by floor or wait for an
occupier for the whole which may never happen of course. Once a single floor is let, the building is
immediately no longer available for a single occupier. It is best to tie a few similar lettings together so
that a reasonable proportion of the building is let at the same time. It is also preferable to do this on
consecutive floors rather than spread lettings around the building in order to be able to meet a large
requirement that may arise.
If the available space does not meet current occupier requirements it may be necessary to consider
splitting floors. Building regulations must be adhered to. The result may be to reduce the net area as
some may need to become common to allow for access and fire exits. The landlord would need to cover
service charge costs on these areas. Always try to let the poorer half of a floor first but this may be difficult.
Many larger investors will have a standard form of lease for each property and will not vary from
that as it can have an effect on investment value. One example will be the service charge arrangements,
because if they are inconsistent, management of it becomes difficult.
In contrast, a public body such as a local authority may have a very different approach where the
aim is to provide property for new or small businesses on a flexible basis not normally offered in the
private sector. The ultimate aim is employment creation and an opportunity for new businesses to
develop and grow in the area.
Some companies own and occupy space for their business rather than renting it and may have
surplus accommodation. They may seek to let out this surplus space and the principal aim is generally
 Agency 33
cost cutting; however, they may well want to ensure that a letting does not compromise the image
and identity of the building. This can limit the type of occupiers or the terms under which they can
use it, thus making the agent’s job more difficult. The result of such a letting will be that the landlord
will become a property manager and may need to set up a service charge arrangement.
There are significant costs in holding empty property – local rates, service charges, security, main-
tenance, insurance etc. This is likely to influence letting strategy. Both RICS and the Law Society
have produced standard short form leases to make the letting of lower value property easier. These will
normally be used for short-term arrangements and are there to benefit both landlords and tenants. The
property industry, led by the RICS, has produced the Code for Leasing Business Premises. The aim is
to create a more flexible leasing environment and this is relevant when agreeing a new lease.

Negotiating options
A property transaction is rarely solely about rent or price. There are many factors you can bring to a negotia-
tion in an effort to agree a deal suitable to both parties. The outcome will depend upon the relative positions
of the parties involved in the negotiation. Always balance a concession against the level of rent to make sure
you do not give away more than you are gaining. The principal options are outlined below:

Rent free
A few months may be appropriate to allow a tenant to move in and fit out. This may be related to
the length of a lease, i.e. the longer the lease the longer the rent free period. This need not always be
at the start of a lease. It could be spread across a few years or some to be effective after a break clause
(see below) if the tenant does not operate it. This concession can be used to offset real costs incurred
by the tenant in carrying out essential repair works.

Rising rent
The benefit is that the tenant will start paying some rent from the start. This can be useful if the tenant
is unknown or perceived to be weak.

Rent deposit
If you are in doubt about the tenant ask to keep a sum of money on deposit that your client can use if
the tenant defaults on rent. Any such monies must be held in a separate bank account.

Guarantor
Again, if you doubt the tenant seek someone to guarantee the lease, e.g. a director if it is a limited
company. The creation of a limited company is to limit the liability of the directors, however, so they
will normally be reluctant to offer such a guarantee.

Term
This can be any length. The longer the better for the landlord, normally. The client may want a maxi-
mum period if they intend to refurbish the building and want all leases to expire at the same time.

Rent reviews
The frequency of these is every 3 or 5 years normally, but they may be any frequency.
34 Andy Dunhill, Jane Stonehouse and Rachel Williams
Break clause
This can be a useful way of securing a longer lease term but giving the tenant a way out as well. These
do have a negative effect on investment value. They can also be difficult to effect depending on how
onerous the break option provisions are. They can be subject to a penalty if operated, e.g. the payment
of a fixed number of months’ rent.

Full repairing and insuring/internal repairing and insuring

Most landlords want an FRI lease, which is sensible in a large, modern and multi-occupied office. But
it may be inequitable for an older industrial building in poor condition. If the building is not in a good
state of repair or if there is one specific part that is in bad condition, e.g. the roof, it can be beneficial
to agree a Schedule of Condition for the property with the understanding that the tenant should yield
up in no worse a condition at the end of the lease. Or specific areas of poor repair can be omitted from
the tenant’s liability, e.g. the roof.

Service charge
This is normally common for all tenants in a multi-occupied building but in an older building a tenant
may not be prepared to contribute to an item that is in poor condition, e.g. a heating system. In this
case it may be a sensible compromise to agree a fixed or capped service charge.

Security of tenure
In England and Wales, but not Scotland, a tenant has a statutory right (under the Landlord and Tenant
Act 1954) to renew a business tenancy at the end of the term. It is possible to contract out of this
right at the start of a lease. This is fairly common, especially where the landlord wishes to redevelop/
refurbish in the foreseeable future. If any new letting is to be contracted out it should be made clear
at the outset of marketing.

User
The landlord may wish to restrict use, e.g. in a shopping centre where they require a good tenant mix.
If the user is too restrictive it can reduce rental value, however. When negotiating a new lease it is
advisable to be as open as possible, without prejudicing the landlord’s position, in order to maintain
the landlord’s investment value. The tenant will also gain by giving them maximum flexibility in use
and the ability to dispose of the lease if necessary.

Repair/refurbishment
Who is to do any work and who is to pay for it needs to be agreed. Often the tenant prefers to be in
control and be given a rent-free period to offset the cost. Sometimes it is preferable for the landlord to
do it especially where the works are substantial and they wish to ensure it is done correctly. The key
is to make it a condition of the lease that one or the other does it.

Fitting out
In a retail unit it is normal to give the tenant a rent-free period as a minimum to cover the time it takes
to do the work. In a slow market the landlord may make a contribution towards the tenant’s costs. There
are examples of tenants that have taken leases in poor market conditions, where landlords have paid for
 Agency 35
all fitting out costs and a long rent-free period, with the sole intention of disappearing at the end so no
rent is ever paid. Such companies rarely pay any property-based local taxes or any other costs. Beware!

Costs – legal and surveyors’

In the UK it has been standard to ask a tenant to pay the landlord’s legal costs but there is no legal
requirement to do so. In some cases a tenant or purchaser may be asked to pay surveyors’ costs as well.
This is common in the public sector and can often be a non-negotiable issue. Sometimes you may be
able to negotiate that the tenant is to make a fixed contribution to the landlord’s costs. Agree who is
to pay what costs – which will often be each party to bear their own costs.

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.

1.16 Marketing a property by way of a sublease

Key terms: sublease; term of lease; occupational lease
An occupational sublease is the creation of a lesser legal interest out of an existing lease. This may be
the whole or part of the demised area for the remainder or part of the term. The lessee will enter into a
management role as they must collect rent from the sub-lessee and pay to the lessor. They will remain
responsible for all terms under the lease.
An occupational lease is one where an organisation has a lease of property to use and occupy in
order to perform the function they are required to undertake – for example, business purposes. Other
forms of leasehold interest are not the subject of this concept.
It must be established with the lessee whether it is the whole of the property/demise that is surplus
to requirements or whether only part is surplus, in which case they may well wish to remain in occu-
pation of the larger part of the property. If this is the case you may be able to surrender part to the
landlord or sublet part.
You should also establish the lessee’s future requirements. It is not uncommon for a lessee of a
multistorey office building to find that, say one floor, is surplus so they may seek to reduce their costs
by subletting a floor. This surplus may, however, be because of a known short-term reason and they
may well want to keep their options open to reoccupy the space at a given point in the future. In such
a case you would be seeking to dispose of part of your client’s demised area for part of the remaining
term of the lease.
You must establish exactly what the lessee wishes to achieve which will influence your report and
recommendations. This, of course, will be directly restricted by the market conditions at the time and
the terms of the lease. The key aim will usually be to minimise your lessee’s costs, which will influence
negotiations accordingly.
The first thing you must do is obtain a copy of the lease with all additional attachments, e.g. Rent
Review Memoranda, Deeds of Variation etc. It is not uncommon to be given incomplete paperwork.
Plans will normally be colour coded but copies are invariably only in black and white. Make sure you
can make sense of them. You must then read the paperwork and understand what it means for the
lessee. The whole of your marketing will be constrained by the terms of the lease. A factor to bear in
mind is that taking over a lease from another occupier is always going to be less attractive than taking
out a new lease because then you can have some influence on the terms of the lease.
36 Andy Dunhill, Jane Stonehouse and Rachel Williams
When disposing of a lease for an occupier it is advisable to involve the landlord at the start of the
process which should make it easier, and various consents will be required from them, not least the
consent to dispose of the leasehold interest. There are normally statutory requirements placed on land-
lords to ensure they act in a timely manner. Intransigence is not however uncommon!
Where you are acting for a company that has a lease of a whole building and only wishes to dispose
of part, say one floor, you will need to consider what areas of the building will become common and
any actions your client must take to secure its own position and that of its intended sub tenant. Security
can be a concern where a company is to share a building that it has previously occupied on its own.
You must make sure the lessee understands that it will need to establish a service charge arrangement
that was not in place previously.
A company that occupies a whole building will normally wish to make an effective advertisement
out of it but this is inconsistent with sharing it with other occupiers. It will make your marketing
efforts more difficult, so identifying the point on inspection should help in your recommendations.

Key factors
Terms of the lease
Establish the main details of the lease – an abstract. This should include as a minimum:

● lease term
● commencement and date of expiry
● rent reviews and break clause
● current passing rent
● repairing liability – FRI or IRI
● rights to sublet
● user clause
● any restrictions, e.g. sometimes any sublettings must be contracted out of the Security of Tenure
Provisions of the Landlord and Tenant Act 1954.

Terms of sublease
These need to be flexible but must link with rent reviews and break clause in the lease if any. The
maximum term of a sublease is one day less than the client’s remaining term. If the lease is due to
expire in the near future you should establish whether the landlord would be prepared to take a sur-
render of the surplus area and grant a new lease to any organisation you find that wishes to occupy
it. They may agree but they may not do so if they believe that the building will be more marketable
as a whole after your client’s lease expires than if they enter into longer term lettings of smaller areas.

Rent review and break clause

If there is an imminent or outstanding rent review your job will be much more difficult because you
will not be able to say what the rent is going to be for very long into the future. This is an unknown
and makes it more difficult for a potential occupier to prepare an accurate business plan. It is prefer-
able to settle a rent review before marketing a property, however, do not let this influence a higher
settlement than necessary.
If there is a break clause ensure that the terms of the sublease do not restrict the lessee’s ability to
operate the break. It may be best to only sublet up to the time of the break, making allowance for any
notice period required.
 Agency 37
Rental valuation
Over-rented – the current rent payable is higher than the market rent. You will need to offer some level
of incentive to secure a deal, e.g. rent free.
Profit rent – the market rent is higher than the rent passing so the lessee could make a profit.
You must establish what the lease requires. It is normal in the UK for a lease to state that a ten-
ant cannot sublet at less than the passing rent. Some leases require the tenant to sublet at the market
rent if it is higher. The rationale here is for the landlord to maximise their investment value. A rental
transaction in a multi-occupied building provides the best evidence for future rent reviews and lease
renewals. If the evidence shows an increase, all other leases in the building become reversionary.
The Code of Leasing Business Premises encourages landlords to allow flexibility during the lease.
One aspect is not to require tenants to sublet at more than the passing rent. The British Property
Federation (BPF), which is a landlord organisation, has agreed with many of its larger members that
they will follow this protocol. You must establish what the standpoint is of the lessee’s landlord.

Repairing liability
If the lease is on a full repairing and insuring basis and the potential sublease only short term this may
be a negative. Be clear whether the liability is direct upon the occupying lessee or via a service charge
in a multi-occupied building.

Comment re-right to sublet

The rights or any restrictions on the tenant’s ability to sublet contained within the lease must be clearly
set out. Some leases absolutely prohibit subletting of part or the whole in which case this is not an
option. Some leases only permit one subletting and some may stipulate that the sub lessee cannot fur-
ther alienate the sublease. Both of these are quite restrictive.

User clause
To avoid an incompatible user with your client there may be restrictions. Beware of the effect on
rent. There may be some restrictions in the lease that you must comply with. For example it is not
uncommon in a building owned by a pension company where surplus space is sublet to find a clause
restricting disposal to another company in that same business. There may be restrictions on the sale of
alcohol, cooking etc. which will mean that some classes of user will not be permitted, thus restricting
marketing efforts. You must establish whether the clause is open, subject to landlord’s consent, and
whether this is qualified by a test of reasonableness on behalf of the landlord or there is an absolute
restriction.

Other restrictions
If the lease is contracted out of the Security of Tenure Provisions of the Landlord and Tenant Act 1954
the lessee can only offer an unsecure interest. Regardless, the lease may say that any subletting must
be contracted out so that a sub lessee cannot establish a right to a new lease on expiry. Some clauses
only permit one subletting such that the sub lessee does not have the right to further sublet their inter-
est although it is normal to permit an assignment. Finally, do any alterations need to be made to the
building to make a sublet practically feasible? Will the landlord’s consent be required and will there be
any concerns in obtaining it?
38 Andy Dunhill, Jane Stonehouse and Rachel Williams
Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
Murdoch, J. (2011) Law of Estate Agency, 5th edn, Estates Gazette, London.
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 3.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 15/11/2013).
www.rics.org/uk (accessed 15/11/2013).

1.17 The marketing process

Key terms: marketing; viewings; for sale; to let; prospective tenant; prospective buyer
Once an agent has received clear written confirmation from the client that recommendations and costs
are acceptable, a legally binding contractual agency agreement has been agreed. The agent should put
the marketing plan into action as quickly as is practical and sensible.
It is not unknown for a client to have an unrealistic expectation of the speed with which this can
be done. Having written the letter of confirmation some clients expect to see advertisements in the
newspapers and for sale/to let boards etc. up the next day. Such expectations must be managed.
As well as arranging for all external actions to be put into place, it must be ensured that this new
instruction is put onto the internal systems so all involved know it is on the market and can respond
to enquiries when needed.
This marketing will hopefully generate some enquiries which must be responded to promptly. While
this all sounds quite simplistic it is vital that there is in place an efficient system that ensures these mat-
ters are dealt with effectively and that all involved engage with the process. There is nothing worse than
receiving no response to an enquiry for information on a property. If this happens an agent is not giving
their client an acceptable duty of care and skill and will not enhance the reputation of the organisation.
Ensure that contact details are kept, including telephone numbers and email addresses so that the
enquirer can be followed up and the enquiry reported to the client.
The aim of a good agent is to match those looking for property to what they have on the market.
The agent must understand an applicant’s requirements and know the properties they are dealing with
in order to do this effectively. If an agent treats an applicant in an efficient and professional manner
they will be happy to deal with the firm and may even instruct it again in the future.
Try to get prospective purchasers/renters to view a few properties to give them a clearer idea of
what is available and what they want. It also offers the chance to meet them. When conducting a
viewing of a building it is crucial to know it so that any questions can be answered.
Where a company is involved, try to find out some background information on the company espe-
cially where they have a substantial requirement. It will help to take a possible deal forward. An agent
should also know the market and appreciate what else they will be looking at, in order to present a
property in an appropriate light. It is a mistake to criticise other buildings or those involved with them.
Follow up all viewings a few days later to establish whether the applicant wishes to proceed. If so,
take the interest forward. If not, is there anything else that will be of interest to them?
A prospective tenant will compare properties in terms of location, specification etc. One of the
main criteria for comparison is annual costs usually on a per square metre/foot basis. The three prin-
cipal costs are rent, rates and service charge. As the agent you need to know what each of these is
for buildings you are dealing with. In the UK these costs are quoted on an annual basis but in other
countries it may be monthly. An agent must understand what is being quoted and what it includes
(see Concept 1.19).
Throughout the marketing period it is very important to report regularly to a client. There is no
fixed timescale but even if nothing has happened, a letter or call at least once a month is advisable so
 Agency 39
the client knows they have not been forgotten. Always try to think of new and fresh ideas to try to
generate some interest in a property that is proving difficult to sell/let.
If an agent or a person connected to them has any level of personal interest in the property being
marketed this must be made clear and transparent and the client kept fully informed. The client’s
agreement must be obtained to confirm they are agreeable to the agent continuing with the instruc-
tion. This principle applies where an agent offers to supply any form of services to a prospective buyer
of property being marketed, and especially where the agent will receive a fee in connection with this.
An example of this is where an agent has an in-house financial advisor or links with a lending organi-
sation to which prospective purchasers of property the agent is marketing are referred, and where the
agent will receive a fee if a loan agreement is completed.
If an agent or employee of the firm or anyone connected to an employee of the firm instructs
an agent to market property on their behalf, this must be transparent on any marketing material.
Prospective buyers or tenants must be aware of who they are negotiating with. The agent must also
take steps to ensure that other clients of the firm are treated on an equal basis and that all properties are
marketed with the same vigour. It is advisable to put in place a procedure whereby another employee
of the firm deals with the property concerned – where this is practical.
All offers received for a property must be reported to a client promptly and in writing. An agent
must not misrepresent any offers or discriminate in any way. For example where two offers are received
for a property, one will take a loan through the agent, for which an additional fee will be received
and the other has arranged their own loan, both offers must be reported on the same basis and recom-
mendations made disregarding the loan and fee arrangements.
An agent must not in any way ‘ring fence’ the marketing of a property or any offers received. ‘Ring
fencing’ is where a property is offered to a limited number of prospective buyers, or perhaps one only,
with the sole intention of underselling it. This has occurred where a vulnerable client, unaware of the
market, instructs an agent to sell a property and they do so at a knockdown price, perhaps to another
friendly client who then subsequently sells it on at a profit. The agent receives two fees and perhaps an
additional undeclared fee.
A key change introduced by the Consumer Protection Regulations is that an agent must be entirely
upfront about problems with a property being marketed in the same way as positive attributes. An
agent is only expected to know things within their line of business but if they do become aware of any
problems, amounting to a material factor, these must be fully disclosed.
If for example a building has a major structural defect; is located in a flood plain; is subject to a com-
pulsory purchase order (CPO); has planning proposals that will alter the immediate area and, therefore,
value – an agent must disclose these issues. In addition if a previous prospective purchaser withdrew
from a purchase following a survey that highlighted problems of repair, this must be disclosed. It is
unacceptable to just put the property back on the market at the same price so that the next purchaser
gets another survey done to simply establish the same problems.
The withholding of information by an agent will be treated as a ‘misleading omission’ (see Concept
10.20). The buyer or seller must have all relevant information at the point they make their decision on
whether to buy or sell – this is termed a ‘transactional decision’. It is the omission of ‘material informa-
tion’ that is an offence under the CPR/BPR. The legal principle of caveat emptor, buyer beware, is in
effect no longer the case.

Further reading
OFT, ‘Guidance on property sales’, September 2012 (OFT1364).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.6.
www.isurv.com (accessed 03/12/2013).
www.rics.org/uk (accessed 03/12/2013).
40 Andy Dunhill, Jane Stonehouse and Rachel Williams
1.18 Negotiating
Key terms: duty of care; flexibility; negotiating margin; Data Protection Act
An agent has a duty to a client to get the best deal possible for them. A property transaction is rarely
solely about rent or price. There are many factors to bring to a negotiation in an effort to agree a deal
suitable to both parties. The outcome will depend upon the relative positions of the parties involved in
the negotiation. Where the client agrees, the negotiations for a letting should be conducted within the
framework of the Code of Leasing Business Premises which encourages a flexible leasing environment.
There are no set rules about how to conduct a property negotiation and most surveyors will have their
own style – the following is intended to be a guide. However, the key is to be prepared.
Make every effort to be on time to meetings. If being late is unavoidable contact the other party so
they are aware. Being late to a meeting without explanation means the agent is fighting an uphill battle
from the start. Turn off mobile phones before the meeting or at least put them on silent. If a phone
does go off do not answer it, just stop the call, then turn it off.
Leave a negotiating margin – never start at the lowest acceptable position. When reporting to a
client with marketing recommendations it is best to provide a range to allow room for negotiation. In
a sale this will generally focus on price but other factors may be relevant. In a letting it is the relation
between the lease terms and the rent.
Be realistic in a negotiating stance. There is no point holding out for a price or rent that is wholly
unrealistic or unjustifiable in the market place. Flexibility is key. Thinking laterally about how to put
a deal together is important. How can the property available match or be made to match the require-
ments of the party looking for new space? This may mean fitting in with their timescales; the vendor/
landlord undertaking some works of alteration to the property; doing a split of space; being flexible
on lease terms especially perhaps with a new business that can really only commit to a shorter-term
arrangement.
Always take on board the needs and views of the other party in the negotiation. Let the other party
to the negotiation have their say, make the case clearly, and stick to it if appropriate. Be prepared to
think about arguments put forward and arrange a further meeting.
Treat those in the negotiation with respect and be polite. The other party may be a surveyor but
in many instances negotiations will be conducted with the potential occupier direct who will not be
a surveyor. They do, however, often have a reasonable knowledge of property in relation to their
requirement. If they do not then taking advantage of their position is not a good course of action. It
is best to recommend they seek appropriate professional advice.
All offers made/received are subject to the client’s instructions. It is not an agent’s role to commit
a client to any transaction; it is the client’s decision based on the advice of their agent. If a deal is pro-
visionally agreed which is outside a client’s instructions, make it clear this is the case and that it will be
discussed with the client.
In a reasonable market with a good property there may be more than one party interested. This
will require the agent to undertake negotiations with two or more parties, so the question arises – is
it acceptable to disclose the details of an offer made by one party to any of the others? The answer is
no – it is a Data Protection Act issue. An agent must go back to each party to ensure that they have
got the best offer out of all interested parties so that the full position can be reported to the client with
a clear recommendation.
There may be a temptation to make up or exaggerate an offer to use in negotiations with one
or more parties interested in a property. Do not be tempted – it is illegal to create false offers; to
misrepresent the detail of an offer; quoting a false high offer to induce a potential buyer to make
a higher offer than they would have done otherwise. This is covered in the Consumer Protection
Regulations (see section 4.6 of the OFT Guidance). The making of false offers is also covered by
the Fraud Act 2006.
 Agency 41
The object is:

● to secure a deal;
● to secure the best deal;
● to deliver a duty of care to their client.

Always remember that a deal is a package of terms, not just a rent/price. Do the job thoroughly. Think
laterally. A good deal is where both parties feel they have secured the best for their client and that there
was something left in their negotiating margin.

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
OFT, ‘Guidance on property sales’, September 2012 (OFT1364).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.7.
www.isurv.com (accessed 15/11/2013).
www.rics.org/uk (accessed 15/11/2013).

1.19 Occupation costs

Key terms: rent; rateable value; uniform business rate; service charge
When marketing commercial property to let – either on a new lease, sublease or by assignment – an
agent needs to be aware of the key costs of occupation of each property per annum. Most prospective
tenants/lessees will compare the various properties available based on these costs as a total per unit of
size either per square metre or per square foot per annum. As far as is practical the agent needs to be
aware of how to establish these costs and have a realistic and justifiable idea of what they are likely to
be. The agent must also understand how these costs are arrived at and be able to explain how each is
calculated. The costs are rent, rates and service charge.
A company looking to take a lease of property will in some way need to prepare a business plan
to justify it. Property costs are only part of the process. Other recurring costs will include employee
salaries; utility costs (so energy performance of a property will become more important as costs rise),
telephone and broadband costs, and many others. There will also be one-off costs, for example reloca-
tion from their existing property, new office furniture, redecoration and refitting etc. Some of these
you may be able to factor into negotiations.
We will now consider each in turn.

Rent
This will be established by the agent based on a passing rent in the case of an existing lease or the
agent’s opinion from appropriate comparable evidence. The quoting rent is subject to client approval
and may be subject to negotiation either by having a margin to agree a slightly lower level or by way
of some form of incentive.

Service charge
This applies in the case of a multi-occupied building such as an office or a shopping centre and relates to
the common costs incurred in running the building on a daily basis. In some cases, especially industrial
property on an industrial estate in single ownership or offices/shops on a business park, there may well be
an estate service charge to cover the costs of landscaping, road maintenance if not adopted, maintenance
of estate sign boards etc.
42 Andy Dunhill, Jane Stonehouse and Rachel Williams
The principle of a service charge is that there are common costs in running the property concerned.
The landlord will normally set up a management company or arrangement to look after the property
on a daily basis. In an office building this will include maintenance of the structure; common area
costs, e.g. heating, lighting, decoration of the entrance and stairs; lift maintenance contract; mainte-
nance contract for the heating system; actual heating costs, e.g. gas for a gas central heating system; and
staff costs, e.g. commissionaire, security and caretakers etc.
In a shopping centre more of the costs will be associated with the malls and other common areas.
Some centre owners try to put all the costs of marketing the centre through the service charge, which
can be contentious. The agent should be aware of any such issues.
Heating is usually the main part of the cost in a service charge so an agent needs to be aware of
whether these costs are included in the service charge. In some cases the heating may be separately
metered to each office or shop. In an older building that has wall-mounted electricity heating that
does not require any form of common heating plant the costs will be paid directly by the tenant.
The managing agent or landlord estimates total expenditure for the year, the tenants pay a propor-
tionate part of this cost on account during the year with rent and actual expenditure then balanced
against these costs – this is called reconciliation. The tenants must then pay additional costs if more
has been spent, or receive a refund if costs have been less than estimated. The estimate and actual
costs should not vary significantly. Costs are usually split on a ratio of floor areas but other methods
may be used. The existing lease will state the method or the landlord must confirm it in the case of a
new lease.
This process should not be a major problem in an established property because estimates will be
based on past costs subject to anticipated work during the forthcoming year. Where the agent is
marketing a new building without that past history, costs in similar buildings will need to be con-
sidered to provide a realistic estimate. An agent should seek the advice of a suitable management
surveyor.
The agent should be able to obtain real costs from either the landlord or tenant client. This will
be actual costs from previous years or budget on account costs where reconciliation has not yet been
completed.
In general a building with air conditioning will have a higher service charge than one with gas
central heating as running costs are more. Such buildings are also likely to command a slightly higher
rent, as air conditioning is more desirable.
In some cases the landlord may be prepared to agree a capped service charge – or if it’s an existing
lease that may have been agreed at the start. This means that the service charge cannot rise above a
maximum level for an agreed period. The agent needs to be aware of this.

Local rates
Rates are a local tax based on market rental value. It is invariably a significant element of the cost of
occupying commercial property. Rating is a significant discipline within the profession; however, an
agent needs to understand the amount payable and the process in outline.
All commercial property is given a rateable value (RV). Each individual hereditament has a separate
RV and this may be explained as:

Hereditament – the defined property comprising the rating unit. It does not need to be the whole
of a property but can be a defined part of a larger unit, for example, in a multi-let office building
or a shopping centre there will be many separate hereditaments.

The RV is the market rental value of the property as at the antecedent (last) valuation date. Previous
dates have been 2003 and 2008. All property is re-valued by the Valuation Office Agency and these
 Agency 43
values, the list, come into effect 2 years after the date of valuation, 2005 and 2008 respectively. This has
historically been done on a 5-year rolling programme. A re-valuation was due in 2013 to be effective
in 2015 but the government delayed this.
The tax payable is calculated by multiplying the RV by the uniform business rate (UBR). This is set
by central government and reviewed annually. Note that this is the maximum sum payable and for a
variety of reasons the actual sum payable may be less. The tax is collected by the local authority where
the property is located.
RV assessments can be obtained from the Valuation Office Agency (VOA) website (see www.voa.
gov.uk). Where an agent is instructed to market a property with an existing RV the process is straight-
forward. If acting for a tenant it should be possible to obtain copies of the accounts received from the
local authority to confirm exactly what was paid. Copies should be kept on file.
If there is not an existing RV the property will be assessed when it is occupied so it is not pos-
sible to give an exact assessment during marketing. This situation will arise where the property
is a new development or major refurbishment or an existing building where, for example, one
floor is to be marketed but which was previously occupied in conjunction with other floors in
the building.
In the former case an agent could make an estimate from the RVs in other similar buildings in the
same location but it must be made clear that it is purely an estimate. Where there are other RVs of
similar accommodation in the same building a clearer estimate can be made but again it must be made
quite clear to any prospective tenants that you have only made an assessment.
The rates for the 2013–14 tax year are:

Rates payable = RV × UBR

RV = market rental value at April/2008 (w.e.f. April/2010)
UBR for 2013/14
RV up to £17,999 – 46.2p/£
RV £18,000 or over – 47.1p/£

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 8.

1.20 Heads of terms

Key terms: lease terms; landlord; lessee/tenant; subject to contract
When a deal has been agreed in principle it is advisable to prepare a clear and full letter of heads of
terms to be confirmed between the landlord and tenant/vendor and purchaser. Heads of terms are a
summary of the agreement between the parties and are used to instruct lawyers to produce the formal
lease or sale deeds. This must always be subject to contract, i.e. not legally binding on either party. It
is the solicitor’s job to finalise the legally binding contract; however, the preparation of a good heads
of terms letter makes that job easier. It should mean that the solicitor can put together a lease/sale
contract that more accurately reflects the intentions of the parties.
The following is a suggested format for a letting and must be subject to contract. If the transaction is
a sale, lease assignment, sublet or long ground leasehold, the heads of terms should reflect it. Suggested
format for a new leasing arrangement is shown below:
44 Andy Dunhill, Jane Stonehouse and Rachel Williams
Table 1.20.1 Suggested format for a new leasing arrangement

Property The full address including postcode.

Lessor/landlord Name and address.
Lessee/tenant The name and trading/registered address.
Make sure the identity of the tenant does not change before leases are to be signed. It is
not unknown for an occupier to negotiate a lease in the name of a company which is of
good covenant strength, and then to try to put the lease in the name of a company with
much less covenant strength within its group but without any main company guarantees.
In any event any financial enquiries e.g. references, credit ratings etc. will be not be
relevant.
Solicitors Names and full addresses for both parties.
Description and Refer to the marketing details, although they should not be used as part of a binding
accommodation contract. This should include a clear location and site plan at an appropriate scale (perhaps
1/1250) and if part of a multi-occupied building, a floor plan showing the demised area
(that to be included in the lease) with common areas.
Parking If any is included in the lease then how many? Where are they (include a plan)? And is the
cost included within the rent or an extra?
Term Length of the lease and is there to be a break clause? If so are any penalties attached to it?
Is this a tenant only break or will the landlord have the benefit of it as well?
Rent review How frequent and on what basis? It is not normal to go into detail about all of the rent
review machinery as this can be very long and detailed in UK leases. It is normally dealt
with by the solicitor; however, there is potential here for cross-referral work for your rent
review specialists to advise on the detail of the rent review clauses.
Rent State the rent payable and frequency of payment – usually quarterly in advance but the
retail sector is pushing for monthly rents to ease cash flow.
Rent free/rising rent etc. State the periods agreed and any conditions attached, e.g. if the tenant is to undertake
certain works in lieu of this.
Guarantor Is there to be one? If so give full identification details and address. Take up references and
a credit check etc.
Commencement An indication of when the parties hope to start the lease gives the solicitor a date to aim
towards.
FRI/IRI State the basis of the tenant’s repairing liability.
Service charge In a multi-occupied building a sensible landlord and managing agent will set up a standard
form service charge and all leases would normally be on this basis. If nothing has been
set up, liaise with the landlord to agree what is to be done in conjunction with your
management colleagues. If it is not your area of expertise refer to someone who will act
for the landlord on a consultancy basis. This is a further opportunity for cross-referral
work.
Standard of fitting at start This is important because a lease normally requires a tenant to give the property back in
of lease the same condition as it was at the start of the lease. If it is not made clear what condition
it was in at commencement of the lease then negotiations at the end become more difficult
for all concerned.
Services State what is available within the building and specifically to the demised areas.
Use It should be clearly stated what the building can be used for. If planning consent is
required for the proposed use it will normally be the tenant’s responsibility to secure it.
Write a timescale into the deal so that the prospective tenant cannot prolong the process.
This should contain a cut-off date if planning is refused, or if the occupier does not
proceed in an acceptable time scale. If there are to be any restrictions on use this should be
clearly stated. This is common in a shopping centre to retain a good tenant mix.
 Agency 45

VAT If VAT is to be payable it is normally the responsibility of the tenant. This can be a very
real cost to a tenant that cannot reclaim it, e.g. a bank.
Repair/refurbishment Make it clear who is to do what, by when and at whose expense.
Hours of access This is only an issue in a multi-occupied building. State the position. Provision will
normally be needed for access outside normal opening hours in an office, e.g. by use of a
swipe card system, key pad entry or through a security firm.
Rating – local taxation State who is to pay the sum to be taxed (RV) and the rate of tax (UBR).
Security of tenure If the parties are to opt out the solicitors should be requested to deal with the appropriate
correspondence.
Authorised guarantee If there is to be the requirement for an AGA when the tenant assigns the lease make it
agreement clear. State if the assignee is to be subject to any specific tests, e.g. minimum profit levels.
Costs Make it clear who is to pay whose costs and when.

When the landlord and tenant have agreed the heads of terms send copies to the solicitors to prepare
legal documentation.

Further reading
‘Code of Leasing Business Premises’, available at: www.leasingbusinesspremises.co.uk (accessed 15/11/2013).
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 5.8.
www.isurv.com (accessed 15/11/2013).

1.21 Money laundering

Key terms: money laundering; dirty money; clean money; legislation
The growth in organised crime, terrorism, tax evasion and other illegal activities has resulted in a signifi-
cant amount of illegal money finding its way into the world’s economy. Most countries have taken some
steps to make it more difficult for this to happen. It remains, however, a major and growing problem.
The problem of money laundering is very much an international one and needs to be tackled on
an international scale. There is a belief in government, both in the UK and especially in the European
Parliament, that property is a popular way to launder money. It is impossible to be certain of the
amounts of money involved, but it is thought that the sums are substantial each year.
The European Union (EU) has issued various directives to its member states, which have embod-
ied these into appropriate legislation within their own legal systems. These regulations are reviewed
regularly, resulting in a further tightening of controls.

The process
Placement
This is the initial introduction/placing of illegally obtained money. In the context of estate agency it
would be the buying of a property.

Layering
The process of moving the money around, through a string of legal sources to create a difficult audit trail.
46 Andy Dunhill, Jane Stonehouse and Rachel Williams
Integration
The ultimate aim is to give the money a sufficiently detailed history and provenance so that it becomes
accepted and unquestioned. The ‘dirty money’ has therefore been converted into clean money.

Definition
Money laundering is the turning of money obtained by criminal or improper means into money with
a known and established provenance. It is the conversion of dirty money into clean money. It is the
concealment of the identity of illegally obtained money so that it appears to have been obtained from
a legitimate source.
The relevant law in the UK is outlined below:

● Criminal Justice Act 1993

● Terrorism Act 2000; Anti-Terrorism, Crime and Security Act 2001
● Money Laundering Regulations 2007 (MLR)
● The Proceeds of Crime Act 2002 (POCA)

What is the aim of the legislation? To reduce money-laundering opportunities by ensuring that busi-
ness has effective anti-money laundering systems and controls.
POCA came into effect on 24 February 2003 and redefined money laundering and the offences
linked to it. The principal offence of money laundering in the Act applies to everyone, even if the
business does not fall under the Money Laundering Regulations. The effect of this is that everyone
has a responsibility to be vigilant throughout all property transactions. It this responsibility that can
often be overlooked – an agent must be vigilant of the actions of all parties to a transaction, including
unsuccessful purchasers, not only their client.
There are three principal offences:

1 Assisting
An agent can be prosecuted for assisting a money launderer by becoming involved in an arrange-
ment and by knowingly helping a suspect deal to go through. It is crucial therefore that an agent
gives due consideration to all instructions received from a client.
Penalty – up to 14 years in prison and/or a fine.
2 Tipping off
Providing information to someone that is likely to prejudice an investigation into money launder-
ing, knowing or suspecting that a disclosure to a money laundering reporting officer (MLRO) or
to the authorities, has been or might be made.
Penalty – up to 5 years in prison and/or a fine.
3 Failure to report
If you fail to report circumstances where you know or suspect, or have reasonable grounds to
suspect, that another person is engaged in money laundering you may be prosecuted.
Penalty – up to 5 years in prison and/or a fine.

Money Laundering Regulations 2007

These regulations placed further requirements on the business sector, which includes estate agents.
A firm must put in place a system of controls that achieves the following:
 Agency 47
1 Set up identification procedures in respect of those wishing to establish a business relationship with
you, whether for a one-off transaction or on a continuous basis.
2 Set up record keeping procedures.
3 Set up internal recording procedures including appointing an MLRO. It is this person that has the
ultimate responsibility of deciding whether or not to report suspicious activity.
4 Establish procedures of internal control and communication as may be appropriate for the pur-
poses of forestalling and preventing money laundering.
5 Take appropriate measures to ensure that employees are aware of the regulations and other pieces
of legislation that govern money laundering. They must be given adequate training in how to
recognise and deal with transactions that may be related to money laundering.

Regulation
Estate agency is now part of the regulated sector. In general in the UK it is advised that an estate
agent should not take cash from a client. All monies for fees etc. should normally be paid through
the banking system.
All firms must have a MLRO. This person is responsible for dealing with all issues relating to potential
money laundering identified by the firm. Where an agent considers that the actions of a client or other
party they have dealt with are suspicious, these suspicions must be reported to the MLRO who will
investigate and decide whether to report the matter or not. The role of the MLRO is an important one.

Reporting suspicions
In the UK this used to be to the National Criminal Intelligence Service (NCIS) and has now moved
to the Serious Organised Crime Agency (SOCA). The normal way to make a report is online and this
is known as a suspicious active report (SAR). The following are some of the things to be aware of:

● Upfront fees – it is not normal for a potential client to want to pay fees in advance.
● Offers of lots of work – the promise of lots of work especially in a short space of time can be
tempting but is not usual. A client will normally want to develop a relationship with an advisor
over a period of time. If the offer of such deals seems too good to be real it probably is not!
● Request for over valuation – never do this under any circumstances, always give advice based on
the market.
● Foreign/unknown lending institution – there are many overseas lending institutions that are per-
fectly acceptable, however, some are not. There are certain parts of the world where the financial
sector is not regulated in the way it is in the UK. If a client or potential buyer is using funds from
an unknown source, check it out.
● Change of money source – there is little good reason for a business to move money around dif-
ferent banks unless it is part of a layering process.
● Purchaser registered abroad – especially in less regulated countries. The UK has seen a lot of inward
investment especially in London which has come from reputable sources, so simply because a cli-
ent or buyer is from outside the UK it does not mean the money is not legitimate but an agent
must take extra care under such circumstances.
● Client has very bullish view – if what you hear simply does not make sense it may be that the
party concerned just wants to place money quickly and if they over pay but get the money into
the system and legitimise it a small loss is not important to them.
● Unrealistic timescales – the property market is relatively slow as due diligence on a property takes
time. Where a buyer wants to proceed too fast or without doing the usual checks, there will be a
reason and usually not a good one.
48 Andy Dunhill, Jane Stonehouse and Rachel Williams
● Large sums of cash – there is no reason for anyone to produce cash and even less reason for any agent
to accept it. If someone tries to pay in cash: where has it come from, has the taxman ever seen it?
● Behaviour out of context – where a known client has bought property in a certain price range in
the past but suddenly wants to buy an investment property of substantially higher value an agent
must establish why and where the additional cash has come from.

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, sections 9.6 and 10.5.
RICS (2011) ‘Money laundering guidance for members of RICS and other organisations’, available at http://www.
rics.org/uk/regulation/regulation-uk/guidance-for-regulated-firms/money-laundering (accessed 05/06/14).
www.isurv.com (accessed 03/12/2013).
www.rics.org/uk (accessed 03/12/2013).

1.22 Safety and security in agency

Key terms: health and safety; accompanied viewings; inspection of empty buildings
Health and safety in the workplace is a key factor in employment in the UK. The base legislation is
the Health and Safety at Work Act 1974 supplemented by additional regulation, e.g. the Construction
(Design and Management) Regulations 2007. The law places responsibilities on both employer and
employee together with an expectation of common sense. There are actions an employer must take
and there are guidelines the employee, in this case an estate agent, must follow.

The employer
Where surveyors are required, as part of their work, to operate outside the office they must under-
take a risk assessment of those activities and put in place appropriate measures to ensure the safety
of employees. An employer owes a duty of care to employees. In the estate agency sector this will
include: travelling outside the office either driving, on foot or by public transport in whatever form;
surveying buildings that may be either empty or occupied (each has its own risks); attending meetings
– the main risk being accompanied viewings in buildings on the market.
In addition employers are required to ensure that all employees are provided with appropriate train-
ing in safety procedures and of course the surveyor is expected to engage in this process, especially
when new to a job and as a trainee estate agent. Where an employee is in any way disabled or has spe-
cial needs, the employer must take appropriate action to ensure safety. The employee must of course
declare any such issues. The Equality Act places responsibility on the employer.
An employer must ensure that all necessary safety equipment is provided or available; for example,
personal protective equipment (PPE) including boots, hard hat and high visibility jacket where visits
to construction sites are required. There are occasions when specialist precautions need to be taken –
for example protective glasses and other clothing when undertaking an inspection of some industrial
property where there are hazardous processes. The estate agent must make full use of such equipment.

The risks
The key risks are mentioned above and some practical suggestions will be made for each. As ever it is
crucial to remember that prevention is better than cure. Travelling to an inspection or meeting on foot
or by public transport should not normally create any undue issues; however, all urban conurbations have
areas where it may be sensible not to walk alone and especially not in a smart suit. Check out the location
of any properties you need to visit to see whether there are any problems and act accordingly. If driving,
 Agency 49
do so legally; especially, don’t text, and only use your mobile phone with a proper hands-free facility. If
you use your own car be certain it is insured for use in your employment as not all policies cover this.
When inspecting an empty building there are many potential hazards. Be certain the building is safe
to enter before doing so. If you are alone, ensure you are not followed into the building. If there is
rubbish lying around watch out for nails you could stand on; pits or holes in the floor covered by rub-
bish; wooden flooring that might be rotten and unsafe; bird droppings that can carry disease; asbestos
that may have been disturbed; exposed bare electricity cables etc.
Never use a lift in an empty building even if you think it works. If you do and it stops part way between
floors such that you cannot get out, there may be no means of calling for assistance as any emergency facil-
ity will probably have been discontinued. Mobile phones will not always work in a lift shaft. You could
be in for a long and uncomfortable wait for rescue – then there’s the embarrassment factor afterwards!
Take care entering a room where the door could shut behind you but cannot be opened from the
inside. This is most likely where the building has a basement. These are just a few things you may
come across but there are many others and you must be alert when doing an inspection.
Wherever possible it is best to do an accompanied viewing of buildings that are on the market and
it is often a job given to trainee surveyors. If the person is known to, and trusted by the agent it is
unlikely there will be a problem. Where those wishing to view a property are unknown there are some
sensible precautions that should be taken. These are outlined in the general guidance below. Very
occasionally a request for a viewing may come from a known party that can be a problem, in which
case the employer should have a specific course of action in place.
Occasionally and without warning the agent may find themselves in an awkward position with
someone who is simply unpleasant or tries to commit you to matters that are inappropriate, i.e. make
the agent agree to possible terms of a deal by the use of pressure or intimidation etc. If this happens
agree to nothing and consider calling the office for assistance or end the viewing. It is unlikely such a
party will ultimately do a deal and in any event they would probably not make a good tenant.

General security guidelines

The RICS and NAEA (National Association of Estate Agents) have agreed the following general guidance
when an estate agent is asked by a client to undertake accompanied viewings of property being marketed:

● record the name, address and phone number of the potential buyer or tenant in a book or on a
system that is available to all staff;
● redial the number to check the authenticity of the person before leaving for the appointment;
● obtain as much information as possible from the buyer or tenant (e.g. employment details, car
registration), and ask whether he or she has property particulars so you can check those against
your mailing list;
● whenever possible, arrange to meet the buyer or tenant at your office and not at the property;
● do not travel to the property in the same vehicle as the potential buyer or tenant when you have
no prior knowledge of that person, but if you need to travel in the same car you should take
someone else with you;
● enter the property after the potential buyer or tenant, and keep yourself between the exit and that
person so if you do have to leave in a hurry, you have as few obstacles as possible in your way;
● advise your colleagues of your anticipated time of return to the office;
● implement a call-back system so that you can report back to the office soon after the completion
of the viewing;
● make sure other members of staff are aware of a distress code, so that you can report to the office
by phone and alert help without further compromising your safety;
● never give out your home phone number;
50 Andy Dunhill, Jane Stonehouse and Rachel Williams
● take a second person with you if there is the slightest feeling of risk;
● carry a personal alarm and a mobile phone, and pre-programme it with an emergency number;
● if in doubt, ask buyers for additional means of identification, e.g. driver’s licence.
(from RICS, 2011: section 8.7.1)

Further reading
RICS (2011) UK Commercial Real Estate Agency Standards, RICS, Coventry, section 8.
2 Building surveying
Stuart Eve, Minnie Fraser and Cara Hatcher

2.1 Building surveying in an estate management context

Key terms: building surveying; common defects; defects diagnosis; construction components
In terms of building surveying in the estate management context, there is a need for a surveyor to
understand the fundamentals of building construction, defect analysis and remedial advice, costing and
effect on value.
A building survey is a structural survey of the property including a description of defects and poten-
tial problems that may be hidden. It gives a recommendation of remedial action and outlines the issue
with a property. A building survey does not include a market valuation of the property (RICS, 2013).

Common defects
There are several inherent or common defects noted in certain types of property built in particular eras:

● Georgian properties
– structural movement due to insufficient or no foundations
– timber issues – dry rot, wet rot, woodworm
– maintenance costs high due to age of fabric
● Victorian/Edwardian properties
– structural movement due to insufficient or no foundations
– timber issues – dry rot, wet rot, woodworm
– nail rot to roof covering
– failure of roof covering (usually slate if original)
– rising and penetrating damp due to insufficient or no damp-proof course
● 1920s/1930s properties
– timber issues – dry rot, wet rot, woodworm
– nail rot to roof covering
– failure of roof covering – terracotta tile or slate
– rising and penetrating damp due to insufficient or no damp-proof course
– electrical failure due to age of the system
● 1950s properties
– structural movement due to land built on – post-war influx of development
– non-traditional housing – some not suitable for mortgage due to severe inherent defects
– nail rot to roof covering
– failure of roof covering – terracotta tile, slate and asbestos
52 Stuart Eve, Minnie Fraser and Cara Hatcher
– rising and penetrating damp due to insufficient or no damp-proof course
– electrical failure due to age of the system
● 1960s/1970s properties
– structural movement due to land built on – post-war influx of development
– failure of roof covering due to lack of lateral restraints to support roof
– failure of windows due to being made of metal which corrodes over time
– use of asbestos
● 1980s/1990s properties
– fewer issues as more modern forms of construction but dated electrical systems
– failure of double-glazed units due to age
– some asbestos materials still commonly used in doors and ceilings for example
● Modern properties
– under 10 years old covered by insurance documentation or an NHBC certificate
– need to check property conforms to the relevant building regulations.

Construction components and types

● Foundations
– none
– ash or stone chippings/rubble
– concrete strip or raft
– brick or stone footings.
These should not be visible unless there is a problem – be aware of underpinning, whereby the original
foundations have failed and remedial work needs to be undertaken to rectify this. In serious cases, this
can blight (severely reduce) the value of the property.

● Walls
– solid stone or solid brick – pre-1910 properties
– cavity – brick and block or stone and block – post-1920s properties
– timber frame – timber framing covered, externally, by blockwork, brickwork, render, pebble
dash etc.
● Floors
– ground floors – solid of concrete or stone construction or suspended timber
– first floors – suspended timber or chipboard
– blocks of flats – can be suspended or concrete to all floors
● Roofs
– flat – lead or asphalt covered
– pitched (and hipped) – slated, tiles, thatch, stone, asbestos
● Services
– water – mains or private
– gas – mains or LPG
– electricity – mains and infrequently generator
– rainage – mains, septic tank, cesspool or private sewerage treatment.
 Building surveying 53
Defect costing
It is difficult to categorically provide costing for works; however, it is a surveyor’s role to estimate the
costs and, importantly, the affect upon value.
When dealing with common defects, it is easier to establish costs but in more severe cases, the
surveyor can withhold their valuation figure pending detailed costing for major works such as under-
pinning, structural movement or repairs to a property in need of total re-modernisation.
In a residential mortgage valuation report, the surveyor has the option to highlight significant repair
work required and will suggest a retention is adopted for the lender. These commonly include:

● electrical repairs – dependent on various costing provided by electrical contractors;

● damp and timber treatment – anywhere in the region of £1000 and in excess of £10,000 depend-
ent on the severity of the issue and the source of dampness;
● structural movement.

Further reading
Hollis, M. (2005) Surveying Buildings, 5th edn, RICS Books, Coventry.
RICS (2013) ‘Guidance note: building surveyor services’, available at: www.rics.org/uk/knowledge/professional-
guidance/guidance-notes/building-surveyor-services/ (accessed 28/10/2013).

2.2 Building pathology

Key terms: building pathology; defects; intrusive; investigations; diagnosis; survey; damp; condensation;
cracking; distortion; boroscope; thermal imaging; insulation; remedy; pathological
The definition of ‘pathology’ is ‘the science of the causes and effects of diseases’ (Oxford Dictionaries
Online, 2013). Applying this term to buildings appears incongruous; however, an analogy can be
drawn between the medical and surveying professions.
The fundamental process of assessing a particular defect within a building, whether it be water ingress
or distress caused by subsidence is exactly the same as medical pathology, hence the term ‘building
pathology’. If we swap the word ‘diseases’ with ‘defects’ in the quotation above this then defines much
of the work undertaken by professionals in order to determine the cause and effect of building defects.
Building pathology involves the careful examination and analysis of surface and sometimes sub-
surface symptoms in order to arrive at the correct diagnosis, synonymous with the medical profession.
Sometimes a defect can be successfully diagnosed merely by undertaking a visual and non-intrusive
inspection. However, in many cases further investigations, involving technology or, more drastically,
opening up the structure are necessary to better understand the nature of defects.
The first stage in building pathology would usually be an instruction from a building owner or
occupier to undertake a survey. This could either involve a survey prior to purchasing a property or
inspecting a specific defect and would usually be undertaken by a building surveyor or structural engi-
neer (in the case of structural movement), although architects and contractors may also undertake this
work at varying levels.
Defects could be any or all of the following:

● leaking roof;
● damp (rising or penetrating);
● condensation;
● cracking to walls;
● distortion to floors.
54 Stuart Eve, Minnie Fraser and Cara Hatcher
Where the cause of the defect cannot be identified using a visual or non-intrusive method of survey, further
investigations would be required. These further investigations might include those shown in Table 2.2.1.
Table 2.2.1 is by no means an exhaustive list of methods available but it gives a broad understanding
of the nature of typical defects and further investigations.
A case study illustrating these further investigations is provided below. The case study involves a
listed warehouse that had been converted into flats. The external walls had been insulated internally
using insulated plasterboard fixed to a metal frame against the internal face of the walls. Dampness had
been noted around windows in a number of flats and a pathological approach was required. Tests were
undertaken to identify condensation risk. Air temperature and relative humidity were recorded and
used to calculate the ‘dew point’ (temperature at which water vapour will condense on a cold surface).
A damp meter such as the one shown in Figure 2.2.1 was used to undertake this analysis.

Table 2.2.1 Defects and further investigations

Defect Further investigations

Leaking roof ● Open up roof structure, either internally or externally.
● Thermal imaging (will identify changes in temperature due to moisture saturation)
● Deep wall probes to test dampness within structure
Damp ● Detailed moisture testing using samples from within wall structure to create a moisture
profile
● Deep wall probes
● Salts testing
● Thermal imaging
● Open up structure
● Test plumbing (hot/cold water and central heating) for leaks
Condensation ● Monitor temperature, humidity and dew point over a period of time using data-loggers
● Further understand use of property (washing/drying clothes, heating, ventilation)
● Thermal imaging
Cracks to walls ● Detailed level survey (horizontal deformation)
● Distortion survey (vertical deformation)
● Detailed monitoring of movement over an extended period
● Trial pits to understand soil conditions
● Drill holes to use boroscope (inspect within cavity)
● Open up structure
Distortion to floors ● Detailed level survey
● Open up and access floor voids for detailed inspection
● Use of microdrill (drills into damp timber to assess extent of rot)

Figure 2.2.1 Damp meter with condensation analysis capability.

 Building surveying 55
There was a relatively high risk of condensation around window openings (where slight mould
growth and spoiled finishes were present) and thermal imaging was employed for further analysis
(Figures 2.2.2 and 2.2.3). The thermal imaging indicated cold spots to the bottom corners of window
openings, illustrated by blue shading in Figure 2.2.3.
Further intrusive investigations were undertaken to understand the nature of the construction as
there were no drawings available. This included first using a boroscope (flexible hose with camera),
which proved inconclusive, followed by opening up of the structure. It is imperative to understand the
nature of the building structure and fabric in order to understand what the defect might be and specify
suitable repairs.
The wall was opened up to reveal that although the main walls were insulated (Figure 2.2.4), there
was no insulation provided to window jambs (Figure 2.2.5). Plasterboard was applied directly against
the solid brick jamb meaning ‘cold bridging’ could occur. This would result in the wall at this point
being much colder than elsewhere, as illustrated in the thermal image (Figure 2.2.3). The temperature
at this location will fall below the dew point as a result and condensation will occur.
A pathological approach led to an accurate diagnosis in this case. A lack of thermal insulation
around windows meant that cold bridging resulted in condensation in specific locations. A remedy (or
cure) could then be confidently specified with full evidence available (Figures 2.2.6 and 2.2.7).

Figure 2.2.2 Dampness to

window jamb.

Figure 2.2.3 Thermal

image indicating cold
spots around windows.

Figure 2.2.4 Wall construction revealed. Figure 2.2.5 No insulation to jamb.

56 Stuart Eve, Minnie Fraser and Cara Hatcher
Window frame
Traditionally constructed
masonry 240mm thick
Softwood cill
30mm cavity Textile vapour buffer
12.5mm plasterboard bonded to insulation

50mm PIR closed cell insulation

Timber stud
Stainless steel vertical spacers Vapour barrier bonded
providing 40mm cavity to plasterboard

Figure 2.2.6 Window detail as existing.

© Alan Gardner Associates.

Brick on edge forming cill

Window frame
Softwood cill Traditionally constructed
42.5mm thick insulated plasterboard masonry 240mm thick
with vapour control layer mechanically
Textile vapour buffer
fixed to masonry
bonded to insulation
12.5mm plasterboard
50mm PIR closed cell insulation
Timber stud
Stainless steel vertical spacers Vapour barrier bonded
providing 40mm cavity to plasterboard

Figure 2.2.7 Proposed remedial works.

© Alan Gardner Associates.

The analogy with the medical profession is an accurate one. The patient (or building) was showing
signs of distress with obvious symptoms (damaged finishes and mould growth) visible. The building
was carefully examined but a correct diagnosis could not be arrived at without further tests being car-
ried, in much the same way a doctor would recommend X-rays or exploratory surgery. A diagnosis
and prognosis was given to the building owner and a choice was made in terms of a remedy or cure.
The plasterboard would be removed to all affected window jambs and insulation would be introduced,
increasing the surface temperature and therefore eliminating the risk of condensation.

Further reading
Hollis, M. (2005) Surveying Buildings, RICS Books, London.
Marshall, D., Worthing, D., Heath, R. and Dann, N. (2014) Understanding Housing Defects, 4th edn, Routledge,
Abingdon.
Oxford Dictionaries Online (2013) Definition of Pathology in English, available at: www.oxforddictionaries.com/
definition/english/pathology (accessed 27/11/2013).
Oxley, R. (2003) Survey and Repair of Traditional Buildings, Donhead Publishing, Sparkford.
 Building surveying 57
2.3 Building surveys
Key terms: valuation surveys; acquisition surveys; maintenance surveys; diagnostic surveys; partial surveys;
schedules of condition; dilapidations survey
In order to successfully carry out a building survey, the building surveyor requires a good knowledge
of building construction, building materials and building pathology. There are a number of different
types of survey that are carried out by surveyors for different purposes. There are also a large number
of different types of building that may be the subject of the survey as well as different types of clients
with their own requirements.

Valuation surveys
Open market valuations (OMV) and mortgage valuations are usually carried out by general practice
surveyors. The survey involves an inspection of the building, an assessment of the condition, and cost-
ings for necessary repairs. After this, comparisons are made with similar buildings in the area that have
recently been sold and their selling prices.
Mortgage valuations are usually instructed by the mortgage lender, but paid for by the mortgage
applicant. Often this leads to the usually erroneous opinion that the report will provide information
that is of use to the applicant and may account for the fact that approximately 80 per cent of house
buyers in the UK do not procure a full survey. The mortgage valuation carried out for the lender
does not usually include a survey of the property; a cursory inspection maybe, but not a survey. The
purpose is to inform the lender whether or not the property is worth the money they are lending, so
that they can be sure that they can recoup their money if it becomes necessary to repossess the property
and sell it. Valuations are often carried out by owners of portfolios of property as part of their asset
management. These do not usually require detailed inspection or survey of the properties unless there
is an additional purpose to the exercise such as maintenance planning.
The type of valuation that is more often carried out by building surveyors is the replacement valu-
ation for insurance purposes, often called a fire insurance valuation (FIV). This involves inspecting
the building to discover its construction so that an estimate can be made of how much it would cost
to rebuild it if it was so badly damaged that it needed to be demolished and rebuilt. For buildings of
standard construction, this is normally done on a square metre basis using up-to-date building price
information from pricing books and the Building Cost Information Service (BCIS).

Acquisition Surveys
This type of survey is carried out where a property is going to be acquired either for occupation or for
investment purposes. Usually this type of survey is carried out on behalf of the prospective buyer of
the property. In the UK sellers of houses have been required to provide information including a home
condition report, however, this requirement was suspended in 2010 and now sellers are only required
to provide an energy performance certificate (EPC).
There are three types of domestic survey marketed by the RICS; these are the RICS Condition
Report, the RICS Homebuyer Report and the building survey. Many house purchasers opt for the
Homebuyer Report otherwise known as the Homebuyer’s Survey and Valuation (HSV). This is car-
ried out to a standard format set out by the RICS, but is only recommended for properties that are in
reasonably good condition, and not for older or dilapidated properties. This type of survey is routinely
carried out by general practice surveyors, although building surveyors may occasionally do the inspec-
tion and appraisal of the building, property valuation is not usually part of the building surveyor’s role.
The RICS condition report is a simpler report that does not include a market or insurance reinstate-
ment valuation for the property.
58 Stuart Eve, Minnie Fraser and Cara Hatcher
The building survey (formerly referred to as the structural survey or full structural survey) is most
typically carried out by a building surveyor. This involves a much more detailed inspection of the
building and the report includes advice and recommendations for repairs and future maintenance as
well as costings for any pressing repairs. The RICS particularly recommend the building survey for:
● listed buildings;
● older properties;
● buildings constructed in an unusual way, however, old they are;
● properties that the client intends to renovate or alter in any way;
● properties that have had extensive alterations.
(www.rics.org/usefulguides)
The RICS information for prospective clients regarding building surveys states that a building survey
can include details of:
● major and minor defects and what they could mean;
● the possible cost of repairs;
● results of damp testing on walls;
● damage to timbers including woodworm and rot;
● the condition of damp-proofing, insulation and drainage (though drains aren’t tested);
● technical information on the construction of the property and the materials used;
● the location;
● recommendations for any further special inspections.
(www.rics.org/usefulguides)

Maintenance surveys
Maintenance survey reports will usually contain specific recommendations for repair of elements where
defects or wear and tear has been identified and general recommendations for preventative maintenance
such as cyclical redecoration of external joinery. The report will cost each item with a projection of when
the work will be required and this will allow the client to plan their maintenance budget.

Diagnostic surveys
Where there is a specific problem or defect, the client may instruct a building surveyor to inspect and
report on the problem, recommending the necessary remedial action. This type of survey may be
associated with a claim on the client’s buildings insurance and, occasionally, the report may be com-
missioned by the insurance company directly. It is often necessary for investigation, testing and/or
ongoing monitoring of the problem to be carried out before a diagnosis can be arrived at. The report
will describe the investigations carried out and interpret the results before making the appropriate rec-
ommendation, which is almost always accompanied by costings for the recommended work. Clearly,
this type of survey will only involve surveying the parts of the building that are the subject of the
specific defect or problem, unless the client has specifically asked for more.

Partial surveys
Like the diagnostic survey, clients may occasionally want a report that only covers certain parts or aspects
of a building. For example, the client may want to acquire a building with a view to refurbishing it. In this
case, there will be no interest in the decorations, finishes, fixtures and fittings and the client will commis-
sion a ‘structure only’ survey. Another example may be the client who has had continual problems with
the roofs on their estate and commissions surveys of all the roofs to discover the extent of the problems.
 Building surveying 59
Corporate clients whose buildings may be workplaces or buildings that are accessed by the general
public need to ensure that their buildings are not going to cause them legal problems. Every time a
new set of legislation is introduced, building owners and managers may find they have new duties or
new requirements for their buildings. New legislation often results in a flurry of related work for build-
ing surveyors. For example, the introduction of the Disability Discrimination Act resulted in building
surveyors being instructed to carry out access audits of commercial premises and workplaces. Examples
include:

● access audits;
● appraisal of fire precautions and means of escape;
● facilities and spatial layouts of care/nursing homes;
● health and safety risk assessments in workplaces.

Some surveyors may be asked to provide energy audits of buildings – it should be noted that in the UK,
an energy assessor must have the relevant qualification to become accredited in order to produce EPCs.

Schedules of condition
A schedule of condition is quite simply a record of the condition of a building at a particular point
in time. The schedule often contains written descriptions of the construction and the condition, but
nowadays it will always contain photographs. Although the preparation of the schedule does not
require the same level of professional knowledge and skill that a diagnostic or building survey does,
many clients will ask a building surveyor to do, or arrange this work as the schedule is usually a docu-
ment of great importance. Any missing details in the schedule could be costly to the client.
Schedules of condition are usually prepared at the commencement of leases or before works are
carried out to adjoining buildings. In fact any client carrying out an operation that could possibly cause
vibration or damage to nearby buildings should be advised to commission schedules of condition. This
will protect them from claims from building owners that every building defect has been caused by
their operation.

Dilapidations surveys
Where a commercial property has a FRI lease, the tenant is usually liable to put the building into a
reasonable state of repair at the end, or termination of the lease or to pay the cost of the repairs where
this does not exceed the diminution in the value of the landlord’s reversionary interest. It is neces-
sary to be able to interpret and appraise the duties of both landlord and tenant according to the lease
covenants and other circumstances.
The schedule of dilapidations is normally prepared at the end of the lease term or when it has been
decided to terminate it. This is called a terminal schedule of dilapidations. Occasionally, the landlord
may decide to issue an interim schedule of dilapidations; this may be prompted by the tenant allowing
the property to fall into disrepair. A building surveyor is normally instructed to prepare the schedule
by the landlord. Before carrying out the survey, the surveyor will need to assess the repairing liability
in the lease covenants and examine the schedule of condition if there is one. The inspection will be
then carried out to discover and evaluate the wants of repair, which will be fully costed.
The tenant will usually employ another Building Surveyor to act and negotiate on their behalf.
Having also assessed the repairing liability in the lease covenants and examined the schedule of condi-
tion appended to the lease if there is one, the tenant’s surveyor will then take the schedules with them
to the property and compare what they find.
60 Stuart Eve, Minnie Fraser and Cara Hatcher
Further reading
Glover, P. (2006) Building Surveys, 6th edn, Butterworth-Heinemann, Oxford.
Hollis, M. (2005) Surveying Buildings, 5th edn, RICS Books, Coventry.
RICS (2004) ‘Building Surveys of Residential Property – RICS Guidance note’, RICS Books, Coventry.
RICS (2005) Building Surveys and Inspections of Commercial and Industrial Property – RICS Guidance Note, 3rd edn, RICS
Books, Coventry.

2.4 Dampness in buildings

Key terms: rising dampness; penetrating dampness; condensation; leaks
The vast majority of defects in buildings are caused by moisture or movement, or a combination of
both. Water is all around us; it is a necessity of life for all organisms, including insects, moulds and rots
that can cause damage to the fabric of buildings. All porous materials will absorb the moisture vapour
in the air, depending on their porosity and the relative humidity of the air. The effects of water on
building materials and entire buildings are of great importance and the building surveyor needs to have
a sound understanding of them. This importance is borne out by the large proportion of successful
negligence claims against surveyors relating to defects caused directly or indirectly by moisture.
Dampness does tend to affect older buildings due to the technology of their construction – solid
walls, lack of thermal insulation and no damp-proof course (DPC). However, problems with moisture
do occasionally affect newer buildings, poor workmanship and the strange things that occupiers do
being two possible problems, but the increasing requirement for airtightness to achieve energy effi-
ciency also has an influence. It is also very important to understand that an old building with solid walls
and no DPC will not necessarily be damp, many are quite acceptably dry. However, many do suffer
some dampness and occasionally people’s attempts at bringing old buildings up to date will cause the
very problems they are trying to avoid.
The building surveyor needs to know where to look, how to investigate and how to assess the
severity of the problem before deciding on the best way of dealing with the problem. The first thing
to be discovered is where moisture is coming from; there are five possibilities:

● groundwater rising up through porous materials – rising dampness;

● rain water (or snow) penetrating through the external envelope;
● leaking services or spillages;
● moisture from the air – condensation;
● flooding.

Water in buildings can cause a number of different problems including:

● loss of strength in timber, resulting in warping, twisting and general deflection under load;
● susceptibility to insect and fungal attack;
● spalling and frost damage to masonry – spalling is where the face of the material, such as brick or
stonework breaks off and is often caused due to the formation of ice crystals in a porous material
as freezing water expands very forcefully;
● corrosion of ferrous metal components;
● staining of finishes;
● mould growth;
● moisture movement.

Rising dampness is classified as water from the ground rising through capillary action through the
building fabric. It often affects older buildings that do not have DPCs; however, the lack of a DPC
 Building surveying 61
does not necessarily mean that there will be rising dampness. Also, buildings with DPCs can suffer from
rising dampness if the DPC is bridged or otherwise compromised. Unfortunately, there has been a ten-
dency in the past for surveyors to diagnose rising dampness in old buildings at the first sign of wetness
at low level in walls. Many such surveyors also passed the buck by recommending further inspection
by a ‘specialist’. Often, clients (usually home owners) would misinterpret this recommendation and go
to the first ‘damp-proofing specialist’ in the telephone book – a company whose main form of income
is installing remedial DPCs. It is not surprising therefore that unnecessary damp-proofing work is often
carried out, sometimes causing damage to the building and almost always costing the client a large sum
of money! This situation should never arise where a competent surveyor has inspected, investigated
and made a recommendation.
It is important for a building surveyor to understand the construction of the building and the mate-
rials it has been constructed with. Rising dampness becomes a problem when it is severe enough to
cause noticeable discolouration and wetness that can support timber decay. There are a number of
influencing factors including the materials, the construction technology, the climate and the internal
environment. For this reason, problems may manifest themselves in different ways in different places
according to the climate and local construction methods and materials.
As an example, the process of a typical case of rising dampness in the UK is illustrated in Figure 2.4.1.
An old solid brickwork wall with no DPC is built on a site with a variable water table that rises quite
high in winter, above the base of the brickwork foundations. The groundwater soaks into the porous
brickwork and wicks up into the wall. The groundwater contains salts in solution which are deposited on
the face of the wall as the water evaporates. These salts tend to be hygroscopic and attract moisture from
the air, which exacerbates the dampness on the surface of the wall. The level of dampness will be worse
in winter when the water table rises.

-
The cycle of rising damp in a solid wall with no dpc

Hygroscopic salts - attract moisture

Rising damp in wnie

tr,
/..+..*
b*

.
...........+ Evaporation
Rising damp in summer +....."
\ . . . .
+........
Moisture from the air
attracted to salts on wall

Evaporation
Evaporation

Evaporation
Evaporation

Figure 2.4.1 The process of rising dampness.

Source: Minnie Fraser 2007.
62 Stuart Eve, Minnie Fraser and Cara Hatcher
Although the above example is described as typical, it is as well to understand that there are very many
different circumstances in which rising dampness may occur. Some water may rise into the walls or
through a solid floor of an old building without causing a problem or noticeable dampness, particularly
if the building is well ventilated and well heated. Older buildings tended to be very well ventilated,
with air gaps around window and door frames and often large open fireplaces which allowed plenty
of air movement facilitating evaporation of any water. The fact that the materials of construction are
porous also means that they are ‘breathable’, preventing any water from being trapped in the con-
struction. Problems often arise, however, when older buildings are adapted or modernised. The old
draughty sash windows are replaced with uPVC replacements with neoprene seals preventing any air
leakage and fireplaces are blocked up. Large houses are divided up into flats with a larger number of
people occupying the space – each person breathing out water vapour and raising the relative humidity
of the air in each room. These changes would reduce the rate of evaporation of water entering from
the ground and a problem may become evident where there was none previously.
Penetrating dampness is classified as water travelling through the external envelope of the building.
Moisture can enter the building in a number of ways. It is more common in solid walls as part of the
purpose of the cavity in a cavity wall is to prevent penetrating dampness. Solid walls may be of insuf-
ficient thickness, particularly if they are in an exposed location. The following problems can contribute
to penetrating dampness in solid walls:

● defective rendering;
● eroded pointing;
● defects or cracks in sills;
● defective rainwater disposal;
● unprotected joints around windows, doors, air bricks etc.

Defective gutters and downpipes are a very common cause of penetrating dampness. There may not
even be an obvious defect, gutters may fall the wrong way, be blocked with debris or vegetation or
simply be of insufficient size.
Other forms of dampness may be caused by leaking services, spillages or condensation. Common
sources of dampness are leaking radiator valves and joints in supply pipes; often where they come up
through sinks/ basins etc. and join the taps. Spillages can also cause dampness if they happen often
enough; for example, frequent floor washing can cause dampness in adjacent walls. Condensation can
be a serious problem that can cause black mould growth and damage to decorative finishes or in more
severe cases, timber decay and failure of timber structures.

Further reading
Burkinshaw, R. and Parrett, M. (2004) Diagnosing Damp, RICS Books, Coventry.

2.5 Timber defects

Key terms: natural defects; conversion defects; weathering; dampness; fungal attack; insect attack
Timber is a very widely used construction material; it is chosen for its easy availability, ease of working,
excellent strength-to-weight ratio and nowadays its low carbon footprint. Timber can be categorised by
its species and which part of the tree trunk it is taken from. The two main classifications of species are
hardwood and softwood. Hardwood is taken from broad-leaved deciduous trees such as oak, ash, elm,
sycamore, chestnut or teak. Softwood is taken from coniferous trees such as pines, firs and spruces.
 Building surveying 63
As timber is such an excellent construction material, it has been used very extensively in buildings
since the earliest days of building construction. It is used for both structural and non structural ele-
ments. For example, structural:

● structural frame;
● roof structure;
● floors;
● staircases;
● lintels and beams;
● load-bearing stud walls.

Non-structural:

● windows and doors;

● frames and sills;
● stud partitions;
● fascias;
● skirtings, architraves, dado rails and other decorative features;
● balustrades;
● weatherboarding/cladding/roof shingles;
● fitted furniture.

The main defects affecting timber in buildings are as follows:

● Natural defects – these are defects that occur as a result of the natural variations in the timber such
as knots and wide growth rings that adversely affect the strength of the timber.
● Conversion defects – defects that occur when the tree is converted into usable timber, i.e. when
it is cut and dried. Timber can distort by bending, twisting and bowing. It can split, crack or hon-
eycomb, splits radiating from the centre are called star shakes. Sections cut from the edge of the
tree can be misshapen or have bark still attached (wane).
● Weathering – weathering is an imprecise term describing the effects on timber of being exposed
to the elements. The combined effect of sunlight, water and wind result in loss of colour (it goes
grey), surface roughening, and cracking and splitting.
● Dampness – dampness causes swelling and loss of strength and can result in deflection, twisting and
warping.
● Fungal attack – including dry rot and wet rot.
● Insect attack – including common furniture beetle (‘woodworm’), death watch beetle, powder
post beetle, wood boring weevil and house longhorn beetle.

Fungal and insect attack are much more likely to occur in damp timber, so buildings that have
problems with dampness are much more likely to suffer from timber decay. The effects and conse-
quences of timber decay can be serious and in severe cases can lead to structural failure. Remedial
work tends to be disruptive and expensive and therefore it is vital that the surveyor is vigilant dur-
ing inspections and knows the circumstances in which these sort of defects are most likely to occur.

Further reading
Bravery, A. F., Berry, R. W., Carey, J. K. and Cooper, D. E. (2003) Recognising Wood Rot and Insect Damage in Buildings,
BRE, Watford.
64 Stuart Eve, Minnie Fraser and Cara Hatcher
2.6 Movement in buildings
Key terms: structural movement; subsidence; settlement; thermal and moisture movement; steel cor-
rosion; sulphate attack

Foundation movement
Structural movement is one of the greatest worries of the building owner or prospective purchaser.
Assessing and diagnosing structural problems on behalf of building owners or insurance companies is
an important part of the work of the building surveyor.
The investigation, evaluation, diagnosis and prognosis of cracking in buildings takes great knowl-
edge and skill. Correct diagnosis and recommendations can save clients a lot of money and heartache
– but often surveyors will recommend unnecessary works to be on the safe side. It should be every
surveyor’s aim to find the extent of a building problem and recommend appropriate action to the
client in order to give good quality and professional service. In the case of structural movement, it is
often the case that full investigation to find the cause of the movement will require time consuming
investigation and monitoring, which some clients do not like. Increasingly, clients, particularly insur-
ance companies, are dispensing with long-term monitoring of structural movement in favour of quick
repair and completion. Surveyors should always advise clients of the possible risks attached to the
course of action they choose to follow.
Where buildings move due to movement of their foundations, this is usually called settlement or
subsidence. Settlement is downward movement of the foundations due to the compression or shrink-
age of the soil beneath the building, or consolidation of the ground due to closing up of small voids.
Settlement occurs where the weight of the building exceeds the bearing capacity of the soil, so it is as a
direct result of the weight of the building acting on the soil. Subsidence is the downward movement of
the foundations due to erosion or shear failure of the soil or collapse of large voids within the ground.
Subsidence does not happen purely as a result of the weight of the building acting on the soil, there is
always some other factor as well. Movement due to clay shrinkage is usually classed as subsidence.
Generally, subsidence results in more serious defects in buildings than settlement. Although
occasionally there may be some doubt over whether movement should be classed as settlement
or subsidence, surveyors should be aware of the importance of the distinction between the two.
Subsidence is usually classed as an ‘insured peril’ whereas settlement is generally not covered by
building insurance policies.
The weight of a newly constructed building will cause the soil beneath to compress and consolidate,
the speed and magnitude of this movement will depend on the soil type as we have already seen, but
it is important to note that all new buildings will settle slightly. This small amount of settlement after
construction should not cause any problems or even be noticeable in most buildings; however, there
can be problems if one part of a building settles more than the rest – this is called differential settlement.
Where differential settlement occurs immediately after construction this is usually as a result of a soft
spot or inadequately designed foundations for the ground conditions.
Where there is downward movement of the foundations to part of a building, stresses will be set up
in the walls. Masonry walls are designed to be in compression, in this state the material is very strong,
however it is weak in tension and movement will cause cracking which will follow the path of least
resistance, i.e. the weakest part that is under stress. In normal masonry construction, this means that
cracking will pass through mortar joints, generally between openings as openings are natural weak
points in a wall. The patterns of stresses and cracks will be different in buildings of different construc-
tion, such as timber frame, panellised or modular buildings that have been manufactured off site. In
these buildings, usually the weak points will be at the junctions between framed panels. The patterns of
cracking may also depend on the type and construction of the foundations. The other major symptom
 Building surveying 65
of settlement and subsidence is tilting of walls. Where a wall is no longer vertical, it is described as
being ‘out of plumb’.
A large number of subsidence problems linked to shrinkable clay are also linked to trees in close
proximity to buildings. Although in normal circumstances the layer of volume change to the soil does
not exceed 1.5 m, where there is a tree taking water from the soil, the depth of desiccation can extend
beyond 6 m below ground level. This can have a very significant effect on a building that is close by.
The amount of water required by a tree tends to increase as the tree grows and gradually stabilises as
it reaches maturity. The effect of trees is felt more in the summer when trees require more water and
there tends to be less water available; some differential settlement may be experienced to a building
whereby the cracks open up in the summer and close again in the winter. These problems become
more severe if there is a very dry summer when there is no rain so the desiccation of the soil due to
the tree increases. There is always a great increase in subsidence claims when there is a dry summer.

Thermal and moisture movement

As with other forms of movement in buildings, thermal and moisture movement tend to cause cracking
to walls where the cracking will follow the path of least resistance and cracks are generally perpendicu-
lar to the stresses that cause them. In both cases, the movements are relatively small and tend not to
cause serious damage although there are circumstances where serious damage can happen.
All materials will expand as temperature rises and contract as temperature falls and the magnitude of
this dimensional change is dependent on their coefficient of thermal expansion. Concrete has a higher
coefficient than brickwork; aluminium, lead and uPVC have very high coefficients and timber has a
relatively low coefficient (although slightly higher across the grain than along the grain). Porous mate-
rials will expand as they take up moisture; this does not have to be as a result of coming into contact
with liquid water, changes in humidity can also cause movement. As a general rule, the more porous
the material, the greater the movement, so dense heartwood will not move as much as the lighter sap-
wood of the same timber. Timber experiences considerably more moisture movement across the grain
than along the grain, which can cause problems, particularly in external joinery. Masonry is porous and
will expand and contract with changes in humidity as well as with changes in temperature.
A well-designed building should not suffer any problems with thermal or moisture movement
because these effects are now well known and the incorporation of movement joints is standard
practice. However, older buildings or buildings that have not been well designed may suffer from
insufficient allowance for these movements. Long masonry walls without movement joints will
develop cracking that is generally vertical stepping up through the mortar joints between openings.
The cracks are narrow, although there can be some ratcheting over many years of cyclical opening and
closing due to changes in temperature.

Steel corrosion
Steel is a material that has been used for many purposes in building construction over the years.
Generally, it is an excellent building material as it is ductile and has excellent tensile strength. For this
reason, it is used to provide tensile strength where this would otherwise be lacking in construction, for
example as reinforcement in concrete beams, panels and slabs and as lintels supporting masonry over
openings in walls and as a structural framework in large span and multistorey buildings. Steel is also the
most common material used for wall ties in cavity walls.
Unprotected mild steel will corrode when exposed to oxygen in the air and water. The resulting
oxidised product of corrosion – iron oxide – occupies a volume many times that of the parent metal
causing expansion. This expansion is very forceful and will break apart material surrounding the cor-
roding metal such as concrete or masonry.
66 Stuart Eve, Minnie Fraser and Cara Hatcher
The type and design of steel lintels has changed over the years; many lintels for external use are
now combined lintels – that is, they combine the function of cavity tray and lintel. Other types of
steel lintel include the box lintel with a flange for the outer leaf to sit on. Most have a generous coat of
zinc galvanising, although some are powder coated and some are made of stainless steel. Stainless steel
is not often used as it is more expensive than mild steel and is not as strong; however it does have the
advantage of corrosion resistance.
Other components commonly made of steel in buildings include the following:

● Bed joint reinforcement in brickwork – used occasionally to increase strength, particularly at

returns or junctions.
● Brackets for fixings to external walls for items such as rainwater downpipes, soil pipes, trellises etc.
● Cramps for fixing window and door frames into openings.
● Window frames and French window frames. Steel was popular for window and door frames in
the 1950s and 1960s, companies such as Crittall making large numbers of frames for domestic,
commercial and industrial properties. Many of these frames are still in place despite their very poor
thermal performance.

If the conditions are right for corrosion of the steel, then corrosion will cause expansion and cracking
of the surrounding masonry. In the case of window and door frames, the expansion may cause glass to
crack and opening sections to bind in their frames as well as pushing up masonry and opening cracks
in adjacent mortar joints.

Sulphate attack
Ordinary Portland cement (OPC) used in concrete, renders and mortar naturally contains tri-calcium
aluminate, which will react with sulphate salts in the presence of water to produce ettringite or thau-
masite crystals or sometimes gypsum. The formation of these long, needle-like crystals pushes the
material they form in apart, making it more permeable and causing it to expand. This process is called
sulphate attack and affects materials that contain OPC and either also contain sulphate salts or are
exposed to sulphate salts as well as being wet for extended periods. This includes the following:

● mortar joints in exposed brickwork;

● ground-bearing concrete slabs with no damp-proof membrane (DPM);
● render coatings to exposed external walls.

It is worth noting that lime also contains tri-calcium aluminate and lime mortars and renders may be
similarly affected. Chimneys are particularly susceptible to sulphate attack where they are in exposed
locations because the coal smoke contains sulphates that are deposited and build up in the brickwork.
The mortar joints on the side of the chimney that are exposed to the prevailing wind will be affected,
causing bending over of the chimney and cracking of the mortar joints. Cracking is most noticeable in
the bed joints and can sometimes be mistaken for wall tie corrosion (and vice versa). However, sulphate
attack is more general and will not confine itself to the joints that contain wall ties. Also, as the cracking
is as a result of expansion of the material itself, the cracks tend to be finer and do not open wide.
Where sulphate attack affects render, the render will expand, debonding from the wall, bowing
outward and eventually cracking and spalling off. Once sulphate attack has occurred it cannot be
reversed; badly affected walls will need to be taken down and rebuilt. Where damage is not so severe,
progression of sulphate attack can be slowed by protecting the wall from moisture if that is possible.
This could be done for example by providing new copings with damp-proof courses to parapet walls
or garden walls.
 Building surveying 67
Further reading
Driscoll, R. and Skinner, H. (2007) Subsidence Damage to Domestic Buildings: A guide to good technical practice, BRE,
Watford.
Hollis, M. (2005) Surveying Buildings, RICS Books, Coventry, pp. 485–538.

2.7 Concrete defects

Key terms: insufficient cover; cracking; corrosion of reinforcement; carbonation; chloride attack; alkali–
silica reaction; sulphate attack; high alumina cement
Concrete is strong, durable and can be moulded into all sorts of interesting shapes. With careful design
it can be designed to span fairly large distances and form the structure of tall buildings. It is a material
that is used all over the world in many different applications and is routinely used for foundations,
frames, floors, roof decks and walls.
Concrete has a fairly high embodied energy, but new and innovative forms of concrete are being
developed to employ recycled aggregate, and cement replacement materials such as ground granulated
blast furnace slag (GGBS) or other pozzolanic agents. Other innovations include the use of non-
ferrous reinforcement either as bars, mesh or fibres. As these are new developments, there is little data
so far on performance. Concrete defects include:

● defects affecting new concrete such as insufficient cover and poor quality;
● cracking;
● spalling and corrosion of reinforcement;
● carbonation;
● chloride attack;
● alkali–silica reaction;
● ‘mundic’ or pyrites;
● sulphate attack;
● high alumina cement.

Insufficient cover to reinforcement can lead to corrosion of reinforcement particularly if carbonation

occurs. Cover should be at least 20 mm in the most mild environment and up to 60 mm in more
severe environments. Problems with insufficient cover to reinforcement are most likely to happen at
slab edges, beam edges, construction joints and beam to column junctions.
Almost all concrete has some cracking; cracks appear for a number of reasons including drying shrink-
age and thermal movement. The severity depends on the width and depth of the crack as well as its
position in relation to reinforcement. Cracks in older concrete may be as a result of corrosion of rein-
forcement. Other causes of cracking to new concrete include plastic settlement, which usually occurs
over reinforcement or at changes of depth of the section. Cracks that are exposed to the weather may
allow reinforcement to start corroding as they allow water penetration more easily below the surface.
Some small cracks in new concrete will close up of their own accord, whereas larger more serious
cracking may need to be repaired. Brushing dry cement into fine cracks and then spraying with water
is often an effective treatment. It is not possible to tell the seriousness of cracking from visual inspection
alone, some form of testing such as radar should be used. Core testing can be used but the crack must
be filled with resin first as the process of coring may make the crack worse or allow it to close.
Carbonation and corrosion of reinforcement can occur. Concrete is an excellent construction
material, however, due to its poor tensile strength, it requires reinforcement where it is to be used
for structural purposes or in relatively slender sections. Reinforcement to concrete usually takes the
form of steel bars or mesh although sheet claddings, tiles and pipes are reinforced with fibres of various
68 Stuart Eve, Minnie Fraser and Cara Hatcher
materials (including asbestos in the past). Corrosion of steel requires water and oxygen, but in addition,
it requires the reinforcement to be susceptible.
In normal circumstances, the alkalinity of concrete is enough to protect the steel reinforcement
from corrosion as it causes a dense layer of oxide to form on the surface of the steel, which protects
it. However, carbonation of the concrete occurs where carbon dioxide in the atmosphere dissolves in
water to form carbonic acid which then reacts with the alkalis in the concrete reducing its alkalinity.
Where the pH falls below 10, carbonation has taken place, and if this carbonation reaches the rein-
forcement corrosion of the steel is likely to begin. The rate of carbonation is dependent on several
factors, the major one being the quality of the concrete; carbonation will be faster where concrete is
more permeable and of course oxygen and water will reach the reinforcement more easily if this is the
case. The depth of cover to the reinforcement will also play a part in the amount of time it takes for
the depth of carbonation to reach it. In typical concrete in moderate exposure, carbonation proceeds
at the rate of about 1 mm per year.
Once the reinforcement is no longer protected by alkalinity and oxygen and water are reaching it, it
will start to corrode and the products of corrosion will start to build up on the surface, putting pressure
on the surrounding concrete. Eventually, cracks will form and the concrete will spall away from the rein-
forcement. Some rust staining may appear at the surface, bleeding through the cracks before the concrete
spalls. Once the concrete has cracked, then there will be greater access to the reinforcement by air and
water and the process of corrosion will accelerate. Testing for carbonation can be carried out by spraying
a solution of phenolphthalein onto a freshly exposed surface of concrete to find the depth of carbonation.
The presence of chlorides in concrete has the effect of increasing the risk of corrosion of the rein-
forcement even where the concrete is still very alkaline. This can occur as a result of chlorides being
present in the concrete as it is mixed; for example, in the 1970s in the UK, an admixture of calcium
chloride was often added to concrete in the UK. In some places, chlorides occur naturally as sand
from marine locations has been used to mix concrete – Hong Kong is an example of a place where
this practice has been used commonly. Buildings in marine locations may absorb some salts from their
environment as will concrete close to areas where salt is spread routinely to prevent ice formation.
An alkali–silica reaction (ASR), also known as concrete cancer (because it can grow gradually over
many years), sometimes occurs between the cement and the aggregate in concrete. The product of this
reaction is a calcium silicate hydrate gel that absorbs water and expands. This can cause:

● expansion of the concrete;

● cracking;
● differential expansion between different pours of concrete;
● reduced elastic modulus;
● increased tensile strains in reinforcement.

Like sulphate attack, the result is expansion and may also manifest itself as surface crazing or delamina-
tion as well as overall expansion of the concrete element. ASR affects stronger concrete that has a high
cement content.
In Cornwall and parts of Devon in the UK, waste from tin and lead mines (mundic or pyrite) was
commonly used as aggregate in concrete for in situ construction or blocks. The pyrite (FeS2) oxidises
and sulphuric acid results which reacts with the alkaline cement. The result is deterioration and loss
of strength which can in some cases require removal of concrete or demolition of buildings. This has
caused immense problems in Devon and Cornwall with many properties becoming unmortgageable.
Petrographic testing is now required for new mortgages on suspect properties.
High alumina cement (HAC) was used extensively between 1950 and 1976 instead of portland
cement as it cures very quickly. However, the mineralogical ‘conversion’ can cause reduction in
concrete strength. There were some high profile-collapses in the 1970s including the roof of a school
 Building surveying 69
swimming pool. This led to the banning of the use of HAC in the UK in 1976 – hence all build-
ings constructed with HAC in the UK are over 30 years old. Conversion is no longer a problem as it
occurred quite quickly and therefore the process is complete in existing HAC buildings. Most prob-
lems with HAC are now due to carbonation and sulphate attack.
Sulphate attack occurs because OPC used in concrete and mortar naturally contains tri-calcium alu-
minate, which will react with sulphate salts in the presence of water to produce ettringite or thaumasite
crystals or sometimes gypsum. The formation of these crystals pushes the material they form in apart,
making it more permeable and causing it to expand. This process affects materials that contain OPC
and either also contain sulphate salts or are exposed to sulphate salts as well as being wet for extended
periods. This includes the following:

● mortar joints in exposed brickwork;

● ground-bearing concrete slabs with no DPM;
● render coatings to exposed external walls.

It is worth noting that lime also contains tri-calcium aluminate and lime mortars and renders may be
similarly affected.

Further reading
Hollis, M. (2005) Surveying Buildings, RICS Books, Coventry.

2.8 Structural frames and floors

Key terms: modern steel frames; cast iron frames; wrought iron frames; concrete frames
Defects in structural frames are often hidden from view, but as with other defects, the surveyor can
predict where defects are likely if they have a good understanding of the materials used in construction,
the technology of how they are fixed together and the most likely agents of damage. As with tradi-
tional load-bearing construction, the majority of defects in older buildings are caused by moisture or
ground movement. Defects affecting modern steel frames are not very common compared to defects
affecting other parts of building, unless the frame is exposed to the weather.
Mild steel has been used for the structure of framed buildings since the early twentieth century. Hot
rolled steel sections are the most common steel used for multistorey building due to its great strength,
good strength–weight ratio, ductility and ease of connection. Cold-formed steel sections tend to be
used for secondary structure such as purlins and cladding support framework. Fixings to cold formed
steel are usually self-tapping screws or bolts.
Fixings to hot rolled mild steel frames are usually bolts on site and welds in the factory – although
site welding is done occasionally, it is avoided due to its hazardous nature. Great care must be taken
with bolt fixings; if bolts are over-tightened the thread can be stripped, but if bolts are insufficiently
tightened then additional stress is put on the bolts which can shear as a result. Adequately tightened
bolt fixings are vital to the structural performance of structural frames which require rigid joints for
their ability to span large distances as the rigid joints ensure that bending is shared by the beams and
columns, reducing maximum bending moment at the centre of beam spans. Often where the main
structural frame is hot rolled steel, smaller members can be cold formed steel (pressed from sheet steel)
– usually the framing that carries lightweight cladding. Hot rolled steel is much heavier and stronger
as it has greater thickness.
The BRE and CIRIA carried out a survey of building failures and found that failure of steel frames
was twice as likely to be due to faulty design rather than faulty erection on site; most failures occurred
within 4 years of completion of the building. It is considered that the use of experienced personnel
70 Stuart Eve, Minnie Fraser and Cara Hatcher
and checking of design concepts are the best ways of avoiding failure. In their research BRE/CIRIA
found that the most likely causes of failure were design that did not take sufficient account of the local
conditions or structural behaviour of the frame.
It is highly probable that many design faults are discovered during construction as the steel erectors
notice any lack of robustness and may have difficulty in levelling the frame. Typical defects include:

● inadequate design – sizing of columns, beams or bracing;

● overstressing members during erection;
● mechanical damage – particularly to slender or cold formed sections;
● incomplete fire protection;
● incomplete paint coatings;
● corrosion of steel;
● failure of bolt fixings;
● failure of welds;
● inadequate allowance for initial deflection or differential thermal movement between frame and
claddings or concrete lift/stair enclosures;
● stressing of frame due to foundation movement.

Most of these defects can be avoided by good management of the design process and the employment
of well-trained and experienced site operatives. The report recommends that designers can decrease
the risk through a process of peer review where a series of ‘what if’ questions are asked. Overstressing
during construction can be due to poor programming of the steel erection.
Large diameter hollow sections, cold formed sections or thin tie members or tension cables are
all susceptible to mechanical damage during construction. Corrosion may be due to leakage or con-
densation to internal steel or inadequate coatings to external steel. It was also noted that there is a
history of failure of welded joints; welding requires good quality control and therefore site welding
is to be discouraged.
There are various defects that can affect iron and steel frames. There are some differences in the
typical defects according to the materials as they have different properties. For example cast iron is
strong in compression but brittle and much less resistant to impact damage than wrought iron. Cast
iron was generally joined with bolt fixings as it is not possible to weld; however, occasionally lugs
might be missing due to miscasting and these were then ‘burned on’ by a process of heating the lug and
the cast iron component that it was to be fixed to and then pouring molten iron into the joint. The
idea was that this would lead to a ‘monolithic joint’; however, the quality of these joints was dubious
and there is evidence that the practice of ‘burning on’ contributed to the weaknesses that caused the
Tay Bridge disaster in 1879 in which 75 people were killed when the bridge collapsed as the train they
were travelling in crossed it.
Wrought iron is stronger in tension than cast iron, but weaker in compression. When subjected to
excessive compressive stress, wrought iron can delaminate; this also happens when wrought iron cor-
rodes. Typical defects in iron and steel frames include the following:

● Structural movement or overloading may cause deflection, deformation and distress at joints – in
wrought iron deformation may include delamination.
● Impact damage – in cast iron this may cause cracking or even shattering due to the crystalline
structure of the material. Wrought iron and steel are more ductile and will dent and bend.
● Water ingress and/or condensation may cause corrosion – due to its laminar structure, wrought
iron will delaminate and expand more quickly than cast iron or mild steel although all will be
damaged by corrosion with some expansion.
 Building surveying 71
● Corrosion tends not to significantly affect the strength of the frame until it is advanced or where
joints are badly corroded. The problems are more often caused by the expansion that corrosion
causes.
● The symptoms of structural movement are usually more noticeable in claddings or other elements
connected to the frame – cracking and deformation of joints and junctions.

Concrete is a very popular material for frame structures although it has a high embodied energy and
in situ cast concrete is very time consuming to construct. It has a number of great advantages includ-
ing the ability to form complex and interesting shapes, excellent strength, thermal mass and acoustic
qualities. In situ cast concrete is generally viewed as not being a ‘sustainable’ material due to the high
embodied energy and the amount of waste generated although the concrete lobby argue that con-
crete buildings have a long life and lower running costs due to the beneficial thermal mass. Concrete
technology is improving all the time with the use of cement replacement such as GGBS and recycled
aggregates to make it more environmentally friendly as well as increasing use of reusable formwork to
reduce waste on site. Defects in concrete frames include:

● cracking and spalling;

● carbonation and related corrosion leading to cracking and spalling;
● insufficient cover to reinforcement;
● chemical attack – sulphates, chlorides, ASR;
● loss of strength in HAC (see Concept 2.7).

Technologies used currently and historically for floor construction include suspended timber – in older
traditional buildings, particularly from the Georgian and Victorian periods, the upper floors were designed
with expected loadings in mind. As a result, in domestic buildings, the upper floors designed as bedrooms
often had smaller joists than the lower floors used for reception rooms. The top or attic floor was often used
only for servants’ bedrooms – with very light loadings. Main bedrooms would have had heavier loadings
with reception rooms heavier still. Problems can occur where these buildings have a change of use with
heavier floor loadings, for example office use. Common timber floor defects include the following:

● timber decay
– joist ends built into solid walls
– inadequate ventilation to sub-floor voids
– dampness encourages decay – insect and fungal.
● excessive deflection
– inadequate design
– overloading
– notching
– long spans lacking strutting.
Timber decay occurs as a result of dampness; this could be penetration through a solid wall that has
become porous due to weathering and age. Excessive deflection occurs as a result of lack of stiffness,
e.g. if joists are not deep enough or there is a lack of strutting or lateral restraint. Clearly if floor load-
ings are increased as described above, then deflection will also increase.
Solid floors include: flag stones or quarry tiles laid on a bed of ash or rammed earth – common in his-
toric buildings up to the end of the Victorian period; and concrete ground-bearing slabs which became
common after the Second World War. In newer buildings floors will normally have a DPM and insula-
tion, although arrangements vary. For heavy duty industrial applications, the mix of concrete is so strong
that it is virtually waterproof; a DPM is still used as a slip plane to prevent uneven cracking. Problems
72 Stuart Eve, Minnie Fraser and Cara Hatcher
can arise where historic buildings are made more airtight with closer fitting windows and blocked up
fireplaces. This reduces the opportunities for water rising through the floor to evaporate, thus dampness
manifests itself. Solid floors may also be cold and attract condensation. The temptation would be to lift
the flag stones and lay a DPM and insulation beneath them to prevent dampness passing through and
coldness that would encourage condensation; however, this would then cause dampness to rise up in the
walls as there is nowhere else for it to go. Typical problems with solid floors include:

● dampness (see Concept 2.4);

● cold and condensation;
● settlement of hardcore that causes loss of support to floor slabs, and consequent cracking and
settlement of the slab;
● sulphate attack (see Concept 2.7);
● alkali–silica reaction (see Concept 2.7);
● clay heave;
● swelling of hardcore.

A number of these problems are linked to the hardcore used beneath concrete ground-bearing slabs.
If the layer of hardcore is too deep or insufficiently compacted, then settlement may occur with con-
sequent opening up of the joint between the floor and the base of the skirting board plus cracking
and breaking of the slab where the settlement is differential. Some hardcore material, for example red
colliery shale or reclaimed brick, contains soluble sulphates that can cause sulphate attack to the slab
where there is no DPM or where the DPM is damaged, particularly in wet conditions. Other materials
are prone to swelling in wet conditions, pushing outwards on walls below the DPC or ground beams,
depending on the construction. These materials include:

● steel slag or blast-furnace slag;

● old crushed concrete, which may expand as a result of sulphates in the soil;
● material containing clay;
● material containing pyrites.

Further reading
Beckman, P. and Bowles, R. (2004) Structural Aspects of Building Conservation, 2nd edn, Elsevier, Oxford.
Hollis, M. and Gibson, C. (2005) Surveying Buildings, 5th edn, RICS books, Coventry.

2.9 Roofs and cladding

Key terms: pitched roofs; slate roofs; clay tiles; concrete tiles; flat roofs; cladding
Roofs and cladding form the main parts of the external envelope of buildings so they are required to
keep the building weather tight, control passage of light, heat and ventilation while remaining durable
and looking good. As with other parts of a building, it is necessary for the surveyor to understand
the technology of the construction, the materials used and how they interact with each other and the
environment. One of the great challenges for the parts of the building that form the external envelope
is to deal with the temperature differentials that occur between the exterior and interior of the building
at various times of day and at different times of year.
Pitched roofs are generally considered to be more durable than flat roofs, particularly in climates
such as the UK where there is plenty of rain and sometimes snow. Life cycle costs are generally cheaper
with pitched roof forms although the initial capital costs are usually greater. There are various types of
pitched roof forms from the basic domestic ‘lean-to’ monopitch roof to large span portal frames with
 Building surveying 73
sheet claddings. Traditional pitched roof coverings include natural slate and clay tiles, while in recent
years concrete and artificial slate have become popular, although slate and clay are still used. The main
causes of defects in pitched roofs are attributable to complex roof layouts, poor construction, poor
design/detailing and lack of maintenance.
Slate roof coverings are prone to the following defects:

● defective mortar fillets;

● problems with torching and bedding;
● split/broken or delaminated slates;
● slipped slates/nail sickness;
● water penetration;
● verge failure;
● problems with ridges and hips.

Concrete tiles are prone to similar problems to clay tiles, although additional problems include:

● overloading of the roof structure;

● loss of surface;
● loss of colour.

Clay tiles are prone to the following defects:

● delamination;
● pitted, cracked or broken tiles;
● slipped tiles;
● efflorescence/salt crystallisation;
● failure of mortar pointing to verges;
● failure of mortar bedding to ridge and hip tiles.

Defective perimeter gutters can cause problems to walls that are repeatedly wetted and leaking valley
or parapet gutters allow water to pass easily inside the building. Penetrating dampness through parapet
walls can cause decay to timber roof members.
One of the main functional requirements of a roof is that it must protect the building occupants
and the building structure from the external environment. To this end the roof must have structural
integrity and weatherproofing; these functions are achieved in the elements of the flat roof:

● Structure – depending on the size of the building and the span, steel frame, concrete frame or
timber joists are all common.
● Deck – again depending on the type of building, decks are typically concrete, profiled steel or
timber (usually plywood), although some buildings may have woodwool slab decks.
● Covering – needs to be more impervious than pitched roof coverings due to the slower runoff.

Types of covering:

● built-up mineral felt;

● single ply membranes;
● mastic asphalt;
● soft metal coverings such as lead, copper or zinc.
74 Stuart Eve, Minnie Fraser and Cara Hatcher
Flat roofs are either cold roofs or warm roofs. Cold roofs are quite common in older buildings and
generally in house extensions. Because the insulation is below much of the structure, there is an
increased danger of condensation and therefore adequate cross-ventilation is very important, particu-
larly with timber structures and decks. The use of a vapour barrier on the warm side of the insulation
is recommended, but this is easily damaged due to its position just above the ceiling.
Warm roofs are the most common form of construction in new buildings – as the insulation is
above the structure, the danger of condensation is reduced. A vapour barrier is still necessary to pre-
vent condensation between the insulation and the covering. With inverted warm roofs the insulation
is above the weatherproof covering and a separate vapour barrier is not required. The insulation must
be carefully chosen and installed as it will be open to the weather – it must not absorb water and must
not be lifted off by the wind. While the membrane is protected from UV radiation and mechanical
damage by the insulation and paving above it, if there is a problem with rainwater ingress, then inves-
tigation and remedy often require stripping the roof back which is very expensive and disruptive. This
type of roof is excellent when it is installed properly, but occasionally the membrane can be damaged
by following trades or if the roof is not kept very clean during construction. Any grit or small objects
can pierce the membrane if caught between it and the insulation due to the loading above and the
movement of foot traffic over the roof.
The most common problem with flat roofs is water ingress. This can be particularly difficult to
diagnose as water will often track along under the covering and appear in the building underneath
some distance from the point of entry. Frequently problems arise due to poor design:

● inadequately sized members;

● insufficient members (too widely spaced);
● inappropriate selection of covering;
● inadequate falls;
● inadequate detailing – upstands/outlets/movement joints etc.;
● inadequate rainwater disposal;
● inadequate consideration of roof use (roof-top plant and traffic etc.).

Other problems occur due to poor construction:

● poor workmanship and/or supervision;

● lack of coordination/cooperation;
● inappropriate selection/combination of materials (including fixings);
● unfamiliarity with products and processes;
● damage by following trades;
● working in unsuitable weather conditions.

Cladding materials include:

● masonry;
● pre-cast concrete;
● metal;
● glass;
● glass-reinforced plastics;
● cement-based composites;
● timber.
 Building surveying 75
As claddings have to cope with the weather and differentials of temperature and humidity between the
exterior and interior of the building, they have to be well designed and fixed to the building. With all
the various forces and environmental changes that claddings have to cope with, it is hardly surprising
that there are a wide variety of defects that can affect them depending on materials, design, sizes and
climate. Typical causes of defects include the following:

● failure of joints;
● movement:
– thermal and moisture movement;
– creep;
– differential movement;
● failure of fixings;
● deterioration of cladding materials;
● impact damage.

Further reading
BRE (1978) Digest 217: Wall cladding defects and their diagnosis, BRE, Watford.
Harrison, H. W. and de Vekey, R. C. (1998) Walls, Windows and Doors: Performance, diagnosis, maintenance, repair and
the avoidance of defects, BRE, Watford.
Harrison, H. W., Trotman, P. M. and Saunders, G. K. (2009) Roofs and Roofing: Performance, diagnosis, maintenance, repair
and the avoidance of defects, 3rd edn, BRE, Watford.
Hollis, M. and Gibson, C. (2005) Surveying Buildings, 5th edn, RICS Books, Coventry.

2.10 Asbestos in buildings

Key terms: white asbestos; blue asbestos; brown asbestos; health hazards; Control of Asbestos Regulations
2012; management survey; refurbishment/demolition survey
Asbestos is a silicate of magnesium and occurs as a glassy rock, which can be split into very thin fibrous
crystals. There are two main groups of asbestos, which have differing crystalline structures.

● Serpentine – white asbestos – fibres are longer and curly.

● Amphibole – blue and brown asbestos – fibres are shorter and straight, brown asbestos being more
brittle.

Asbestos is commonly known by its colour; however, this can often be misleading as the material is
usually incorporated into another material such as asbestos cement or vinyl that may contain pigment
or a matrix of another colour.

● Chrysotile – white asbestos – least hazardous – examples: asbestos cement, Artex.

● Amosite – brown asbestos – examples: asbestos insulation board, soffit board.
● Crocidolite – blue asbestos – most hazardous – examples: pipe lagging, sprayed ‘limpet’ insulation.

The properties of asbestos are the reasons why it is so popular for building materials:

● Heat resistant – asbestos can withstand a temperature of 900°C without change.

● Mechanical strength – the fibres are strong in tension and are good to add as reinforcement to
cement products.
76 Stuart Eve, Minnie Fraser and Cara Hatcher
● Chemical resistance – it has good resistance to alkalis, neutral salts and organic solvents. The
varieties of asbestos used for building products also have a good resistance to acids.
● It is easily woven into materials to form heat resistant textiles and ropes.
● There are abundant natural sources of asbestos so it is a low cost material.
● It is water resistant.
● It is weather resistant.

Ninety per cent of consumption of asbestos in the UK in 1989 was for construction materials; this has
fallen due to the high profile of the health hazards and now new regulations that prohibit its use. As a
result of its durability and cheapness, it has been very widely used as a building material and there is a
large amount of it distributed around the built environment.
The health hazards of asbestos have been known for some considerable amount of time and in
recent years more has become known about asbestos and its effects on health. The amphibole forms
of asbestos, crocidolite (blue) and amosite (brown) are more dangerous than chrysotile (white) asbes-
tos. This is not to say that chrysotile is innocuous though, as stressed by the HSE in their publication
Managing Asbestos in Buildings:

The carcinogenic risk from chrysotile (white asbestos) has been evaluated by the International
Agency for Research on Cancer and it is considered to be a category 1 human carcinogen. HSE’s
view is that there is sufficient evidence that chrysotile causes cancer in humans but that there is
some uncertainty as to the scale of the risk.

ASBESTOS

SERPENTINE I AMPHIBOLE

Chrysotile Crodcjolfte
CWhfte asbestos) CBlue asbestos)

Aroosite
CBrawn asbestos)

Anthophyllfte

Contract

Contract

Figure 2.10.1 The asbestos family tree.

 Building surveying 77
The major health problems with any form of asbestos are caused by breathing in dust containing the
fibres, which become lodged in the lungs. The HSE website states that on average four plumbers, 20
tradesmen, six electricians and eight joiners die every week in the UK as a result of asbestos-related
diseases. Due to the long latency period of these diseases the numbers dying are expected to continue
rising and peak in about 2015.
All surveyors that undertake inspections and surveys of buildings should be able to recognise materi-
als that may contain asbestos and warn their clients accordingly. Asbestos-containing materials (ACMs)
may be present in any building built or refurbished before the year 2000. Building surveyors should
be aware that asbestos may be hidden behind finishes, panelling, inside ducts or voids. To further aid
recognition, you are recommended to look at the photographs in the asbestos image gallery on the
HSE website at www.hse.gov.uk/asbestos/gallery.htm.
Asbestos has often been used in external claddings and roof coverings. Fibre reinforced cement is a
very popular cladding material as it is light, strong and weather resistant. This material is still manufac-
tured and used, but the fibres used to reinforce the material are no longer asbestos. It is not possible to tell
whether the material contains asbestos just by looking at it, but unless the cladding is demonstrably new,
it is very likely to contain chrysotile although both crocidolite and amosite have been known to be used
for this purpose so their presence cannot be ruled out without testing. The most common form is the
corrugated sheets that are often seen as roof coverings or cladding to industrial or agricultural buildings.
Other roof coverings include artificial slates that can look quite convincingly like natural slate once
it has lichen or moss growing on it. Other artificial slates may originally have been bright colours such
as red, orange or even green or blue in some cases. Quite often these slates will have a small metal hook
protruding through the lower edge to prevent wind uplift. Soffit boards to the underside of the eaves
and occasionally fascia boards are sometimes made from asbestos board, either amosite or chrysotile.
There are various types of asbestos board panels used as external wall claddings and spandrel panels
in cladding systems on commercial, institutional and residential buildings. Often these are difficult to
recognise as there is such a variety of coatings and finishes, but most are either chrysotile or amosite.
Linings, panelling and ceilings can contain asbestos. Again there is a great variety of internal linings
that can be composed of ACMs. This can include wallboards, laminate panels, applied ceiling tiles, sus-
pended ceiling tiles etc. The most common finishes to contain asbestos are vinyl floor coverings – in sheet
or tile forms – and textured paint coatings such as ‘Artex’. ACMs are commonly found in conjunction
with services due to the heat and fire resistant nature of the material. Crocidolite is commonly found as
an insulating material around hot water/steam pipes and tanks or calorifiers; this is usually considered to
be the most hazardous of commonly found ACMs. There are plenty of other examples of ACM to be
found in the plant room such as asbestos board to mount electrical meters and switchgear, textile rope
gaskets around doors to boilers, textile movement joints in metal air conditioning ducting, textile sleeves
to electrical wiring to hot devices and asbestos tape repairing flue pipework etc. Chrysotile is usually the
fibre reinforcing asbestos cement products that have been used extensively in the past for flues, gutters,
downpipes, hopper heads and sometimes cisterns and tanks.
The incombustible properties of asbestos make it a good material for fire protection purposes and it
has been used for protecting vulnerable parts of buildings over many years. For this purpose, the forms
used are usually asbestos insulation board (often referred to as AIB) or sprayed on coating or ‘limpet’.
Structural steelwork is very vulnerable to distortion and failure in a fire and so it usually has some sort
of fire protective coating or encapsulation.
The Control of Asbestos Regulations 2012 relate to non-domestic premises and confer duties onto
those responsible for the running and maintenance of the buildings. The regulations require duty
holders to:

● take steps to find and assess materials likely to contain asbestos;

● presume that materials contain asbestos unless there is strong evidence to the contrary;
78 Stuart Eve, Minnie Fraser and Cara Hatcher
● make and keep an up-to-date record of the location and condition of ACMs;
● assess the risk of anyone being exposed to these materials;
● prepare a plan to manage that risk and to put the plan into effect;
● review and monitor the plan to ensure effectiveness;
● provide information to people who may work with ACMs.

The first of these duties involves finding out whether there are any ACMs in the building; this either
requires the carrying out of a sampling survey or the making of assumptions that materials contain
asbestos unless there is strong evidence to the contrary. In practice, it is usually more cost effective to
carry out a survey than to make a presumption about materials containing asbestos as this requires so
much care and management.
There are two types of survey carried out in the UK – the first is the management survey, where no
major works are planned in the building and the circumstances and design of the building are straight-
forward. The aim is to:

● ensure that nobody is harmed by the continuing presence of ACM in the property;
● ensure that the ACMs remain in good condition;
● ensure that nobody disturbs an ACM accidentally.

In order to do achieve this, the survey should identify all ACMs that might be disturbed in the normal
running and maintenance of the building and assess their condition. This is the standard type of survey
carried out and usually involves sampling and analysis to positively identify ACMs, although it can be
acceptable to make a presumption that a material contains or does not contain asbestos. A presumption
that a material does not contain asbestos would only be made where there is incontrovertible evidence!
The second type of survey is the refurbishment/demolition survey, where there are plans to carry out
works or demolish the building. It aims to

● ensure nobody will be harmed by work on the ACM;

● ensure that any work involving ACMs will be done in the right way by the right contractor.

In order to achieve this, every ACM present in the building must be found and positively identified
prior to commencement of work. This usually involves opening up and destructive testing.
The HSE recommend that surveys be carried out in accordance with HSE guidance HSG264
Asbestos: The Survey Guide by accredited specialist surveyors, who have been accredited by the UK
accreditation service UKAS. This is not an area of work normally carried out by building surveyors
unless they have had specific training in asbestos surveys and the relevant accreditation from UKAS.
Standard professional indemnity insurance for building surveying practice does not cover asbestos
surveys and surveyors contravene the RICS code of conduct if they carry out work that they are not
insured for.

Further reading
Hollis, M. and Gibson, C. (2005) Surveying Buildings, 5th edn, RICS Books, Coventry.
HSE (2012) Managing Asbestos in Buildings, available at: http://www.hse.gov.uk/pubns/asbindex.htm (accessed
02/06/2013).
HSE (2012) Asbestos: The Survey Guide, available at: http://www.hse.gov.uk/pubns/books/hsg264.htm (accessed
02/06/2013).
3 Commercial property
Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson

3.1 Commercial property

Key terms: UK economy; retail; offices; industrial; leisure; health care; owner-occupation; investor;
developer; rental value; capital value
According to the British Property Foundation’s Property Data Report 2012, the UK’s commercial
property value in 2011 reached £717 billion. Close to 1 million people are employed in commercial
property activities. The commercial property sector directly contributed about £45 billion to the UK’s
GDP in 2011 – more than the country’s IT industry, and comparable with the engineering sector.
Commercial property is, generally speaking, property used for the sole purpose of carrying out
or performing a business activity. This would exclude residential property and/or primary industries
such as mining and agriculture. The commercial property sector contributes a large part of the UK
economy and provides a platform for the majority of the country’s commercial enterprises. It is a sector
that plays a crucial role by providing places in which people can work, shop and enjoy leisure activi-
ties. The three main types of commercial property are retail (including supermarkets, shopping centres
and retail warehouses); offices (including business parks); and industrial property (including factories and
warehouses). Also included to a lesser degree is leisure property (including hotels, bars and restaurants)
and health care property (including hospitals, doctors’ surgeries and care homes).
Commercial property ‘activity’ covers those whose main business is the construction and the man-
agement and care of buildings. The letting, buying and selling of property is also significant. Investment
and fund management is a small but high-value-added part of the industry, and currently the largest in
Europe. While the residential property sector is approximately eight times larger than the commercial
property sector, the majority of residential properties are owned by private householders and therefore
less desirable to large investors.
About a third of all commercial property is acquired by owner-occupiers who need buildings from
which to run their business. Some of these occupiers want to buy the property outright by acquiring
the freehold of the property, while others may prefer to acquire a leasehold interest in the property for
a temporary period to better suit their business requirements. The other two-thirds of all commercial
property is generally bought by property investors with the intention of letting out to tenants. This
has the benefit of providing the investor with a regular income (by way of rent) that has the potential
to increase over time and also a profit from any increase in the capital value of the property over the
same time period. Many occupiers and most investors, other than institutions, buy commercial prop-
erty using a combination of debt and their own capital. The proportion of commercial property that is
rented grew over the last decade. This is because many businesses have become increasingly reluctant
to commit the capital and management time required of owner occupation.
A small proportion of commercial property will be held by property developers whose main pur-
pose is to make gain from the development of existing land and/or buildings to a more profitable use
– for example, converting redundant riverside warehousing into prestigious residential apartments. In
80 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
recent years, due to the economic downturn, much speculative commercial property development has
declined due to a fall in demand for the end product but also, due to the risk involved, funding from
banks has not been forthcoming.
Commercial property can be owned by a variety of different people and organisations. According
to the Property Data Report 2012, direct ownership of commercial property in the UK up to 2011
comprised the following:

Table 3.1.1 Ownership of UK commercial property

Ownership of commercial property (%)

UK investors 23
(insurance companies and pension funds)
Overseas investors 23
Collective investment schemes 18
UK REITs and listed property companies 15
UK unlisted property companies 9
Private investors 5
Traditional estates/charities 4
Others 3

Further reading
British Property Foundation (2012) Property Data Report 2012, British Property Foundation, London.
Rodell, A. (2012) Commercial Property, College of Law Publishing, Guildford.

3.2 Private investors

Key terms: investment; security of capital; assurance of income; location; physical condition; covenant;
lease terms; yield; risk and reward
‘Investment’ – Using a capital sum to acquire an asset which will, hopefully, produce an acceptable flow of
income and/or appreciate in capital value.
‘The Glossary of Property Terms’ (2004), Estates Gazette

With regard to commercial property investment, most investors would agree that in a perfect world
all investments would provide:

● total security of capital;

● complete liquidity of capital;
● absolute assurance of income;
● absolute regularity of income.

Total security of capital: The investor is guaranteed there is no risk of the large capital invested being lost
or its value diminishing in real terms. Ideally, the value of the investment would increase over time.
Complete liquidity of capital: The investor will need assurance that the investment can be easily sold
at short notice and/or capable of division into smaller parts should the investor need to recover the
capital.
 Commercial property 81
Absolute assurance of income: The investor is confident that the rent received (income) is always forth-
coming, will never decrease and would increase over time.
Absolute regularity of income: The investor is guaranteed the full rent is received on the correct due date
without the need for demand being made.
Any property that does not possess some or all of these qualities is deemed to pose more risk to an investor.
When it comes to choosing which property to invest in, there are many types, e.g. commercial, residential
or agricultural, but also they can be classified by quality such as prime, secondary or tertiary. All property
is heterogeneous and encompasses a vast array of types with varying qualities and weaknesses. This makes
property a difficult asset type to benchmark and define for investment purposes. The quality of a property
depends largely on four main factors: location, physical condition, covenant (tenant) strength and lease terms.
Clearly, a property scoring highly in all four areas would be considered a prime property investment.
While physical qualities of a property are important, investors tend to focus more on the quality
and security of the cash flow the investment produces. It is the precise terms of the lease that dictates
and controls the cash flow. The parties to, and the terms of, the lease will greatly affect the value and
attractiveness of the property. This means two almost identical properties in terms of location and
physical condition can have very different values depending on the quality of the tenant and the terms
of the lease. Three main factors in a lease that will affect a property’s value are the quality of the tenant,
length of the lease and, if the tenant has any, rights to determine the lease early through a break clause.
In their choice of property investment, investors will often assess the quality of the investment by
considering the yield or return they will receive from the capital invested. Most investment involves
the forgoing of a large capital sum now, in return for an income, with property, via a rent. The annual
income return from the investment expressed as a percentage of its market value is termed the yield.
For example:
Annual income × 100 £17,000 p.a. × 100
= Yield = 7.9% yield
Capital paid £215,000

The percentage yield an investor requires from an investment will reflect the characteristics and risks associ-
ated with the property. The basic concept is the greater the risk involved, the higher the yield required,
and the more secure the investment, the lower the yield required. The ideal investment would therefore
represent the lowest yield, as there is no risk or uncertainty connected with the ownership of the invest-
ment. The yield provides investors with a common basis of comparison between investments. An investor
may have the choice between a prime property providing a 5 per cent yield and a secondary investment
providing 15 per cent. The higher yield therefore does not necessarily represent the best investment as the
question that must be asked is does the yield represent good value and a balance between risk and reward.

Further reading
Blackledge, E. (2009) Introducing Property Valuation, Routledge, London.

3.3 Private finance initiatives

Key terms: public–private partnerships; public sector procurement; special purpose vehicle; consortium
Private finance initiatives (PFIs) use private money for major public sector capital projects. They were
first introduced in Australia in the late 1980s, in order to fund toll road and railway projects. A PFI
contract is a way for the public sector to obtain new buildings using private investment which is then
repaid to the private sector by rental and maintenance charges over a period of time. The first UK
project was the Severn River crossing, which started operating in April 1992.
82 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
There were two principal issues driving the move to PFI: the transfer of the risk involved in the
procurement of public infrastructure and the use of private finance to keep the cost of infrastructure off
public sector borrowing requirement (PSBR). The need for risk transfer was evident from a series of
humiliating public sector building procurement exercises, a typical example being the British Library
in London which was originally estimated at £150 million but after a series of design changes and
delays over 21 years the final bill was £500 million.
Since 1992 there have been more than 720 PFI contracts in the UK. Projects such as highways,
hospitals, schools, prisons and government offices have been undertaken to provide more than £100
billion of development in the UK. In a PFI contract the public and private sectors collaborate. Private
firms operating in a consortium agree to design, build, finance and manage a public sector facility and
in return the public sector client agrees to pay annual charges and/or allows the private sector consor-
tium to reap any profits that can be made over the life of the project (30 years or more). Figure 3.3.1
shows how PFIs are structured.
In theory, as the consortia are responsible for building and maintaining the facility over a protracted
period they should produce a building design using life cycle cost analysis, high quality, low maintenance
materials and a tried and tested design. The risk in the procurement process is effectively transferred to
the consortia and, because the payments from the client only start after the building has been delivered
there is an imperative to build to programme and the overruns of previous years have become a thing
of the past. While the construction process is reduced, the procurement process under PFI is expensive
and protracted. This process requires a considerable input from the client, the potential occupiers of the
facility, the design team and the lawyers. Once the output specification has been established and put out
to tender, interested consortia will produce designs and costs, and establish a rent, normally index-linked
over the period of the contract. The considerable amount of design work is carried out ‘at risk’ of not
getting the project; it is not unknown for five consortia to be bidding for a £25 million capital project
and each generating £1 million of costs with a one in five chance of success.
Another problem has been the lack of flexibility inherent in the PFI contract – when a local author-
ity has to cut services, as in the current recession, the PFI library or leisure centre is sacrosanct and
everything else has to be closed as the PFI payments must continue whether the building is open or
closed. Another example of PFI inflexibility has been the ill-fated Fire Control project, which aimed
to replace 46 local emergency call centres with nine regional centres; the project was scrapped by the

Private sector
Public sector client Special purpose vehicle
contractors

Facilities
Design and life Building
Banks management Consortium
cycle consultants contractor
contractor

Figure 3.3.1 PFI structure.

 Commercial property 83
new Coalition Government as part of the ‘localism’ agenda and in the face of union and community
opposition, but this was not before the regional control centres had been built and equipped to speci-
fication. The nature of the PFI contract means that in 2011 the government was paying £1.4 million
per month in rent for empty buildings in addition to writing off £140 million in procurement costs
and consultants fees.
Supporters claim that the advantages of PFIs are:

● the contractor no longer ‘builds and disappears’;

● the client drives the project;
● competition reduces inefficiency;
● there is improved flow of information;
● there are incentives to complete on time, within budget and to expected quality.

Detractors claim that the disadvantages of PFIs are:

● transaction costs are high so only a few firms bid;

● bid costs are often more than £1 million;
● ongoing rental payments can be a burden on public finances (Jowsey, 2011).

The debt created by PFI can have a significant impact on the finances of public bodies. By 2012 there
were 719 PFI projects in the UK with a capital value of about £60 billion, but the amount of pay-
ments to be made over the next 30 years was more than £300 billion. Annual payments to the private
owners of the PFI schemes are due to peak at £10 billion in 2017 and are already stretching constricted
public sector budgets, to the extent that public services could be suffering.
A National Audit Office study in 2003 endorsed the view that PFI projects represent good value for
taxpayers’ money, but some commentators have criticised PFI for allowing excessive profits for private
companies at the expense of the taxpayer. There is also evidence that some PFI projects have been
poorly specified and carried out. Supporters of PFI, however, claim that risk is successfully transferred
from public to private sectors as a result of PFI. The Nation Audit Office again reported on PFI in
2011 and noted that:

Government Departments and the Treasury have built up considerable experience of PFI and
developed guidance, support and project assurance systems to assist in procurement. This has
included standard contracts and specialist units to assist individual (inexperienced) authorities
embarking on PFI negotiations.

An example of a successful PFI is new office accommodation for the Treasury at 1 Horse Guards
Road, Whitehall. This was opened by Alan Greenspan, former Chairman of the United States
Federal Reserve Board on 25 September 2002. The increased space available in the new building
(known as 1HGR) will enable all Treasury staff to work in the same building for the first time in
over 50 years. This was achieved on budget and ahead of time in a successful innovative value for
money PFI project.
GCHQ Cheltenham is another successful example of a PFI. This 100,000 m2 building is a major feat
in all respects. As the largest PFI project in Europe, the GCHQ’s new building will be home to over
4,500 staff, relocating them from 50 different buildings on two existing sites in Cheltenham. Since
2007 many sources of private capital have dried up; nevertheless, PFI remains the UK government’s
preferred method for public sector procurement.
84 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, Ch. 21.
National Audit Office (2011) ‘Lessons from PFI and other projects’, available at: www.nao.org.uk/report/
lessons-from-pfi-and-other-projects/.

3.4 Office market

Key terms: office design; office location; low carbon office design; business parks
During the twentieth century office design and office work was transformed beyond recognition. At
the beginning of the century offices were often elaborate Victorian edifices with cellular office spaces
and coal fires. They were clustered together for easy day-to-day communication, with shipping offices
along the dockside and insurance businesses famously around Lloyd’s Coffee House in London. By
the end of the century offices had been transformed by the modern movement in architecture, the
maxim ‘form follows function’ led to the tower blocks that characterise New York, the design being
copied throughout the world. In the UK the modern era was completed by 1 Canada Square, the
poster building for Canary Wharf, London completed in 1991 just in time for a recession which kept
it empty for years and eventually bankrupted the developers, Olympia and York.
In the twenty-first century office design is being affected by the need for environmental sustain-
ability and, more importantly, the changes brought about by the integration of telecommunication and
computers, which has created demand for an entirely new office type, the call centre. In the modern
economy offices can be readily classified into two types, characterised by their location: city centre and
out of town business parks.
Business parks are an evolution of office design. They are out of town office developments to take
advantage of cheap land and good road links. Occupying firms appreciate lower rent, good access and
a homogenous selection of buildings with a variety of floor plate sizes. Employees appreciate a new
working environment, ample free parking and an attractive parkland setting which may offer recrea-
tion facilities for lunch breaks and evenings. The idea of the out of town business park originated
in the west coast of America where high-tech and IT start-ups favoured the ‘campus style’ low rise
design that imitated the universities their employees had come from. In the UK, Stockley Park, which
opened in 1986, provided the successful model which all business park developers hope to emulate.
Stockley Park is handily located just off the M4 motorway to the north of Heathrow airport; it is
served by West Drayton rail station and has an adjoining golf course and on-site leisure facilities such as
pubs and restaurants. The site is set out at a low density with woodland and lakes providing an attrac-
tive setting. The superb accommodation, attractive setting and proximity to Heathrow attracted global
blue chip tenants such as Apple, Canon, M&S, IBM and Mitsubishi.
The tranquil parkland environment allows developers to produce environmentally friendly build-
ings. The low rise offices may be built to a narrow floor plate to allow natural daylight and the absence
of traffic noise and pollution allows offices to be built with natural ventilation and openable windows
which employees prefer (in reality most developers go for the safe option of air conditioning).
Now all major UK cities have their version of an out of town business park. Many are very suc-
cessful but at their worst they can provide a bleak experience for employees. The out of town location
may be isolated and provide very limited recreational facilities for lunch breaks, the ‘ample free park-
ing’ referred to earlier may be overwhelmed by demand which leads to full car parks and all the service
roads lined with the overflow. The out of town location usually translates into a lack of public trans-
port which means most employees commute by car and as motoring costs increase and salaries stagnate
the business park may become an unattractive option.
City centre offices at the nexus of public transport facilities have maximum accessibility and this will
drive demand. Where there is demand, the office form can be extended vertically to the maximum
 Commercial property 85
height the market and planning regime will allow. The higher the offices the more expensive the build
cost becomes and the ratio of gross to net floor space becomes less favourable due to the need for lifts
and emergency exit stairs. The modernist slab office block is very efficient but as developing countries
produce their iconic buildings, less efficient but more spectacular designs have emerged such as the
Taipei 101 building in Taiwan and the Bahrain World Trade Centre.
In the UK the design of offices is largely dictated by the British Council of Offices (BCO)
specification, which gives guidance on design of modular sizes, building services, lift specifications,
sanitary facilities and finishes. The BCO is a subscription membership group of property developers,
designers, investors and occupiers who have come together to research, develop and disseminate
good practice in office design. It has its origins in the 1990s when likeminded groups came together
to establish an ‘investment’ standard for offices, partly to prevent wasteful over specification and
promote an overarching minimum standard that property developers, financiers and the pension
funds and investors would accept as of acceptable quality for prime investments. The current BCO
specification dates from the 2009 edition and will be superseded in 2014. The 2009 specification laid
great emphasis on environmental sustainability, especially heating and cooling strategies to minimise
environmental impact.
Current office design shows a marked departure from the modernist glass box that dominated the
latter half of the twentieth century. Current designs will normally feature solar shading, typically brise
soleil or a mesh to reduce solar gain and the subsequent cooling demand. Cooling systems are gener-
ally low energy designs such as displacement ventilation or chilled beams. As local planning authorities
demand an element of renewable energy, hybrid gas and biomass heating systems are being designed,
or air source heat pumps, to both heat and cool the building.
Office occupiers have become increasingly concerned to gain the maximum benefit from the space
they occupy. In 2005 the Commission for Architecture and the Built Environment (CABE) and BCO
published an influential report entitled ‘The impact of office design on business performance’; it drew

Figure 3.4.1 Brise soleil on the south elevation Figure 3.4.2 Mesh solar shading perforated by oval feature
of the Museum of London. windows.
Source: John Holmes. Source: John Holmes.
86 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
particularly on the architectural firm DEGW’s framework to encompass the business objectives of an
organisation:

● Efficiency: making economic use of real estate and driving down occupancy costs (getting the
most from the money).
● Effectiveness: using space to support the way that people work, improving output and quality
(getting the most from the people).
● Expression: communicating messages both to the inhabitants of the building and to those who
visit it, to influence the way they think about the organisation (getting the most from the brand).

Since the publication of the report the principles have been manifest in the office market and office
design. As regards efficiency, offices are no longer 9–5 operations; offices are being used more inten-
sively by increasing staff density, open plan working and hot desking. The effectiveness of the space is
enhanced by improving staff satisfaction to reduce absenteeism by ensuring the building services work
to the optimum to enhance staff comfort as regards temperature, air quality, noise and lighting. Space
must be used effectively to facilitate staff tasks, open plan for communication and team working, and
individual spaces available when quiet concentrated study is needed, as well as a variety of meeting
rooms for project work. Finally expression is the ability of the organisation to transmit its brand values
to staff and visitors through the space it occupies. Traditionally, banks have expressed their reliability
and gravitas by occupying impressive neoclassical offices or ultra modern HQs in the city. Expression
is very important when it comes to attracting high quality staff in competitive employment sectors.
For example, the Google HQ under construction in London will feature a ‘quirky’ fit-out to provide
a vibrant workspace for their creative staff.
Offices are places where may people spend lots of time; they can be bleak and dismal, where each
day is a struggle to work effectively in a space that is too hot/cold, stuffy/draughty, overlit/underlit,
noisy/sepulchral. Or, with some thought and clever design they can enhance productivity, reduce
absenteeism and make staff feel valued by their employer.

Further reading
BCO (2009) ‘British Council for Offices Specification 2009’, available at: bco.org.uk, (accessed 29/10/2013).
BCO (2013) ‘Occupier density study’, available at: bco.org.uk (accessed 29/10/2013).
CABE/BCO (2005) ‘The impact of office design on business performance’, available at: bco.org.uk (accessed
29/10/2013).

3.5 Industrial market

Key terms: Planning Use Classes Order 2010; logistics; multi-channel retail; logistics centres; ware-
houses; distribution centres; industrial estates
From a property perspective, industrial property is property (land and buildings) that can be used for a
variety of purposes, with the following being the most common uses:

● production;
● manufacture;
● storage;
● distribution;
● energy production;
● waste disposal;
● industrial land, e.g. mining/quarrying.
 Commercial property 87
As a general rule, agriculture and forestry are not included in the industrial property sector. From a
UK planning perspective, industrial property use is generally classified under the Use Classes Order
2010 as:

● B1 Business – light industry appropriate in a residential area;

● B2 General Industrial – use for industrial process other than one falling within Class B1 (excluding
incineration processes, chemical treatment or landfill or hazardous waste);
● B8 Storage or Distribution – this class includes open air storage;
● Sui Generis – certain uses do not fall within any use class and are considered sui generis. An example
would be a vehicle/metal scrap yard.

Although industrial property is such a large commercial property sector and its buildings can range in
size from a small business workshop of 500 sq ft (46.5 sq m) up to a large warehouse of 350,000 sq ft
(32,516 sq m), the sector generally includes the following types of properties:

● logistics centres;
● warehouses;
● distribution centres;
● industrial estates.

A logistics centre is the hub of a specific area where all the activities relating to transport, logistics and
goods distribution, both for national and international transit, are carried out, on a commercial basis,
by various operators. The operators may be either owners or tenants of the buildings or facilities
(warehouses, distribution centres, storage areas, offices, truck services, etc.) built there. The whole
concept of ‘logistics’ has had a significant impact on the sector with the emergence of multi-channel
retail and the development of multi-channel logistics to support it. The growth of online retail is
transforming the way consumers shop, not least by generating multiple channels through which they
can research products and make purchases. At the same time, it has added significant difficulty to
the logistics operations of retailers. Instead of the relatively simple process of replenishing high street
stores, multi-channel retailing is giving rise to multiple channels of distribution to service a huge
range of destination points, as consumers can choose to shop at stores, order goods for home delivery
or click-and-collect, and return purchased items that they do not want. At present, many companies
are struggling with what this change will mean for their business, their logistics operations and their
warehouse requirements.
Warehouses are used for storage of goods by manufacturers, importers, exporters, wholesalers, trans-
port businesses, customs, etc. They are usually large open space buildings in industrial areas of cities
and towns. They usually have loading bays to load and unload goods from trucks. Sometimes ware-
houses are designed for the loading and unloading of goods directly from railways, airports or seaports.
They often have cranes and/or use forklifts for moving goods, which are usually placed on standard
pallets loaded into pallet racks. Stored goods can include any raw materials, packing materials, spare
parts, components, or finished goods associated with manufacturing and production.
Distribution centres are similar to warehouses in terms of being generally large in size and used for
storage; however, distribution centres are the foundation of a supply network, as they allow a single
location to stock a vast number of products. They will be stocked with products (goods) to be redis-
tributed to retailers, to wholesalers, or directly to consumers. A typical retail distribution network
operates with centres set up throughout a commercial market, with each centre serving a number of
stores. Large distribution centres for companies such as Tesco serve 50–125 stores. Suppliers transport
truckloads of products to the distribution centre, which stores the product until needed by the retail
location and then distributes the required quantity of goods.
88 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
Industrial estates, also known as industrial parks or trading estates, are areas zoned and planned
for the purpose of industrial development. They are usually located on the edge of, or outside
the main residential area of a city, and normally provided with good transportation access,
including road and rail. Examples would include the large number of industrial estates located
along the River Thames in the Thames Gateway area of London or in the Team Valley area of
Gateshead. The idea of setting land aside through this type of zoning is based on the ability to
attract new business by providing an integrated infrastructure in one location – also to set aside
industrial uses from urban and residential areas to try to reduce the environmental impact of the
industrial uses.
Within the UK commercial property sector, there are difficulties with industrial property invest-
ment including problems due to inflation, the strength of the currency affecting manufacturing industry
and the economic downturn. These make this sector challenging for investors and developers.

Further reading
JonesLangLasalle (2013) ‘The impact of multi-channel retail on logistics’, available at: www.joneslanglasalle.co.uk/
UnitedKingdom/EN-GB/Pages/ResearchDetails.aspx?itemID=10883 (accessed 25/11/2013).

3.6 Retail market

Key terms: high street; supermarkets; retail parks; shopping malls
Traditional high streets are the product of a way of life that has been fundamentally superseded.
From 1900 to the 1960s shopping was a daily event based on ‘corner shops’ and local high streets.
The population was densely packed in terraced houses or semis around traditional high streets
providing a captive market for an inefficient retailing offer based on independent traders. Before
supermarkets, all groceries were bought over the counter at the butcher, the baker, the fishmonger
in a daily excursion by stay-at-home mums. It is this lifestyle that sustained the volume and size of
shops on our local high streets; thus, it is unsurprising that when society has changed so radically
the traditional shopping high street is struggling to survive and has become the focus of government
initiatives to ‘save the high street’.
The transformation of retailing has taken place in a number of waves, first supermarkets, initially
quite small and on the high street and then larger and larger super stores on the outskirts of town.
In the 1960s and 1970s many city centres where ‘comprehensively redeveloped’ to incorporate
modern shopping malls. These malls were very successful and had the advantage of reinforcing the
dominance of the city or town centre as the focus of retail activity. The next wave has been out
of town retail parks, often resisted by local planning authorities as they rightly predicted that they
would undermine the traditional high street. The initial demand for out of town, or more accurately
edge of town retailing came from bulky goods retailers, specifically carpets, furniture and white
goods. These retailers originally took space in redundant warehouse or factory units on the arterial
roads. The cheap space, ease of deliveries and parking outweighed the disadvantage of a non-central
location. Retailing from these ‘sheds’ became more formalised as developers built retail units, with
large shared car parks on the orbital roads of large cities and towns. These developments were
very successful and attracted carpet and white goods retailers and subsequently leisure uses such as
cinemas and restaurants that shared the car parking which would be underutilised in the evening.
There was a significant growth of edge of town retailing during the 1970s with a consequent loss
of spending power in the traditional town centres. These retail parks have evolved (and smartened
up) as high street retailers, in addition to the bulky goods retailers, have joined the edge of town
movement, so we now find M&S, Next and Boots taking advantage of the easy free car parking and
modern, relatively maintenance-free shops to operate from.
 Commercial property 89
The past 20 years has been characterised by what has been known as the ‘space race’ from the major
supermarket groups. Supermarkets were classified under three basic headings by the Office of Fair
Trading report on the groceries market:

One stop shop Over 1,400 m2

Mid-range 280–1400 m2
Convenience stores Up to 280 m2

It is the one stop shop and the convenience stores that have been the focus of activity for the major
grocery retailers in the UK. The space race alluded to earlier was a period of fierce competition
when supermarkets competed for sites and sought to build ever larger hypermarkets, in the range of
10,000–14,000 m2. These stores offered clothes, white goods, consumer electronics, DVDs and books,
undermining local high streets. The attraction of large floor plates was the opportunity to offer a wide
range of goods, with higher profit margins than groceries. Mid-range supermarkets were altered to
increase sales space by reducing storage space (the shortfall accommodated by more just in time stock
deliveries) where possible, mezzanine floors were installed to increase sales area or café facilities. The
main grocery retailers, Tesco, Asda, Sainsbury and Morrison’s were competing to increase floor space,
retail sales and profits. The firms also innovated bank and insurance spin-offs to generate turnover and
profits without needing any further floor space.
The current retailing scene is now very different as all operators have moved into online sales and
the public are using the internet to purchase clothes and household goods. Currently 9.5 per cent of all
retail sales (other than petrol) is online. The large supermarket chains are now finding themselves over-
supplied with space, Tesco in particular are installing Giraffe restaurants and Harris and Hoole coffee
shops in the stores and are negotiating with gym operators to take space. To maintain their growth in
floor space they have been opening convenience stores on high streets and in petrol stations. This was
originally a reaction to the difficulty in gaining planning permission for large edge of town stores but
has proven to be a sound business model, bringing their high-value, high-profit-margin foods to city
centre and high street stores.
Meanwhile on the traditional high street, independent traders have been squeezed by the supermar-
kets and the internet. Vacancy rates have increased; in 2013 overall high street vacancy rates averaged
14 per cent but within that figure there are significant winners and losers. Winners, with vacancy rates
below 10 per cent, are generally characterised by a wealthy hinterland or historic centres which can
attract tourists – for example, York, Harrogate, Cambridge, Salisbury, Whitstable. By contrast, the
losers with vacancy rates of over 25 per cent are mid-range towns and cities in declining industrial
areas – Grimsby, Wolverhampton, Blackburn, Stockton.
Boarded-up shops create a bleak shopping environment; charity shops, which used to be a
disguise for low demand, are now considered prime tenants and are benefiting from the recent
interest in all things ‘vintage’. The government has recognised the crisis and has set up a number
of financial initiatives to regenerate ailing high streets, but the logic is inescapable, there are too
many shops and high streets need to be repopulated by converting shops to homes and social
facilities. It will be a long and painful process that needs to be managed sympathetically to main-
tain the heart of the community.

Further reading
Competition Commission (2008) ‘Supply of groceries in the UK’, available at: www.competition-commission.org.uk/
assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2008/fulltext/538 (accessed 05/12/2013).
Portas, M. (2011) ‘The Portas Review: An independent review into the future of our high streets’, available at: www.
gov.uk/government/uploads/system/uploads/attachment_data/file/6292/2081646.pdf (accessed 21/11/2013).
90 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
3.7 Leisure market
Key terms: Town and Country Planning (Use Classes) Order 1987; ‘boutique’ hotel; serviced apart-
ment; Licensing Act 2003; shopping centre development; food courts; roadside restaurants
Leisure property is one of the key sectors within the commercial property market. It has its own use
class (Class D2) under the Town and Country Planning (Use Classes) Order 1987 and includes many
properties such as hotels, restaurants and public houses, outdoor sporting and recreational properties
such as golf courses, as well as holiday centres and caravan sites. Leisure property differs from other
commercial property in that the value of the property arises from and very much depends on the
value of the business that is being carried on within it. Since the success of a leisure business will often
depend on client loyalty, the business or property reputation, or ‘goodwill’, assumes a greater impor-
tance for leisure property than in other property sectors.
The hotel sector, like many other sectors within the leisure industry, is a cyclical and volatile market
compared with retail and can be easily upset by events outside its particular sector such as currency fluc-
tuations, tourism related events such as terrorism, bad weather and economic recession. Generally, city
centre and provincial hotels can be categorised into very simple bands of hotels. The luxury hotels (i.e. 5
star) were traditionally limited to mainly London but more recently a number of 5 star hotels have been
constructed in city centres outside London and a number of refurbished hotels are attaining 5 star status.
The bulk of the business hotels in London and the provinces is in the 3/4 star market.
A recent growth has been in the budget hotels sector, e.g. Premier Inn, Travelodge, Holiday
Inn Express, which nominally have a 2-star category. They are popular with the business sector and
younger generation for associated social/leisure events. They often provide a more comfortable and
functional bedroom and en suite facility than is normally associated with the traditional 2 star market.
The ‘boutique’ hotel with examples such as Malmaison has now established itself in the market and
provides a very high quality of individual accommodation with personalised service and bar/lounge/
brasserie facilities. The latest sector that is starting to grow is the serviced apartment or ‘aparthotel’.
An apartment hotel uses a hotel style booking system and offers a complete apartment fitted with most
things the average home would require.
The history of the public house dates back many centuries, to before Roman times. The true
beginnings of the public house probably date back to when the first licences were granted, in the mid
sixteenth century. The need for a licence to sell alcohol in these premises together with licences for
other leisure businesses (e.g. casino activities and hot food takeaways after 11 p.m.) still remains today
under the Licensing Act 2003. Over time, this has resulted in the emergence of four main categories
of public houses. The first two are brewery owned, or the pub company will have a substantial share-
holding owned by a brewer, or a brewer will have a supply agreement with the owner.
Managed houses. The owning company has the right to nominate all products sold through the
outlet including beers, ciders, wines, spirits and all sundry supplies. All outgoings are borne by the
operating company, including the salary of the manager who is an employee of that company.
Tenanted houses. These have identical ownership to managed houses, the public house is let to a ten-
ant. The terms of occupation, historically, have been a short-term agreement with a rent or a turnover
lease agreement. There will be specific purchasing and stocking obligations, particularly with regard to
beer purchases. Unlike the manager, the tenant has a financial stake in the business.
Free houses. Independently owned and not tied to any specified brewer or supplier in respect of liq-
uor supplies. Such properties can be either individually owned or form part of the assets of a multiple
company.
Loan tied free houses. Similar to the above category. To a greater or lesser extent the owner, in return
for financial support, or other capital sum, undertakes to purchase minimum purchasing obligations
from a nominated supplier in the form of a brewer.
 Commercial property 91
With regard to restaurants, this sector, like the hotel sector, has a wide variety of offerings for the
public. The location and format of restaurants can be quite diverse, with footfall not always being as
important as to e.g., the retail sector. If we ignore fast-food restaurants such as McDonalds, who favour
high street locations, most major suburban and provincial centres do demonstrate what is known as the
‘crater effect’. In essence, it can be proved that restaurants have tended to move outwards from prime
city-centre positions to the periphery and destination locations. This may only be 100 metres or so,
away to the periphery of a shopping centre or to locations close to travel termini, cinemas, theatres,
leisure and social/drinking circuits. These positions are normally prominent, with good parking facili-
ties, servicing and access. For these reasons, planning consent is generally slightly easier to obtain in
these locations than in the prime position.
Developers of the older retail developments in town centres tended to locate restaurants out on a
limb in secondary areas of malls. Developers now identify that the public need good catering facilities
to enable them to stay for a longer period within the development. The popularity and emergence of
the ‘coffee culture’ provided by Starbucks, Costa Coffee and Caffè Nero has also helped in this regard.
Food courts are another concept that have been used with mixed success within shopping centre
developments. This is an ever changing field and property professionals need to remain up to date with
current criteria and concepts.
Roadside restaurants have also become common in the UK following a long history of success in
the United States. Trunk road operators such as Little Chef, Happy Eater, Pizza Hut and Kentucky
Fried Chicken, to name but a few, are constantly looking for new sites to expand. Sites range in size
from 0.2 acre to approximately 1 acre as a general rule and may be drive-through or drive-to opera-
tions, of freestanding sites or linked to a leisure/retail park. Module size can be anything from 1,500 sq
ft to 10,000 sq ft but most modules are between 3,000 and 6,000 sq ft. Car parking is an important fac-
tor, as is access from trunk roads. Planning consents can be more difficult as the Police and Highways
Authority play a major part in consultation and decision making. If in a more residential location in
the suburbs, then the likelihood of objections from local residents will be higher.

Further reading
Marshall, H. and Williamson, H. (1996) Law and Valuation of Leisure Property, 2nd edn, Estates Gazette, London.

3.8 The health care market

Key terms: ageing population; domiciliary care; fair maintainable operating profit (FMOP)
Due to improvements in mortality rates and an historic decline in fertility rates, the population of the
UK is ageing (Office for National Statistics, 2012). Consequently, over the last decade this has had an
impact on the levels of private investment in elderly care facilities, and seen the emergence of a key
specialist property market in the UK in health care.
There has been a separation in recent years between the care home market and the market for
domiciliary care where care is provided to clients in their homes. The majority of individuals requiring
domiciliary care are referred through local social services, who then contract out the work to inde-
pendent providers (see ukhca.co.uk); 89 per cent of publicly funded homecare is now provided by the
independent sector, compared to 5 per cent in 1993 (Community Care Statistics, 2013), marking a
move away from care homes and towards care in the home.
Many care providers offer both services, and there has been increasing encouragement from the
government to assist people who wish to remain in their own homes rather than opting for a care
home at an earlier stage. This has potentially placed additional pressure on care home operators as they
are required to provide intensifying levels of care and deal with an increase in admissions to hospital.
92 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson

A ddition by
2008

2033

6
4
M illions
2
0
100 +
10-14
15-19

30-34
35-39

50-54
20-24
25-29

40-44
45-49

55-59
60-64
65-69
70-74
75-79
80-84
85-89
90-94
95-99
5-9
0-4

Figure 3.8.1 UK population.

Source: Government Actuary’s Department (2010).

In terms of health care properties as an investment, the operational care home business and the prop-
erty within which it operates are intrinsically linked, so the value of a residential elderly care home is
inherent in its profitability. Therefore, market practice is to value a care home by analysing its profit
and loss accounts to ascertain the financial position of the business. The valuer then uses their expertise
to establish the fair maintainable operating profit (FMOP) that any competent operator could achieve
from the business, and calculate the value of the investment based on this figure.
The main income source for care homes comes from weekly fees, which comprise a contribution
from the relevant local authority (based on an individual’s personal income), and, if necessary, a ‘top-
up’ paid by the individual or their family. The security of this fee income is affected by a number of
different external factors, and this subsequently impacts on the value to investors.
Consequently, factors such as local demographics, government policy and property market activity
all impact on the value of care properties. For example, in an area with an older population and a high
level of personal wealth, a care home operator could expect to achieve a high level of weekly fee in
comparison to other areas of the UK. A larger proportion of this would also be a top-up payable by the
individual or their family. A good example of this sort of area would be Harrogate in North Yorkshire
where care home investments can achieve prime investment yields. In contrast, a poorer area of the
UK with a large elderly population would see good occupancy rates for care home operators, but
lower fee levels – the majority of which would be covered by local social services.
Changes to the local government fee structure for care homes and the reassessment of individuals
for benefit entitlement are also likely to impact on investor sentiment. From 2016, proposed govern-
ment funding reforms will deliver a new cap of £72,000 on eligible care costs (Department of Health,
2013). The concern from the sector will be how the shortfall between government funding and the
cost of care will be covered.
In recent times, local authorities have failed to raise fees by a sufficient amount to cover increasing
care costs. In 2010/2011, average baseline fee rates increased by 0.7 per cent, compared with estimated
cost increases of 2.1 per cent. In the financial year 2011/2012, the funding gap widened with average
local authority increases of just 0.3 per cent compared with estimated care home cost increases of 2.8
per cent. In 2012/13, baseline fee rate increases were slightly higher as local authorities responded to
 Commercial property 93
the threat of judicial reviews by providers, but the average increase of 1.4 per cent in England (1.6 per
cent across the UK) was still less than estimated cost increases of 2.5 per cent in the year (Bupa, 2012).
However, the health care property market remains the focus of many investors and is subject to
expansion into other areas such as care villages.

Further reading
Bupa (2012) ‘Bridging the gap: Ensuring local authority fee levels reflect the real costs of caring for older people’,
available at: www.bupa.com/media/479673/bridging_the_gap_final.pdf (accessed 25/11/2013).
Community Care Statistics, available at: statistics.gov.uk (accessed 26/11/2013).
Department of Health (2013) ‘New fairer capped funding system to help everyone plan for the cost of care’, available at:
https://www.gov.uk/government/news/new-fairer-capped-funding-system-to-help-everyone-plan-for-the-cost-of-
care (accessed: 26/11/2013).
Laing, W. (2008) ‘Calculating a fair market price for care’, Joseph Rowntree Foundation, available at: www.jrf.org.uk/
sites/files/jrf/2252-care-financial-costs.pdf (accessed 26/11/2013).
Office of National Statistics, available at: ONS.gov.uk (accessed 26/11/2013).
UK Homecare Association, available at: UKHCA.co.uk (accessed 26/11/2013).

3.9 Student accommodation

Key terms: higher education; student accommodation; residential investment
In the UK, participation in higher education has been on an upward trend for decades; in 2011/12 there
were 1.8 million full-time students in the UK, compared to 1.45 million in 2007/8. This growth in
numbers has generated additional demand for student accommodation and in parallel with this growth
in demand in absolute numbers there is also an increase in demand for high quality accommodation.
In the past, universities held student accommodation as part of their institutional ethos, especially
those who ran a college system. The standard of accommodation is very variable; students attending
Trinity College Cambridge may be billeted in Lord Byron’s old room and dine in halls, students in
the ex-polytechnic may have a room in a high rise block built in the 1960s. Universities attempt to
‘guarantee’ all their first year and international students a place in halls, the national average of provi-
sion being 65 per cent and in London 30 per cent. Thus, there is a shortage of student halls to meet
demand from first years, and additional supply may persuade students to stay in halls rather than mov-
ing into private rented accommodation in their second and final years.
In the current higher education environment student accommodation has become a key deter-
minant in student’s selection of university and university management has become more focused on
providing modern accommodation to attract students. The new fees regime, at £9,000 per year plus
approximately £4,000–6,000 for accommodation has made a university education an expensive prod-
uct and students are demanding high quality in all aspects of the experience. The standard ‘modern’
university student accommodation used to be a six-bedroom ‘flat’, sharing a kitchen and bathroom
facilities. This is deemed to be a bare minimum standard and to accommodate new expectations there
has been a surge of student halls building across the sector.
This demand has created a variety of providers in addition to the traditional university halls. Two
models have emerged, joint ventures and independent providers. Joint ventures between developers
and universities have become popular in the past decade. The developer finances, builds and manages
the facilities and the university adds the accommodation to their ‘portfolio’ of accommodation without
any capital outlay. For the university this is a zero-cost means of increasing their accommodation offer,
the developer consortium is provided with a low risk investment and income stream, provided their
accommodation is attractive and the university can attract students. The nature of the joint venture will
be negotiated between the developer and the university as regards design, rents, length of nomination
agreement and share of income. The largest provider in the sector is Unite which has approximately
94 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
25 per cent of the market and 40,000 beds let. They have a vigorous expansion programme recently
funded by a £380 million bond issue, with a 3.4 per cent return, which was three times oversubscribed.
Independent providers operate in major university cities without a specific link to a university. Nido
is a typical example of this type of operation, with three blocks of halls in London; the Spitalfields
block, for example, accommodates 1,200 students over 33 floors, as well as en suite rooms and wi-fi
which has become standard. Facilities include ‘chill out spaces with giant flat screen televisions and an
ultra-modern gym and spa’. It is no coincidence that they have three premises in London – London
has 290,000 students, larger than the next five student cities put together and the highest concentration
of overseas students, who are most likely to live in university halls.
Student accommodation has become a new investment vehicle; annual investment in the UK has
increased from £400,000 in 2009 to £2.7 billion in 2012. With an undersupply in the market there
are prospects for growth and lots of opportunity to replace elderly halls built during the 1970s higher
education boom. Figure 3.9.1 shows halls built in the 1970s – not old enough to be interesting, not
good enough to be attractive.
Figure 3.9.2 shows modern halls under construction – 1000 en suite bedrooms above a supermarket
– rooms have fast wi-fi, the accommodation includes fitness facilities and multi-use games area. There
is also a multi-screen cinema on site, as well as bars and restaurants.

Figure 3.9.1 1970s student accommodation.

Source: John Holmes.

Figure 3.9.2 Modern student accommodation.

Source: John Holmes.
 Commercial property 95
Further reading
Hubbard, P. (2009) ‘Geographies of studentification and purpose-built student accommodation: Leading separate lives?’
Environment and planning, A 41(8): 1903.

3.10 Building information modelling and commercial property

Key terms: BIM; 3D modelling; facilities management; service charges
This technology is used as standard in construction for new developments in both public and private
sectors. It is now a requirement for £5 million-plus public sector contracts, as identified by govern-
ment strategy in May 2011. Quantity surveyors are embracing it and more recently building surveyors
are applying it on schemes relating to existing buildings. It can be defined as:

The process of Building Information Modelling is the action or the creation and maintenance of
a database of information relating to a building. This data is digital and is recorded in such as way
as to serve as a useful tool for the future life of the building. For example, details of structure and
specifications of windows would make the task of replacing windows quicker and easier. The
data can be used to inform maintenance decisions potentially saving time and money over the full
lifecycle of a building.
The BIM process can be conducted at different levels, depending on the specifications of the
client, represented by either a project or facilities manager. It is important to determine what level
of detail is required from the outset as this will inform provision of digital storage space and to
some extent what system the model will be created in. Broadly the level of detail can be equated
to cost, the more detailed and complete a building information model the higher the cost and the
greater the potential benefits and cost savings in the long run.
(isurv, 2013)

A BIM model comprises two distinct sets of information:

1 A 3D visual model drawn in, for example, Autodesk Revit Architecture.

2 Detailed information on the construction and design of the building. It will comprise a full speci-
fication of all component parts of the building fabric.

The original design team use BIM design software to create a multidisciplinary model. That model can
then be used by others to assist their own needs. Examples can be seen at www.bentley.com, www.
autodesk.co.uk.
There is also a range of additional BIM software that allows the end user to manage the building. Some
examples are: www.kykloud.com, www.fmsystems.com, www.artra.co.uk, www.archibus.com.
BIM will be an effective tool to assess and, therefore, improve the energy efficiency of buildings. This
will become more important as the energy efficiency requirement of property is increased in 2018 and
after. The essential aim is to create one model in which all information about a building is stored for
the duration of its life. Copyright might be an issue. The developer/investor should specify the use of
a BIM model.

New build versus existing property

It is estimated that around 60 per cent of the property that will be here in 2050 has already been built
and most will not have a BIM model. In the current economic climate there is limited new construc-
tion which is why BIM has been used over the past few years.
96 Andy Dunhill, Dom Fearon, John Holmes and Becky Thomson
New build – it is relatively easy to create and apply a BIM model in a new build as the visual aspects
of it will be generated from the design team plans and the information behind that will come from the
construction process.
Existing buildings – the required information must be obtained from onsite survey and inspection
or laser surveys. This is potentially viable where a major refurbishment is planned. Where existing
floor plans exist it may be possible to use them, together with further site inspection to create the visual
model. It will assist in change of use and adaptation of buildings.

Potential uses for the commercial property surveyor

● Development appraisal
This facility should be able to aid both the planning and the construction processes especially
where variations or changes are made during the construction process. The risk factor during con-
struction will be reduced, thus decreasing the need for contingencies and ensuring work is done
on time. This will assist the valuation process done for acquiring funding for the scheme.
● Agency
The information and visual aspects of BIM should assist in marketing during the development
process to obtain a pre-let – to assist with layout or specific design requirements of occupiers etc.
The visuals would be best enhanced using specific 3D modelling software such as 3Dstudiomax.
● Property management
The information should enable more accurate estimation of service charges throughout the life of
the building. The management of this process could be added in to the model by additional com-
patible software to include all key lease information, rents etc. (see www.fmsystems.com, which
Jones Lang Lasalle support). Detailed construction information and models will make future inter-
nal alterations easier. In an existing building, records could be kept of problem areas, e.g. the
existence of asbestos.
● Facilities management (referred to as 6D BIM)
The model will enable the facilities manager to deal with maintenance and operational issues,
alterations and refurbishment of buildings etc. in a more effective way, taking into account factors
such as life-cycle costing. They should be involved from the beginning of the process.
● Investment sale
The provision of all information relating to a building being held in one model should make the
‘ready for sale’ state more easily achieved. This will make property more liquid as an investment,
reducing the process of due diligence and avoiding the need to input all lease information about the
building each time it is transferred. As a result there should be less uncertainty and more transparency.

Further reading
isurv (2013) ‘What is BIM?’ available at:
www.isurv.com/site/scripts/documents_info.aspx?documentID=7216&categoryID=1246 (accessed 21/11/2013).
4 Construction
Graham Capper, Barry Gledson, Richard Humphrey, Eric Johansen, Ernie
Jowsey, Mark Kirk, Cara Hatcher and John Weirs

4.1 Building Cost Information Service

Key terms: RICS; reinstatement valuation; insurance valuation; tendering; indices
The Building Cost Information Service (BCIS) is a part of the Royal Institution of Chartered Surveyors
(RICS) and deals with five areas of surveying and construction:

● construction;
● maintenance;
● rebuilding;
● consultancy;
● insurance.

The BCIS and RICS offer advice and guidance for clients on the above areas of resource and offer
statistical information on indices in the relevant surveying and construction sectors. The BCIS is sub-
divided into several indices that are used to determine the cost involved with building various schemes,
including the following:

● BCIS cost indices;

● BCIS tender price indices;
● BCIS regional price indices;
● BCIS output indices;
● BCIS trade indices;
● construction new orders;
● construction output;
● house prices;
● housing starts and completions;
● resource indices;
● retail prices.

BCIS software is actively used in real estate in the form of valuation for reinstatement or insurance
valuation purposes. It is calculation of relevant constructional data prices and rates in conjunction with
the size, style and type of property. Reinstatement valuations are an integral part of any residential
valuation and are also, when required, actively used in commercial valuations.
The purpose of a reinstatement valuation is to provide a valuation figure based on the rebuilding of
a property if required. This is based on the square metre of the building and a figure is applied to deter-
mine the cost of rebuilding. The reinstatement figure is as important as the valuation of the property,
98 Capper, Gledson, Humphrey et al.
as the purchaser will rely upon this to insure their property. If the figure is incorrect, it may well not
be sufficient to rebuild if ever required.
Table 4.1.1 looks at specific pricings that materially affect the construction market. Interestingly,
from an estate management context, retail prices are anticipated to increase from 2013/2014 year on
year until 2017/2018. The BCIS have also predicted that building costs (as shown in Table 4.1.2)
continue to increase steadily.
Cost is a major driver for all construction projects and the BCIS offers information on tendering,
indices and reinstatement issues that can be utilised by a client, contractor, developer and valuer in
order to provide comprehensive advice on a range of costing issues that might arise when undertaking
cost analysis of a project.
Table 4.1.1 Construction costs

2Q2011 to 2Q2012 to 2Q2013 to 2Q2014 to 2Q2015 to 2Q2016 to 2Q2017 to

Annual % change 2Q2012 2Q2013 2Q2014 2Q2015 2Q2016 2Q2017 2Q2018
Tender prices +2.7% +2.2% +2.6% +3.3% +3.6% +7.4% +8.3%
Building costs +1.6% +1.3% +1.9% +2.8% +3.0% +3.5% +3.7%
Nationally agreed
wage awards +1.1% +1.6% +1.9% +2.7% +3.3% +3.8% +3.9%
Materials prices +1.2% 0 +1.1% +2.6% +2.9% +3.2% +3.5%
Retail prices +3.2% +3.1% +2.6% +3.3% +3.2% +3.1% +3.3%
Construction new
work output –11.3% –1.9% +1.6% +3.7% +5.4% +6.6% +7.3%
Source: BCIS (2013).

Table 4.1.2 Building costs 2013–2018

Forecast
Year on Year Jul 2013 Sep 2013
2Q2013 to 2Q2014 +1.9% +1.9%
2Q2014 to 2Q2015 +2.8% +2.8%
2Q2015 to 2Q2016 +3.0% +3.0%
2Q2016 to 2Q2017 +3.8% +3.5%
2Q2017 to 2Q2018 +3.7% +3.7%
Source: BCIS (2013).

Further reading
BCIS (2013) BCIS, available at: www.bcis.co.uk/ (accessed 13/11/2013).
RICS (2013) ‘BCIS overview’, available at: www.rics.org/uk/knowledge/bcis/, (accessed 13/11/2013).
 Construction 99
4.2 Building control in England and Wales

Key terms: Building Act 1984; services; fittings; elements; material change of use; consequential
improvements

Why do we need regulations for building work?

Regulations for building work were initially introduced in the 1980s in order to protect the health and
safety of the public after a link was discovered between poor construction and spread of disease. The
problems identified as causing this were:

● damp;
● poor ventilation;
● poor lighting (natural and artificial);
● lack of adequate sanitary facilities;
● clean water;
● refuse disposal.

Although the above are still important today, the current building regulations are a major tool in
implementing the Government’s mandate for reducing carbon emissions from buildings.
The principal piece of legislation that covers building regulations is the Building Act 1984: there
are 135 sections and seven schedules arranged in five different parts. The Act gives powers to the
Secretary of State to make regulations. The Act also for the first time introduced a set of approved
documents that provide technical guidance for designers when submitting plans for a development
to building control.
Part 1 of the Act is the Building Regulations 1985; the current version is the 2010 edition. This is
quite a small document with only a few pages of legal text – revised in 1994, 1997, 1999, 2000 and
2010 and to be revised again and again.
The principles on which these new regulations were based in 1984 were:

● maximum self-regulation;
● minimal government interference;
● simplicity of operation;
● totally self-financing.

The 1985 Regulations contained 20 administrative, functional and performance requirements and
there were 12 approved documents with 377 pages. However, the current 2010 Regulations have 18
approved documents with 877 pages, which contradicts the ethos of the act.
The Building Act 1984 also introduced the provision of building works to be undertaken by
approved inspectors. Prior to this piece of new legislation all building work as certified by the regula-
tions was to be administered by the local authority. The aim of this was to allow competition from the
private sector which would reduce costs and increase efficiency.
Further reduction of local authority control of the regulations is the introduction of self-certifi-
cation schemes as detailed in Part 5 of the Building Regulations. Self-certification allows competent
persons to assess specific work carried out to the relevant standards. These include the following:
100 Capper, Gledson, Humphrey et al.
Gas Safe Work on gas appliances
OFTEC Work on oil fired appliances and oil storage tanks
HETAS Work on solid fuel appliance
FENSA Replacement windows and doors
NICEIC Specific work to electrical safety in dwellings

Part 2, Regulation 3, of the Building Regulations 2010 states the meaning of building work that needs
to be controlled by a relevant body, i.e. local authority, approved inspector or competent person. The
following are defined as building work:

● erection/extension;
● provision or extension of a service or fitting;
● material alteration of a building, service or fitting;
● material change of use, as defined by regulation 5;
● insertion of insulating material into the cavity;
● underpinning;
● work required by Regulation 22 (relating to a change of energy status);
● work required by Regulation 23 (relating to thermal elements);
● work required by Regulation 28 (consequential improvements to energy performance).

The above states terminology which is not plain or clear to a person not familiar with the regulations,
these are:

Service These include fixed heat producing appliances, baths, toilets, sinks,
wash basins, controlled heating systems and domestic electrical
installations
Fitting These include external windows and doors
Element These include floors, walls and roofs

Material change of use is defined in Regulation 5 and is in connection with changing the use class of
a build, i.e. dwelling house to a flat, etc.
Consequential improvements relates to proposed works to existing buildings (other than dwellings)
with a total useful floor area of over 1000m2, and including:

● an extension;
● installation of new fixed building services (other than renewable energy generators);
● increasing the capacity of fixed building services (other than renewable energy generators).

Where such works are proposed, additional consequential improvements will be required to make
the whole building comply with Part L of the Building Regulations to the extent that such improve-
ments are technically, functionally and economically feasible. In most circumstances, this means that
the payback period for the consequential improvements required does not exceed 15 years (or less if
the expected life of the building is less than 15 years).
 Construction 101
Consequential improvements could include:

● upgrading heating, cooling or air handling systems;

● upgrading lighting systems;
● installing energy metering;
● upgrading thermal elements;
● replacing windows;
● on-site energy generation;
● applying measures proposed in a recommendations report accompanying an Energy Performance
Certificate.

Schedule 2, Regulation 9 of the Building Regulations states areas of work that are exempt from the
regulations:

● Class 1:
– any building subject to Explosives Act 1875 and 1923;
– any building falling under provisions of Nuclear Installations Act 1965;
– any Scheduled Monument under section 1 of the Ancient Monuments and Archaeological
Areas Act 1979.
● Class 2: buildings not frequented by people;
● Class 3: greenhouses and agricultural buildings;
● Class 4: temporary buildings (28 days);
● Class 5: ancillary buildings – site cabins;
● Class 6: small detached buildings:
– detached single storey, floor area less than 30 m², no sleeping accommodation and is a building;
– no point of which is less than 1m from the boundary; or
– it is constructed of non-combustible material;
– a detached building designed and intended to shelter people from the effects of nuclear, chemi-
cal or conventional weapons, and not used for any other purpose;
– a detached building having a floor area that does not exceed 15 square metres, which contains
no sleeping accommodation.
● Class 7: extensions:
– a conservatory, porch, covered yard or covered way; or
– a carport open on at least two sides;
– where the floor area of that extension does not exceed 30 m², provided that in the case of a
conservatory or porch which is wholly or partly glazed, the glazing satisfies the requirements of
Part K (Glazing).

Further reading
HMSO (1991) The Building Act 1984, The Stationary Office, London.
HMSO (2010) Statutory Instruments No. 2214 Building and Buildings, England and Wales: The Building Regulations 2010,
The Stationary Office, London.
102 Capper, Gledson, Humphrey et al.
4.3 Construction firms
Key terms: small firms; subcontracting; linked processes; economies of scale; diseconomies
The construction sector is a key sector for the UK economy and comprises a wide range of products,
services and technologies including:

● the construction contracting industry – providing 2,030,000 jobs in 2013 in 234,000 businesses
and contributing £63 billion to the UK economy;
● the provision of construction related professional services – 580,000 jobs in 30,000 businesses and
£14 billion;
● construction related products and materials – 310,000 jobs in 18,000 businesses and £13 billion;

In total, construction contributes almost £90 billion (about 6.7 per cent of GDP) to the UK economy
from 280,000 businesses and almost 3 million jobs which is about 10 per cent of total UK employment
(DBIS, 2013).
Firms in the construction industry vary in size from the large civil engineering/building contractors,
often undertaking such types of construction work as roads, bridges, office blocks, shopping centres
and speculative housing estates, to one-man labour-only contractors such as bricklayers, plumbers,
carpenters and jobbing maintenance firms.
Large construction firms can obtain the advantages of large-scale production that economists call
economies of scale. These include technical economies of specialised equipment and linked processes;
commercial economies in buying materials; specialisation in management, such as their own surveyors
and legal experts; the ability to raise finance on cheaper terms; and the spread of risks through diversifica-
tion into many products, including international contracts. For small or even medium-sized contractors,
spreading risks is difficult since a single contract may account for a large proportion of their work.
Nevertheless, the small firm predominates: those with less than twenty-five workers (including the
self-employed) covering 96.8 per cent of all firms. However, such small firms account in value for only
29 per cent of total work. Large construction firms with more than 600 employees are only 0.06 per
cent of the total number of firms but they account for almost 25 per cent of the value of construction
work done (Jowsey, 2011).
This predominance of the small firm is more marked in the construction industry than in other
industries such as manufacturing, a phenomenon common to other developed economies. The reasons
are to be found on both the demand and supply sides.
Demand in construction is characterised by the dominance of relatively small contracts resulting
from the individuality of the product (for example, a single house or extension) and also the impor-
tance of minor repair work. In addition there are the fluctuations in demand, which induce firms to
remain small and flexible rather than burden themselves with high overheads resulting from specialist
equipment that is under-used.
Supply factors in construction also favour small firms. Since production is on site rather than in a
factory, the difficulties of supervision are greater. With a large firm carrying out work on many sites,
the difficulties of management control are magnified. As a result, management diseconomies of scale
may soon outweigh technical, commercial and other economies.
Vertical disintegration in construction through the employment of specialist firms results from the
consecutive nature of the operations and the lack of continuity of the work for specialised equipment.
This leads to comparatively small firms contracting for pile-driving foundations, roofing, electrical work,
heating and ventilation systems, lift installation, and so on. Such subcontracting has advantages to the
main contractor, because (apart from saving on overheads) it makes estimating easier and reduces on-site
supervision. On the other hand, it can increase the problem of coordinating the various construction
operations. For a typical large building project of £20–25 million, the main contractor may be managing
around 70 subcontracts of which a large proportion are small – less than £50,000 (DBIS, 2013).
 Construction 103
As with other types of production, small businesses exist in construction because the owner is prepared to
accept a lower return in order to be his own boss. Entry to the construction industry is fairly easy, as many
jobs require little capital equipment (if specialist tools and equipment are necessary, they can be obtained by
hiring or subcontracting). Like most other businesses, however, builders find difficulty in obtaining capital
to expand beyond a certain size, for their sources are, to all intents and purposes, limited to merchants’
trade credit, personal savings, bank overdrafts and ploughed-back profit. Many small builders try to oper-
ate on too limited a cash flow, even though progress payments are received on an architect’s certificate.
Fluctuations in demand can prove financially crippling even for medium and large firms. As a result, the rate
of bankruptcies in the construction industry tends to be much greater than that of other industries.

Further reading
DBIS (2013) ‘UK construction: An economic analysis of the sector’, Department for Business Innovation and Skills,
available at: www.gov.uk/government/uploads/system/uploads/attachment_data/file/210060/bis-13-958-uk-
construction-an-economic-analysis-of-sector.pdf (accessed 21/10/2013).
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 13.

4.4 Competitive tendering

Key terms: estimating; tendering; selective tendering; measured term tendering; serial tendering; target
cost tendering; successful bids
Competitive tendering is the process used to obtain prices from two or more companies to carry
out work or provide goods and services. It involves estimating the cost of supplying all the resources
required and submitting the final bid (tender sum) to the client. The vast majority of construction
companies rely on competitive tendering as a way of winning work (Harris et al., 2006), while it is
the method most commonly used by construction clients for contractor selection (Winch, 2010).
Competitive tendering is an expensive process, both in terms of time and money, and is estimated to
account for approximately 10 per cent of a contractor’s turnover (KPMG, as quoted in Winch, 2010).

Estimating versus tendering

The terms estimating and tendering are often used interchangeably; however, it is important to dif-
ferentiate between the two.

● Estimating: the process of preparing a reasonably accurate calculation of the cost of carrying out
the work. A company’s estimating team, using the tender documents provided by the client, will
consider all labour, plant, materials and timescales required for each section of the work. From
this, the estimator can calculate a reasonably accurate cost of the work.
● Tendering: the offer to carry out the work for a stated price. Once an accurate estimate is produced,
the company will hold an adjudication meeting. Senior management will consider the estimate as a
whole and agree the percentage ‘mark-up’ to be added to cover company overheads and profit. The
percentage should ensure the contractor’s final tender sum is not only profitable but also sufficiently
competitive to give them the opportunity of winning the work. All construction projects carry an
element of risk, be it production, physical or economic risk and it is during the adjudication process
where the contractor will give due consideration to the risks in undertaking the project.

There are several methods of competitive tendering commonly used in the construction industry,
including the following.
104 Capper, Gledson, Humphrey et al.
Open tendering: companies are invited to tender for a project by responding to an advertisement placed
by a client. Anyone can request the tender documents but, due to the cost of producing them, a
deposit may be requested prior to them being sent out which would be refundable on the submis-
sion of their tender. This prevents companies requesting the tender documents out of interest only
with little intention of submitting a bid. Open tendering is commonly used for public sector work
where, under European legislation, the opportunity to tender must be made widely available. With
this method, a contractor’s competency to carry out the work is established after tendering but before
the contract is awarded.
Selective tendering: with this form of tendering, the client will draw up a list of preferred bidders. The
select list is normally drawn up after a pre-selection process whereby the suitability of the contractors
is established. Pre-selection will consider factors including financial stability, experience of carrying
out similar projects, management structure, and their health and safety record. Therefore, contractor
competency is established prior to the tender process.

1 Single stage selective tendering:

As the name suggests, there is only one tendering stage. Pre-selected contractors are invited to bid
for the work and, after due consideration of all tenders, the successful contractor is appointed.
2 Two stage selective tendering:
This type of tendering is used to encourage early contractor involvement. During the first stage,
all selected contractors bid for the work as in single stage tendering. The client will then choose a
preferred contractor to go through to the second stage which will involve some cost negotiation
but, importantly, early integration into the design team.
Measured term tendering: where a client has regular work over a specific period, (eg. maintenance work),
a measured term form of tendering can be used. A schedule of rates is submitted by the preferred bid-
ders, which is used to select the successful contractor. These rates are then applied to the work as it is
carried out.
Serial tendering: this form of tendering is often used where a client has a series of projects of a similar
nature. A schedule of rates is submitted based on a sample project in the knowledge that a number of
similar projects will be carried out.
Target cost tendering: the contractors bid is prepared using basic project information provided by the
client, with the successful tender forming the basis of the target cost (sometimes referred to as a
‘guaranteed maximum price’). The contractor will be paid the actual cost of carrying out the work
providing it does not exceed the original tendered target cost.
Successful bids: while it is the lowest priced tender that is often the main criteria used by the client for
contractor selection, it should be noted that, on occasion, cost might not always be the client’s main
concern. Speed of construction may be the primary concern, particularly where their business depends
upon the final building being operational as early as possible. In this instance, providing the tender falls
within an acceptable cost range, the contractor indicating the earliest completion date may be success-
ful in winning the tender.

Further reading
Harris, F., McCaffer R. and Edum-Fotwe, F. (2006) Modern Construction Management, 6th edn, Blackwell Publishing,
Oxford.
Winch, G. M. (2010) Managing Construction Projects, 2nd edn, Wiley Blackwell, Oxford.
 Construction 105
4.5 Design and build
Key terms: design and build (D&B); employer’s requirements (ERs); contractor’s proposal (CP); single-
stage tendering; multi-stage tendering; novation
The design and build (D&B) form of procurement is often the preferred option for clients who
favour both a shorter overall project period – that is the period from project inception to final comple-
tion, as opposed to just the on-site construction period – as well as greater certainty over the planned
project costs, and are happy to give greater importance to these project objectives over the aesthetic
considerations.
When preparing to enter into a D&B arrangement, a set of highly prescriptive employer’s require-
ments (ERs) must be prepared by the client design team which must then be responded to or ‘met’ in
the form of the contractor’s proposals (CPs) prepared by the bidding contractors.
One simplistic theory when using a D&B form of procurement is that the quality of the design will
suffer due to the lower priority allocated to this aspect of the project, but in reality clients requiring
physical assets built to service a particular business need are often better off in engaging the services of
contractors who specialise in constructing that particular type of development – industrial, residential,
commercial etc. – as in many instances the nature of these particular structures means that the contrac-
tor often has partially prepared ‘off the shelf’ design solutions ready to go.
On one end of the spectrum D&B contracts are often the procurement route of choice awarded
when fairly simple structures with a clear and predetermined business need such as new build offices,
warehouses and schools are required, as often the nature of these products is that they are so similar in
many aspects of their design (structural spans, amount of space to be allocated to each predetermined
area etc.) that they become variations on a theme and the fabled 80/20 standardised design/bespoke
design ratio comes into play.
D&B can also be the choice of clients on more complicated projects who are particularly risk averse
and want one party to take ownership of project risk and have determined that, because of the nature
of the project, the contractor would be best placed to manage that risk. Other client considerations
include a wish to avoid playing the part of referee between contractor and designer whenever a dispute
arises, or a wish to avoid the additional expenditure of appointing an external project manager to act
as a client’s representative to perform this duty – although a project manager can also be appointed
regardless to manage a D&B contractor.
The ‘design’ part of the D&B process can be done in a number of ways. Some major contrac-
tors have in-house design expertise that can match or indeed better any external design practices. This
expertise is not limited to any particular design discipline, and it is not unusual to find contractors who
can offer a full range of internal design provision: architectural, civil, structural and building services
design. Alternatively companies may have only one or two of these resources – for example, the civil
and structural design services are ‘in house’, with the remainder of the design team appointments made
up of external partners to complement the existing team. These partners could come from designers
who have pre-existing contractual arrangements with the client or they could be subcontract design com-
panies that are employed directly by the main contractor either through competitive tendering or existing
company-to-company partnering arrangements.
Companies with this type of partial design provision and frequent subcontract design partner agree-
ments can have arrived at this business model, either as the result of clear strategic planning, or by
organic growth, through the purchasing and absorption of other companies, or by employing multi-
skilled specialist resources.
106 Capper, Gledson, Humphrey et al.
For companies who do not have in-house design provision – or who do have it but do not want to
use it on a particular project, then novation of existing project designers often takes place. This can occur
either on a traditionally tendered project (single stage tendering) or on higher value–higher risk projects that
employ multi-stage tendering strategies such as 2-stage tendering. In essence, this is when a client will have
engaged a design team to produce initial, fairly comprehensive tender documentation and would like a fairly
early appointment of a major contractor in order to benefit from their expertise in construction.
Design novation is an arrangement that occurs when members (all or some) of the original design
team having fulfilled their original contractual obligations to the client by producing initial project
documentation up to the level meeting a predetermined RIBA Plan of Work stage, and at a specific
period of the project – typically at the end of the period where building contractors have competitively
tendered for the project – would then be re-employed on the project, this time by entering into a
direct contractual relationship with the successful bidder – the building contractor – rather than in a
new contract direct with the client, during the construction phase of the works.
It is important to note that under this arrangement, the designers then effectively become design sub-
contractors to the main contractor and will have to complete their design duties under the management
of their main contractor who may well want to make amendments to the design such as material substitu-
tions. These could be for several reasons such as ease of procurement (shorter lead times), improvements
in constructability, or more commercial reasons such as reductions in areas of project cost.
A frequent area of concern in this arrangement is when design team members continue to act as
client consultants rather than as design subcontractors and continue to bypass the main contractor in
dialogue with the client, particularly in aspects where they consider the quality of the design to be at
risk. This is a key challenge for the main contractor to manage in novated design and build contracts.

Further reading
Hackett, M., Robinson, I. and Statham, G. (2007) The Aqua Group Guide to Procurement, Tendering and Contract
Administration, Blackwell, Oxford.
A full and comprehensive explanation of all available procurement strategies is provided in this highly recommended
text.
RIBA (2013) ‘RIBA Plan of Work 2013’ Available at: www.architecture.com/TheRIBA/AboutUs/Professionalsupport/
RIBAOutlinePlanofWork2013.aspx (accessed 1/11/2013).

4.6 Modern methods of construction (off-site manufacture)

Key terms: modern methods of construction (MMC); off-site manufacture (OSM); modular construc-
tion; lean construction; volumised and panelised construction
The sub-optimal performance of the construction industry has been identified repeatedly in multiple
UK construction industry reviews from the 1940s until the present day. Recurring criticisms have
been that the industry is fragmented, adversarial, unwilling to measure performance and ineffective in
resource utilisation.
One early attempt to improve the efficiency and effectiveness of the industry was the move after
the Second World War to develop ‘system building’ based on manufacturing. These were standardised
on- or off-site systems that were used to deliver repetitive buildings from single dwellings to high rise
flats to schools. Unfortunately the quality of many of these buildings was considered to have failed and
many were demolished. Later attempts to use timber-framed housing also encountered technical quality
problems and were mainly abandoned. For many years the industry mistrusted these types of approach.
One of the more prominent of the later industry reviews was Rethinking Construction (Egan, 1998),
which highlighted client concerns of inefficiency and waste and advocated greater industry integration.
This report focused on additional areas requiring attention that included ‘low industry profitability;
 Construction 107
low investment in research and development (R&D); inadequate training, and low levels of client
satisfaction’ (Egan, 1998: 7) Several drivers for change were identified including the need to focus on
a ‘quality driven agenda’ (Egan, 1998: 4) and provided several recommendations for ‘improving the
project process’ (Egan, 1998: 18), such as applying lean thinking in construction and innovating in
design and assembly.
These reports led to several movements seeking to reform poor performance and promote con-
struction ‘best practice’. A notable response to the recommendations in Rethinking Construction was the
move to reconsider manufacturing-based approaches through the modern methods of construction
(MMC) initiative which was heavily promoted in the early 2000s, particularly by organisations within
the residential sector, as a solution for reducing waste and time spent on site, improving site safety and
quality, and addressing industry skills shortages.
MMC is a general term for construction technologies that include elements of off-site prefabrica-
tion or assembly. There are many other names given for technology that utilises these principles,
including (but not limited to) off-site manufacture (OSM), pre-fabrication, and modular construction.
There are two broad categories of MMC:

● panelised construction elements – factory built flat panel units ready for on-site assembly and
incorporation into or onto a structure. Typical examples would include external cladding panels
that are made up of several different components already joined together prior to site delivery.
● volumised construction elements – factory built units either of a smaller scale for incorporation
into a structure or larger-scale units that make up the structure itself.

Smaller-scale units may typically be complete self-contained bathrooms or kitchen ‘pods’ used in mul-
tiple repeat units such as those found in residential type (hotel or large-scale apartment block) projects.
Benefits of having these units constructed off site include achieving consistency in the finished qual-
ity of the product, due to the greater quality control procedures that factory conditions enable, and
reductions in on-site construction time and labour as multiple ‘wet trades’ operatives such as plasterers,
decorators, plumbers etc. are moved off site.
Larger-scale volume units may typically be semi-completed sections of buildings that are con-
structed off site, transported to site and positioned on foundations and quickly joined together on
site. These modular structures reap the benefits of standardisation in design and construction and are
repeatable. They are typically used to rapidly provide a new facility for an established business in a
new geographical location. An ideal example of this is how fast food restaurants are able to have new
facilities constructed in the space of a few days due to a ‘plug and play’ system of construction. There
are also several subcategories to MMC that include hybrid systems that integrate aspects of both volu-
metric and panelised systems.
At present the use of off-site components is increasing in the industry and things such as ‘bathroom
pods’ are commonly seen. However, the use of panelised or volumised larger-scale units is still in its
infancy. Still, there is much interest and expectation within the industry about the possibilities for this
to improve effectiveness and efficiency in the same manner that the car industry has seen the use of
Design for Manufacture and Assembly (DFMA) to deliver different types and brands of cars using up
to 85 per cent of common components.

Further reading
Cain, C.T. (2003) Building Down Barriers: A guide to construction best practice, Spon, London.
Constructing Excellence (2013) ‘Modern methods of construction’, available at: www.constructingexcellence.org.uk//
resources/az/view.jsp?id=718 (accessed 4/11/2013).
Egan, J. (1998) Rethinking Construction: The report of the Construction Task Force to the Deputy Prime Minister, John Prescott,
on the scope for improving the quality and efficiency of UK construction, HMSO, London.
108 Capper, Gledson, Humphrey et al.
4.7 Managing construction
Key terms: construction management; integration; communication; design/construction interfaces
This is about the ‘production’ of the built asset. It is difficult to consider as a stand-alone issue because
its success is so heavily influenced by other parts of the process. Certainly the following have a major
effect on what happens on site:

● The procurement system – other sections in this book deal with aspects of procurement but for
the construction manager the key issue is that procurement and the form of contract used tends
to control the times at which the parties get involved and to some extent the way they work with
each other.
● The timing of involvement of the production side of the supply chain is particularly important – con-
struction is one of the few industries that separates design and production. There are clear advantages
to having those who build talking to the designers as they produce the design and offer advice on
how buildable the designs are, what the possible problems might be and alternative solutions.
● The main contractor’s approach to the appointment of supply chain companies (subcontractors)
– few main contractors do much work directly these days. They contract the work to a supply
chain (usually referred to as trade or subcontractors). Relationships with these are vital but can
vary from ‘long-term’ relationships in which trust has been developed and best practice solutions
are expected; to ‘cheapest price’ tendering where in many cases the people working on site are an
unknown quantity and the contract is relied on to force performance.
● The quality of the management of design/construction and other interfaces – management works
well if you use the best people; communicate as close to perfection as possible; and do as much
as you can up front before the actual work takes place. This applies to design or production.
However, that is easy to say but difficult to put into practice in an industry that has been character-
ised so much in the past by the ‘discontinuities’ between the parts of the process. In many ways it
is like a dysfunctional family and the long list of reports into the industry since just after the Second
World War has highlighted the need for improvements in integrated working, communication
and the ways the parts interface with each other.

The industry has traditionally measured itself against the delivery of the project to meet time, cost and
quality performance. In the later part of the twentieth century the issue of safety was also added to
these headline performance measures. What has become obvious is that the management measures that
ensure high performance against one of these key indicators are also vital in delivering the others. Of
course what is vital to the project is that any performance indicators arise from a clear understanding
of what the client requires but again the management measures on the best projects also ensure that
this happens.
While it is possible to argue that a case study taken at a moment in time is not necessarily the best
guide to good practice because the world is a complex and changing place, it is more true to say that
good practice is generally applicable at any time. Thus, if we look at a specific report for a specific pro-
ject and take some of the lessons learned from that we can see an excellent and long-standing exemplar
for the industry. While there has been much failure in construction over time there have also been
excellent examples of good practice. The delivery of the 2012 London Olympics, for example, was
generally a triumph for the construction industry, yet many of those involved in it said that they felt
that it was no different to other projects and what they had done could be applied anywhere.
We can learn much from the way the Olympics delivered an excellent health and safety record
because the issue was embedded in good practice which also helped deliver the other performance
indicators. Bolt et al. (2012) produced a report for the HSE in which the following issues were con-
sidered vital to the success of the Olympics:
 Construction 109
● From the beginning – ‘leadership and resolve’ existed from the highest levels.
● Objectives were developed early and clearly by an integrated team which had built up trust
throughout all the actors – ‘clients, contractors, designers, workers and regulators’. This allowed
relationships and trust to develop quickly in which people’s ideas were valued.
● Communication was also an early focus and robust systems were introduced to build on and assist
the relationships and trust.
● Agreeing the deliverables and being consistent in providing them was seen as vital for success.

Obviously the Olympics were a huge undertaking and there were many more practical systems and
technologies that ensured its success, but essentially these were rooted in the above.

Further reading
Bolt, H. M., Haslam, R. A., Gibb, A. G. and Waterson, P. (2012) ‘Pre-conditioning for success: Characteristics
and factors ensuring a safe build for the Olympic Park’, Research Report RR955, prepared by Loughborough
University for the Health and Safety Executive. Available at: www.hse.gov.uk/researcH/rrpdf/rr955.pdf (accessed
13/11/2013).

4.8 Planning and organising construction

Key terms: planning; logistics; site organisation; critical path programming
Essentially the construction manager (CM) succeeds by managing people through excellent commu-
nication and good planning. This means that there is an organisation that comes together to allow the
work to be planned by considering the management of resources, quality and time. It requires data to
allow decisions to be made in advance of action and decisions are usually optimal – that is they are the
best solution that balances all of the inputs and produces the best output possible given this balance.
Concept 4.7 dealt with aspects of communication and clarity of definition of deliverables. Here we
will consider the practical issues that allow those deliverables to be achieved.

Organisation
This is often seen as the formal relationships between those involved in the process and these are usually
expressed using an ‘organogram’ or ‘family tree’ diagram that can show the contractual relationships
between the parties or the managerial relationships between individuals within a group. For the CM
the most useful is the managerial version which indicates the relationships and patterns of accountabil-
ity between staff. However, once this is captured it becomes simply a signpost, the actual management
of the communication between these staff and the contractually linked entities (e.g. subcontractors,
suppliers or the design team) requires the CM to set up a communication and decision-making process
usually based around a schedule of meetings (either physical or virtual).

Logistics
In addition to the organisation of people, the other resources require to be organised. These include:

● the people, in terms of their location and accommodation, to allow the work to be carried out
effectively and safely;
● the materials, so that they can be accessed and used easily and so that waste is minimised;
● the plant and machinery which are needed to allow the people and materials to be used effectively.
110 Capper, Gledson, Humphrey et al.
The way these are organised is called logistics and it is closely linked with planning and scheduling.
The key variable for decisions about logistics is the available room on site. A greenfield site is likely to
have fewer logistics problems than a tight city-centre site. Much thought is put into ensuring the logis-
tics are planned and prepared and the physical signs of this are usually seen in a ‘site plan’ (or plans).
This is usually a location plan of the site in which the positions of the following are shown:

● temporary accommodation (assuming a decision has been made to put something on site rather
than hire something nearby). This includes all the health and welfare facilities required;
● storage areas including where storage containers can be located and where ‘lay down’ areas for
specific types of material are located (such as rebar). Of critical importance is the amount of time
and effort that has gone into making decisions about whether any of the materials can be manu-
factured as components off site so that only assembly is required on site;
● positions and usage of plant – the transport of materials efficiently and effectively is vital to on-
site success. Time and effort must be spent on making strategic decisions about how materials
will be stored and transported (horizontal and vertical coverage), which is based on factual data.
For example; does the project need tower cranes? To work this out historic data on tower crane
performance needs to be used alongside a detailed breakdown of the type, weight and number of
lifts required.

Planning and scheduling

Planning involves deciding, before the work starts, what activities and resources are needed to deliver
the project on time and how they relate to each other. This has to be communicated in a manner
understood by everyone involved. It will involve the evaluation of alternatives.
The schedule is the (usually diagrammatic) output of the plan related to time.
The process is hierarchical moving from the tender to the master programme and then to more
detailed short term and sometimes weekly (or even daily/hourly) programmes.
Construction planning involves the following activities:

1 Information gathering – asking what is known, establishing what can be found out and measuring
and considering what assumptions can be made (including assessing risk).
2 Deriving logic and sequence – sequence is the order in which activities should take place and
involves choice between options. Logic clarifies the relationship between activities and usually
does not involve choice (logic dictates what has to happen).
3 Decisions on method and resources – most operations can be carried out using a range of possi-
ble methods and a range of resources (e.g. do you dig a hole with one operative and a shovel or
with a mechanical digger?). The choice of these also affects costs and time and to calculate the
options accurate costs and high quality performance data are required. The latter, in particular,
is often not available so it is necessary to be circumspect and investigate the quality of decisions
based on this.
4 Calculating and assessing time to completion – for tender programmes this should be based on a
confident analysis of historic performance records from previous projects and their programmes
but is usually calculated from scratch with some reliance on the experience of the planner. Once
the project is won (post tender) the project team should produce a master programme (which
should involve reviewing the decisions made at tender stage). The shorter-term and weekly pro-
grammes are vital to delivering the project but with the pressures on site-staff can sometimes be
not particularly well produced. There are innovative approaches to planning arising from lean
construction research which challenges this hierarchical ‘push’-based traditional approach.
 Construction 111
The last important issue is the choice of planning method. The most common way to express a plan
by far is the ‘bar chart’ programme. Most construction students are also taught to use critical path
programming and these are very often used in computer planning software (although the actual plan
may be issued as a bar chart). Critical path planning is an excellent tool for understanding the activities
within a project and how they might link to each other but there has been criticism of its effectiveness
for planning in a complex and dynamic environment such as a construction project.

Further reading
Cooke, B. and Williams P. (2009) Construction Planning, Programming and Control, 3rd edn, Wiley-Blackwell, Oxford.

4.9 Managing building services

Key terms: services design; performance specification; engineering solutions; commissioning
Services design and performance output (thermal comfort, air flow etc.) is derived from the initial designs
made by the architect about functional spaces and the zones of the building. Many engineers and particularly
those in building services will tell you that they are the ‘invisible hand’ in the industry. By this they mean
that no one notices their work until something goes wrong. There is some truth in this in that an environ-
mental problem (e.g. the building is cold, the lights do not work properly or the lifts break down) which
occurs in the first weeks of the building’s use can stay in the mind of the occupiers for years afterwards.
There is a reverse side to this, in that many others within the industry see engineering solutions
as a ‘black box which cannot be challenged’. Engineering education is seen as heavily mathematics
based and involving derivation of solutions from first principles. This can produce a belief from other
members of the industry that engineering solutions are opaque, confusing and so specialist that they
cannot be challenged. In fact many engineering solutions can be considered as ‘catalogue based’ where
standard solutions are chosen without the need for deep first-principle analysis. That is not to denigrate
the abilities of some of the great engineers we have in the industry who have provided world beat-
ing solutions to major problems but most projects do not require this. The drive for more sustainable
buildings that are more energy efficient has seen some major developments in things such as façade
design, and passive and low carbon system design, and building services engineers are at the forefront
of these so much that they are now more often being called architectural engineers.
The major change in services engineering design in the recent past has been to move towards ‘per-
formance specification’ where the performance outputs required from the systems are provided and
the services designers (often the subcontractors) are expected to produce solutions that deliver these
outputs. Some engineers feel that this produces ‘thinner’ and cheaper solutions but there is an argu-
ment based on practice in the USA that says the UK over-designed in the past and that this is a more
efficient approach if we take the built environment as a whole in that it produces what is needed and
therefore reduces the waste of over-design.
Managing building services is one of the biggest challenges on any construction project. This is for
a number of reasons:

● All of the services work may be bundled together producing the largest value subcontract on the
project with one main services contractor in charge. Thus mechanical, electrical, plumbing, lifts
etc. may all have one nominal company looking after them but each area may be subcontracted
to other companies, making the chain of command and communication quite long.
● Much of construction is managed on a linear basis whether vertically or horizontally. By this we mean
that we work from floor to floor, section to section or room to room. Services are systems based and
run through the whole building and are often working across the linear sequence of the other works.
112 Capper, Gledson, Humphrey et al.
● Services systems often have a ‘nexus’ where the whole system comes together such as plant rooms
or control panels. These are often the most vital and important areas for completing the systems
but can be in awkward locations and involve equipment that is on long delivery.
● While there are some excellent examples of off-site manufacture from the services sector, as men-
tioned in Concept 4.6 (such as prefabricated plant rooms and service modules) there is still a lot of
work that occurs in the traditional manner.
● All services systems require a process of ‘proving’ or putting to work which we tend to call ‘com-
missioning’. These are vital to ensure that the systems work properly within the finished building
and often require little or no other work to be going on. However, this happens at the very end
of the building construction which is difficult to plan. It is usually under the most time pressure
as previous problems and delays have to be incorporated, while the time available is compressed
against a fixed end date. Thus it becomes even more difficult to give the commissioners the time
and the lack of interference that they need.
● Sometimes on the more traditional types of project the input of services contractors to the overall
planning of the project can be lacking because of the complexities of multiple subcontracting.

The solution to managing building services are similar to general issues we mentioned in Concept 4.7
using the Olympics as an example. Perhaps we could rephrase these for the services area as:

● Make sure there is a clear and well communicated vision of what the client wants and the key
performance indicators arising from this.
● Involve the services main contractor and as many subcontractors as possible as early as possible.
● Make sure the commissioning engineer (and the client’s facilities manager) are also involved as
early as possible (and allow time for commissioning to occur properly).
● Communicate regularly and often throughout the project and use high quality management
systems (see further reading below) to ensure the quality of planning in particular is high.
● Do not allow services designers or contractors to persuade you that their work is some sort of
‘magic’ and cannot be challenged. While it is specialist much of it is fairly basic in production.

Further reading
www.leanconstruction.org.uk (accessed 02/12/2013).

4.10 Sick building syndrome

Key terms: sick building syndrome (SBS); building-related illness (BRI); indoor air quality; environ-
mental sensitivity
There is an accepted understanding that sick building syndrome (SBS) is the general, non-specific
symptoms of malaise that may be experienced within a building (i.e. discomfort). The cause of the
symptoms is typically unknown but, importantly, the symptoms cease shortly after the person leaves
the building. SBS describes a situation where more people than normal suffer and where the symptoms
increase in severity the longer the occupants spend time in the building.
Related to SBS is building-related illness (BRI), a term perhaps more prevalent in the USA. This
has a narrower focus with specific symptoms such as a cough or muscle aches experienced within a
building. The symptoms are more clinically defined and have identifiable causes. Instead of the symp-
toms ceasing upon leaving the building, complainants may require prolonged recoveries. Even in the
UK there is a distinction in illnesses associated with buildings – those with an identifiable cause, such as
legionellosis and conditions from exposure to building components containing known substances such
as asbestos – and those with no identifiable cause and described only by a group of symptoms – SBS.
 Construction 113
There are parallels between both SBS and BRI and what is known as multiple chemical sensitiv-
ity (MCS), although MCS (or environmental sensitivity) is not recognised by the World Health
Organization as a valid diagnosis.
The most typically reported symptoms of SBS are:

● headaches;
● mucus membrane irritation – eye, nose or throat;
● dry cough, dry or itchy skin, rashes;
● dizziness or nausea;
● asthma-like symptoms such as tight chest, difficulty breathing;
● difficulty concentrating, irritability;
● lethargy and fatigue;
● sensitivity to odours.

Many aspects of SBS have been researched and as a result SBS can be considered a function of the
interaction of one or more aspects of the individual, the building and the internal environment in the
building. The following risk factors are considered to be detrimental/contributory to SBS:

● Personal – job related stress; where the building occupant has no control over workspace condi-
tions including heating, lighting and ventilation; where the work is sedentary and repetitive.
● Physical/environmental – where the indoor air quality (IAQ) is low; the workspace is noisy; light-
ing levels are insufficient; there is a tendency for overheating and low levels of humidity.
● Design – where there is a low floor/ceiling height; where offices are open plan; where there is an
over reliance on artificial light and little natural light.
● Organisational – poor maintenance; poor management and a failure to respond to requests; where
there is a high turnover rate of staff (churn); uncertainty and job dissatisfaction.

Very often the spur to investigating SBS has been an increase in absences from workplaces, either
through sickness or churn. It may also be as a result of a decrease in productivity. The former is perhaps
understandable given that good productivity in any situation requires:

● a variety of settings to support different tasks;

● comfortable working conditions; and
● a degree of personal control.

All of these are in marked contrast to the contributory factors to SBS given above.
From the above, it is important to note that some complaints may clearly be due to psychosocial factors.
Some may also result from an illness that was contracted either outside the building and/or at an earlier
instance. A typical pattern is for a susceptible person, subjected to an initial exposure, becoming a sensitive
person. Acute sensitivity (e.g. allergies) may then be triggered by exposure at relatively low levels.
The investigation of SBS requires an assessment of IAQ and an investigation of possible contami-
nant sources (pollutants) and possible pollutant pathways. The sources may be the result of:

● human activities;
● materials and products, including heating, ventilation and air conditioning (HVAC) systems;
● combustion processes;
● microbiological organisms, e.g. mould, dust mites;
● outdoor air pollution;
● the ground under a building.
114 Capper, Gledson, Humphrey et al.
In order of preference the pollution sources may be controlled by:

● source control, e.g. removal, replacement by an alternative material, sealing;

● removal by local exhaust ventilation at the point at which the pollutant is generated, e.g. kitchens,
bathrooms, rest rooms, copy rooms, printing facilities;
● dilution by ventilation;
● air cleaning, as an adjunct to one or more of the above.

Both of the major environmental assessment tools in use in both the UK (Building Research
Establishment Environmental Assessment Method, or BREEAM) and the US (Leadership in Energy
and Environmental Design, or LEED) recognise the potential problems caused by contaminants asso-
ciated with certain materials and seek to minimise those that are odorous, potentially irritating and/or
harmful to the comfort and well-being of both occupants and installers.

Further reading
Institute of Medicine of the National Academies (2011) Climate Change, the Indoor Environment, and Health, National
Academies Press, Washington, DC.

4.11 Sustainable construction

Key terms: environmental impact; assessment; Considerate Constructors Scheme
Sustainable construction is required in order to produce sustainable buildings. Sustainable buildings
are buildings that are constructed in a resource-efficient manner with due regard to the environmental
impact of the materials and components used and the methods adopted to put these together. The
result should be a building that is healthy to live in and can be heated efficiently at reasonable cost. It
should make best use of natural resources and be future proofed for potential changes, such as those
through climate change. There should be opportunities for alterations along with an appropriate life
span and there should be opportunities for recycling and reuse at the end of its expected life. To be
fully sustainable a building needs to be in a sustainable community where other wider issues such as
transport and ecology have been addressed.
Sustainable construction therefore requires appropriate materials and appropriate methods.

Materials – ratings
An individual material or element could be selected on the basis that it provides the best balance
between the following criteria:

● clean or non-polluting;
● healthy;
● renewable;
● abundant;
● natural;
● recyclable;
● energy-efficient;
● locally obtained;
● durable;
● design-efficient.
 Construction 115
However, these are very broad criteria and although a matrix could be drawn up to aid selection it
might be difficult to objectively agree on the exact metric for each of the issues and the appropriate
weighting across the criteria. What is clear is that the choice of materials and building elements for a
sustainable building should not simply be done on the basis of selecting insulating materials to ensure
that a building can be heated cost effectively.
The Green Guide to Specification (Anderson et al., 2009) is probably the UK’s most extensive guide
for design professionals and addresses some of the issues referred to above by limiting the criteria
and subdividing them into more measurable issues. It provides ‘environmental impact’, with cost
and replacement interval information for a wide range of commonly used building specifications,
and does so over a notional 60-year building life. The factors assessed and included in the Green
Guide are:

● the implications of mineral extraction to derive the basic product;

● the pollution and energy consequences of the manufacturing/production process;
● the toxicity of product and chemicals etc. used in manufacturing process, e.g. global warming
potential/ozone depletion potential;
● the waste issues at all stages of the production and construction processes;
● the distribution/transport issues;
● the life-cycle and recycling options at the end of its expected life.

There are a number of green guides that include the above issues and attempt to provide some weight-
ing on the likely impact of all the above. The Green Guide addresses the broad environmental issues
and each is separately awarded a rating, and a weighting system is then used to calculate a summary
score. The resulting guide gives typical wall, floor, roof and other elements that are listed against an
environmental rating scale running from A+ (best) through to E (worst).

Materials – embodied energy

In some environmental assessments and rating systems a single issue is used as a standard proxy for
environmental impact and a surrogate of all of the above – ‘embodied energy’ or ‘embodied carbon’.
Embodied energy is the total energy impact of a material and the summation of energy use in the
extraction, manufacturing, processing, transport to the site and assembly of a product or building ele-
ment. In order to truly represent the overall impact, any maintenance and disposal implications should
also be assessed and included in a whole-life calculation.
In the UK there are a number of potential sources for embodied energy data, but the main, authori-
tative and open source of data is the ICE database at the University of Bath, published by Building
Services Research and Information Association (BSRIA). This contains over 400 values of embodied
energy with 30 main material classifications broken down into approximately 170 different building
materials. For a global perspective, the Ecoinvent Centre is probably the leading exponent of life cycle
inventory data.
The data in the ICE database are values calculated on a ‘cradle to (factory) gate’ basis and omit any
allowances for transport to site, waste etc. Although energy data is preferable, embodied carbon has
become the common currency for life cycle assessment, i.e. converting the raw energy data (in MJ/
kg) into CO2 (in kg CO2/kg). This is done in the UK by utilising common conversion values given
by Defra. This has been taken a stage further by incorporating the effect of other greenhouse gases as
well as CO2, resulting in ‘CO2 equivalent’ (CO2e).
Table 4.11.1 shows an extract of the embodied energy for a number of common building
materials.
116 Capper, Gledson, Humphrey et al.
Table 4.11.1 Embodied energy

Embodied energy Embodied carbon

Material (MJ/kg) (kg CO2e/kg)
Aggregate 0.083 0.0052

Aluminium 155 9.16

Clay brick 3.00 0.24

Glasswool 28.00 1.63

The coefficients illustrate the relatively high processing in manufacturing a product made from alu-
minium. In contrast, a natural product such as aggregate requires little energy.
One clear limitation of embodied energy as a proxy is the failure to take into account any large
environmental impacts, such as water usage or waste generation that may be inherent in a low
embodied-energy product. It does, however, have the appeal of simplicity – one number, and it is
questionable whether most busy designers have time for more than one number, be it a CO2e value
or a single rating such as A+.

Processes
There are a number of recognised schemes that encourage construction sites to be managed in an
environmentally and socially considerate and accountable manner. One of the best known is the
Considerate Constructors Scheme (CCS) operated by the Construction Confederation. CCS moni-
tors visit sites at intervals and awards credits in accordance with a Code of Considerate Practice. The
areas included in the assessment are:

● considerate;
● environmentally aware;
● site cleanliness;
● good neighbour;
● respectful;
● safe;
● responsible;
● accountable.

In addition to the CCS scheme a broader assessment may be made of the measures taken to
ensure that the site is managed in an environmentally sound manner in terms of resource use,
energy consumption and pollution. It might be expected that a contractor operates an envi-
ronmental management system (EMS) and demonstrates that some or all of the following are
addressed:

● the monitoring, reporting and target setting for energy use on site;
● the monitoring, reporting and target setting for transport to and from a site;
● the monitoring, reporting and target setting for water consumption on site;
● the implementation of best practice in respect of air (dust) pollution arising from the site;
● the implementation of best practice in respect of water (ground and surface) pollution arising on
the site;
 Construction 117
● the use of an environmental materials policy for the sourcing of construction materials to be uti-
lised on site (i.e. not restricted to a material to be part of the construction of a building, such as
timber for site use).

Further reading
Anderson, J., Shiers, D. and Steele, K. (2009) The Green Guide to Specification, 4th edn, Wiley-Blackwell, Chichester.
BSIRIA (2011) available at: https://www.bsria.co.uk/information-membership/bookshop/publication/embodied-
carbon-the-inventory-of-carbon-and-energy-ice/ (accessed 02/06/2013).

4.12 Fraud in construction

Key terms: monopoly profits; cartel; oligopoly; collusion; cover pricing
Fraud in the construction sector could be worth as much as $860 billion (£539 billion) globally,
according to a report by Grant Thornton. The total amount of fraud was calculated to be equivalent to
10 per cent of industry revenues, and it could hit $1.5 trillion (£941 billion) by 2025. Across Australia,
Canada, India, China, the UK and the US it is evident that fraud in construction is commonplace and
in some cases could be described as endemic.
A cartel is a group of firms in oligopoly (see Concept 6.11) who act together (collude) for the pur-
pose of avoiding a competitive market in order to create monopoly profit for themselves. An example
of a cartel is OPEC (Organization of Petroleum Exporting Countries), which agrees international oil
prices. For the cartel to work effectively the producers must control supply to maintain an artificially
high price. Even in the case of a concentrated market, with few firms, the existence of an unreliable
firm may undermine the collusive behaviour of the cartel. Theoretically, cartels are very unstable
because they are an informal agreement to collude: to sell at a higher price together, rather than com-
pete down the price. It is very unstable because there is no binding agreement that one of the firms
will not undersell the other and capture the entire market share.
The cartel practice may involve the use of false invoices. Construction giants Balfour Beatty
and Carillion are among those the OFT accuses of taking part. ‘Cartel activities harm the economy
by distorting competition and keeping prices artificially high’, said OFT chief executive John
Fingleton. He further added ‘businesses have no excuse for not knowing and abiding by the law’
(OFT, 2009).
The most recent example of a cartel was between Unilever and Procter & Gamble who were found
guilty of price fixing washing powder in eight European countries. The case was conducted by the
European Commission after a tip-off from a German company, Henkel. The resulting penalty was a
€315 million fine, split between Unilever (€104m) and Procter & Gamble (€211m). An Australian
manufacturer has been fined AUS$2 million (£1.2 million) for its role in a cartel to increase the
price of ball and roller bearings. The Federal Court imposed the fine on Koyo Australia following an
investigation by the Australian Competition and Consumer Commission (ACCC). It came after the
company acknowledged liability for a scheme where it arranged with two competitors to raise prices.
Collusion means competing firms come together in an oligopoly system to decide the price. Price
fixing can also be implemented by government (especially in the agriculture sector), in which case it
is not considered a collusion. Collusion is easier to achieve when there is a relatively small number of
firms in the market and a large number of customers, market demand is not too variable and the indi-
vidual firm’s output can be easily monitored by the cartel organisation. Tacit collusion occurs when
companies make an informal agreement to fix prices (i.e. they do this without letting their competitors
or official bodies know).
The fewer the number of firms in the industry, the easier it is for the members of the cartel to moni-
tor the behaviour of other members. Given that detecting a price cut becomes harder as the number of
118 Capper, Gledson, Humphrey et al.
firms increases, so much the bigger are the gains from price cutting. The greater the number of firms,
the more probable it is that one of those firms is a maverick firm; that is, a firm known for pursuing
an aggressive and independent pricing strategy. In September 2009, a total of 103 UK construction
companies were fined almost £130 million for illegally colluding in bids to secure building contracts
including schools and hospitals. The biggest fines were £17.9 million to Kier Group, £5.4 million to
Carillion and £5.2 million to Balfour Beatty. The OFT conducted a four-year investigation, uncover-
ing about 4000 tenders that were affected by anti-competitive activities. The firms involved effectively
operated a ‘cartel’, having secretly agreed the prices they would submit during a tender process – a
practice known as ‘cover-pricing’. In its simplest form, companies that do not have the resources or
spare capacity to take on a job but still want to remain on tender lists obtain an inflated price from
a rival and submit it in the knowledge that their bid will not succeed. The companies involved had
driven up the price of the projects by agreeing to submit artificially high quotes. In at least six cases
the companies submitting high tenders were compensated for the cost of tendering. The tendering
authority, often a local council, is given a false impression of the level of competition and could end
up paying artificially high prices. Some estimates of the amounts overpaid were as much as 10 per cent
but the OFT did not put a figure on this.
Bidders for contracts were given a high price from the competitor as a cover price, which was then
submitted as a genuine tender offer but not intended to win the contract. Thus, the lowest bidder, and
subsequent winner of the contract, in reality did not face any competition. The OFT’s investigations
revealed that the practice of cover pricing was widespread in the construction industry. As any main
contractor would probably have experienced, this issue extends down through the supply chain with
cover prices submitted by specialist package contractors as well.

Further reading
CIOB (2006) ‘Corruption in the UK construction industry’, Survey 2006, CIOB, Ascot.
CIOB (2013) ‘A report exploring corruption in the UK construction industry’, CIOB, Ascot.
Grant Thornton (2013) ‘Time for a new direction’, available at: http://www.grant-thornton.co.uk/Global/Publication_
pdf/Time-for-a-new-direction.pdf (accessed 02/04/2014).
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 13.
OFT (2009) ‘Construction firms fined for illegal bid-rigging’, available at: http://www.oft.gov.uk/news-and-updates/
press/2009/114-09#.Uz0fFNNOXIU (accessed 03/04/2014).
Sohail, M. and Cavill, S. (2006) ‘Corruption in construction projects’, in: A. Serpell (ed.) Proceedings of the CIB W107
Construction in Developing Countries Symposium: ‘Construction in Developing Economies: New Issues and Challenges’,
January 18–20, Santiago, Chile.
5 Development
Hannah Furness, Ernie Jowsey and Simon Robson

5.1 Developers
Key terms: trader developer; investor developer; commercial development; residential development;
visionary developers
Developers come from a variety of backgrounds and their involvement in the development process
ranges from hands-on day-to-day management to a more remote strategic role. They come from a
range of sectors including private, public and voluntary, and all have different motivations, but overall
developers are in essence entrepreneurs who identify opportunities and are prepared to take risks in
order to deliver a completed property development scheme in anticipation of the requirements of the
market in return for profit. The risks inherent in the process are that the requirements of the market
(the demand) are uncertain. The developer therefore recognises the potential for development by (i)
estimating future demand for alternative uses of existing land resources, and (ii) calculating the cost
of the building for new uses. The viability of the development project is the developer’s assessment
of which scheme will produce the maximum net return subject to the constraints and many variables
involved in the process including: the availability of finance; planning and building requirements; and
legal restrictions in the title or use of the land. The developer therefore carries the risk and uncertainty
of the development. In addition, Miles et al. (1991) say that developers have a complex and shifting
mixture of roles including:

● creator – the identification of an opportunity and the inception and evolution of a development
scheme;
● researcher – of the property development market in order to establish that demand exists for the
development;
● analyst – assessing the financial viability of the scheme through analysis of the costs and likely value
of the scheme;
● promoter – the marketing agent for the development scheme;
● negotiator – for financial resources to fund the development from lending institutions;
● manager – of the professional team and the construction stage of the development process;
● leader – of the overall development process;
● risk manager – responsible for identifying, managing and mitigating risks associated with the suc-
cessful completion of the development;
● investor – if the development is financed with the developer’s equity.

There are two main kinds of private sector developer: trader and investment. Trader developers tend
to develop speculatively in order to sell completed development schemes to investors in order
to fund the next development project. This is usually true of smaller development companies or
120 Hannah Furness, Ernie Jowsey and Simon Robson
‘one-man bands’. Such developers often do not have sufficient equity or resources to commence on
a new development project without completing and selling another. Investor developers on the other
hand will tend to retain completed developments to generate rental income and capital growth and
build up portfolios of income-generating properties. Larger development companies and multina-
tionals will tend to operate on this basis.
Depending on the size and type of the development company, a developer might deliver a
range of commercial or residential development projects, or may specialise; for example, there are
solely residential developers (e.g. the house builders Barratts or Belway), or solely commercial,
which may themselves specialise in a specific sector, such as retail (e.g. Dransfield, Westfield) or
industrial (e.g. Prologis). Developers can also be property managers, maintaining facilities through
refurbishment or improvements to ensure that profits are maximised through attracting the best
tenants. They play a vital role in controlling expenses and improving efficiency and effectiveness
of buildings for all parties involved. However, no matter what the end product, the developer’s
principal objective is to generate profit.
Notable visionary developers include:

● John Raskob and Al Smith, who wanted to create the world’s tallest building and did so (at the
time) with the Empire State Building in New York in 1931.
● Walt Disney, who had the idea for the world’s first theme park (near Los Angeles in 1955) despite
considerable scepticism from the banks and his own company.
● Victor Gruen, a Viennese architect who was responsible for the world’s first modern shopping
mall at Northland near Detroit in 1951.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 7.
Miles, M. E., Berens, G. L., Eppil, M. J. and Weiss, M. A. (1991) Real Estate Development: Principles and practice, 4th edn,
Urban Land Institute, Washington, DC.
Ratcliffe, E., Stubbs, M. and Keeping, M. (2009) Urban Planning and Real Estate Development, 3rd edn, Routledge,
London and New York, ch. 11.

5.2 Development
Key terms: development process; property development; factors; land; actors; site
‘Development’ is defined by statute in the Town and Country Planning Act 1990 s55(1), as:

the carrying out of building, engineering, mining or other operations in, on, over or under land,
or the making of any material change in the use of any buildings or other land.

In addition, property development has been defined by Cadman and Topping (1996) as:

an industry that produces buildings for occupation by bringing together various raw materials of
which land is only one. The others are building materials, public services, labour, capital and pro-
fessional expertise. The completed building may be let or sold to an occupier. If it is let, it can be
held as an investment. It is a venture in which losses as well as profits are made.
 Development 121
In essence therefore, development is necessary to ensure the efficient use of land resources. The devel-
oper that can put the site into its most profitable use is the one who can make the highest bid for it,
and ultimately make a profit from the development.
Development may be the construction of a new building, or the refurbishment or redevelopment
of existing structures/buildings. The first questions that the developer will ask is whether the value of
the replacement (or new) building will exceed the value of the current building (or land) plus the cost
of construction/rebuilding. The developer will therefore have to assess the rationale for a development
by assessing the following factors:

1 choice between development projects;

2 estimate the demand for different developments;
3 decide on the quality of the building;
4 calculate the intensity of development on the site;
5 estimate the costs of development;
6 estimate how much can be bid for the site;
7 obtain finance;
8 decide whether to develop alone or in partnership.

Once these considerations have been made, there are a number of other factors and stages of the
development process that must be considered. The development process is made up of four principal
dimensions: factors, actors, the site, and events.
Factors include things such as the economy, property cycles and markets, government policy and
strategy, legislation, and trends such as the environment, population, politics, transport, technology
etc. All of which can have a significant impact on the viability or progress of a development project,
which ultimately affects profitability.
Actors are the individuals who are involved in the development process. In addition to the devel-
oper, the key stakeholders in any development project are: the landowner, the professional team
(architect, contractor etc.), the occupier, the investor/lending institution, local planning authority,
the client, the community etc. All of these ‘actors’ in the process have different aims, roles and status
in the process and can have influence over it. It is the role of the developer to manage these differing
expectations so that all parties feel that their specific objectives are met.
The site is fundamental to the development. Since each site is different in terms of location and
condition, this can impact on the viability of the development. The developer will need to consider
factors such as the shape, size, aspect and topography of the site, as well as investigate whether there
is any contamination or pollution. The load baring capacity of the site will need to be assessed, as will
any existing buildings on the site. Its location relative to water sources and courses, areas of historical
or scientific interest, and conservations areas will also have to be assessed.
Finally, there are a number of events that link to all aspects of the development process. Put
simply, the process is split into three main phases: pre-construction, construction, and post-con-
struction. Preconstruction includes assessment of the viability of the development, and preparation
activities such as site acquisition and securing finance and planning permission. The construction
phase includes the tendering for a contractor and the construction of the development. And finally
the post-construction phase includes the letting or selling of the completed development. There
are a number of different illustrations of the development process that have been proposed. One of
the best known, proposed by Birrell and Gao (1997), is made of four principal stages and contains
14 core activities, illustrated in Figure 5.2.1. One or all of these activities are subject to change and
variation depending on the nature of the specific development and its various elements.
122 Hannah Furness, Ernie Jowsey and Simon Robson
Stage 1:Evaluation
opportunity'
site identification
d 2. Market Research 3. Site Investigation d 4. Feasibility Study

Stage 2: Acquisition 1
8. Site Assembly @ 7. Planning @ @ 5. Professional
6. Financing
& Purchase

1
Application Appointments

Stage 3: Procurement
1) 10.Tenderingl 1) 11.Construction
Contract contracting

Contract
Stage 4: Disposal

Contract Contract
Contract
1
Figure 5.2.1 The 14 phases of development.
Source: adapted from Birrell and Gao (1997).

Further reading
Birrell, G. and Gao, S. (1997) ‘The property development process of phases and their degrees of importance’. RICS
Cutting Edge Conference, Dublin. Available at: www.rics-foundation.org.uk (accessed 03/04/2014).
Cadman and Topping (1996) Property Development, 4th edition, Chapman and Hall, London.
Isaac, D., O’Leary, J. and Daley, M. (2010) Property Development Appraisal and Finance, 2nd edn, Palgrave Macmillan,
Basingstoke, ch.1.
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 7.
Reed, R. and Sims, S. (2014) Property Development, 6th edn, Routledge, Abingdon.

5.3 Development costs

Key terms: land acquisition; site investigation; build costs; finance costs; contingency
There are a number of costs associated with property development, all of which must be carefully
considered and managed throughout the process in order to ensure that a profitable development
scheme is delivered. The costs of the development therefore must not be greater than the value of the
completed development. Although each development project will be different in terms of location,
 Development 123
site conditions and scale of development, the main costs of development and construction will usually
include:

● land acquisition/assembly – plus Stamp Duty Land Tax and purchasers costs;
● site investigation/works;
● build costs – plus professional fees;
● finance/interest;
● contingency;
● marketing/promotion;
● sale fees;
● letting fees;
● planning fees;
● planning contributions (e.g. s106 obligations; Community Infrastructure Levy).

Land acquisition/assembly
The development site is purchased for a given price, often that which is advertised or suggested by
the vendor’s agent. In addition to the purchase price the cost of valuer’s and legal fees will be in the
region of 1.5 per cent of the purchase price depending on the complexity of the deal. Legal fees are
usually between 0.25 per cent and 0.5 per cent and valuer/agency fees are normally agreed at 1–2
per cent of the land price. For larger developments, a number of separately owned sites may need to
be purchased which can lengthen negotiations and conveyancing which increases the fees payable. In
addition, unless a site is in an exempt area, Stamp Duty Land Tax (SDLT) will be payable. Stamp duty
rates for non-residential land is divided into four bands: for land priced up to £150,000, no stamp duty
is payable; for land priced between £150,000 and £250,000, 1 per cent of the land price is payable; for
land priced between £250,000 and £500,000, a duty of 3 per cent is charged; and for land exceeding
£500,000, a 4 per cent duty is payable.
Assembling the site and the construction phase both take time, which can expose the developer to
a possible fall in profit. For example, if during the site assembly process the government restricts office
development, or there is a rise in construction costs. These additional costs can be divided into ‘ripen-
ing costs’ and ‘waiting costs’. Ripening costs arise through holding land in anticipation of profitable
future development, whereas waiting costs are incurred (even if the land already has planning permis-
sion) as construction takes time before any revenue is received.

Site investigation/works
Before construction can begin the site has to be prepared. Site investigations will be carried out
in addition to the usual legal searches of title, including ground investigation and land surveys. In
addition, costs will be incurred for demolition, clearance, provision of access and provision of util-
ity services. These must all be accurately estimated and in particular the advice of an environmental
engineer or surveyor should be sought over potential contamination and the need for remediation.
Especially for residential developments, any land contamination must be identified and rectified at the
outset in order to reduce risks as far as possible.

Build costs
This is the cost to construct the structure, which is usually expressed as a ‘per unit’ cost, such as per
square metre, which is then multiplied by the gross area to give an overall development cost. The
Building Cost Information Service (BCIS) can provide evidence for this purpose if reliable figures
124 Hannah Furness, Ernie Jowsey and Simon Robson
are not to hand from previous jobs. Clearly this is an expert matter and will normally be referred to a
quantity surveyor (QS). In addition, fees will have to be paid to the various consultants involved in the
development. These will usually be subject to variation and negotiation depending on the nature/scale
of the project and are estimated at the time of the proposed implementation of the project, but can be
assumed to approximate the following percentages of the total build costs: architect 5–7 per cent; QS
2 per cent; structural engineer 2 per cent; services engineer 2 per cent; and project manager 1 per cent.

Finance/interest
The construction phase of the development process is the most expensive for the developer. In addi-
tion to the site purchase, the developer is paying out vast sums for building materials and labour.
Unless the developer has sufficient equity, in order to purchase the site, pay the fees and duty, and fund
the construction phase, the developer will have to borrow. Lending institutions will often charge high
rates of interest for the loans due to the risks associated with property development. Interest charges
are usually calculated assuming that the borrowing period is the whole development period from start
to finish, including the pre and post development stages. The precise draw-down of interest payments
month by month will vary according to a number of factors that will influence how much is spent,
e.g. weather, contamination, requiring heavy up-front costs etc. might all impact on the time taken
to deliver the project; in 2008/9 work deliberately slowed in hope that the market recovered in time
for project completion and disposal.

Contingency sum
At the early stages of a project it is usual for a contingency sum to be included in the calculation. This is
to cover extra costs and unforeseen risks and is calculated as a percentage of total build costs (including
professional fees). For example, the risk of archaeological remains should be considered at the outset
but these may turn up unexpectedly. The allowance may be 3 per cent of the running total of costs
for a very simple site rising to say 7 per cent for a refurbishment. A figure of 5 per cent is usually used
as a standard assumption.

Planning contributions
The local planning authority (LPA) will often grant planning permission for a development scheme with
a number of conditions. These may include a planning obligation, whereby the developer will provide
or pay for something that is to the benefit of the wider community, or enables the capacity of the site to
be increased, e.g. a contribution towards recreational facilities adjacent to a housing scheme; or a con-
tribution towards the upgrade of a highway serving a new business park. These contributions tend to
result from negotiations between the developer and the LPA and will vary on a project by project basis.

Other costs
An estimate of the cost of promoting and advertising the buildings for letting or sale has to be included.
These costs depend very much on the client but may be estimated at 5 per cent of open market rental value.
Letting agent’s fees will be in the region of 10 per cent of open market rental value. The cost of agents’
and legal fees on selling the investment will be in the region of 1.5 per cent of the net development value.

Further reading
Havard, T. (2014) Financial Feasibility Studies for Property Development, Routledge, London, ch. 7.
 Development 125
5.4 Development finance and funding
Key terms: debt; equity; short term; long term; corporate; project
There are numerous ways for funding property developments (Table 5.4.1). In essence, development
funding may be classified as debt versus equity, corporate versus project based, or long term versus short
term. Each type of development finance package may be categorised as part of this three-way matrix.

Table 5.4.1 The eight main ways of funding property development

Debt Equity
Short term 1 Overdraft 5 Sale of assets Corporate

2 Bridging loan 6 Joint venture Project based

Long term 3 Debenture 7 Ordinary shares Corporate

4 Mortgage 8 Sale and leaseback Project based

Figure 5.4.1 Property development.

Source: © Simon Robson 2007.
126 Hannah Furness, Ernie Jowsey and Simon Robson
The eight main ways of funding property development are discussed as follows:

1 Debt finance, corporate based, short term

An overdraft is available to companies by agreement. These can be called in at any time and are
therefore short term. Overdrafts may be used as long-term funds by established companies where
call in is very unlikely.
2 Debt finance, project based, short-term
Also known as bridging finance, this type of loan is required by a developer to cover the period
from the commencement of the development until funding of a more permanent basis is made
available enabling the bridging loan to be repaid.
The purpose of a bridging loan is to allow the developer to proceed with the scheme in
the short term. The money plus interest typically has to be repaid shortly after completion. This
is known as rolling up the interest. Such loans allow expenditure on: the purchase of land and
buildings, including adjacent sites; the purchase of leaseholds; site investigation and early site
improvement works; access, demolition, security; payment of builders and consultants in stages.
Clearing banks are the main sources of bridging finance with loans generally being up to a maxi-
mum of 70 per cent of net development value. Some form of security for the loan will be required
such as the first legal charge on the site and works in progress. The interest rate is normally at a
variable or ‘floating’ rate of interest based upon ‘LIBOR’ (the London Inter-Bank Offered Rate).
3 Debt finance, corporate based, long term
Loan stock secured against real property(s) is known as a mortgage debenture. They are similar to
mortgages but with many stock holders (investors) rather than one ‘mortgagee’. Debentures are
paper securities or bonds that may be traded on the stock market. ‘Gearing’ is the ratio of debt to
equity for a company. Gearing can increase investment returns but also increases risk. Too much
debt and the high gearing may scare off equity investors who fear a lower dividend, which may
negatively impact the share price.
4 Debt finance, project based, long term
Debt investment generally involves the borrower offering the investor a guaranteed return in
fixed terms over a finite period (perhaps 5–30 years). The return is not directly linked to the suc-
cess of the development being secured in some other way. It provides long-term funding for the
developer who does not have to employ so much equity capital and enables the repayment of
the short-term bridging loan(s). The property is used as security for the loan and if the mortgagor
defaults on interest or capital repayments the lender may ‘foreclose’, i.e. take over either vacant
possession or the income stream. The source of this form of loan is generally a clearing bank with
the loan generally being up to 70 per cent of open market value with variable or fixed rates of
interest being available.
5 Equity finance, corporate based, short term
After paying its interest charges and before declaring a dividend for the equity shareholders any
company can announce that it is retaining profits to reinvest in the business. The advantage of
using retained profits is that it is often cheaper than borrowing. Profit retention can have effects
on dividends and the share price. A smaller dividend can reduce the price, depending on reception
by the market.
Property and other assets including recent developments may be sold to raise equity capital
for reinvestment into development. Residential builder/developers use sales as normal practice to
provide a ‘rolling fund’ of capital and reduce the overdraft. Commercial ‘trader’ developers sell
on their assets to investors to raise capital either immediately or at the first rent review. Phases of
developments may also be sold to release capital and reduce the depth of debt.
 Development 127
6 Equity finance, project based, short term
Developers may enter into joint ventures for a variety of reasons including spreading the risk of
major projects between two or more partners. Joint ventures can be used to bring in new sources of
equity and debt finance. Joint venture companies (JVCs) are where two or more parent companies
hold shares in a third subsidiary company they create for the purpose. They operate via shareholders
and directors and under company law. Partnerships may also be used to structure joint ventures.
7 Equity finance, corporate based, long term
The sale of ordinary shares gives the shareholder an equity share in the company. Ordinary share-
holders will receive a dividend, a residual sum from the gross profits, after preference shares and
debentures have been paid. Equity shares bear the risk of the company and depend on its success for
the dividend. The ‘gearing ratio’ of a company is the ratio of its total debt to its total equity value.
8 Equity finance, project based, long term
One method of obtaining this form of finance is via a ‘forward sale’ where a fund agrees in advance
to buy a property development once completed on agreed terms. The objective of the developer is
to reduce their risk and achieve ‘take out’ of the bridging finance. The objective of the investment
institution is to secure new prime investment property with a good return. The investor will pay less
than for a completed and fully let development and shoulder some of the development risk.
Another way of securing long-term, project-based equity funding is via a sale and leaseback.
This is the sale of the freehold in a development to a fund subject to a long leaseback to the
vendor. This vehicle is often used by occupiers who wish to raise funds from their premises, e.g.
supermarket operators, hotel chains.

Further reading
Isaac, D., O’Leary, J. and Daley, M. (2010) Property Development: Appraisal and finance, Palgrave Macmillan, Basingstoke.

5.5 Site assembly and acquisition

Key terms: site investigation; ‘buildability’; land tenure; site purchase; land value

Site investigation
Following the strategic consideration of a development proposal, which will involve an assessment
of viability and the likelihood of obtaining planning permission, a site investigation will generally be
required. The information needed for a site investigation will be collected from carrying out a desktop
study and from a physical inspection of the development site.
Desk research should cover both physical and environmental aspects of risk. A study of historical
maps will help identify whether the site has been occupied by polluting activities in say the last 200
years. In addition sites may have been contaminated by activities on surrounding land necessitating the
survey to cover an area of one kilometre radius from the boundary.
A site inspection should include a systematic walk identifying all relevant indicators. Samples should
be taken of surface soils and water. The position and condition of all boundaries should be noted as
legal conveyance plans can be inaccurate. The inspection should also look for visible evidence of
site problems such as poor ground conditions, dereliction, contamination and flooding. These may
include storage tanks, waste heaps, embankments, presence and condition of any vegetation, discol-
oured ground, and evidence of past structures or buildings.
To determine the ‘buildability’ of a site it will normally be necessary to carry out a geotechnical sur-
vey. Before carrying out actual work on site, desk enquiries should be made with the British Geological
128 Hannah Furness, Ernie Jowsey and Simon Robson
Survey and the Coal Authority. The survey is directed at the fundamental geology and other factors
such as filled (‘made’) ground, voids, basements, previous foundations or other underground struc-
tures. The engineer’s report will advise on the bearing capacity of the site and the foundations that will
be needed.
If there is an existing building on the site to be refurbished then a complete structural survey will
have to be carried out. The report should cover not only the existing state but also the physical feasibil-
ity of refurbishment or conversion work.
The developer also needs to know whether the site is liable to flooding. The developer needs to
know the location of the site relative to the coast, rivers and minor water courses. What has been the
history of past flood events, frequency and severity? Are there any flood defences and if so are they
adequate and in good condition? Can the development be carried out in spite of the flood risk? This
involves questions of insurance, planning, mortgages, finance and marketing. Can the development be
protected by new defences or be designed to be flood resistant?
The presence or absence of utility services such as water, sewerage, electricity, gas and telecom-
munications affects the development potential of the site. In each case it is necessary to check with the
local company to see where the mains are, whether any increase in capacity will be needed and how
much it would cost. In addition, the presence of pipelines and cables running over and below the site
will add to development cost. Besides bearing capacity, developers need to know whether a site may
be contaminated. This will involve a desk survey, physical inspection, site investigation and analysis.

Land tenure
It is ultimately the job of the solicitor to thoroughly check all aspects of the ownership of the site
undertaking the ‘enquiries before contract’. However, the developer needs to know as early as possible
about potential legal pitfalls. When inspecting the site it is often possible to pick up clues as to prob-
lems with tenure. Evidence may be boundaries, car parking, tenants, power lines, footpaths, manholes,
notices or squatters. The precise nature of the ownership or occupation will then have to be checked.
The basic freehold title to the property will normally be registered at the Land Registry. There may
be restrictive covenants placed on the use of the land by a previous vendor. These may be bought out
or may be removed on application to the Lands Tribunal.
To carry out a project the developer needs to have complete vacant possession of the site.
Leaseholders have the right to remain in occupation until the end of their lease; they may be persuaded
to sell their lease to the developer voluntarily though the price may be high. At the end of a lease com-
mercial tenants have security of tenure unless the landlord goes through the relevant statutory process
and proves to the court that it needs vacant possession for development.
In addition to leases there may be other minor property rights, which can frustrate projects. These
include easements either public or private for sewers or cables, public or private rights of way, rights
to light, and rights of support. Removing or rerouting such rights can take time and expense.

Site purchase
A variety of site purchase methods are considered elsewhere. Private treaty is by far the most common
method of purchase and has the benefit of privacy. Plenty of time is available for investigation and
negotiation. This method may be associated with an informal tender.
The purchaser is able to limit its exposure to risk by using a ‘conditional contract’ under which a
deposit is paid and a price is fixed for the purchase subject to a condition(s). If conditions are met the
developer is obliged to complete or lose the deposit. Conditions will normally be planning permis-
sion, site assembly, and site investigation. A similar method is an option to purchase whereby a sum of
money is paid for an option to buy the site at an agreed price or price formula within a time period.
 Development 129
The purchaser may alternatively agree a delayed purchase (or partnership agreement) with the site
owner. Under such a contract the landowner receives an agreed percentage of the sale price of any
properties developed when they are sold or let.
A building agreement or licence permits the developer to enter a site and build to agreed plans, nor-
mally linked to an agreement to purchase or lease the site. This may happen as part of a joint venture
where the proceeds will be shared.
A formal tender is often used by public authorities. In this case the highest bid will be accepted. An
informal tender is sometimes carried out by estate agents who will ask for written bids by a certain date.

Definitions of land value

When negotiating the purchase price of a development site it is essential that definitions of land value
are clear. These will be largely covered elsewhere – however, it is useful to briefly review the main
terms here.
Existing use value (EUV) assumes no development scheme. There is very little risk associated with
buying for EUV as no change from the status quo is assumed. It is unlikely that a purchase for EUV
will be possible if the potential for development is known.
The development value (DV) can be ascertained by undertaking a residual valuation assuming devel-
opment is to take place. The DV potentially entails maximum risk as it is underpinned by numerous
assumptions regarding planning, market conditions etc.
Hope value (HV) is a halfway house between EUV and DV. HV consequently involves a level of
risk somewhere between EUV and DV.
Merger value is the extra value that can be realised from assembling two or more adjacent sites to
form a (more) viable development. Often referred to in practice as ‘marriage’ value (see below).
Marriage value is the extra value resulting from marrying freehold and leasehold interests in the same
property.
The ability to compulsorily acquire interests in property ensures that development for the public good
is not held to ransom by site owners. It takes time to get the necessary powers, which are not guaran-
teed. Such powers may be used to support private development.

Further reading
Keeping, M. and Shiers, D. E. (2004) Sustainable Property Development: A guide to real estate and the environment, Blackwell,
Oxford.
Ratcliffe, J., Stubbs, M. and Shepherd, M. (2004) Urban Planning and Real Estate Development, 2nd edn, Routledge,
London.
Reed, R. and Sims, S. (2014) Property Development, 6th edn, Routledge, Abingdon.

5.6 Evaluation and appraisal methods

Key terms: residual; cash flow; internal rate of return; yield; capitalisation; net present value
Individuals’ personal objectives in relation to development will vary but in the business world the aim
of profit is paramount. The developer is in business to create a profitable scheme without which he
will go out of business. The aim of the project is therefore to provide a mix of scale, use type, design
and cost that will maximise profit on the site at this time. The two most commonly used methods of
determining profitability are residual and cash-flow methods.
130 Hannah Furness, Ernie Jowsey and Simon Robson
Residual method
Central to the residual method is the basic development appraisal equation. The end product of the
appraisal is the estimate of capital profit to be made by the developer at the sale of the completed
scheme. The equation in its simplest form is:

P=V–(C+L)
P = Profit
V = Net development value
C = Construction and associated costs
L = Land price and associated costs

Example
Net development value (V) £10m
Construction and associated costs (C) £6m
Land price and associated costs (L) £2m

P = £10m – (£6m + £2m) = £2m

Hence the developer’s profit in this example is £2 million. The mechanics of a residual appraisal are
relatively straightforward. The key to a ‘good’ appraisal is the quality of the inputs. The inputs will be
considered under the headings of value and cost.

Value
In simple terms the capital value of a commercial development is ascertained by capitalising the
open market rental value of a development at the investment yield (normally by multiplying by
the years purchase).
Within an active market it is possible to find comparable evidence of rents per square metre of
similar local lettings. However, an active market is often a rising one so these get out of date quickly.
Within a slack market there are few comparables to be found and the judgement is much harder to
make. Where a rent free period or similar has been agreed with the incoming tenant the cost of this
must be deducted from the net development value.
The yield used for capitalisation purposes is the one justified by the most appropriate market com-
parable evidence. Purchaser’s costs of fees (legal and agent’s) and stamp duty are deducted to give the
actual net transaction value.

Costs
Before building can begin the site has to be prepared. Costs for this will include demolition, clearance,
provision of access and provision of utility services. These must all be accurately estimated possibly by
a QS. The advice of an environmental engineer or surveyor should be sought over potential contami-
nation and the need for remediation.
At this early stage cost estimates will be on a per square metre floorspace basis. Building cost indices
can be used or the matter referred to a QS.
 Development 131
Fees will be have to be paid to the various consultants involved in the project including the archi-
tect, QS, structural engineer, services engineer and project manager. It is usual for a contingency sum
to be included in the calculation. This is to cover extra costs and unforeseen risks.
The developer will generally need to borrow money short term to undertake the project, to buy the
site and to pay the builder and consultants. (Development finance is covered in detail elsewhere.) An
estimate of the cost of promoting and advertising the buildings for letting or sale has to be included.
In a development appraisal, as opposed to a valuation, it is assumed that the site is purchased for a
given price, often that advertised or suggested by the vendor’s agent. In addition to the purchase price,
the cost of valuer’s and legal fees, and stamp duty should be added. In order to purchase the site and
pay the fees and duty, the developer will have to borrow. The interest charges are calculated assuming
that the borrowing period is the whole development period from start to finish.
Developers’ profit is a residual after the total development cost (TDC) has been deducted from the net
development value. The rate of the developer’s profit is normally expressed as a percentage of TDC.
The same basic methods may be used to estimate the value of the site. This is considered further in
the ‘residual value’ concept.
It is generally acknowledged that the residual approach has a number of flaws. It is cumbersome,
often referred to as a ‘back of a fag packet’ approach. It is poor at handling the timing of costs and
returns. It makes inaccurate assumptions in assuming a straight-line build-up of costs. It is poor at han-
dling phased projects unless each phase is the same. It is poor at handling possible changes during the
project such as interest rates, revised mix of uses or the sale of sites. It is a poor platform for financial
monitoring, i.e. during construction and letting void.
The residual method is widely used in practice because it is simple, quick, widely understood and
is thus used in the early stages of development projects.

Cash-flow methods
A cash-flow method will be adopted when more accurate input data becomes available. This is often
later on in the project.
In discounted cash flow (DCF) appraisals each cost or return is calculated on a quarterly, monthly or
weekly basis and assigned to the correct time slot in a cash-flow chart. The ‘period by period’ method
(PBP) employs a simple allocation of costs and values to time slots. Negative cash flows typically give way
to positive ones. Later positive cash flows can reduce interest costs. PBP shows the outstanding debt figure
throughout. It identifies the actual break-even point, and is widely used in practice. PBP is, however, very
tricky to perform without a computer and does not link well with internal rate of return calculations.
With the net present value method, each individual cash flow is discounted by multiplying by a pre-
sent value of £1 factor. The results for each period are summed to produce a net present value (NPV).

Internal rate of return

The normal expression of profitability is profit as a percentage of either the total costs or the net
development value. In either case time is not accounted for. Where two projects produce the same
value any prudent developer will choose the shorter one. A measure of profitability is needed that can
compare different profits that are received at different times. This is the IRR (internal rate of return).
The IRR is defined as ‘That rate of return at which the net present value of the cash flows equals zero’
– IRR is thus the true rate of return independent of time and scale.
The residual method is flawed but widely used in practice at the early stages. Cash-flow methods are
more accurate but need better data. The PBP cash-flow method is the most widely used method. The
NPV method is quicker and easier and relates to the IRR well. The IRR is the most complete and
informative method increasingly used since it is an output from all commercial software programmes.
132 Hannah Furness, Ernie Jowsey and Simon Robson
Further reading
Isaac, D., O’Leary, J. and Daley, M. (2010) Property Development: Appraisal and finance, Palgrave Macmillan, Basingstoke.
Ratcliffe, J., Stubbs, M. and Shepherd, M. (2004) Urban Planning and Real Estate Development, 2nd edn, Routledge,
London.

5.7 Intensity of site use

Key terms: diminishing returns; variable factor; fixed factor; marginal physical product; marginal rev-
enue product; marginal cost; economic rent
A developer has to decide how intensively a site should be developed. For example, if the most profit-
able use of a large suburban site is for housing, to what density should the houses be built? Or, if an
office block is to be built in a city centre, how many floors (given no planning restrictions) should it
have? In economic terms the issue is: how much capital should be combined with the land?
Since we are dealing with a particular site, we can regard land as a fixed factor. The problem is
one of applying units of a variable factor, capital, to a fixed factor, land. As extra units of capital
are applied to the fixed site, the law of diminishing returns eventually comes into operation, and
the marginal physical product (MPP) of capital falls. This is because building upwards incurs extra
costs; for example, more foundations are necessary and lifts and fire escapes have to be provided.
So the return on capital eventually decreases, giving a downward-sloping marginal revenue product
(MRP) curve (see Figure 5.7.1). Since all capital can be obtained at a given price, the marginal cost
(MC) curve is horizontal.
Development of the site will take place up to the point where marginal revenue equals mar-
ginal cost: that is, to where the MRP of a unit of capital equals the cost of a unit of capital (OC in
Figure 5.7.1) The building reaches its optimum height, i.e. the development is complete, when OX
units of capital have been applied to the site.

MRP and
capital cost
per unit (£)

B
Economic rent

C MC

Total cost of capital

0 X Units of capital

Figure 5.7.1 Applying capital to a fixed site.

 Development 133
Using this analysis we can see that where the marginal revenue product of a site is high, such as in
a city centre, the amount of capital applied to the site will be greater and it will be developed more
intensively. This can be seen in Figure 5.7.2, which contrasts a city-centre site with a suburban site.
In Figure 5.7.2a the MRP curve is further out because the city-centre site is more productive and
more profitable (with higher economic rent ACB) than the suburban site in 5.7.2b (economic rent A'
C' B'). As a result more capital (Xa) is applied to the city centre site than that applied to the suburban
site (Xb). This means that the city centre site is more intensively developed, and explains why build-
ings are higher in city centres than in other parts of a city.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics. Palgrave Macmillan, Basingstoke, ch. 13.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 7.

a City centre b Suburbs

A'
Rent
C Rent
C'
B B'

MRP
MRP
Capital

Capital

0 Xa Units of capital 0 Xb Units of capital

Figure 5.7.2 Intensity of site use.

134 Hannah Furness, Ernie Jowsey and Simon Robson
5.8 Public sector development
Key terms: local authorities; central government; infrastructure; social benefits
‘Developer’ encompasses a wide range of agencies and organisations, across the public and private
sectors, all with their own motivations, aims and objectives. Development undertaken by public
sector agencies varies enormously according to the nature and function of the organisation. Public
sector development accounted in 2009 for approximately 11 per cent of total development but the
percentage varies from year to year. Public development tends to fluctuate with the politics of the
government in power, the current requirements of its stabilisation policy, and whether there are
any major infrastructure and property development projects under way (such as the Olympics and
the proposed HS2 railway).
Local authorities undertake a wide range of development activity across both the commercial and
residential sectors. The degree of involvement with capital development projects varies between
authorities depending on a number of factors such as location, identified economic and social priori-
ties, land ownership, financial resources and political remit. In addition, national government agencies
undertake a wide variety of development initiatives at a national level such as the Highways Agency.
The key difference between the private and public sectors is that the public sector is accountable,
and therefore must demonstrate value for money and ensure that all expenditure into capital projects is
in the public interest. Therefore the public sector is motivated by social benefits, rather than profit (see
Concept 6.8). Typical public sector development projects will include provision of housing, schools,
hospitals, and schemes that will generate employment. Sustainable development is also a key objective
of public sector development.

Further reading
Ratcliffe, E., Stubbs, M. and Keeping, M. (2009) Urban Planning and Real Estate Development, 3rd edn, Routledge,
London, ch. 11.

5.9 Redevelopment
Key terms: refurbishment; redevelopment; new development; value of net annual returns; value of
cleared site
As a result of changes in the conditions of demand and supply, some structural change of buildings may
be necessary. This may take different forms:

● modification of the existing building through refurbishment (for example, new office or shop
layouts) or conversion (for example, houses divided into flats, offices converted into residential
apartments);
● redevelopment, where existing buildings are demolished and replaced by new ones;
● new development through outward expansion on undeveloped land (for example, suburban
housing).

Where land is already developed by having a building on it, fixed capital is embodied in the land.
Such capital has no cost in the short period; as a result, redevelopment to a new use, which requires
expenditure of further capital, usually occurs only after a considerable period of time. In general
terms, redevelopment takes place when the present value of the expected flow of future net returns
from the existing use of the land resources becomes less than the capital value of the cleared site. We
have therefore to calculate the present value of the land resources in their current use and compare
this with the value of the cleared site.
 Development 135
The present value of the most profitable alternative use is obtained by the procedure used for
calculating the present value of the current use: (i) the future net annual returns (NARs) in the best
alternative use are calculated; and (ii) these NARs are discounted to the present and aggregated to give
a capital present value, DD1 in Figure 5.9.1.
Over time the value of the alternative use (DD1) rises. This occurs for two main reasons. First,
changes in the conditions of demand and supply mean that a new building, being specifically designed
for the new use, will earn higher NARs. Thus an old office building will give way to one that is air
conditioned and has the structure and space suitable for modern office equipment. Second, any new
building would probably have a longer time horizon than the old building (which has already run a
part of its life) so that there would be more future NARs to aggregate to obtain its present value.
From the present value of the best alternative use at any one time, we have to deduct: (a) the cost
of demolishing and clearing the site (AB in Figure 5.9.1); and (b) the total cost of rebuilding for the
new use, including ripening costs and normal profit (OA). For simplicity, we have assumed that costs
(a) and (b) both remain constant over time. BB1 represents the sum of (a) and (b).
The present value of the cleared site is thus the difference between DD1 and BB1 in any given year.
In year O the value of the best alternative use would be only just below that of the chosen current use,
for then each was competing for a cleared site. However, once a site has been allocated to a given use
and has had a building erected upon it, any new use has the additional handicap of demolishing and
rebuilding. So, until year R the value of the cleared site is negative. Eventually it becomes positive and
exceeds the present value of existing use and redevelopment takes place at T in Figure 5.9.2.
The economic life of a building is the period of time during which it commands a capital value
greater than the capital value of the cleared site. In year T the building becomes economically inef-
ficient because resources (the site) can be switched to a new use having greater value.

PV of current highest
and best use
PV of current + D1
best use, costs
Cost of clearing site
of clearing site
B1
and of rebuilding B

D
Value of
cleared site Cost of
rebuilding

0
R Years
–

Figure 5.9.1 The value of the cleared site.

136 Hannah Furness, Ernie Jowsey and Simon Robson

PV of existing
use and value
of cleared site Secures land and
building for existing use Value of cleared site

Retains land and

building in existing use

0
R T Z Years

Redevelopment
= PV of existing use

Figure 5.9.2 The timing of redevelopment.

Further reading
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 8.

5.10 Refurbishment
Key terms: renovation; net annual returns; sustainable refurbishment; retrofit
Buildings are maintained, repaired and improved throughout their economic life. At some point
a decision must be made as to whether to renovate in order that the building can continue to
provide useful services, or to clear it and rebuild or redevelop the site. If the decision is taken
to renovate or refurbish the building, the objective must be to raise the present value (PV) of
future revenues or NARs by more than the cost of the refurbishment. NARs would increase
because future rents in the refurbished building would be higher and because operating costs
are likely to be lower, especially if (as is increasingly the case) refurbishment also includes
energy-saving and possibly energy-generating measures such as the fitting of solar panels or wind
turbines. Renovation or refurbishment would delay clearance and redevelopment as illustrated
in Figure 5.10.1.
In many cities the economic life of large old houses has been extended by renovation or conversion
into apartments. Inner-city areas can thus maintain the appearance of former grandeur at least from
the façades of such buildings, while internal modification and refurbishment provides smaller, more
modern accommodation.
Sustainable refurbishment includes insulation and related measures to reduce the energy consump-
tion of buildings, and sometimes installation of renewable energy sources such as solar water heating
 Development 137

PV’ after refurbishment

PV of existing £
use and value Value of
of cleared site cleared site

Secures land and

building for existing use

0
R T Z X Years

– Redevelopment
PV of existing use

Figure 5.10.1 Refurbishment delays redevelopment.

and solar energy from photovoltaic panels. This process is often termed ‘retrofitting’ existing buildings.
Measures can also be taken to reduce water consumption, to reduce overheating, to improve ventila-
tion and to improve internal comfort. The process of sustainable refurbishment includes minimising
the waste of existing components, recycling and using environmentally friendly materials, and mini-
mising energy use, noise and waste during the refurbishment.
The vast majority of existing buildings were constructed when energy standards were low and
incompatible with current standards. Much of the existing building stock is likely to be in use for many
years to come since demolition and replacement is often unacceptable owing to cost, social disruption
or because the building is of architectural or historical interest. Refurbishment of such buildings is
necessary in order to make them appropriate for current and future use and to satisfy current standards
of energy use.
Concerns about high energy use leading to climate change, overheating in buildings, the need
for healthy internal environments and waste and environmental damage associated with materials
production, all mean that the importance of sustainably renovating existing buildings is becoming
increasingly important.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 8.
138 Hannah Furness, Ernie Jowsey and Simon Robson
5.11 Residual value
Key terms: development, demand, planning, profit
The residual value is the value of property determined by the residual method. The residual method
is used to value property that has the potential for development, redevelopment or refurbishment.
When valuing for development purposes a valuer will normally utilise both the comparison method
and the residual method. This will depend on the availability of comparable evidence and the nature
and complexity of the development proposed.
The basic equation for undertaking a residual land valuation is:

L = V – C – P, where:
L = land price and associated costs
V = net development value
C = building and associated costs
P = developer’s profit
So for a site valuation: L = V – C – P

The residual method is essentially the same as the method detailed in the ‘Evaluation appraisal
methods’ concept.
In the first instance it is necessary to determine what the optimum scheme for the site is. This
requires an analysis of planning and market considerations. The chosen scheme must have a reasonable
prospect of gaining the necessary planning consent. This can be ascertained by an analysis of relevant
national and local planning policies. An analysis of the market should be undertaken to establish the
potential demand for the ideal alternative forms of development that may be possible. An analysis of
existing supply and the development pipeline will also help ensure the identified demand will not be
satisfied by an alternative scheme in advance of the subject development project being completed.
The main components of construction and associated costs are considered in the appraisal methods
concept. When carrying out a development appraisal an assumption is made regarding the value of the
development site and the resultant residual represents the predicted profit for the project. When carrying
out a residual valuation an assumption has to be made about profit to enable a land value to be derived.
In determining the level of profit to use in a residual valuation the nature of the development and
associated risk must be considered alongside the prevailing practice in the market for the sector. Profit
will normally be expressed as a percentage of the total development cost or the gross development
value, with the former being more common.
Although the overall concept is fairly simple, there are many variables to consider including:

● what can be built

● what demand there is
● what the levels of supply are
● what the likely build costs are
● method of procurement
● the cost of land remediation
 Development 139
● professional fees
● interest on capital borrowed
● how easy it will be to sell/let the completed building
● the risk of overrunning on costs.

The result is that residual valuations are complex and there is much scope for uncertainty about their
outcomes. Nonetheless, they are widely used in the property market for development appraisal, i.e.
determining bids and sale prices for land and buildings with development potential.

Further reading
RICS (2008) ‘Valuation Paper 12: Valuation of development land’, RICS, London.

5.12 Local asset-backed vehicles

Key terms: operational assets; regeneration; development projects; investment LABV; value capture
LABV; integrated LABV
Local asset-backed vehicles (LABVs) are joint ownership limited liability special purpose vehicles with
the specific purpose of carrying out regeneration or renewal of operational assets. The public sector
invests property assets into the vehicle which are then ‘value matched’ by private sector equity. The
partnership then uses these assets as security to raise finance to bring forward further development. The
public and private sector are equal equity holders and share profits equally, according to their original
equity contribution.
The basic LABV model is illustrated in Figure 5.12.1:

Public Private
sector sector

Property Finance
assets Expertise
LABV Ideas

Development

Figure 5.12.1 Local asset-backed vehicles.

Source: adapted from Grace and Ludiman (2007).
140 Hannah Furness, Ernie Jowsey and Simon Robson
LABVs typically run for 20 years, at the end of which the assets are returned to the investing
partners through a predetermined exit strategy, e.g. selling the land with planning permission, sell-
ing the land once development is completed, or retaining the development as an investment. Before
each party enters into a partnership, the long-term goals of the partnership are detailed in the legal
documents, which protect the wider social and economic aims of the public sector along with the pre-
agreed business plans based on the requirements of the private sector.
Whereas traditional public–private partnership (PPP) methods such as PFI (private finance initiative)
have a clear and specific purpose, for example a hospital or school, LABV is a long-term partnership for
the regeneration of a town, designated area or a cluster of communities, and must therefore be more
flexible as priorities may change over the life of the partnership.
The benefits delivered by such asset-backed vehicles for the public sector, include access to new
markets, increased capacity through the possibility of reinvestment of returns into other projects, the
sharing of both risks and costs, access to greater resources including staff, private sector expertise and
finance, as well as ensuring that development strategies are well focused and coherent. They also offer
continued control over the direction of the investment, reduced exposure to deflated asset values,
access to gearing and increased flexibility in the vehicle used to deliver infrastructure projects.
The three main types of LABV are:

1 Investment LABV: this can be used where a site requires significant investment to make
it marketable, e.g. where major infrastructure, remediation or substantial planning input is
required, but otherwise the opportunity is viable. A private sector investor will fund this
requirement. Once the works have been carried out and site value is enhanced, the LABV
will sell the asset or parts of it on the open market. The risk is relatively low and profit is fairly
modest.
2 Value capture LABV: the LABV acts as the developer, ensuring sites are ready for develop-
ment, carrying out infrastructure works and remediation and obtaining planning permission.
This type of LABV provides greater scope for profit but risks are commensurately higher.
3 Integrated LABV: this will deliver most, if not, all of the required development and carries the
greatest risks and scope for the highest level of profit. The construction supply chain is pro-
cured before the LABV is established. The vehicle potentially carries the risk for land assets,
planning infrastructure, some or all construction sales.
(Pinsent Masons, 2011)

The ‘patient capital’ investment characteristic of LABVs is regarded as an attractive quality of the model
as it incentivises the private sector to invest and deliver over the longer term, as returns are subject to the
performance of the partnership over 10–20 years time frame. To date, LABV take up in the UK has been
relatively modest. There are a number of reasons for this – firstly, local authorities have a responsibility to
ensure they get best value from the disposal of public assets and are cautious about ‘selling off the family
silver’ at an unfavourable point in the property cycle or of handing over control of public assets.

Further reading
British Property Federation and the Local Government Association (2012) Unlocking Growth Through Partnership, BPF,
London.
Grace, G. and Ludiman, A. M. W. (2007) ‘Local asset backed vehicles: The potential for exponential growth as the
delivery vehicle of choice for physical regeneration’, Journal of Urban Regeneration and Renewal, 1(4): 341–353.
Pinsent Masons (2013) ‘Guide to LABVs’, available at: www.out-law.com/en/topics/property/structured-real-estate/
local-asset-backed-vehicles (accessed 28/10/2013).
Thompson, B. (2012) Local Asset Backed Vehicles: A success story or unproven concept?, RICS, London.
6 Economics
Ernie Jowsey

6.1 Allocation of resources

Key terms: wants; resources; economics; production possibilities curve; opportunity cost
Allocating scarce resources is the overall economic problem. In comparison with all of the things we want,
our means of satisfying those wants are very inadequate. On a personal level there are probably many things
you would like to have but you cannot afford them. On a global scale, if everyone on earth was to live at
the same standard of living as people in the United States, more than three planets would be needed!
So we have unlimited wants and very limited resources, and this is a problem that can never be
completely resolved. But we can make the most of what we have – in other words, ‘economise’. Each
household has to make the most of its limited resources, and the word ‘economics’ is derived from the
Greek word meaning the management of a household. Shoppers have to make decisions as to what to
buy in order to obtain maximum satisfaction. Scarcity forces us to economise. We weigh up the vari-
ous alternatives and select that particular assortment of goods that yields the highest return from our
limited resources. Students have to make sure their funds last the term. Businessmen have to decide on
quantities of raw materials to buy and labour to hire. Even the richest person in the world must decide
how to allocate their time!
There are four aspects of this economic problem:

1 the wants of human beings are without limit;

2 those wants are of varying importance;
3 the means available for satisfying those wants – human time and energy and material resources –
are limited;
4 the means can be used in many different ways – that is, they can produce many different goods.

An illustration of this can be seen by considering the problem facing a house builder or property
developer when deciding exactly what type of properties to build on a piece of land. Suppose there
is a choice of affordable homes or executive houses or a combination of the two. We need to assume
there is no interference from the planning authorities. Table 6.1.1 shows the combinations that can
be produced.
These production possibilities can be shown in a production possibilities curve (PPC). The straight
line PPC in Figure 6.1.1 represents the trade-off between executive homes and affordable homes facing
this developer. She cannot build 40 executive homes and 80 affordable homes because she does not have
the resources and so that combination lies outside the PPC and is unattainable. Of course the actual com-
bination that is decided upon will be influenced by demand for executive homes and affordable homes
in the market and almost certainly by planning conditions. If the decision is made to build 40 executive
homes, then the opportunity cost of that decision is 80 affordable homes (that are not built).
142 Ernie Jowsey
Table 6.1.1 Production possibilities for housing

Affordable homes Executive homes

80 0
60 10
20 30
0 40

Affordable
homes
80

60

20

0
10 30 40 Executive homes

Figure 6.1.1 A (straight line) production possibilities curve.

Governments also have to decide how their resources or funds are allocated. Less spent on roads might
mean more can be spent on the health service, but might lead to more road traffic accidents. Better
schools and hospitals may be needed but they are competing for the limited revenue that can be raised
from taxation. Extra houses, new roads and conservation or wildlife areas – all are claiming a share of
the limited land available. A decision to provide more of one type of facility will have an opportunity
cost.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 1.
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 1.

6.2 Supply and demand

Key terms: demand curve; supply curve; market equilibrium; clearing price; complements; substitutes
Demand in economics is the desire for something plus the ability to pay a certain price in order to
possess it. Technically, it is how much of a good people in the market will buy at a given price over a
 Economics 143
certain period of time. The higher the price, the less people will want to buy and at a very high price
their demand is zero. In Figure 6.2.1 there is a demand curve with price rising on the Y-axis and
quantity demanded increasing from left to right along the X-axis, the demand curve slopes downwards
from left to right.
Demand is determined by price and other factors affecting demand. These other factors are:

● prices of other goods, especially complements and substitutes;

● incomes of consumers;
● tastes of consumers.

If price changes then quantity demanded adjusts along the demand curve. If there is a change in one
of the factors affecting demand, such as tastes of consumers, the demand curve will shift to the left or
right within Figure 6.2.1.
Supply in economics refers to how much of a good will be offered for sale at a given price over a
given period of time. This quantity depends on the price of the good, and the conditions of supply.
More will be supplied at a higher price, because producers can make more profits. Supply is deter-
mined by price and other factors affecting supply. These other factors include:

● prices of factors of production;

● the level of technology.

If price changes then quantity supplied adjusts along the supply curve. If there is a change in one of the
factors affecting supply, such as a change in the price of a factor of production, the supply curve will shift
to the left or right within Figure 6.2.1. A supply curve will rise from left to right as in Figure 6.2.1.
The intersection of demand and supply in the market is at price p and quantity q. At price p the
quantity demanded and supplied is q. There are no unsold goods and no shortage of goods at the
price p (the market ‘clears’).

Price
per unit
S

0 q Quantity demanded and supplied

Figure 6.2.1 Equilibrium price and quantity.

144 Ernie Jowsey
In reality, prices are rarely ever at this equilibrium level – house prices, for example, do not usually
clear the market and there is often excess supply with downward pressure on prices; or excess demand,
with upward pressure on prices.
To summarise: a market can be defined as ‘all buyers and sellers of a good or service who influence
its price’. The price of a good or service is determined by the interaction of the forces of demand and
supply. Since demand and supply curves slope in opposite directions, they intersect at a single point.
This is the market or equilibrium price where demand equals supply – the ‘market clearing price’.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 3.
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 3.

6.3 Pareto optimality

Key terms: welfare; distribution of income; potential Pareto improvement; cost–benefit analysis
Efficiency in the use of resources is often called Pareto optimality or the Pareto criteria in honour of
the Italian economist Vilfredo Pareto (1848–1923), who first identified this idea.
The Pareto optimal condition is that welfare is maximised when no one can be made better off
without somebody else being made worse off. Any improvement in economic efficiency that involves
nobody losing will represent an increase in welfare. This avoids the distributional problem which may
result from very unequal income distribution. Even a society with a few very rich people and a lot of
very poor people can be Pareto optimal if the poor cannot be made better off without taking some-
thing from the rich. For this reason Pareto optimality is known as a weak welfare criterion.
Figure 6.3.1 illustrates this. Starting from the initial income position X, with A’s income equal to
OA and B’s equal to OB, movement to M would represent an increase in welfare for both A and B; a

A’s income £

L M

A Q

0 B
B’s income £

Figure 6.3.1 Pareto improvements.

 Economics 145
movement to Q would increase B’s welfare without reducing A’s. Both M and Q therefore represent
Pareto improvements. It is impossible, however, to say whether position L represents an overall gain
or loss, since A’s income has increased but B’s has fallen.
The problem with the strict Pareto-optimality condition is that its application is restricted to those
cases where there are gainers but no losers resulting from the reallocation of resources. There may
be ways of improving production and overall welfare which make some people much better off but
others a little worse off. Applying the strict Pareto criteria would not allow this change. A weaker
condition is that of potential Pareto improvement if those who gain could compensate those who lose
and still be better off. The compensation does not actually have to be paid – it is only necessary to
show that it could. This condition forms the basis for decision making in cost–benefit analysis (see
Concept 6.8). It can be summarised as:

∑i [Bi –Ci] > 0

where ∑i is the sum over a time period i; Bi is total benefits over a time period i; and Ci is total costs
over a time period i. In words: if total benefits minus total costs over the time of the project are greater
than zero then the project should go ahead.

Further reading
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 2.

6.4 Economic efficiency

Key terms: limited resources; resource allocation; production possibilities curve; Pareto optimality;
competition; perfect competition
Economic efficiency is achieved when society has secured the best allocation of its limited resources,
in the sense that the maximum possible satisfaction is obtained. Society’s aim is to maximise its welfare
in terms of the way it uses its limited resources; and the distribution of income between members of
society. Decisions on income distribution are political decisions, so we can leave that to politicians
and adopt a fairly limited condition, that of Pareto optimality or Pareto efficiency (see Concept 6.3).
This states that: ‘welfare is maximised when no one can be made better off without somebody else
being made worse off.’ Thus, any improvement in economic efficiency that involves nobody losing
will represent an increase in welfare.
A PPC (or frontier) can illustrate the concept of economic efficiency. In Figure 6.4.1 an economy’s
production of food and manufactured goods is shown in a graph of possible outputs. If only food is
produced then 40 units can be made – and if only manufactured goods are produced then 50 units can
be made. Of course society is likely to want a mixture of both and it can choose any combination on
or inside the PPC.
Choosing point X where 20 units of each resource are produced is not Pareto optimal because
more of either good could be produced without reducing output of the other. Any point inside the
PPC, such as X, is not technically efficient. Both A and B are on the PPC and are technically efficient
– as much as possible is being produced. But society may prefer more food to be produced than it is at
point B, where only 10 units are made. There are two ways for society to achieve its preferred alloca-
tion at point A – by government direction (in a command economy) or by using the price system to
allow people to express their preferences. Starting from point B with a lot of manufactured goods and
little food would mean the price of food is high and the price of manufactured goods is low. Producers
would respond by growing more food and reallocating resources away from manufactured goods. This
process would continue until prices stabilised for both food and manufactured goods – where demand
146 Ernie Jowsey

40

Food A
30

20 X

B
10

0 10 20 30 40 50
Manufactured goods

Figure 6.4.1 A production possibility curve.

equals supply for both goods. If this is at point A on the PPC then point A is both technically efficient
and economically efficient.
Competition increases efficiency in the economy. Without competition, producers have no incen-
tive to reduce costs (and prices) and to innovate. Perfect competition is a market form where there are
many buyers and many sellers of a product and this situation will ensure that competition results in the
most efficient methods of production.
The market economy or price system is very efficient but there are instances of market failure that arise
from externalities such as pollution, and from the existence of goods and services that cannot be priced, such
as defence and street lighting. As a result, the market economy is unlikely to be fully efficient in allocating
resources, but allocation by government decisions in a command economy can present even greater prob-
lems. At least the market system does start with the advantage that economic decisions are based on prices
that reflect consumers’ preferences and relative costs. This suggests the compromise of a mixed economy.
This uses the price system as the basis for allocating resources, but, recognising its defects, relies on the gov-
ernment to provide, as far as possible, the conditions necessary for its efficient functioning.
Allocation of real estate resources is still mainly through the price mechanism of a market economy.
How efficient is the real property market in registering changes in demand and supply through their
effect on price? In an efficient market we could expect the market to be in equilibrium most (if not all)
of the time. This would mean the market clears or demand equals supply. So if the real property mar-
ket is efficient there would be no prolonged periods of excess demand or excess supply. Any observer
of the cyclical nature of the real estate market in most market economies would recognise that this is
not the case – in the upswing or boom there is a period of excess demand and in the downswing or
recession there is a period of excess supply.
 Economics 147
Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, chs. 1 and 2.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, chs. 2 and 3.

6.5 Market, command and mixed economies

Key terms: market economy; command or planned economy; invisible hand; community goods; exter-
nalities; economic efficiency

Market economy
The first exchanges of goods and services were quite simple: there was a direct swap of one good for
another – a market was established. Eventually money was developed, allowing goods to be priced and
sold more easily. The subsistence economy had now become a market economy, where decisions on
production follow from people’s decisions in the market. In the market economy, emphasis is laid on
the freedom of the individual, both as a consumer and as the owner of resources.
Consumers express their choice of goods through the price they are willing to pay for them. The
owner of resources used in production (usually his or her own labour) seeks to obtain as large a reward
as possible. If consumers want more of the goods than is being supplied at the current price, this is
indicated by their ‘bidding up’ the price. This increases the profits of firms and the earnings of fac-
tors producing that good. As a result, resources are attracted into the industry, and supply expands in
accordance with consumers’ wishes. On the other hand, if consumers do not want a particular good,
its price falls, producers make a loss, and resources leave the industry; consumers control the economy.
Prices therefore indicate the wishes of consumers and allocate the community’s productive resources
accordingly. There is no direction of labour and people are free to work wherever they choose.
Efficiency is achieved through the profit motive: owners of factors of production sell them at the
highest possible price, while firms keep production costs as low as they can in order to obtain the
highest profit margin. Factor earnings decide who is to receive the goods produced. If firms produce
better goods or improve efficiency, or if workers make a greater effort, they receive a higher reward,
and have more spending power to obtain goods in the market.
In a market economy, the price system acts like a huge invisible hand or computer, registering
people’s preferences for different goods, transmitting those preferences to firms, moving resources to
produce the goods, and deciding who shall obtain the final products. The driving force is the motiva-
tion of individual self-interest.
Of course, the market economy has problems and does not work quite as perfectly as this. In
particular:

● community goods, such as defence, may not be provided;

● competition, upon which the efficiency of the market economy depends, may break down;
● imperfect knowledge may impair the working of the price system;
● externalities or ‘spillover effects’ such as pollution may occur;
● great inequalities of income can arise.

Command economy
In a command economy, the decisions are taken by an all-powerful planning authority. It estimates
the assortment of goods which it considers people want and directs resources accordingly. It also
decides how the goods produced shall be distributed among the community. Economic efficiency
148 Ernie Jowsey
largely depends upon how accurately wants are estimated and resources allocated. The central plan-
ning authority can ensure that adequate resources are devoted to community and other goods; and
it can use its monopoly powers in the interests of the community, e.g. by securing the advantages of
large-scale production, rather than make maximum profits by restricting output. There can be more
certainty in production by integrating plans and improving mobility by direction of resources, even of
labour. External costs and benefits can be allowed for when deciding what and how much to produce,
and uneven distribution of wealth can be considered when planning what to produce and in reward-
ing the producers.
There are also problems with a command or planned economy, however:

● Estimating the satisfaction derived by individuals from consuming different goods is impossible –
although some help can be obtained by introducing a modified pricing system. Often, however,
prices are controlled, supplies rationed or queues form for limited stocks.
● Many officials are required to estimate wants and to direct resources and this may lead to bureau-
cracy, such as excessive form-filling, ‘red tape’, slowness in coming to decisions and an impersonal
approach to consumers. At times, too, officialdom has been accompanied by corruption.
● State ownership of resources, by reducing personal incentives, diminishes effort and initiative.
● Direction of labour may mean that people are dissatisfied with their jobs.
● Officials may play for safety in their policies.
● There is a danger that the state will make it easier to pursue economic objectives by restricting
freedom of action.

Mixed economy
Most economies in the world are free market economies regulated by government. They have a mixed
economy in which more than half of production is carried out by private enterprise through the mar-
ket (though subject to varying degrees of government control), while for the rest of the economy the
government is directly responsible. The government influences the allocation of the goods and services
produced using fiscal and monetary policy, income redistribution and subsidies.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 2.

6.6 Externalities
Key terms: private costs; social costs; private benefit; social benefit; spillover effects
Resource allocation in the economy is the result of the decisions of consumers and producers who
seek to maximise the difference between benefits and incurred costs. These are private benefits and
private costs. There may be benefits and costs – externalities – additional to those that are the immedi-
ate concern of the parties to a transaction and that are not provided for directly in the market price.
These benefits or costs spill over onto others not directly involved. For example, a firm may decide
to build a new factory on a derelict site in a depressed district. In doing so it confers some external
benefits: tidying up the site and reducing the cost of government unemployment benefit payments.
But if the factory is built in a predominantly residential district, it would incur external costs of vehicle
movements, noise, etc.
The full social benefits are, therefore, private benefits plus external benefits. The full social costs are
private costs plus external costs. If an economically efficient allocation of resources is to be achieved,
externalities should be allowed for.
 Economics 149
The spatial characteristic of land in particular gives rise to considerable ‘spillover’ costs and benefits.
For example, if the grounds of a previously derelict property are landscaped and much improved, there
can be benefits for the whole area. And if planning permission is granted for the construction of several
new houses on a greenfield site, there may be additional traffic costs in the form of delays, congestion
and pollution for existing residents of the area. This situation is shown in Figure 6.6.1.
On private benefit/costs considerations alone, houses would be built to a plot density of N where
the developers benefit (MSB) is equal to his costs (MPC). But more intensive development gives
external costs of pollution and congestion. MSC, therefore, exceeds MPC. Plot density should there-
fore be limited to N1, in order to achieve optimal development where MSB = MSC (equalising social
benefits and social costs).
Of course, some spillover costs are inevitable. Living in cities limits the open space available to
people and they suffer continuous traffic noise. But people live in cities because of the advantages and
these include external benefits, such as convenient amenities and leisure facilities.
Sometimes externalities are reflected in the market price. People will pay more for a house in an
area that has good schools, open spaces, leisure facilities, and road and rail links. Shops where traffic
congestion is a serious problem will command a lower rent because trade will be affected. Externalities
can also be ‘internalised’ by private arrangements. Developers often attract prestigious shops to a shop-
ping centre by making prior agreements with key retailers. They offer these anchor tenants a good deal
on their rent in order to have the benefit of their reputation and good name in their centre. Houses
and flats may be sold subject to leases or covenants in order to secure external benefits (such as satisfac-
tory maintenance) or to avoid external costs (for example, excessive noise, car-parking nuisance etc.).

MSC
Marginal social benefit
MPC
(MSB), marginal social
cost (MSC), marginal
private cost (MPC)

MSB

0 N1 N Number of houses

Figure 6.6.1 Additional marginal social costs of development.

150 Ernie Jowsey
Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 17.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 12.

6.7 Market failure

Key terms: exchange efficiency; technical efficiency; economic efficiency; externalities; imperfect com-
petition; government intervention; community goods
The vast majority of the world’s economies work by using market forces to allocate resources. Usually
this is done in a very efficient way (see Concept 6.4). If so there will be:

● ‘exchange efficiency’ so that no overall gain in satisfaction can be obtained by an exchange of

goods between persons;
● ‘technical efficiency’ in production so that no increase in output can be obtained by producers
substituting one factor for another or reorganising the scale of production;
● ‘economic efficiency’ so that out of society’s limited resources, the selection of goods and services
produced is that which gives the greatest possible satisfaction (so that supply equals demand).

If the market economy is to achieve these types of efficiency, there must be perfect competition (see
Concept 6.9), no external benefits or costs, and all economic goods must be priced in the market.
Obviously, not all markets are perfectly competitive as there are many examples of imperfect competi-
tion, oligopoly and even monopoly in the real world and in many real estate markets. There are also
many external benefits and costs that are unpriced because they are outside the market (see Concept
6.6). For example, the design of a new building may be out of character with the surrounding area,
imposing ‘spillover costs’ on other residents. And with many economic goods and services, such as
defence, street lighting, common land and many environmental goods and services it is not possible to
exclude non-payers and so they are not priced.
So for the reasons mentioned above, the market economy does not always lead to an efficient allo-
cation of resources and so government intervention is necessary. For example, governments have rules
and regulations relating to monopoly and imperfect competition; they provide community goods;
they try to improve imperfect knowledge; and to ‘internalise’ or bring in to the market external ben-
efits and costs such as pollution.
In real estate markets there are many examples of externalities and, therefore, the potential for
market failure. A firm may decide to build a new business park on a derelict site in a run-down area.
This confers external benefits by tidying up the site and providing much needed employment. If the
business park was built in a mainly residential district, however, it would incur external costs of extra
vehicle movements, noise, air pollution and so on.
Another example is provided when an individual household spends time and money on house
improvements, and there are benefits for other houses in the area. If the improvement makes the
general area tidier and more appealing, then other households in the vicinity benefit from a positive
externality. If several households make improvements the area may be considerably improved and all
property values could increase. Of course this issue could suffer from the problem of ‘free-riders’ –
some households doing nothing but still benefitting from the uplift in property values. The benefits of
the improvement to the area are non-excludable and if enough households acted as free-riders then
the improvement would not materialise (Jowsey, 2011).
In order to try to encourage the households in the area to engage in individual (and thus general)
improvement, the local authority could provide improvement grants in run-down areas. This will be
Pareto optimal if the private and social benefits are greater than the private costs to the residents plus
 Economics 151
the cost of the grants. There is evidence to suggest that subsidising housing investments produces sig-
nificant and sustainable external benefits to urban areas, and of course, they can be used to reduce the
external costs of inadequate housing (health and social problems etc.).
These are examples of market failure where government intervention takes place. There is no
guarantee of course that the government solution will not have its own adverse effects and there are
many examples of ‘government failure’. The poor history of twentieth-century rent controls in the
UK provides a fairly clear example.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, chs. 17, 18 and 19.
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, chs. 3 and 12.

6.8 Cost–benefit analysis

Key terms: Pareto optimal; ‘spillover effects’ or externalities; discount rate; shadow prices
If those who gain from a property development can in principle fully compensate those who lose then
a potential Pareto improvement has occurred. In the public sector, cost–benefit analysis may be used
to determine whether a development will lead to a potential Pareto improvement. In a cost–benefit
analysis (CBA) it is necessary to:

● list all relevant items – including spillover benefits and costs (see Concept 6.6);
● value expected benefits and costs;
● discount future flows of benefits and costs using an appropriate rate of discount;
● assess the net present value of the development – if it is positive then there is potential Pareto
improvement.

Difficulties arise at each stage of the CBA and especially in the choice of discount rate (which is often
based on market rates of interest by default). Nevertheless, CBA provides a rational technique for
appraising developments where market information is lacking.
Government responsibility for roads, bridges, airports, parks, amenity land, new urban areas and
housing means that decisions have to be made as regards the allocation of land and land resources.
Questions arise such as: is investment in a new motorway justified? Which site should be chosen for a
new airport? The difficulty is that, since many public-sector goods are provided free or below market
price, indications of the desirability of investment through the price system are either non-existent or
defective. CBA is a technique that seeks to bring greater objectivity into decision making. It does this
by identifying all the relevant benefits and costs of a particular scheme and quantifying them in money
terms so that each can be aggregated and then compared.
CBA is likely to have its main use in the public sector where

(i) price signals are inadequate to guide investment decisions;

(ii) ‘spillover’ benefits and costs are important because of the magnitude of the schemes; and
(iii) the welfare of unborn generations (intergenerational equity) has to be allowed for – for example,
by conservation measures.

CBA can be used in all public investment decisions, it has particular application to the allocation of
land resources, where externalities are likely to be considerable. As a result CBA studies have been
undertaken for:
152 Ernie Jowsey
(a) the construction of the M1 motorway;
(b) London Underground’s Victoria Line;
(c) the siting of the third London Airport;
(d) consideration of a third runway and sixth terminal at Heathrow;
(e) the re-siting of Covent Garden Market.

There are, however, several difficulties in the application of CBA:

Distributional effects: country lovers may lose pleasure through mobile phone masts intruding on the
landscape. If they are fully compensated, there is no problem in terms of Pareto optimality. However,
the difficulty of identifying such losers means that compensation is not actually paid, and there are thus
distributional effects.
Adjusting market prices: where market prices reflect the true opportunity cost to society of employing
resources in a particular way (assuming no externalities), they can be used to estimate the cost of a
project. However, in the real world it has to be recognised that prices in the market may not accurately
reflect opportunity cost. This may be the result of imperfect competition, indirect taxes and subsidies,
or controls that interfere with the free operation of the market mechanism.
Pricing non-market goods: market prices may not be available. This occurs with the following goods:
1 community and public goods, where ‘free riders’ cannot be excluded (examples are street lighting,
land, radio programmes) or where it is decided to make no charge (for instance, for public parks
or bridges). Here the cost is covered by taxation that is unlikely to reflect true ‘willingness to pay’;
2 intangible externalities, such as noise and congestion cost, human lives saved, the pleasure derived
by passers-by from flowers and trees in private gardens or from a walk in a park.

Since both enter into CBA calculations, it is necessary to ascribe notional prices to them so that ben-
efits and costs can be quantified in money terms. But formulating such ‘shadow’ or ‘surrogate’ prices
faces formidable difficulties.

Valuing time saved: transport improvements usually result in reducing the time spent in making a jour-
ney. What price do we put on this benefit?
The value of human life: such projects as road improvements reduce deaths and accidents; others such as
rock quarries (with associated lorry movements) may increase them for people in the vicinity. How
can a money value be given to human life?
Spillover effects: the problem of which spillovers should be included is concerned, first, with the dif-
ficulty of distinguishing between real changes and distributional effects, and, second, on deciding the
cut-off point – how widely effects are considered.
Intangibles: in aggregating costs and benefits, how much weight should be attached to the shadow
prices of intangibles compared with true market prices? In so far as there is perfect competition, market
prices at factor cost reflect true opportunity costs. In comparison, shadow prices are derived indirectly,
and to that extent are somewhat suspect.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 17.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 11.
 Economics 153
6.9 Perfect competition
Key terms: many buyers and many sellers; homogeneous products; freedom of entry and exit; normal profits
As the term suggests, perfect competition is the market situation where there is the most possible
competition. This is because:

● there is a large number of relatively small sellers and buyers;

● the product they sell is exactly the same (homogeneous);
● there is perfect knowledge of market conditions;
● there is free entry to the industry;
● in the long-run there is perfect mobility of the factors of production.

In Figure 6.9.1 price in the market or industry is set in the graph on the right, where demand equals
supply. In the graph on the left, the firm is a price-taker; it can sell as much of this product as it can
produce at the market price. Real world real estate examples are hard to find but the market for breeze
blocks used in construction may provide one. These blocks are homogeneous and producers can sell a
large number at the market price. Without a perceived difference in quality any one producer would
find it difficult to raise the price of their product and so the firm’s demand curve is perfectly elastic at
the market price (P).
It should be apparent that there are no real estate markets where all of these conditions apply and
so the real estate industry generally does not operate under conditions of perfect competition. If it did
prices would be as low as possible (because of all the competition) and the industry would be very
efficient (with costs as low as possible). In fact it is widely believed that the real estate industry is quite
inefficient (see Concept 6.4), and the reason for this is that it does not exhibit the conditions listed
above as being necessary for perfect competition.
In particular, every property is unique – even if that is only because it is in a slightly different posi-
tion to other properties – so the condition of homogeneity cannot apply. There may be many buyers
and many sellers, as is often the case in residential estate agency, but they most certainly do not sell
products that are exactly the same. And often there is not perfect knowledge, for example, of the true
value of a property – that is why professional valuers are required to advise on prices.

Cost and MC price

revenue
S

AC

0 output quantity

Figure 6.9.1 Long-run equilibrium in perfect competition.

154 Ernie Jowsey
Areas of the real estate industry where there is most competition, such as residential estate agency,
general practice surveying firms, property management companies etc. are generally those areas where
only normal profits can be made (sufficient profit to keep the firm in the industry). If supernormal
profits could be made (much greater than normal profit) then because there is relatively free entry to
the industry, new firms would be attracted and provide more competition to reduce those profits. Of
course it would be in the interests of the existing firms in the industry to try to restrict entry of new
firms by forming professional bodies and trade associations, but this is difficult to do without infringing
laws on fair trading.
In a perfect market any price differences would quickly be eliminated and demand would always equal
supply at the market price. It is obvious that this situation rarely exists in real estate markets where peri-
odically there are conditions of excess demand (in a property boom) and excess supply (in a recession).

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, chs. 1 and 2.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, chs. 2 and 3.

6.10 Imperfect competition

Key terms: product differentiation; elastic demand; freedom of entry; normal profits; competitive
advertising
Between the two extremes of perfect competition and monopoly there is a situation where many firms
or perhaps only a few compete imperfectly in the market. The products are not exactly the same and
so producers can make claims about them that differentiate them from others. Such a situation is some-
times called ‘monopolistic competition’ because the slight differentiation of each product gives it a little
monopoly power. An example might be an estate agent claiming that they provide the best advertising
options or a small builder stressing that the quality of their work is their advantage over others.
If such firms raise their prices, some customers will buy competitor’s brands, but some will consider
competitor’s brands inferior and will only switch after a large rise in price. And if the firm lowers its
price it will only attract a limited number of customers from rival producers. Demand will be elastic
(with a shallow slope) but not perfectly elastic (horizontal – as in perfect competition).
In the short run, monopoly (or supernormal) profits can be made. The short-run situation is the
same as for a monopolist (see Concept 6.12). But these supernormal profits attract other firms and
because there are no barriers to the entry of new firms, the extra competition from new producers will
reduce the profits of existing firms. Entry of new firms will continue until the supernormal profits in
the industry disappear and only normal profits remain in the long run.
In Figure 6.10.1 at the profit maximising output of MC = MR, only normal profits can be made
because AC = AR. These are sufficient to keep the firm in the industry but no more. The situation
is not as good for consumers as perfect competition, however, because average costs (AC) are not at
their lowest point (where the AC curve is cut by marginal cost, MC). This is because extra costs will
be incurred by firms in competitive advertising and in finding ways to differentiate their product. For
example, estate agents may offer viewing services and expensive photography. Small builders may pay
for local advertising or sponsor local events etc.
So, imperfect competition is not as efficient as the situation that prevails with perfect competition because
firms’ costs are greater and they are not producing at the lowest cost output. But it is a much closer repre-
sentation of most real world markets where firms compete through advertising and reputation. Most firms
involved in the real estate industry, from general practice surveyors to letting agents, property management
companies, maintenance firms, security firms and builders operate in this form of market.
 Economics 155
Cost and MC
revenue
AC

D = AR

MR

0 X Output

Figure 6.10.1 Long-run equilibrium in imperfect competition.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, chs. 1 and 2.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, chs. 2 and 3.

6.11 Oligopoly
Key terms: competition among few; price leader; kinked demand curve; price stability; non-price
competition; cartel
Where there are only a few firms in an industry, conditions of competition can produce surprising
outcomes. This situation is not uncommon in the real estate world where the very large building firms,
national and international property companies and many financial institutions experience competition
among the few. In oligopoly, pricing and output conforms to no given principles. Sometimes one firm
is the ‘price leader’, setting the price that will maximise its profits and taking its share of the market.
Smaller firms then accept this price and try to compete in terms of quality and service.
If the firms are of roughly equal size, then no one firm can set a price without considering its competi-
tors’ reactions. Cutting price does not guarantee more sales because competitors may retaliate and reduce
their prices. Raising price to try to make more profits may not work if competitors leave their prices
unchanged. This means that the firm’s demand curve is relatively inelastic for price cuts, but relatively
elastic for price increases. This is shown in Figure 6.11.1 where the demand curve is kinked at P. If the
original price is P, the firm could expect to move along the relatively elastic section towards D1 if it raises
its price. This would mean losing customers to competitors if it raises its price. Lower its price and the
firm could expect to move along the relatively inelastic section of the demand curve towards D.
Under such circumstances the firm will be reluctant to alter its price – it gains little from either a
price increase or a decrease. Even if its costs change the profit maximising. output and price may well
remain the same because of the broken marginal revenue curve MR, which is the result of the kinked
demand curve. So marginal cost could vary from MC to MC1 without the profit maximising output X
(where MC = MR) changing. So price stability or rigidity is likely where a firm in oligopoly is unsure
of its competitors’ reactions to a change in its own price.
156 Ernie Jowsey

Cost and D1
revenue

MC1

MC

MR

0 X Output

Figure 6.11.1 The kinked demand curve in oligopoly.

If firms in oligopoly are reluctant to compete in terms of price, they may engage in non-price
competition through advertising, discounts, loyalty cards etc. Or they may come to a tacit agree-
ment in order to jointly maximise profits. This might involve following the price of the leading
firm. In some circumstances illegal anti-competitive agreements may be made between firms,
effectively forming a cartel. Instances of this happening are not unknown in the construction
industry (see Concept 4.12).

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 16.

6.12 Monopoly
Key terms: monopoly power; barriers to entry; supernormal profits
The term monopoly literally means one seller. It is possible for firms with a large market share to have
some degree of monopoly power even if there is more than one seller in the market. In practice pure
monopoly – one seller only – is rarely found in real life. But one seller can dominate market supply of
a good or service, and competition laws in the UK consider a market share of 25 per cent to constitute
monopoly power.
 Economics 157
Monopoly power can come from the following sources:

● control of the source of supply by one firm, e.g. mineral spring water, a secret recipe for a product,
specialist skills such as fashion design;
● patents, copyrights and trademarks that are allowed in order to encourage innovation;
● legal prohibition of new entrants such as in some utilities and essential services;
● indivisibilities – it may require enormous amounts of capital to enter the industry (for example,
investment in prime city centre offices can mean hundreds of millions of pounds are required);
● restrictions on imports.

Essentially conditions in monopoly, where there is a downward sloping demand curve, mean that
withholding supply achieves a higher price and more profit for the monopolist. Certain professions
achieve this by restricting membership and so increasing remuneration for their members.
In the long run the firm in monopoly can make supernormal profits because there are barriers to the
entry of new firms. This means that competition is restricted, allowing the monopolist to produce less
than competitive firms would, and to sell it at higher prices. The situation is illustrated in Figure 6.12.1.
In Figure 6.12.1 the monopolist sets the profit maximising output where MC = MR. At this output
supernormal profits are made equal to PCAD, because at output 0X average revenue (AR) is greater
than AC. Total profit is the difference between AR and AC multiplied by output 0X, which is equal
to PCAD.
In real estate markets, sometimes conditions allow an owner to gain monopolistic control. For
example, geographical divisions between markets can allow local monopolies for selling agents to
develop; and the imperfections of the capital market may exclude all but the biggest investment firms
from purchasing certain developments; and because property is fixed in location, certain site owners

Cost and
revenue
MC

C
P
AC

A
D D

MR

0 X Output

Figure 6.12.1 The long-run situation in monopoly.

158 Ernie Jowsey
can have a strong bargaining position relative to buyers, especially if their land unlocks a development.
The owner of such a site can exploit his monopoly power by demanding a price far in excess of that paid for
other sites, and so virtually secure all the developer’s supernormal profit from the scheme (Jowsey, 2011).

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, chs. 1 and 2.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 15.

6.13 Economies of scale

Key terms: average costs, long-run average costs; mass manufacturing; minimum efficient scale; indus-
trialised building
Production on a large scale can reduce average costs of output. This is the basis of mass manufacturing
which standardises units of output so that they can be produced in large numbers at low individual
cost per unit. The advantages of large-scale production are referred to as ‘internal economies of scale’.
These include:

● technical economies – greater division of labour, more specialised machines, linked processes that
reduce costs;
● managerial economies – dividing the functions of management into separate roles such as sales,
production, transport etc.;
● commercial economies – bulk buying at lower unit prices, spreading advertising costs, selling
by-products;
● financial economies – large firms offer better security and so borrowing costs are lower;
● risk-bearing economies – large firms can cover their own risks and better manage fluctuations in
demand than small firms.

The minimum efficient scale (MES) is the long-run output for a business when internal economies of
scale have been fully exploited. This will be the lowest point on the long-run average total cost curve
and is also known as the output of long-run productive efficiency. The MES will vary from industry
to industry depending on the nature of the cost structure in a particular sector of the economy. There
are many areas of real estate where significant economies of scale can be found. These include large
property agencies with specialised departments (managerial and risk-bearing economies), large prop-
erty investment companies with low borrowing costs (financial economies) and large house building
companies (commercial and technical economies).
When the ratio of fixed to variable costs is very high, there is great potential for reducing the aver-
age cost of production. This would be the case when a large investment in a factory is required in
order to engage in large-scale production. Industrialised building requires a demand that is both large
and continuous. Thus, in Figure 6.13.1, in order to secure the lower long-run average cost curve of
industrialised building (LRACIB) resulting from design/construction integration, factory production of
components and economies of scale, there must be a demand for at least 300 dwellings per period. To
take full advantage of the economies of scale available from industrialised building, however, output
would need to be at 700 units, where the LRACIB is at its minimum point. Long-run average costs for
traditional building (LRACTBTB) are higher than those for industrial building (LRACIBIB).
In the construction industry, demand is in small parcels: 90 per cent of all contracts are for fewer
than 100 dwellings. Increasing the size of contracts would only be possible if the variety of buildings
was restricted. But private clients, especially house buyers, demand buildings that are individual in
some way. Industrialised building, in contrast, is frowned upon as being uniform, a view mainly
 Economics 159

Average
cost per
unit (£) LRACTB

LRACIB

0 300 700 Units of output

Figure 6.13.1 Economies of scale in industrialised building.

derived from the austere appearance presented by local authority flats that were subject to severe
cost restrictions.
Demand for industrialised building therefore has to come from those clients where some uniformity
of product is acceptable and where the highest and best use of the site is not impaired by the erection of a
factory-built construction. This has meant that in the private sector the method has been most successful
for retail parks, factories, hotels, farm buildings, small garages, house extensions and garden sheds.
A twenty-first-century revival of industrialised building could be seen with the entry of Ikea-
Skanska into the market via the ‘BoKlok’ (Swedish for ‘Live Smart’). About 800 such homes are built
in Sweden each year and the first development in the UK – construction of 119 dwellings consisting
of 36 BoKlok apartments, 57 BoKlok houses and 26 LiveSmart@Home dwellings – is sited along the
Felling Bypass in Gateshead. The company aims to assemble about 500 affordable dwellings per year
in the UK (Jowsey, 2011).

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch.7.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch.13.

6.14 Mobility of labour

Key terms: efficiency; occupational mobility; geographical mobility; transaction costs
For an economy to be efficient, the factors of production, including labour, should be free to move
to where they are most valued – which will be where they are most profitable. So labour should be
mobile and free to move to where it commands the highest wage.
If there was perfect geographical mobility of labour, then workers would move from low wage
areas to higher wage areas and this would continue until wages were equal in all areas. And if there
160 Ernie Jowsey
was perfect occupational mobility of labour then wages would be equal across all occupations.
Clearly these situations do not exist and so there must be some geographical and occupational
immobility of labour.
The property sector contributes to geographical immobility of labour in the UK. This is because
property markets are not the same in all areas. Property prices are higher in London and the southeast
than in other parts of the country. This can mean that even if a better paid job is available to someone
from the regions, they do not take it because to do so would mean spending much more of their salary
on accommodation. This can be the case for owner-occupiers who cannot afford the higher property
prices in the south east, and for tenants who cannot afford the higher rents. Council tenants may feel
unable to move away from the area that they are in because they will have to go onto a waiting list for
rent controlled council accommodation in the new area – and such waiting lists can be very long and
so this could take a long time.
The costs of moving can also be considerable, especially for owner-occupiers who will have to pay
estate agents fees, solicitors fees, removal costs and stamp duty (if the property they purchase is above
the threshold). These transaction costs can amount to several thousand pounds. Stamp duty alone
would be £9000 on a house costing £300,000 – not an extravagant property price in London. Since
the majority of properties in the UK are owner-occupied (about 67 per cent in 2013) this is a signifi-
cant obstacle to labour mobility and economic efficiency. It can be argued that an economy with a
larger proportion of rented property such as Germany has a more efficient labour market as a result.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 20.

6.15 Property rights

Key terms: interests; spatially fixed; fee simple absolute; freehold; leasehold
Real estate markets actually deal in ‘property rights’ often referred to as ‘interests’. This is no differ-
ent, however, from any other market. It is possible, for instance, to go to a Land Rover dealer and
buy a car. The car is handed over and the buyer is given the exclusive right to drive it as long as they
wish, and, to part with that right by selling it to somebody else. Alternatively, a car could be hired
from Avis. Here the right to drive the car would be restricted to a certain period of time and subject
to conditions regarding damage etc. These restricted rights are more likely to be clearly defined in a
written agreement which, by implication, also excludes Avis from letting anybody else drive the car
during the specified period.
The situation is similar for real estate, but here it is not possible to hand over land and buildings
because they are spatially fixed. Because of this, it is ‘rights’ that are dealt in, especially as, accompany-
ing the transaction, there is a written statement defining the exact rights that are being transferred. In
short, the real property market deals in the rights relating to real property rather than in the land and
buildings themselves.
With real estate the separation of rights is more usual than with personal property. The largest collection
of rights that can be held in real property is ‘fee simple absolute’; that is, the unencumbered freehold. But all
the rights included in the ‘fee simple absolute’ can be separated and transferred individually to other people.
For example, a lease may be granted to a person to erect a building on a plot of land and to enjoy the rights
to this building and land for a 99-year period on payment of a specified yearly sum to the lessor. Provided
the terms of the lease are fulfilled, the lessor’s rights are, for 99 years, now restricted to the receipt of a
freehold ground rent. The freehold has then been divided into two interests: the leasehold and the freehold
ground rent. In any given land resource different people may have many different rights – for example, a
freehold ground rent, a head lease, a sublease, a mortgage, a rent charge, and so on (Jowsey, 2011).
 Economics 161
The exact rights transferred can be finely adjusted according to the individual preferences of the
seller or buyer, for example, by a restrictive covenant. Such a fine differentiation to meet the individual
preferences of sellers and buyers is achieved automatically through the free-market mechanism and is
reflected in prices.
Within his rights the ‘fee simple absolute’ owner can possess, use, abuse and even destroy his real
property. He can sell rights in such a way as to restrict their future use (for example, by covenant), or he
can bequeath them to distant heirs. Nevertheless, his rights are limited to some extent if there are other
people’s rights in force, such as ancient rights to ‘easements’ (see Concept 10.9),or if the land is subject
to the legal restraints imposed by planning restrictions, building regulations and similar legislation.
An interest comes into existence simply because a bundle of certain rights is wanted. But no rights
would be wanted unless their owner could exclude others from them – there would be no point in
paying for the right to use something that others could use for free. Thus the concept of rights is essen-
tially a legal one: it presupposes that there is a government authority that will, if necessary, protect
the rights vested in the owner. Moreover, being a legal concept, a right must be clearly defined. This
implies limitations to the right. Thus a right is merely exclusive, not absolute or unlimited. In fact,
different rights are really only differences in ‘exclusiveness’.
Where rights are well defined and the costs of negotiating and enforcing contracts are small com-
pared with the benefits of the transaction, an exchange system based on prices works smoothly.
Economic theory tends to assume these conditions. At times, however, the failure to define rights
unambiguously may lead to economic inefficiency.
Property is durable and so the rights existing in real property have a long timescale. Real property
rights, such as stocks and shares, are, therefore, demanded as investment assets and the real property
market can now be regarded as a part of the wider investment asset market.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 3.

6.16 Economic rent

Key terms: land; resources; opportunity cost; transfer earnings; surplus
This is payment made for a resource that is not necessary as an incentive for its production, often
regarded as a surplus over cost. Undeveloped land, or ‘pure’ land, refers solely to natural resources and
space. Thus land as a whole – that is, the earth’ land surface – can be regarded as being fixed in supply.
No one had to be paid to make it and so rent paid to the landowner is economic rent. If the land has
been improved, however, part of the rent is payment for the improvement.
With man-made commodities, including capital goods, price is a function of demand and supply
and because supply is influenced by cost of production, price itself is influenced by cost. But since land
as a whole is a fixed supply provided by nature, it has no supply costs and the earnings of ‘pure’ land
are determined solely by demand.
Thus in Figure 6.16.1 POXT represents the earnings of land when demand is D, and P1OXL when
demand is D1. No matter how small the earnings, the total supply of land is still the same, hence the
supply curve S is perfectly inelastic (a vertical straight line at X). This means that its opportunity cost
is zero and so all the earnings of land as a whole are an excess over opportunity cost. They represent
economic rent, that part of the earnings of a factor that results from it having some limitation of sup-
ply – the return arising because supply is not perfectly elastic.
Because the earnings of land are a surplus over opportunity cost does not mean that payments do not
have to be made for land. Price still rations scarce supply of land among competing uses. This ensures that,
in each location, land is put to its most profitable use according to the preferences of consumers and society.
162 Ernie Jowsey

Price (£)
S

T
P
D

P1 L
D1

Quantity of ‘pure’ land

0 demanded and supplied
X

Figure 6.16.1 Economic rent.

So the supply of land can never be regarded as fixed. Additional supplies can always be bid from other
uses if the proposed new use has a higher value than the existing use. Furthermore, the productivity
of land can usually be increased in response to additional demand by using it more intensively by the
addition of capital.
The fact that the earnings of land as a whole are entirely demand-determined is important from the
point of view of taxation – land will still be there, no matter how heavily it is taxed. As a result a tax
on pure land has no disincentive effect on the supply of land and economic rent could theoretically be
taxed away entirely without affecting output.
David Ricardo showed in 1817 that the price of wheat was high not because land commanded a
high price or rent but because the demand for wheat was high and this determined the high rent of
land. Rents are highest on the most productive land and, as Tim Harford shows in The Undercover
Economist, coffee shop rents are highest in the best locations such as train stations (Harford, 2006).
The concept of economic rent can be applied to payment made to people with special abilities, such
as footballers or rock stars, but it is difficult to distinguish their natural talent (for which they receive eco-
nomic rent) from their skills acquired by hours of practice and training. Transfer earnings are the amount
that a resource could expect to earn in its best alternative use. In the case of land for development, its
best alternative use might be for agriculture and that value is at least what must be paid to secure it for
development. If it commands a higher price (and it almost certainly will because of high demand and
competition among developers to buy the land) then the additional earnings are economic rent.

Further reading
Harford, T. (2006) The Undercover Economist, Abacus, London, ch. 1.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 4.

6.17 Gross domestic product

Key terms: gross national product; national income; GDP per head; living standards
The title of this concept could be ‘national output measures’, but many people will come across the terms
gross domestic product (GDP) or gross national product (GNP). Fluctuations in the level of economic
activity are monitored by quantitative information on the national income. Income is a flow of goods
 Economics 163
and services over time: if our income rises, we can enjoy more goods and services. The principal figures
are published annually in the United Kingdom National Accounts (The Blue Book – see www.statistics.
gov.uk). They include several measures of national output and it is important to realise that national out-
put equals national income and national expenditure – these are measures of total production from the
economy, but measured at different points in the circular flow of income (see Figure 6.19.1).
For goods to be enjoyed they must first be produced. A nation’s income over a period, then, is
basically the same as its output over a period. National income is the total money value of all goods
and services produced by a country during the year. The GDP is simply the money value of the final
output of all resources located within a country. In order to obtain GNP we have to add the balance
of net property income from abroad – such as profits made by UK companies in other countries.
Figures for GNP are calculated for income, expenditure and output. Because information is incom-
plete and derived from a variety of sources, results are not identical and there is a statistical discrepancy.
Very often the term national income is used in economic literature. Technically this is net national
product which is equal to GNP minus depreciation (machinery and buildings that have worn out).
National income, then, is quite a good representation of the additional output/income/expenditure
produced in a twelve-month period.
Property contributes to GDP in a number of ways:

● Rent is a significant part of incomes.

● The value of home ownership is given an imputed rent in the national income accounts.
● Goods and services are produced in space provided by land and buildings.
● The incomes of at least 3 million people in the UK come from working in construction and wider
real estate occupations such as facilities management and security.
● Investment in property development is a significant component of national output.

GDP divided by the population size gives GDP per head. This is often used as a measure of living
standards and because of economic growth it usually rises over time. This can also be used to compare
living standards between countries but caution must be exercised here because so many things that
contribute to living standards (such as environmental quality, leisure time, cultural development and
health) are not measured by the national accounts.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 28.

6.18 Economic growth

Key terms: production possibility frontier; full employment output; gross national product; capital
goods; consumer goods
If an economy is not producing the maximum that it could and there are unemployed resources, the
economy’s actual output is below its potential output. In terms of Figure 6.18.1, the economy is pro-
ducing inside production possibility frontier I, say at point X. Starting from X, output can be increased
by measures that utilise unemployed resources. But even full employment of an economy’s resources
(as would be the case actually on the production-possibility frontier) does not necessarily mean that the
economy will grow. Growth occurs over the long run where the potential full-employment output
of the economy increases over time.
In terms of Figure 6.18.1, economic growth means that, over time, production possibility frontier
I is pushed outwards to II and III. Increases in the productive capacity in the economy over time are
usually measured by calculating the rate of change of real GNP per head of the population.
164 Ernie Jowsey

Capital
goods

I II III

0 Consumer goods

Figure 6.18.1 Production possibility frontier.

Economic growth is the major way of achieving improvements in the standard of living. It means more
consumer goods, better living conditions, better quality food and so on. While such improvements occur
gradually and almost imperceptibly from year to year, small differences in the annual rate of growth pro-
duce large differences in the speed of growth. For instance, a rate of growth of 2.5 per cent per annum
will double real GNP in 28 years, whereas a 3 per cent rate doubles GNP in only 24 years. An annual rate
of growth of 10 per cent (which has frequently been achieved by China in recent years) doubles GNP in
only 10 years! In addition, growth makes it easier for the government to achieve its economic policy objec-
tives. Revenue from taxation increases, allowing government services, e.g. education and health care, to be
expanded without raising the rates of tax while still allowing the standard of living of the better-off to show
some improvement. Economic growth makes it possible for living standards generally to increase.
There are five basic causes of growth:

● a rise in the productivity of existing factors of production, e.g. education improves labour productivity;
● an increase in the available stock of factors of production, e.g. development of natural resources
such as shale gas;
● technological change, e.g. inventions and innovations;
● change in composition of national output, e.g. moving from agricultural production to manufac-
turing production;
● sustained improvement in the terms of trade – enabling more imports to be bought for a given
quantity of exports.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 34.
 Economics 165
6.19 The multiplier
Key terms: national income; injections; leakages/withdrawals; marginal propensity to consume; mar-
ginal propensity to withdraw; equilibrium
The ‘multiplier’ refers to the multiplied effect on incomes of an increase in spending. It is sometimes
referred to as the ‘Keynesian multiplier’, after J. M. Keynes, the economist, or the national income
multiplier, where the effect is on the whole economy.
The basic principle behind the multiplier is that one person’s spending is another person’s income.
So when there is a boost to spending in an area, it is multiplied because the shopkeepers or dealerships
receive a boost to their income and they will spend at least some of it.
In a simple model of the economy known as the circular flow of income, there is a flow of expendi-
ture from households to firms and a flow of factor payments (income) in return in the other direction.
The situation is shown in Figure 6.19.1. There are also ‘leakages’ out of the circular flow in the form
of savings (not spent within the flow), taxes (taken out of the flow by government) and spending on
imports (which goes to firms overseas). There are also ‘injections’ into the circular flow in the form of
investment, government spending and exports.
In short, as long as the amount leaking out equals the amount being injected into the econ-
omy, the economy will be in equilibrium, remaining the same size. If the leakages exceed the
injections then the economy will shrink; and if the injections exceed the leakages the economy
will grow. These leakages and injections are subject to the multiplier effect. So if there is an
increase in investment (an injection into the economy) the economy will grow by more than
the amount of the extra investment, that is, it is multiplied. If there is an increase in savings (a
leakage out of the economy) the economy will shrink by more than the amount of the extra
savings – it is multiplied.
If we assume that in the national economy on average people spend 60 per cent of their income; and
that there is an increase in government spending of £1 million, then the recipients of the £1m will spend
£600,000, and the recipients of this will spend £360,000 (600,000 × 0.6) and so on. The final increase
in income will be the cumulative amount of all of these spending flows (Figure 6.19.1).

Households
Savings

Taxes
Factor
payments
Imports

Consumer
expenditure

Investment Firms
Government
spending
Exports

Figure 6.19.1 The circular flow of income.

166 Ernie Jowsey
Technically, if the re-spending was 60 per cent of any injection, the total of the leakages (sometimes
called withdrawals) would be 40 per cent or 0.4. The formula for the multiplier is:

1 1
K= or K=
1 – MPC MPW

where K = the multiplier, MPC = the marginal propensity to consume (in this case the 60 per cent
expenditure) and MPW = the marginal propensity to withdraw (in this case the 40 per cent leakage).
The value of the multiplier would then be 1/1 – 0.6 = 2.5 or 1/0.4 = 2.5.
This means that an injection (for example, an increase in investment) of £1 million would increase
the circular flow of income or national income by £2.5 million. The extra expenditure on investment
is multiplied. Of course this example is very theoretical – in the real world the multiplier does exist
and it is easy to see the simple premise that one person’s spending is another person’s income, but the
value of the multiplier for the UK (where there is a lot of spending on imports so a lot leaks out of the
economy) is lower at, perhaps 1.6. Nevertheless it is still an important concept with implications for
government spending, employment, output and incomes.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 30.

6.20 Fiscal policy

Key terms: macroeconomy; government spending; taxation; aggregate demand; automatic stabilisers
Fiscal policy is the use of government spending and taxation in order to influence the macroeconomy.
Broadly speaking, an increase in government spending will add to aggregate demand and stimulate the
economy. A cut in government spending will reduce aggregate demand and slow the expansion of the
economy. An increase in taxation will reduce aggregate demand (households and firms have less money
to spend); and a reduction in taxation will increase aggregate demand, encouraging more spending and an
expansion of the economy.
Some fiscal policy operates automatically – taxation yields increase as incomes increase because
many taxes are progressive (see Concept 17.1). Some government spending also automatically sta-
bilises the economy, for example, as the economy slows and unemployment increases, so do benefit
payments. This allows for a ‘softer landing’ than would be the case as the benefits help to maintain
aggregate demand.
Some fiscal policy is discretionary – it is specifically initiated by government. An example of this
would be government changing the type of taxes levied in order to influence the economy, say by
switching from direct taxation such as income tax, to indirect taxes such as VAT in order to try to
reduce tax avoidance. Changes to taxation and government spending are announced each year in the
budget. Again broadly speaking, aggregate demand will be increased if taxation is less than government
spending and vice versa.
Property is directly affected by a number of taxes including stamp duty land tax, council tax and
uniform business rates, all of which can be changed by government with subsequent consequences
for the real estate sector. Government spending is often directed at the property sector in order to
stimulate the overall economy. For example, in the 2013 budget the UK government announced a
‘Help to Buy’ scheme to help first-time buyers to get onto the property ladder. The scheme provides
a government loan of up to 20 per cent of the price of a property if the buyer can raise a 5 per cent
deposit. The loan is interest free for 5 years and is available on properties costing up to £600,000.
 Economics 167
The government can use fiscal and monetary policy to influence the macroeconomy. Fiscal policy,
because it involves altering areas of government spending and taxation, can be used to stimulate or
slow down specific parts of the economy and because property is such an important part of the econ-
omy, fiscal policy is often employed to affect the property sector.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch.31.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, chs. 20 and 22.

6.21 Property cycles

Key terms: boom; recession; recovery; endogenous causes; exogenous causes; time lags in supply
In all developed economies there are regular cyclical fluctuations in economic activity, which includes
output, employment and incomes. The business cycle has distinct phases:

● A boom is the top of the cycle, when GDP peaks – industries become fully utilised and bottle-
necks begin to appear, putting upward pressure on prices.
● In a downturn or recession, consumption, investment and employment fall and business expecta-
tions become negative. A severe recession could lead to a depression which is characterised by
high unemployment, a low level of consumer demand and surplus productive capacity plus low
business confidence.
● In a recovery, employment, incomes and consumer spending all begin to increase; business expec-
tations improve and investment increases.

The business cycle is illustrated in Figure 6.21.1. The long-term trend line rises over time because of
economic growth.
Property cycles involve fluctuations in the rate of all property returns. In real estate markets, hous-
ing, commercial, retail and industrial sectors are subject to periods of booms and slumps. Property

Level of
economic
activity GNP
(GNP) Long-term trend

0
Time

Figure 6.21.1 The business cycle.

168 Ernie Jowsey
cycles take place over irregular periods of time and their impact on prices and activity varies. Most
developed countries have a property cycle that is closely linked to GDP and the business cycle.
Property cycles occur for reasons that are endogenous (from within the property sector) and
exogenous (influences outside the property sector). Endogenous reasons can arise from time lags in
production that lead to periods of excess demand and excess supply which mean the property market
is hardly ever in equilibrium. At first, demand increases but there is a delay before new building can
commence while planning permission and finance are arranged; further shortages of space lead to rising
rents bringing forth more new developments; speculation that rents will go on rising adds to supply;
completions then provide excess supply leading to falling rents and less development.
Exogenous influences on the property sector include: fluctuations in income, employment, availability of
credit, rates of interest, exchange rates, changes in government policy etc. A simple example is the introduc-
tion of energy performance certificates that involve considerable expense for commercial property owners.
A strong economic upturn coinciding with a shortage of available property may be the starting
point of a cycle. Rents and capital values increase, and this encourages new development. Further
speculative developments are financed by an expansion of bank lending and a building boom results
but it takes time for supply to reach the market and so rents and capital values continue to rise. When
the new developments are completed the business cycle may have peaked and slowed down, causing
falling demand for property and a property slump with falling values, high vacancy levels and wide-
spread bankruptcies in the property sector. It is clear that the economy, the property sector and the
financial sector are strongly interlinked (see Figure 6.21.2).
There have been three major boom/slump cycles in the UK in the last 40 years (the 1970s, late
1980s and 2007–9). All were the result of strong demand growth, supply shortages and credit expansion
acting together. In each of the three cycles the government and/or the banks pursued expansionary
monetary policy (Barber boom 1972/3, Lawson boom 1987/8 and the property bubble created by
US and UK banks 2004–7). In each of these ‘bubbles’ an upswing in the business cycle was added to
by relaxation of credit restrictions. Increases in demand meant existing space was quickly occupied

The Economy The Property Market The Monetary Sector

Increased property Credit expansion

demand
Economic upturn
Supply shortages

Rising rents/Falling yields

Economic boom Credit boom
Building boom

Increased supply
Economic downturn Rising interest rates
Slackening demand

Falling rents/Rising yields

Recession Credit squeeze
Property slump

Figure 6.21.2 Links between the property cycle, the economy and the monetary sector.
Source: Jowsey (2011) adapted from Barras (1994).
 Economics 169
and rent and capital values soared. The availability of easy credit fuelled a speculative boom. When
the economy went into recession, however, over-supply of property caused a fall in rental and capital
values (Jowsey, 2011).

Further reading
Barras, R. (1994) ‘Property and the economic cycle: Building cycles revisited’, Journal of Property Research, 11: 183–197.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 6.

6.22 Globalisation
Key terms: international trade; migration of people; exchange of technical knowledge; foreign direct
investment; global transparency index
Since the 1980s globalisation has increased the free flow of information, people, goods, services and
capital across international borders. This has increased the integration of economies and societies and as a
result most economies in the world have become more interdependent. Transnational corporations can
now locate the production of each component part of a product in the country that can produce it at
least cost as long as the quality is satisfactory. Many workers in the USA, Germany, Poland, France, Japan
and many other countries now work for foreign-owned firms. Many companies have a global presence,
such as Nike, Coca-Cola, MTV, McDonalds and Guinness. Markets are also global thanks to worldwide
media so that tastes in such things as designer clothes, music and films are similar in cities everywhere.
Technological progress has made it easier to supply services remotely, to separate production activi-
ties and to manage them remotely. International corporations engage in ‘offshoring’, which involves
firms selecting and holding on to the stages in the value chain that they consider to be core, while
relocating their less essential activities to foreign countries or to subcontracting firms in foreign coun-
tries. This transfer of production, office support, and research and development centres to developing
countries has boosted commercial real estate in many of these countries. Many countries have adopted
more open economic policies. Economic reform in India and China has enabled their development as
low wage producers of many of the world’s manufactured goods and international trade in intermedi-
ate inputs and services has grown strongly in the last decade.
The increased exposure to alternative markets, more investment choices, and access to global capital
markets has led investors to look beyond their own borders, in part because their home markets are too
small or too competitive and do not offer many investment opportunities. Investors try to realise higher
returns by taking advantage of inefficiencies or unique opportunities in local markets, while owners seek to
expand their existing portfolios of assets and build on the success of their domestic businesses. Securitisation
and the development of a number of financial instruments has enabled international investors to have
liquidity. For the host country, global investment means increased employment, access to international
capital to finance growth and compete internationally, and access to global technologies. Real estate
investors have become increasingly international in their outlook over the last decade. The opening-up of
markets has increasingly led to international development and investment in real estate. With finance and
investment capital increasingly mobile, it is possible for investors to achieve higher returns, to widen their
investment opportunities, and to diversify internationally as a strategy to reduce risk.
Of course real estate stays where it is, but the reduction of regulatory barriers to international
finance flows has led to greater integration of worldwide financial markets and real estate investment
flows now take place in and out of most countries with the aid of information technology. Knowledge
of international real estate markets is key to successful investment and ‘transparent’ markets are those
where information on security, opportunities and values is good. Jones Lang LaSalle produces a Global
Transparency Index which ranks countries according to the transparency of their real estate markets.
In 2012 the most transparent markets were the USA, UK and Australia.
170 Ernie Jowsey
The UK has about 8.4 per cent of the global real estate market, largely in London assets. There are no
UK exchange controls on inward or outward investment (direct or portfolio), or on the repatriation of
income or capital, the holding of currency accounts or the settlement of current trading transactions. And
with a few exceptions there are no limitations on foreign ownership of real estate in the UK, although the
recent introduction of the Annual Residential Property Tax on properties worth more than £2 million
may discourage foreign investors (see Concept 17.8). Property may be acquired or occupied by individuals,
trustees or companies. It can be acquired as a freehold interest in the land, on a long lease, on a short lease
or on licence. There are, however, some restrictions on how the owner of an interest in real estate uses or
develops the land or building in the form of covenants, planning legislation and building regulations.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 18.

6.23 The credit crunch

Key terms: business cycles; property cycles; speculation; property bubble; globalisation
The term ‘credit crunch’ technically means a severe shortage of money or credit in the economy, but
it has become associated with the extremely severe worldwide recession of 2007–9. In all economies
there are regular cyclical fluctuations in output, employment and incomes. Sometimes the cycles are
severe and impact upon all sectors of the economy, often having very serious effects on property
markets. These business cycles repeat periodically as fluctuations in aggregate economic activity with
expansion in many sectors at the same time, followed by contractions in many sectors at the same time
– they vary in length from 1 to 12 years.
In a boom, at the top of the cycle, GDP peaks and industries become fully employed and short-
ages and bottlenecks begin to appear, putting upward pressure on prices. In a downturn or recession,
consumption, investment, output and employment fall and business expectations become negative.
In a recovery, employment, incomes, output and consumer spending all begin to increase. The cata-
strophic credit collapse of 2007–9 was triggered by events in the United States when the housing
boom in the US was halted by interest rates rising from 1 per cent to 5.35 per cent between 2004 and
2006. Property is a major part of most developed economies and it has sufficient influence on other
areas and especially the financial sector to cause significant macroeconomic effects.
House prices rose in real terms in most developed countries except Germany, Japan and Switzerland
in the decade up to 2006. The boom in house prices was driven by low interest rates and changing
perceptions of relative returns on assets which caused investors to switch from shares to property.
Speculation that property prices would continue to rise added to demand and further increased prices.
US banks relaxed lending criteria in order to give mortgage loans to people with poor credit histories.
These were high-risk loans and have become known as ‘sub-prime’ (i.e. not the best) lending. These
sub-prime mortgages along with other loans, bonds or assets were bundled into portfolios known as
collateralised debt obligations (CDOs) and sold to investors around the world, thus providing a trans-
mission mechanism for the crisis to go global when the bubble burst (Jowsey, 2011).
When prices of property reach unsustainable levels relative to incomes or rents or some other
economic fundamentals the ‘bubble’ bursts and subsequent falls in house prices result in many
owners finding themselves in a position of negative equity – a mortgage debt higher than the
value of the property. Homeowners in the US began to default on their mortgages. Default rates
rose to record levels and the effects were felt across the financial system because of the CDOs that
had been sold worldwide.
On 9 August 2007 the French bank BNP Paribas told investors they could not take money out of
two of its funds because of ‘complete evaporation of liquidity in the market’. In other words, the banks
 Economics 171
had stopped lending to each other. The European Central Bank injected more than 200 billion euros
into the banking system to try to improve liquidity. The US Federal Reserve and other banks around
the world also began to intervene, because the liquidity crisis threatened to cause a recession.
Banks around the world began to announce losses. UBS lost $37 billion. Merrill Lynch announced
a loss of $7.9 billion. The US Federal Reserve coordinated action by five leading central banks around
the world to bail out the banks with loans and interest rates were reduced in the US and UK. In April
2008 the IMF warned that losses from the credit crunch could be more than $1 trillion and stock
markets worldwide fell significantly.
The two largest US mortgage corporations, Fannie Mae and Freddie Mac, were bailed out by the
US government in September 2008 as they could not be allowed to fail because they were owners
or guarantors of $5 trillion worth of home loans. In September 2008 Lehman Brothers became the
world’s biggest corporate bankruptcy ($639 billion).
In October 2008, governments and central banks around the world implemented rescue packages
worth hundreds of billions of dollars. The Eurozone, the UK and the US all went into a severe reces-
sion, the worst since the 1930s. In the UK, GDP fell by a record 5 per cent in 2009 and the property
sector was badly hit with a substantial fall in values and reduced development and construction activity.
The credit crunch recession of 2007–9 was almost certainly the worst worldwide recession ever.
It was triggered by a property ‘bubble’, and is a demonstration of the interlinked nature of property
markets, financial markets and a globalised world economy (see Concept 6.21).

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 6.

6.24 Currencies and exchange rates

Key terms: international transactions; currency risk; international property investment
Different countries around the world have their own currencies. When they engage in trade and
international transactions these currencies must be exchanged and the price of a currency in terms of
another currency is its exchange rate. Thus one pound sterling might be worth 1.58 US dollars (£1.00
= $1.58) and 1.19 euros (£1.00 = €1.19).
Exchange rates are prices and are determined by the demand and supply of currencies. Factors
affecting exchange rates are:

● global trade movements

● interest rate expectations
● inflation
● macroeconomic events
● investors’ appetite for risks
● economic growth.

Property and land of course stays where it is and does not cross borders, and this means that currency
exchange for imports and exports of property is very unlikely to be needed. It is increasingly possible,
however, to invest in property overseas (see Concept 8.16) and this necessitates currency exchange.
Indeed currency exchange is an additional risk of overseas real estate investment. This is because the
exchange rate can change after the purchase price has been agreed – during the time it takes to com-
plete a transaction. For example, a British investor may decide to buy a €10 million office block in
Berlin when the exchange rate is £1.00 = €1.19. The cost in pounds is £8,403,361. When the deal
completes 6 weeks later, however, the exchange rate has changed to £1.00 = €1.06 and the cost in
pounds is now £9,433,962; more than £1 million pounds more!
172 Ernie Jowsey
If the transaction is made at the current exchange rate, this is known as the ‘spot rate’. It is possible
to secure an exchange rate now for a transaction at a specified future date – this is a ‘forward contract’.
The forward rate is adjusted for the differential between interest rates in the two different countries over
the time to the specified future date. Of course, a forward contract is something of a gamble because it is
binding and the actual rate may actually be more favourable when the transaction takes place.
The exchange rate can also change between the time of purchase of the investment and the time
of its sale. For example, a UK individual buys a property in Florida for $350,000 when the exchange
rate is £1.00 = $1.50 and so the cost in pounds is £233,333. After 3 years the Florida property has
risen in value to $500,000 and the owner decides to sell and realise the profits on the investment. The
exchange rate, meantime has changed to £1.00 = $1.97 (the pound has strengthened against the dol-
lar) and the sale now produces 500,000/1.97 = £253,807. When transaction costs such as legal fees
and taxes are taken into account there would be very little profit left!

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 18.
7 Finance
Ernie Jowsey and Hannah Furness

7.1 Banks
Key terms: central bank; clearing banks; deregulation; base rate; credit creation; monetary control
Banks vary, both in the type of function they perform and in size. They can be classified as:

● The central bank – in the UK this is the Bank of England, which, on behalf of the government,
exercises a general control over the banking system (through the Financial Conduct Authority
since 2012) and the availability of credit (using monetary policy).
● The clearing banks – these banks, once dominated by the ‘Big Four’ (Lloyds TSB, Barclays,
Natwest and the Midland, now HSBC) now include former building societies, such as the Halifax
and Nationwide. Even so, unlike the systems of other countries, such as the USA, which are com-
posed of a large number of unitary small banks, Britain has only a few large banks, each having a
network of branches throughout the country.

The basic business of the clearing banks is holding cash balances or deposits and lending on the basis of
these holdings. Bank loans create bank deposits and banks are able to lend multiples of their deposits.
A bank’s main assets are loans to customers, cash and short- and long-term bonds and securities. Its
liabilities are customers’ deposits.
In relation to real estate, the banks are a source of funds for developers, private buyers of invest-
ment properties, businesses purchasing premises and home buyers. Property provides collateral for
loans from the banks, making lending against property relatively low risk in normal circumstances. Of
course there have been times, notably in the run up to the credit crunch recession of 2008, when the
banks over-extended their lending as property prices went up and up – until the bubble burst and the
crash led to massive losses and bank failures around the world (see Concept 6.23).
The Bank of England has control over the base rate of interest which influences all interest rates in
the economy. This affects the housing market through mortgage interest rates and the property and
development market through the direct effect on yields on investments and indirectly through interest
rates affecting aggregate demand in the economy.
The Bank of England also influences the quantity of money in the economic system and the avail-
ability of credit. This can be done in order to stimulate the economy (as with quantitative easing after
the 2008 crash) or by tightening monetary policy by increasing interest rates and contraction of the
money supply in order to reduce inflation.
Since deregulation of financial markets in the UK in the 1980s, the clearing banks, building soci-
eties and insurance companies have encroached on each other’s territories in competition for the
mortgage market (worth over £77 billion in the UK in 2010). More competition in the market gave
prospective buyers more choice, but contributed to risky lending and eventually the ‘credit crunch’
174 Ernie Jowsey and Hannah Furness
recession of 2008–9. Over-optimistic developments were left empty or not completed, and banks had
to write off billions in bad debts from property companies.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 26.

7.2 Bridging loan

Key terms: short-term finance; closed bridge; open bridge; risk
A bridging loan is a type of secured short-term loan, typically taken out for a period of weeks or
months while longer-term finance is arranged. Security for the loan is provided by property but bridg-
ing loans are normally more expensive than conventional financing to compensate for the additional
risk of the loan. Bridging loans typically have a higher interest rate and the lender may also specify
a lower loan-to-value ratio. An arrangement fee, interest and possibly an exit fee will be payable.
However, they can be arranged quickly with relatively little documentation.
In the residential property market, a house buyer may plan to make a deposit with the proceeds
from the sale of a currently owned home, but the sale will not complete until after the date that the
new property must be bought. A bridging loan is a short-term loan to bridge the period between
someone buying a new property and selling their previous home. This allows the buyer to take equity
out of the current home and use it as down payment on the new residence, with the expectation that
the current home will complete within a short time frame and the bridging loan will be repaid.
There are two types of bridging loan: closed bridging and open-ended. With a closed bridge the
money is borrowed for a short and clearly defined period, perhaps a week or a month and so the risk is
quantifiable and limited. With an open bridge, contracts have not been exchanged on the sale property
and so there is much greater risk as the buyer may pull out. If there is not yet a buyer at all an open
bridge is very risky and expensive.
Bridging loans can also be used by developers to finance a project while planning approval is sought.
Because there is no guarantee the project will happen, the loan will be at a high interest rate and from
a specialised lending source that will accept the risk. Once the project has full permission, it becomes
eligible for larger loans from more conventional sources that are at lower interest and for a longer term.
A bridging loan may be used to purchase a property offered at a discount if the purchaser can
complete quickly. The discount offsets the costs of the short-term bridging loan used to complete.
Long-term lending may not be available in auction property purchases where the purchaser has only
14–28 days to complete and a bridging loan may be necessary.
In 2012 the UK bridging loan market was growing rapidly in response to the cautious lending poli-
cies of the banking sector. The size of bridging loans was also increasing and commercial loans were
increasing as a proportion of all bridging loans. Bigger projects are being financed with lower loan to
value ratios, meaning that the interest rates on bridging loans have fallen.

Further reading
www.cml.org.uk/cml/publications/newsandviews/121/454 (accessed 15/10/2013).

7.3 Company accounts

Key terms: balance sheet; income statement; cash flow; liquidity; assets; liabilities; ratio analysis
Company annual reports provide data that can be analysed in order to assess the financial health of
a company. Within the annual reports are financial statements that are of use to potential investors,
 Finance 175
existing shareholders, landlords assessing the reliability of the company as a tenant and potential part-
ners considering a joint venture. Other interested parties could include company creditors, employees
of the company and the tax authorities. The financial statements almost always include a balance sheet,
from which the value of the company can be ascertained; an income statement showing the profits
(or losses) over the previous 12 months to the accounting date; and a cash flow statement showing the
flow of cash in and out of the business. The statement of cash flows is useful in determining the short-
term viability of a company, particularly its ability to pay bills.
The balance sheet of the company shows the assets, liabilities and shareholders funds of the company
at a particular date. Generally:

total assets = shareholders funds + liabilities

and
shareholders’ funds = total assets – liabilities.

The balance sheet provides details under the following headings:

● non-current assets (fixed assets such as investment properties, loans, joint ventures etc.);
● current assets (cash and money on deposit, properties for sale etc.);
● current liabilities (any short-term borrowing, trade debts, tax owing etc.);
● non-current liabilities (longer-term borrowing).

Total assets minus total liabilities gives net assets and these are equal to total equity or shareholders
funds (including reserves of capital held by the company) and, hence, the balance sheet balances.
Property companies often have considerable capital reserves in the form of investment properties
that rise in value over time. These are not liquid assets, however, and if they were to be sold quickly
there would probably be considerable loss of value. As a result the net asset value of the company can
be less than the stock market value of the shares in the company. To put that another way the price
of the company’s shares can be less than the net asset value per share. Such a situation could make the
company a target for ‘asset stripping’ – the process of buying the shares then selling some or all of the
assets to make a profit.
The income statement of a company (sometimes called a profit and loss account) shows the firm’s
trading results for the previous 12 months. This is usually presented as revenue and costs under the
following headings:

● Revenue (rents, income from sales etc.)

● Costs (maintenance costs, staff costs and overheads).

Then revenue minus costs gives gross profit, from which indirect costs such as interest payments on
loans and costs of disposals are deducted to give profit/loss before tax. Then tax is shown and deducted
to give profit/loss for the year. Some of this may be retained (ploughed back) by the company (transfer
to reserves) and some distributed to shareholders (dividends to shareholders). It is customary to show
earnings per share which is total dividends to shareholders divided by the number of shares issued in
the company.
Both the balance sheet and the income statement normally show figures to the accounting date
plus the figures for the previous year so that comparisons can be made. A visit to a company’s
website on the internet will quickly enable you to peruse their annual report and accounts; see, for
example www.britishland.co.uk.
Ratio analysis can be used to assess the performance of a company using figures in their accounts.
For example, assets per share can be calculated by dividing net assets by the number of shares and profit
176 Ernie Jowsey and Hannah Furness
as a percentage of turnover (revenue) can be calculated and compared with other companies’ perfor-
mance. Other commonly used ratios include:

● profit before interest and tax as a percentage of average capital employed;

● interest cover – the number of times any interest payable on loans is covered by profits;
● gearing – the proportion of total funds that is borrowing;
● liquidity ratio – the ratio of current assets to current liabilities.

Further reading
Isaac, D. and O’Leary, J. (2011) Property Investment, 2nd edn, Palgrave Macmillan, Basingstoke, ch. 10.

7.4 Debentures
Key terms: fixed interest security; redemption date; convertible debenture
In the UK a debenture is a secured loan raised by a company, usually at a fixed rate of interest and
secured against specific assets of the company (often property). The interest must be paid whether the
company is making a profit or not. The redemption date, when the loan is to be repaid, is normally
specified. Debentures are the most common form of long-term loans that can be taken by a company.
Debentures are usually loans that are repayable on a fixed date, but some debentures are irredeemable
securities. A debenture holder enjoys no ownership rights of voting on management and policy.
‘Mortgage debentures’ are secured on specific assets of the company such as land and buildings.
A company whose profits are subject to frequent fluctuations is not in a position to raise much of its
capital by debentures. They are really only suitable to a company making a fairly stable profit (suffi-
cient to cover the interest payments), and possessing assets that would not depreciate a great deal were
the company to go into liquidation. Debenture interest is included in the costs of a company for the
purposes of calculating tax and so it reduces taxable profits.
Debenture holders (the lenders) have no control over the company as long as the loan conditions
are complied with and the interest is paid. If this is not the case, they can take control of the company
because the loan is secured against the company’s assets. Debenture holders are paid first in the event of
liquidation of the company. Debentures usually have a lower nominal rate of interest compared with
unsecured loans. If the debenture has a ‘sinking fund’ this means that the borrower must pay some of
the value of the bond after a specified period of time. This decreases risk for the creditors, as a hedge
against inflation (which diminishes the value of the fixed interest payments) or bankruptcy. A sinking
fund makes the bond less risky, and therefore gives it a smaller ‘coupon’ (or interest payment).
Convertible debentures combine the security (to the lender) of a fixed interest loan with the
growth potential of equities. Fixed interest is paid but the debenture holder also has an option to
convert stock into a specified number of ordinary shares at a given date. If the option to convert
is not exercised, the debenture continues as a fixed interest stock. A convertible debenture is less
risky than ordinary shares because the fixed interest to be paid limits the fall in value that could
occur if the company does badly. If the company does well, the potential for conversion means the
convertible debenture will rise in value because it can be converted into shares in the successful
company. If a profitable conversion is anticipated, the price of the convertible debenture will reflect
the expected share price at conversion.
In the United States debentures are not secured by physical assets or collateral. These debentures
are backed only by the general reputation and creditworthiness of the issuer. Both corporations and
governments issue this type of bond in order to secure loan capital.
 Finance 177
Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 6.

7.5 Depreciation
Key terms: asset value; obsolescence; rent voids; yields; refurbishment; redevelopment
Depreciation means a reduction of asset value, often because of physical deterioration of a property,
but also because of economic change reducing demand, or technological change making the building
less functional. Land does not deteriorate in value in the same way that buildings do and it is possible
for buildings to depreciate while the land value increases.
Property is affected by depreciation, which reduces its value and the income it can make from rent.
Eventually, when a building has no rental value it is obsolete, meaning redevelopment of the site is
required. Redevelopment may take place before this point for economic reasons because the value of
the cleared site is greater than the existing buildings.
Buildings (but not land) depreciate and since the value of commercial and industrial building is nor-
mally much greater than the value of the land it is on, this can be a substantial cost to companies. Rents
can be affected by depreciation and capital value can fall as the property becomes less attractive or fit
for purpose. The risk of voids (periods when the property is vacant) also increases. To try to offset the
effects of depreciation, the property owner may refurbish or redevelop, but this requires capital outlay
and possibly loss of rent during the process.
For office buildings, as new stock is built older buildings gradually become secondary stock and
their rents decline compared with the new prime properties. Periodic refurbishment can offset this.
Industrial buildings are greatly affected by economic fluctuations and so factory buildings are at more
risk of void periods. Factories and warehouses usually have a shorter building life than offices and most
shops, and so the impact of depreciation on them is greater. As a result yields on industrial property are
normally significantly higher than those on other commercial property.
Traditionally, yields are lowest on agricultural property (where land is a greater component of asset
value than buildings); higher on retail premises and higher still on offices (which are thought to be less
vulnerable to rent voids); and higher still on industrial property.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 8.

7.6 Financial gearing

Key terms: equity; debt; loan to value; high gearing; leverage
The principle of financial gearing is to use a smaller equity stake by an investor to supplement a larger
loan to enable the purchase of an investment, for example, 25 per cent of an asset’s value is used to
acquire a loan for the remaining 75 per cent. Gearing enables investors to gain exposure to a number of
new investments by spreading available equity to supplement different loans. It is a high-risk and poten-
tially high-return strategy and is applicable to both residential and commercial property investments.
Gearing exaggerates market returns; however, it also increases risk. The capital gearing effect can be
explained by the following example:

Mr Smith has agreed to buy a house for £100,000. In return for paying £25,000 of his own
equity, the bank will loan him the remaining £75,000 in order to purchase the property. If the
house price was to increase by 10 per cent one year after purchase, then Mr Smith’s equity would
also increase as illustrated below (see also Figure 7.6.1):
178 Ernie Jowsey and Hannah Furness
House prices have risen by 10 per cent.
£100,000 house is now worth £110,000.
Bank is still owed £75,000 (assuming an interest-only loan).
Therefore, Mr Smith’s equity = £110,000 – £75,000 = £35,000 (40 per cent uplift in equity
from £25,000 to £35,000).
Had Mr Smith bought the house wholly with his own money (i.e. 100 per cent equity) then he
would have received only 10 per cent in return.

In Figure 7.6.1 the advantage of gearing is illustrated by comparing a low-geared investment of 50 per
cent loan to value (LTV) and a highly geared investment of 90 per cent LTV. When the investment
increases in value from £100,000 to £110,000, the return on equity is 20 per cent with the 50 per cent
LTV loan (£10,000/£50,000); but 100 per cent with the 90 per cent LTV loan (£10,000/£10,000).
As long as the investment increases in value by a greater percentage than the rate of interest on the
loan this will be the case.
However, while the principle can amplify returns in a rising market, in a falling market it increases
volatility of returns. An investment’s underlying growth can be supplemented by gearing; however, in
a rising market gearing magnifies equity returns, but in a falling market it magnifies market falls.
Companies are said to be ‘highly geared’ if their gearing ratio (debt/equity) is greater than 50 per
cent. If this is the case, in a good market profits are likely to be greater than the interest payable on
the companies’ borrowing and being highly geared provides better returns for shareholders. Gearing is
referred to as leverage in the US because the borrowing is used to lever out greater returns for share-
holders. In a poor market, however, profits are likely to be lower than the interest on borrowing and
highly geared companies can get into financial difficulties.

50% geared: equity 90% geared: equity

increases by one fifth is doubled

10% equity

50% equity

90% LTV

50% LTV

Before After Before After

Figure 7.6.1 The capital gearing effect – 50 per cent equity stake versus 10 per cent equity stake – house price rises
10 per cent.
Source: Furness (2013).

Further reading
Isaac, D. (1994) Property Finance, Macmillan, Basingstoke, ch. 4.
Isaac, D. and O’Leary, J. (2011) Property Investment, Palgrave Macmillan, Basingstoke, ch. 8, ch. 10.
 Finance 179
7.7 Liquidity
Key terms: conversion into cash; direct property investment; asset values
The concept of liquidity is important when considering property. All assets can usually be turned into
money eventually and so liquidity is largely a matter of degree, often depending upon the organisations
that exist to make assets such as pension funds, company shares, government bonds and insurance policies
liquid. All assets except money yield either a flow of income or direct satisfaction. Only money is per-
fectly liquid and can be changed into another asset without delay, extra cost or some form of capital loss.
Of course these non-money assets can be sold at some capital loss, so they do give some liquidity
to their owners, meaning that they could keep a lower cash balance for emergencies. Ownership of
a house makes it possible to raise cash by re-mortgaging if there is sufficient equity in the property to
provide security for the lender.
So a liquid asset is one that can be converted quickly into cash without loss of value. Of course if I
own a property I can almost certainly sell it quickly but not at full value. If I need to sell it very quickly
I may have to accept a lot less for it than it would be worth if I could afford to wait for the proceeds.
And of course property takes time to sell because a valuation is required and the transaction can be
complex and require legal searches, arrangement of finance and preparation of legal documents.
The illiquidity of direct property investments – investment in actual buildings rather than in PUTs or
REITs (see Concepts 8.8 and 8.9) – means that this form of investment is at a disadvantage compared to more
liquid investment assets such as shares in companies. In a recession it is very difficult to sell property because
buyers are reluctant to buy when prices are falling. Of course this makes property assets even less liquid and
increases the risk that full value or something close to it cannot be achieved. When house prices fall and few
buyers want to enter the market, sales fall to almost zero. At such times the market has become illiquid.
Liquidity indicates how quickly an asset can be converted into cash and so liquidity is a desirable
trait to investors; so generally the more liquid an asset the lower the return it offers, due to investors
bidding up its selling price. The most liquid asset markets have a high turnover of assets and many
participants, and the cost of doing business in them is lower.
Property companies with considerable investments in actual buildings, may find that their balance
sheets (see Concept 7.3) fluctuate enormously as their asset values change with the cyclical perfor-
mance of the overall economy.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

7.8 Freehold ground rent

Key terms: property rights; leases; reversion; government bonds; gilts; yields
A ground rent is created when a freehold piece of land or a building is sold on a long lease or leases. The
ground rent provides an income for the landowner. With real property it is not possible to hand over land
and buildings in the same way as would be the case with movable goods. Therefore, it is ‘rights’ that are
dealt in and accompanying the transaction there is a written statement defining the exact rights that are being
transferred (see Concept 6.15). In short, the real property market deals in the rights relating to real property
rather than in the land and buildings themselves. One such property right is a freehold ground rent (FGR).
So, FGRs are the annual payments accompanying long leases. Originally they were mainly charged
on land leased for development, but they are now received for flats sold on long leases. Since they are
small relative to the full value of the developed site upon which they are secured, the income is certain.
Thus, where reversion is distant, FGRs are comparable with irredeemable or very long-dated govern-
ment stock, although, being less liquid, yields are higher, especially if management is involved (as with
180 Ernie Jowsey and Hannah Furness
FGRs on flats). Because of inflation, freeholders granting long leases have insisted on provisions for
periodic revision of the ground rent or for profit sharing or for some combination of both. Certainty
of payment means that FGRs are similar to an investment in gilt-edged securities.
When reversion is less than 50 years, an FGR increasingly assumes equity characteristics, as its
reversionary value will tend to rise. Its price will tend to be higher if it has a special value to a particular
person, such as the current lessee of the property or a property developer who wishes to assemble land
for future development.
The contemporary accepted meaning of ground rent is the rent at which land is let for the purpose
of improvement by building. So it is a rent charged in respect of the land only, and not in respect of
the buildings on it. It is therefore usually lower than the rent that might be achieved for a building let
on the open market and is let for a longer term. Under the terms of a lease agreement, the freeholder
(the outright owner of the land or property) grants permission for a leaseholder to take ownership
of the property for a specified period of time. This could range from 21 years to 999 years (which is
common in central London). During this lease time the leaseholder will pay ground rent to the free-
holder. Freeholders lease property primarily for the initial premium paid by the original leaseholder
for granting the lease; but in addition ground rent (often a token amount) will be payable over a long
term, and this may be an attractive fixed income investment for some types of investor.
Of course, inflation has eroded the value of most ground rents with long leases and non-rising
incomes, so their value is small where there is no prospect of a reversion (when the ownership of the
property reverts back to the freeholder) within say 150 years.
The Commonhold and Leasehold Reform Act, 2002 and the Landlord and Tenant (Notice of
Rent) (England) Regulations 2004 now govern the form of notice that needs to be issued to collect
ground rent. Previously there had been a problem with some landlords sending confusing or dishonest
demands for payments to tenants.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 3.

7.9 Reverse yield gap

Key terms: yields; gilts; inflation; nominal rate of interest; real rate of interest; asset bubble
Demand for prime properties, such as city-centre shops and offices from institutional investors, is often
very great because such investments appear to have future growth potential. As a result, yields on their
freeholds are low and sometimes below the yield on long-dated government securities (gilts). A reverse
yield gap is the amount by which the yield on gilts exceeds that on property.
The term is also used to describe the situation where interest charges are greater than yields. This can
often occur during times of high inflation when nominal interest charges are high in order to compensate
for inflation and maintain a real rate of interest (the real rate of interest equals the nominal rate minus the
rate of inflation). For example, a property developer might borrow £1 million at 11 per cent interest in
order to finance a development with initial rents amounting to only £90,000 a year. The £90,000 equates
to 9 per cent interest and so there is a reverse yield gap of 2 per cent. Of course this is a loss-making situ-
ation (interest £110,000 p.a. is greater than the income of £90,000 p.a.), but it may be acceptable if the
developer expects the capital value of the property to increase or if rents are likely to increase at review.
Since gilts are considered a risk-free investment (because they are government backed) it would seem
to make very little sense to invest in relatively risky property that provides a lower return than this. In
fact it indicates that the investor is prepared to accept the initial lower return in the expectation that in
the long term the capital value and income return from the property will be much more profitable than
the yield on gilts.
 Finance 181
Since yield is the return on the initial capital investment, if they are less than the return on gilts this
can be a sign that capital values have been driven up too high in a boom and might be a signal that the
market is overheating and the asset bubble is about to burst.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

7.10 Sale and leaseback

Key terms: equity release; operational control; tax benefits
Sale and leasebacks, in which companies sell property assets and then rent them back, became increas-
ingly popular during the years of rising property prices as companies turned their property assets into
cash in a rising market. Sale and leaseback is a method of raising funds for companies with property
assets. Equity can be released from the property while still occupying the premises on a leasehold
basis. This might enable the company to obtain funds for expansion without resorting to borrowing.
Property is becoming more important in corporate decision making (see Concept 8.18), and attach-
ment to corporate property ownership has weakened, with the recognition of the often significant
funding potential within assets where value has often appreciated significantly over recent years.
Sale and leaseback can offer a profitable company significant tax advantages. For example they could
sell their asset to another company in their group and the lease payments would then become an allow-
able tax deduction.
Sale and leaseback has several advantages:

● it allows a company to gain access to money tied up in valuable business assets;

● capital is released to fund merger and acquisition activity or to reallocate to core activities;
● the asset can still be used even if it is no longer owned;
● tax benefits are realised by offsetting lease costs as an operating expense;
● the seller remains in day-to-day operational control of the property;
● property value risk is transferred to a third party.

Disadvantages include:

● the asset is no longer owned by the company, thereby weakening its balance sheet;
● there may be better ways to gain access to the funds either by refinancing or by securing a loan
using that asset as collateral;
● the long-term costs of the premises are likely to be greater than if they remain in ownership of the
company.

Developers can raise finance using sale and leaseback arrangements. The freehold of the development
with the benefit of planning consent is sold to an institution which then advances the development
costs at a fixed rate of interest. If the development is not let within, say, 6 months of completion, the
developer receives a balancing payment in return for either entering into a leaseback or providing a
leaseback guarantee at an agreed base rent. This balancing item represents the developer’s profit and is
based on a certain yield to the institution of about 7.5 per cent. If costs rise or completion takes longer
than expected, the developer makes up the difference from his balancing item.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 9.
182 Ernie Jowsey and Hannah Furness
7.11 Mortgages
Key terms: fixed rate; variable rate; repayment mortgage; interest only mortgage
The term ‘mortgage’ is from the French language and means ‘death pledge’. Thankfully, most long-
term loans secured against residential property – or mortgages – are for a fixed term of 10, 20 or (more
normally) 25 years and the borrower usually outlasts the mortgage. Owner occupiers comprised about
67 per cent of all UK households in 2013. This was slightly less than at the peak of 2007 because the
private rental sector grew in the recession.
Most people cannot afford to buy a property outright and instead require a deposit and a long-term
loan or mortgage, which they pay off with interest over a number of years. A mortgage can be a ‘repay-
ment mortgage’ where the capital sum and interest are repaid over the term of the loan – or an ‘interest
only’ mortgage where the interest is paid but the capital sum remains outstanding and must be repaid
in some way at the end of the mortgage term. Repayment mortgages guarantee that the whole loan is
repaid by the end of the term, making them a low-risk option. More interest is payable overall on an
interest-only mortgage as the borrower pays interest on the whole loan for the whole term. In the past,
interest-only mortgages were more commonly linked with endowment policies as a repayment vehicle,
but endowments are risky because they are investments related to the performance of the stock market.
There’s always the possibility that if the stock market doesn’t grow enough, the investment might not
become big enough to pay off the total amount of the mortgage. Many households are facing shortfalls
on their mortgage when it matures because their endowment has underperformed. Because of their poor
history, endowments are now rarely recommended for interest-only mortgages.
With a fixed rate mortgage, the interest rate stays the same for a set period of time. This means that
for every month during this set period, the mortgage repayments will remain the same. This enables
easier budgeting and greater security. This is in contrast to a variable rate mortgage, which will go up or
down in relation to the Bank of England base rate, or the lenders’ standard variable rate (SVR). A SVR
mortgage is a lender’s ‘default’ rate – without any limited-term deals or discounts attached. The term of
a fixed rate mortgage usually lasts between 2 and 5 years, but can be longer, before reverting to SVR. In
certain circumstances, fixed rate mortgage deals can have higher rates than variable rate mortgages – if
you’re on a fixed rate and the base rate drops, your monthly repayments don’t change but variable rates
probably will. In addition, arrangement fees may be payable to set up a fixed rate mortgage – and you’re
also likely to face early repayment charges if you pull out of a fixed rate deal before the end of the term.
A tracker mortgage interest rate tracks the Bank of England base rate at a set margin (for example,
1 per cent) above or below it. Tracker mortgage deals can last for as little as one year, or as long as the
total life of the loan. Once the tracker deal comes to an end, the mortgage reverts to SVR and, usually,
this will have a higher rate of interest.
Flexible mortgages let you over and under pay, take payment holidays and make lump-sum with-
drawals. This means the mortgage could be repaid early and a saving made on interest.
Other types of flexible mortgages include offset mortgages, where savings are used to offset the amount
of mortgage interest that is paid on each month. So, for example, if you have a £200,000 mortgage and
£10,000 in savings, you only pay interest on £190,000. Current account mortgages combine current
account, savings and mortgage into one so all credit balances offset the mortgage debt.
Flexible deals can be more expensive than conventional ones but they can be particularly worth-
while for higher-rate taxpayers because no tax is paid on interest from savings as they are offset against
the mortgage.
The LTV ratio of a mortgage represents the amount of money that is borrowed as a percentage of the
value of the property. For example, if you were to buy a £500,000 property and borrowed £400,000 you
would have an 80 per cent LTV mortgage. The bigger the LTV the more expensive the mortgage is likely
to be. This is because the more you borrow the bigger the risk for the lender – they have more to lose if
repayments are not made – so the larger the deposit, the better the mortgage rates that will be offered.
 Finance 183
In the past UK lenders would lend 100 per cent or more of a property’s value but these types of
mortgage are not available anymore. The most lenders will offer now tends to be 95 per cent of a
property’s value but most people will borrow less than this. The government’s ‘Help to Buy’ mortgage
scheme enables borrowers with deposits of just 5 per cent to buy a property, with the government
guaranteeing up to 15 per cent of the loan in return for an insurance fee. The government guarantees
lenders losses if the property is repossessed and prices fall.
A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial
building or other business property. Commercial mortgages are taken on by businesses instead of indi-
vidual borrowers and so assessment of the creditworthiness of the business can be more complicated
than it is with residential mortgages. Businesses may purchase premises using a commercial mortgage
which can enable them to own a large asset that is likely to increase in value and repayments can be
similar to rental costs. The mortgage interest payments are tax-deductible.
Some commercial mortgages are non-recourse; this means that in the event of default in repayment, the
creditor can only seize the collateral, but has no further claim against the borrower for any remaining debt.
A commercial mortgage is often supplemented by a personal guarantee from the owner, which makes the
debt payable in full if repossession of the mortgaged collateral does not pay off the outstanding balance.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 5.

7.12 Sources of finance

Key terms: financial devices; liquidity; security; collateral; recourse loan; non-recourse loan
New financial devices are constantly being invented in order to meet changes in market conditions. New
development projects often involve finance that is designed to suit both borrower and lender. Short-term
finance covers the development period until the completed development is sold. This is mainly obtained
from banks – the clearing banks, merchant banks and the UK subsidiaries of foreign banks. All will be
concerned about liquidity, security and the profitability of the loan. Banks are increasingly sensitive to
being ‘locked in’ as a lender of project finance where the sale of the completed development is the sole
means of repayment. Since the financial crisis of 2008, the banks have put much more emphasis on
liquidity so that money lent can be recovered quickly in the event of a property market collapse.
Lenders will look at a number of areas when considering whether they will provide finance for a
development project. These include:

● experience as a property developer;

● financial strength of the developer;
● how much equity is brought to the project;
● the location of the proposed development;
● the profit potential of the development;
● builder experience and capacity;
● project management team experience;
● type of development (residential housing, apartments, commercial or mixed use);
● level of pre-sales/pre-leases;
● ability to cover cost overruns;
● exit strategy.

A clearing bank limits the loan to about two-thirds of the cost of the development, usually determined
by its own valuer. This may present a difficulty for a housebuilder or minor office developer with few
184 Ernie Jowsey and Hannah Furness
capital resources. A well-established property company has an advantage, because its existing property
holdings provide collateral and net revenue from them may cover interest payments on the new loan.
Even so, it will limit its collateral as far as possible since uncommitted property can be used to support
later borrowing. Where a loan is confined to the specific project it is known as a ‘non-recourse’ loan;
where other assets of the company or parent company can be called upon, it is a ‘recourse’ loan. usually
the final agreement lies between these two – a ‘limited recourse’ loan.
A large property company may wish to form a subsidiary company to carry out a particular devel-
opment, but limiting its equity commitment to an initial 5 per cent of the finance required. A bank
would advance, say, 80 per cent of ‘senior debt’. The balance of 15 per cent – ‘mezzanine debt’ –
could probably be obtained by arranging cover against loss with an insurer who specialises in loans
secured against commercial property.
Longer term finance can come from: priority yield schemes, sale and leaseback, profit erosion,
forming a joint company and raising equity capital by selling shares. Table 7.12.1 summarises the
advantages and disadvantages of different forms of finance.

Table 7.12.1 Advantages and disadvantages of sources of finance

Source of capital Method Advantages Disadvantages

Finance by cash/assets – paid before acquisition – certainty – drain on resources
– paid after acquisition – no ongoing liability – can affect cash flow
– paid by instalment – retain control of – restricted to own cash/
development assets
Finance by loans – bank/institutional loan – steady cash flow – liability/possibility of
– issuance of shares/bonds/ – risk sharing liquidation
futures/options/REITs – default option/ prepayment – cost of loan (depends on
option credit rating)
– better control of quality and – collateral at risk
asset
– specificity
Finance by sub letting – sale and leaseback – no cash drain – loss of control of land
land interests – joint venture (PPP/PFI) – ultimate ownership of land interests
– build-operate-transfer (BOT) retained – high asset specificity
– build-own-operate-transfer – own the development (the investments made
(BOOT) with no construction and to support a particular
– sale of land promises (e.g. operation costs transaction have a higher
naming rights/roof-top – risk sharing value in that transaction
antenna/external wall – can attract value-added than they would have if
advertisement) developers and increase they were redeployed for
profits any other purpose)
– moral hazard (may act
differently if risk is
reduced)
– quality of development
affected
Source: adapted from Jowsey (2011).

Further reading
Jowsey E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 9.
8 Investment
Ernie Jowsey and Hannah Furness

8.1 Investors
Key terms: owner-occupiers; private investors; institutional investors; charities and trusts; foreign inves-
tors; PUTs; REITs
Real estate investment is carried out by private persons, private trusts and the institutions – insurance
companies, pension funds, charities, property companies, property bond funds, property unit trusts
(PUTs) and real estate investment trusts (REITs).
Unlike many other types of investment, such as shares and bonds, property is a tangible asset. While
property valuations can fluctuate, the property is still there. Many private investors feel that they
understand property better than other assets, because they can see it and because they often have the
experience of buying their own homes. The considerable sums required for major commercial prop-
erty investments, however, act as a barrier to entry for private individuals.
Anybody who purchases a property rather than renting is an investor (home ownership confers
consumption benefits and investment benefits). The satisfaction or return received should at least equal
what could be obtained if, instead, premises were rented and the money invested elsewhere. So the
return on investment in property is in competition with the return on other investments.

● Owner-occupiers – for example, shop-owners, farmers and householders – are holding wealth in
the form of real property. They enjoy a full equity interest, which includes income or satisfaction
from the use of their property, and (normally) a hedge against inflation.
● Other private persons investing in real property usually have only limited funds. Thus, their direct
investment tends to be restricted to dwellings and secondary shops. Indirectly, however, they can
invest in prime shops and offices by buying property bonds or shares in property companies or
unit trusts specialising in quoted property companies.
● Insurance companies and pension funds are major institutional investors in commercial property.
Pension funds compete strongly with insurance companies and property companies for first-class
properties, because the inflation hedge helps to retain the real value of the accumulated pension
funds. The average pension fund had around 20 per cent of its assets in property in the 1970s, a
figure that fell to 12 per cent in the 1980s and 6 per cent by the mid-1990s. The smaller pension
funds invest in property indirectly through PUTs and REITs (see Concepts 8.8 and 8.9), which
give the advantages of property investment without management problems. The larger funds,
however, prefer to purchase and manage their own properties and sometimes even participate
directly in investment with development companies, property companies and construction firms.
● Charities and trusts require investment income (from which periodic distributions are made) but
must also retain the real value of trust funds. Consequently, although they pay no income tax,
they cannot invest entirely in high-yielding securities. Unlike most institutional investors, charities
186 Ernie Jowsey and Hannah Furness
receive little ‘new’ money for investment each year, so they are constantly reviewing their existing
portfolios to see what possible adjustments could best serve their beneficiaries.
● Property investment and development companies tend to be highly geared, their capital consisting
of a high proportion of loans to ordinary shares. Properties owned provide the security against
borrowing, while interest charges are covered by regular rents. High gearing is beneficial to the
shareholders when profits are good, and it makes it easier to retain control. The larger compa-
nies tend to specialise in office blocks or prime shop properties, and a few, such as SEGRO, in
industrial property. Hammerson specialises in shopping centres. Residential property investment
is confined mainly to smaller companies.
● Foreign investors into UK property (particularly in central London) have increased their invest-
ment considerably since the fall in property prices through the 2007–9 recession and the fall in the
sterling exchange rate. The UK also tends to have longer leases than continental Europe, 15 years
compared to six or nine, and investors are attracted by the income security that offers during the
recession.
● Property bond funds, PUTs and REITs invest in commercial properties and investors can buy
shares in them, taking advantage of their favourable tax treatment (see Concepts 8.8 and 8.9).

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

8.2 The property investment market

Key terms: assets; commercial; office; retail; industrial; residential; PUTs; REITs; income; capital gain
Investment is an exchange of present capital value for future income and capital. Future cash flows
from the investment depend on:

● variability of income
● variability of capital value
● security of income
● security of capital value.

Direct property investment is expenditure on the purchase of existing assets – for example, shares of a
company, or an interest in an existing (perhaps tenanted) office block. There are several types of real
estate investment property including:

● residential property investment

● commercial property investment
● buy-to-let property investment (see Concept 8.11)
● investment in land purchase.

Residential property investment is the least risky form of investment because the purchase of a resi-
dential property by the owner is not only an investment decision as the property performs the function
of providing somewhere to live and is thus a consumer good as well as an investment good. One of
the main reasons for home ownership rather than renting is because generally investment in property
is profitable. By combining the consumer good function of shelter with the investment nature of
property purchase, investment in residential property provides a safe and usually profitable dual use
of funds. In addition, homeowners have an excellent incentive to regard their property purchase as a
long-term financial priority because it provides their home and as a result lenders are often willing to
 Investment 187
advance up to 90 per cent of the purchase price of a residential property, seeing this as low risk lend-
ing. In most developed countries loan to value ratios can be in the region of 70–90 per cent as a result.
Commercial property investment involves the purchase of office buildings, retail space, hotels and
motels, warehouses, industrial units and workshops, and other commercial properties. For the UK the
main commercial property investment sectors are office, retail and industrial. In many other countries
investment in residential apartments is also common. The investment usually provides a rental income
and the possibility of growth in the capital value of the asset, but commercial property is generally
regarded as being more risky than residential and so loan to value ratios are usually in the range of
50–70 per cent.
Real estate investments have certain characteristics that affect their performance:

● They are in a fixed location.

● Heterogeneity – they are all different.
● They tend to be of high unit value (or large acreages) and this can be a barrier to entry.
● Illiquidity – they are among the least liquid of assets.
● Lack of transparency in the market (poor information). Aggregate data has been available in the
UK since the 1960s and in the USA since 1978 but in other countries only recently. A further
information problem is the need for valuers (and subjective valuations) to measure some of the
returns on property that arise from increases in capital value.

It is also possible to invest in property indirectly by buying shares in PUTs and REITs (see Concepts
8.8 and 9.9). These provide tax advantages and many of the benefits of direct property investment with
the added advantage of liquidity as they can be traded quickly on the stock market.
The broad objectives of investment are to preserve or enhance the real value of the asset and to receive
a flow of income over time. Different interests in real property really represent different bundles of rights,
such as freeholds, leaseholds, freehold ground rents and mortgages. Because land resources are durable,
rights existing in them have a long time scale and, although there may be management costs, no problem
exists in storage. Property rights, such as stocks and shares, are therefore demanded as investment assets.
The real property market can be regarded as a part of the wider investment asset market which also
includes company shares or equities and company bonds or government bonds (gilts).

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

8.3 Commercial property investment

Key terms: prime property; secondary property; efficient markets; retail; office; industrial; yields
The commercial property investment market has two parts (possibly three) which are not well defined.
The primary or prime property sector consists of top quality premises in the best locations. The sec-
ondary sector is poorer-quality property in fringe locations. If we were to include a third category it
would be tertiary property which is in run-down, possibly declining areas and is difficult to let.
The market for prime properties is dominated by large corporate investors, many of them invest-
ing internationally in order to get higher returns and to diversify their investment portfolios. Prime
property is often considered an efficient market (see Concept 6.4) because there is a lot of knowledge
about the properties, the rents they command and the yields that can be obtained. Because information
is so available it is difficult to ‘beat the market’ and the strategy for prime property investors may be to
accept market returns and diversify their portfolios in order to reduce risks. Market returns are often
considered to be those reported by Investment Property Databank (IPD).
188 Ernie Jowsey and Hannah Furness
The secondary property market is less efficient as there is less information about rents, capital
values, yields and tenant covenants. As a result there may be opportunities for investors in secondary
property (and tertiary property) to ‘stock pick’ and try to beat the market by investing in properties
that may be under-priced. Indeed it is possible to become an expert in certain specialised second-
ary markets, such as industrial property in south London boroughs, in order to obtain better than
market returns.
More than 20 per cent of all UK property investment by value is in central London, and more than
50 per cent is in London and the southeast. The main types of property invested in in the UK are:

1 Shops (retail sector)

Location is all important in determining the yield on shops. Generally speaking the best high street
positions are occupied by the multiples, their values being enhanced because they complement
each other. The main reasons for the low yield (and high capital value) on prime shops are:
– the supply of such sites is limited;
– multiples are willing to pay high rents for these sites;
– the goods sold have a high income elasticity of demand, thereby ensuring growth in turnover;
and
– institutions (such as pension funds and insurance companies) seek such investments because
occupiers have excellent covenants and the rate of rental growth has been the highest of all
types of property.
Even a short distance from the prime shopping location rents fall off considerably, while potential
rental growth is not as good. As a result yields on secondary shops are much greater than those on
prime shops.
2 Offices
Prime office blocks in the central business districts of cities appeal to institutions with large funds,
because they can often be let to a single tenant providing an excellent covenant, thereby reduc-
ing risks and management costs. During the recession of 2007–9, amalgamations of firms, and
reduced staff requirements because of the introduction of new technology, led to an over-supply
of offices, resulting in falling rents, over-renting and reduced prospects for future increases. This
has highlighted the problem of obsolescence through technical advances and changes in work-
ing practices. Hence, though the institutions are still buying prime modern office blocks, it is the
property companies that are acquiring the older properties where there are opportunities to add
value by management expertise or even redevelopment.
3 Industrial factories and warehouses
Industrial premises tend to be less popular as investments than other types of property. This is
because rents are usually more affected by economic depression and many factories are built for a
special purpose, and if they have to be re-let it can be difficult to find a similar tenant. Sometimes
expensive modifications will be necessary. Changes in techniques of production and handling
goods can also make industrial properties obsolete; for example, greater height may be required
for forklift stacking or container unloading in a warehouse. Industrial properties are also liable to
more rapid depreciation than other properties, though tax reliefs give some compensation.

The result is that yields on industrial premises are about 8 per cent. Newly built B1 premises are
becoming more popular as investments, however, as they are of simple construction, on the ground
floor only, have large clear spaces, roof lighting and office accommodation attached, and are easily
adapted to different uses. Furthermore, they can be written off as depreciation for tax purposes, and
may carry special tax allowances.
 Investment 189
Other commercial property investments would include farms, hotels and leisure premises such as
cinemas and golf courses, but they are not major sectors.
In other countries residential investment, often in the form of multi-family apartment blocks are
popular investments for institutions and sovereign wealth funds. This has not, traditionally, been the
case in the UK where buy-to-let investments (see Concept 8.11) are generally small to medium-sized
investors. To some extent there may be cultural resistance in the UK to the idea of large corporate
landlords (Isaac and O’Leary, 2011).
Investment in commercial property gives the possibility of rental income plus capital gain; and
such investments are tangible assets that appear less risky as a result. Such investments are very illiquid
(see Concept 7.7), however, and are subject to considerable market volatility in periodic booms and
slumps.

Further reading
Isaac, D. and O’Leary, J. (2011) Property Investment Markets, Palgrave Macmillan, Basingstoke, ch. 2.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

8.4 Portfolio strategy

Key terms: equities; gilts; diversification; direct property investment; indirect property investment;
efficient market theory; passive management; active management
An investment portfolio can include a number of different types of asset, one of which is property.
Other investment assets are government bonds (gilts), shares in companies (equities), commodities
such as gold and antiques or works of art. Investment portfolios often consist of a mixture of gilts,
equities and property so that the portfolio is diversified and the risk of losses from one asset is spread.
Institutions such as insurance companies, pension funds, investment trusts, unit trusts and sovereign
wealth funds are important investors.
There are two methods of investing in property;

● as a direct investment by buying a physical asset;

● as an indirect investment by purchasing a paper asset backed by property (property company
shares, PUTs, REITs, mortgages and loans).

Corporate property investors (such as REITs) aim to maximise returns for shareholders while reduc-
ing risk. They take an active role in managing property investments, undertaking refurbishments,
partial redevelopment and even complete redevelopments. Even fully let prime properties require
asset management.
There are a number of problems with commercial property as an investment:

● an optimal mix of properties from different sectors would include office, retail, industrial and lei-
sure properties with different management issues;
● an optimal mix of properties from different geographical locations would increase management
costs;
● often the investments are indivisible – large expensive buildings that are beyond the reach of small
investment funds;
● the funding of the investment can be complex;
● there is a need for strategic management decisions on acquisitions, upgrades and disposals of prop-
erties in the portfolio.
190 Ernie Jowsey and Hannah Furness
Efficient market theory suggests that in efficient market share prices reflect all that is known or know-
able about a company. There are, however, three levels of market efficiency:

1 Strong form efficiency – where no information can achieve superior returns to the overall market
(not even insider dealing). These markets are unlikely to exist in reality.
2 Semi-strong form efficiency – no public information helps investors beat the market, since it is
already allowed for in prices (so fundamental analysis can’t beat the market) but private informa-
tion might (e.g. insider dealing). Stock markets are like this.
3 Weak form efficiency – where fundamental research into details about the investments can help
the investor do better than the overall market (‘beat the market’).

If efficient market theory (strong form) is accepted, then it is not possible to outperform the mar-
ket consistently – so the strategy to employ is ‘passive management’. This involves constructing a
portfolio with the same structure as the market: a market fund or index fund. It will have a return
below that of the market because of management costs. The portfolio should be diversified by
sector (office, retail, industrial, leisure, residential, agricultural, forestry, infrastructure etc.) and
by geographical location (UK, Europe, global). The portfolio can also be diversified by property
size, age and type of business. The IPD produces an annual index that measures returns from the
total professionally managed UK investment market and this is often used as the benchmark for
market performance.
In a weak form efficient market, the strategy would be to engage in active management of the port-
folio and through research and management expertise to achieve above average returns consistently.
Active fund managers seek to buy, sell and improve assets in order to add value to portfolios, over and
above that possible from a passive strategy. Investors return is related to the risks taken and, generally,
higher risk leads to higher returns. Investors need to decide on their preference for a risk and return
combination and achieve that in the construction of the portfolio (i.e. use modern portfolio theory;
see Concept 8.5).

Further reading
Hoesli, M. and MacGregor, B. (2000) Property Investment: Principles and practice of portfolio management, Pearson, Harlow.
Sayce, S., Cooper, R., Smith, J. and Venmore-Rowland, P. (2006) Real Estate Appraisal: From value to worth, Blackwell, Oxford.

8.5 Modern portfolio theory

Key terms: unsystematic risk; diversification; correlation; correlation coefficient; efficient frontier
Markowitz’s modern portfolio theory (MPT) suggests that unsystematic risk (non-market risk) can
be reduced and returns optimised when investment assets that have negative or low correlations are
included in an investment portfolio. The purpose of MPT is for a given level of risk to maximise
return or for a given return to minimise risk.
It was developed for share dealing, but has some relevance for commercial property portfolios
because it is possible to find properties with a low correlation of returns, although it is more difficult to
find negative correlations. The correlation coefficient is the degree to which variables change in rela-
tion to one another over time; if time series data showed that retail rents in a city always moved in the
same direction and with the same order of magnitude as average income then the two variables have a
correlation coefficient of 1; in practice anything over 0.6 suggests high correlation. For diversification,
low or negative correlation between investments is required.
A beta value (β) indicates the volatility of an investment relative to its group, e.g. if the commercial
property index shows capital values falling 10 per cent in one year but within that office values fell
 Investment 191
20 per cent, then offices are more volatile with a β of 20/10 = 2. If shop values only fell by 8 per cent
over the same period, the β value is 0.8 – lower volatility than the asset class.
In an efficient market prices instantly reflect all public knowledge and so no abnormal returns can
consistently be made. It is only possible to achieve high return by taking on high risk, and management
of risk therefore becomes important. MPT develops formal ways of diversifying portfolios to achieve
chosen risk/return profiles. A more informal approach is ‘naïve diversification’, i.e. don’t put all your
eggs in one basket.
Markowitz developed the theory using two assets. First we define the return and risk expectation of
each available investment asset. Then if we split our money between two assets, we can work out the
risk and return of the resulting portfolio, based on risk and return of the two component assets. We
should look at expected return and risk; practically, investors tend to use:

● past returns as a proxy for future expected returns; and

● the standard deviation of past returns as a proxy for future expected risk.

The return of a portfolio with assets A and B depends on:

● return of A, proportion invested in A;

● return of B, proportion invested in B.

For example, two assets A and B provide a range of portfolio options, with returns ranging from
10 per cent up to 18 per cent (Table 8.5.1).

The risk of a portfolio with money distributed between assets A and B depends on:

● risk of A, proportion invested in A;

● risk of B, proportion invested in B;
● correlation coefficient of A with B.

The correlation coefficient measures how closely linked the returns of the two assets are. Correlation
coefficients always lie in the range –1 to +1:

● if the coefficient is +1, it means the returns move exactly in step: perfect positive correlation;
● between 0 and +1 means the returns are linked, the nearer to 0 the weaker the link: positive
correlation;
● if the coefficient is –1, the returns move exactly oppositely to one another: perfect negative correlation;
● between –1 and 0 means the returns have an inverse link, weaker the nearer the coefficient is to
0: negative correlation.

The lower the correlation between assets’ returns, the better the effects of diversification. Ideally we
would combine negatively correlated assets, but most investments are tied into the general economy,
so can only find low positive correlations; however, these still offer the possibility of managing risk
and return by diversification.

Table 8.5.1 A two-asset portfolio

All A 70% A 50% A No A

No B 30% B 50% B All B
18% 15.6% 14% 10%
192 Ernie Jowsey and Hannah Furness
When assets are combined in a portfolio, the expected return of the portfolio is the weighted average
of the expected returns of the component assets; the risk is determined by the covariance structure
of the component asset returns. The way in which asset returns covary is central to portfolio risk: it
provides diversification opportunities.
The risk of the portfolio can be lower than the average risk of the constituent assets. Even adding a
risky but negatively correlated asset to a portfolio can reduce portfolio risk. A high-risk portfolio will
offer high returns and a low-risk portfolio will offer low returns. For any given return level, an optimal
portfolio (one with the lowest risk for that return) can be found.
There will be combinations of assets that are not optimal, meaning that by using different asset
combinations it is possible to get extra return for the same risk, or to have less risk for the same return.
By eliminating the suboptimal points it is possible to construct the efficient frontier (see Figure 8.5.1).
The choice of the optimal portfolio along the efficient frontier depends on the investor’s trade-off
between risk and return. Markowitz’s theory of diversification was developed for stock markets in
order to design a portfolio to manage risk and return. It does have relevance for property, showing:

● how to use property to diversify a mixed asset portfolio;

● how to diversify within a property portfolio.

There are, however, problems applying the theory because of property’s data and investment char-
acteristics. Defining ‘the property market’ and its sectors/regions is difficult, as is getting returns data
to identify risk/return for property sectors (office, retail, industrial). It is usual to use IPD data, but
it relates only to the ‘institutional’ part of the market, which is dominated by prime and some good
secondary property.

Portfolio’s
expected
return Beyond the curve
represents returns
impossible in current
conditions
High risk and
high return
Medium risk and
medium return

Low risk and Below the curve represents

low return inefficient operations that may
achieve greater returns
elsewhere with the same risk

Portfolio’s expected risk

Figure 8.5.1 The efficient frontier.

 Investment 193
Further reading
Baum, A. and Hartzell, D. (2012) Global Property Investment: Strategies, structures, decisions, Wiley-Blackwell, Oxford,
ch. 4.
Markowitz, H. M. ( 1952) ‘Portfolio selection’, The Journal of Finance, 7(1): 77–91.

8.6 Capital asset pricing model

Key terms: investment portfolio theory; beta value; risk and return; systematic risk; asset specific risk
The capital asset pricing model (CAPM) considers systematic or market risk and asset specific risk. It
is a theoretical way of determining the required rate of return for an asset to be added to an already
diversified portfolio – given that asset’s market risk (see Concept 8.5). Risk is considered to be the
sensitivity of the asset return to changes in market returns represented by the quantity beta (β). If the
return on the asset is highly sensitive to a change in market returns it will increase the volatility and
risk of the portfolio – and so it requires a higher risk premium in its return.
CAPM puts a numerical value (β) on this sensitivity, allowing calculation of this required return.
If an asset increases the volatility of the portfolio, it increases the risk and so increased returns are
necessary if it is to be included. Stocks with a β of one have the same risk as the market because their
returns move in step with the market. Stocks with a β of more than one are more volatile/risky than
the market (sometimes called ‘aggressive stocks’) and stocks with a β of less than one are less volatile/
risky than the market (sometimes called ‘defensive stocks’).
So the beta value measures the volatility of an investment in relation to a market portfolio – which
would be a portfolio of all known assets weighted in terms of market value. A β of 1.0 means that if the
market increases by 20 per cent, the expected value of the new investment increases by 20 per cent.
A β of 2.0 means that if the market increases by 6 per cent, the expected value of the new investment
increases by 12 per cent. A β of 0.5 means that if the market decreases by 10 per cent, the expected
value of the new stock decreases by 5 per cent.
The expected return on the market portfolio (E(Rm)) should be higher than the risk-free rate of
return (RFR). It comprises the RFR plus an expected risk premium (E(Rp)):

E(Rm) = RFR + E(Rp)

The risk premium depends on the β:

E(Rm) = RFR + β x [E(Rm) – RFR]

If we assume a risk premium of 3 per cent and a risk-free rate (say the rate available on government
bonds) of 4 per cent, the expected return on the market is:

E(Rm) = 0.04 + 0.03 = 0.07 or 7 per cent

The return on a risky investment should comprise the risk-free rate plus a risk premium that reflects
the systematic risk of the investment relative to the market. If an investment is more risky than the
market, it should earn a higher risk premium. β measures the risk and so the return on a risky invest-
ment (y) is:

E(Ry) = RFR + β × (Rp)

194 Ernie Jowsey and Hannah Furness
If the risk premium is 3 per cent, the risk-free rate is 4 per cent and the asset β is 2, then the expected
return on the asset is:

0.04 + 2 × 0.03 = 0.10 or 10 per cent

Relating this to property investments, suppose research gives us estimated betas of:

Offices β = 1.5
Shops β = 0.8
Industrials β = 0.7

Then if the risk-free rate of return is 4 per cent and the risk premium is 3 per cent, the expected return
on an asset in the different sectors is:

Offices: ro = RFR + β(Rp) = 0.04 + 1.5(0.03) = 0.085 or 8.5 per cent

Shops: rs = RFR + β(Rp) = 0.04 + 0.8(0.03) = 0.064 or 6.4 per cent
Industrial: ri = RFR + β(Rp) = 0.04 + 0.7(0.03) = 0.061 or 6.1 per cent.

This looks straightforward but the problem with CAPM applied to property is that it is very difficult to
calculate returns (which include change in capital value) on an individual property or even a portfolio
on a frequent basis. REITs (see Concept 8.8) are actively traded on stock markets, however, so there
can be some useful application of the theory with these assets.

Further reading
Baum, A. and Hartzell, D. (2012) Global Property Investment: Strategies, structures, decisions, Wiley-Blackwell, Oxford.
Brown, G. R. and Matysiak, G. A. (2000) Real Estate Investment: A capital market approach, Prentice Hall, Upper Saddle
River, NJ.

8.7 Risk and return

Key terms: risk–return trade off; risk averse; risk taking; volatility; variance; standard deviation; risk-
adjusted return
Investors look at both return and risk when evaluating investments. Return is usually expressed as a per-
centage per annum of the capital cost of the investment. They prefer a high return to a low return, given
equal risks; some may choose lower risk in preference to high return. Attitudes to risk-taking vary, but
in general, low risk is preferred to high risk, given equal returns. The risk–return trade off is shown in
Figure 8.7.1. The risk-free rate of return might be the rate available on government bonds (gilts).
In Figure 8.7.1 point A gives low return with low risk and point B high return and high risk. A risk-
averse investor will require a larger increase in return to take on more risk – and a risk taking investor
will accept more risk in order to achieve an increase in return than a risk averse investor.
There are many sources of property investment risk:

● risk to income flow (tenant risk);

● risk of increased future costs (e.g. because legislation changes);
● risk of capital value changing (it varies with income flow and outgoings and yields).
 Investment 195

Return % Risk-averse investor

Risk–return trade-off
B

A
Risk-taking investor

Risk-free
rate of return %

Risk

Figure 8.7.1 The risk–return trade-off

The risk profile of an investment is made up of two factors: the risk associated with assets of that class
or subclass – systematic risk, usually called the beta factor; and the risk of that particular asset itself
– unsystematic risk called alpha. Risk is measured by volatility of returns over a given period and
volatility of returns is measured by their variance or standard deviation (which equals the square root
of the variance).
A risk-adjusted return (RAR) shows the amount of return per unit (percentage) of risk. So if retail
return is 11.3 per cent and risk is 7 per cent (standard deviation), then retail RAR would be 11.3/7 =
1.61 units of return per unit of risk. This can be compared to the RAR of other sectors (Table 8.7.1).
And it can be seen from the table that retail investment gives the highest RAR.

Table 8.7.1 Risk-adjusted return

Risk-adjusted return
All Property 1.2
Retail 1.61
Office 0.87
Industrial 1.24

Further reading
Isaac, D. and O’Leary, J. (2011) Property Investment Markets, Palgrave Macmillan, Basingstoke, ch. 9.
196 Ernie Jowsey and Hannah Furness
8.8 Real estate investment trusts
Key terms: tax efficiency; liquidity; capital appreciation; yield; diversification
Individual investors in property usually have insufficient funds to buy prime property, which has
shown the greatest capital growth and least-risk income returns. Real estate investment trusts (REITs)
are a way around this problem. Already well established and very popular in many countries over-
seas such as Australia, the USA, Germany and Japan, REITs were launched in the UK on 1 January
2007. A REIT is a quoted company that owns and manages income-producing property on behalf of
shareholders. A REIT can contain commercial and residential property. Most of its taxable income (at
least 90 per cent) is distributed to shareholders through dividends, in return for which the company is
largely exempt from corporation tax (see Concept 17.3). REITs are designed to offer investors income
and capital appreciation from rented property assets in a tax-efficient way, with a return more closely
aligned with direct property investment. This is achieved by taking away double taxation (corporation
tax plus the tax on dividends) of ordinary property funds. The introduction of UK REITs created an
opportunity for a wide range of investors to invest in property as an asset class by creating a more liquid
and tax-efficient method.
REITs provide a way for investors to access property assets without having to buy property directly.
In the UK, REITs can apply for UK-REIT status, which exempts the company from corporate tax.
The introduction of a UK-REIT regime, combined with the traditional strengths of London’s capital
markets, created opportunities for the growth of the property investment sector. A UK-REIT enjoys
all the benefits of any other company, in addition to the tax advantages. UK resident companies listed
on a recognised stock exchange are eligible for REIT status. Companies that qualify as REITs are not
subject to corporation tax on their qualifying rental income or chargeable gains. A conversion charge
applied to companies adopting REIT status, equal to 2 per cent of the market value of their investment
properties at the date of conversion, but this was scrapped in 2012. Nine UK property companies con-
verted to REIT status in 2007, including five that were FTSE 100 members at that time: British Land,
Hammerson, Land Securities, Liberty International and Slough Estates (now known as SEGRO). The
other four were Brixton, Great Portland Estates, Primary Health Properties and Workspace Group
(Jowsey, 2011).
REITs receive special tax considerations and typically offer investors high yields, as well as a highly
liquid method of investing in real estate. Equity REITs invest in and own properties (thus responsible
for the equity or value of their real estate assets). Their revenues come principally from their proper-
ties’ rents.
REITs offer capital appreciation along with yield, and so provide more diversification to an invest-
ment portfolio. REITs are considered to have a low correlation with equities, meaning they do not
normally move in the same direction as equity stocks or bonds. Since their introduction in 2007 in
the UK, REITs have shown disappointing returns (as might be expected given market conditions)
but they have performed much better in the last few years and they allow much greater liquidity than
direct investment in property with the same effective tax treatment.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

8.9 Property unit trusts

Key terms: collective investment schemes; offer price; bid price; diversification
Property unit trusts (PUTs) are collective investment schemes where the underlying properties are
held on trust for the participants. They are unit trusts that specialise in property (for example, Cornhill
 Investment 197
Property Share specialising in emerging property markets and off-plan residential investments), but in
order to avoid management commitments, such unit trusts use their funds to buy shares in property
companies or in companies such as hotels that are concerned with property.
PUTs operate on a similar principle to REITs as ‘open-ended’ collective investment funds that can
continually accept new cash and use it to buy more property assets. Closed ended collective invest-
ment funds are where investors pool money to buy one or more property assets but after that no
further investment takes place. Unit trusts that specialise in property avoid management commitments
using funds to buy shares in property companies or companies concerned with properties (e.g. hotel
groups). The underlying assets of a PUT are mainly direct property investments; some PUTs also
invest in other indirect property vehicles (i.e. other PUTs or property company shares or bonds).
An operator (usually a bank) sets up a Trust, which holds a group of properties. Units in the Trust
are bought, often by small pension funds or by private investors, who cannot afford direct property
investment but want exposure to property returns. Authorised PUTs (APUTs) have stricter Financial
Services Authority (FSA) rules to protect small, ‘retail’ (i.e. non-professional) investors. Non-authorised
PUTs are available only to ‘professional’ investors such as pension funds.
Investors can ‘redeem’ their units if they wish at the price set by trustees, based on periodic revalu-
ation (often monthly). The offer price equals the price to buy a unit; and the bid price equals price on
sale back to the trust (always lower). The difference between bid and offer prices is called the ‘bid–offer
spread’ and covers costs of administration and ‘round trip’ investment costs (stamp duty, legal fees etc.
on buying and selling the properties).
Some examples of specialist funds are:

● Airport Industrial Property Unit Trust

● Henderson Central London Office Fund
● Standard Life UK Retail Park Trust
● The Residential Property Unit Trust
● The UK Logistics Fund.

By buying units in specialist vehicles, investors can manage their own diversification – or diversify
against their direct property holdings.

Further reading
Ball, M., Lizieri, C. and MacGregor, B. D. (1998) The Economics of Commercial Property Markets, Routledge, London,
ch. 12.

8.10 Active fund management

Key terms: passive management; active management; Investment Property Databank; structure setting;
stock selection
Investment assets can be managed either actively or passively. Passive management involves setting up
a portfolio of assets with similar characteristics that are traded to maintain these characteristics, such as
index funds. These funds require very little management, therefore have low management costs, and
have guaranteed market performance due to the minimal risk involved in their management.
Property, however, is heterogeneous, and therefore requires active management in order to increase
performance and control risk. Active management assumes that the market contains inefficiencies that
can be exploited by research, and enables added value to be realised by outperformance of the market.
Active management dominates all investment markets.
198 Ernie Jowsey and Hannah Furness
The purpose of active property fund management is primarily to increase rental income and there-
fore create capital value. This creates market evidence for the rental and investment markets, and it
can improve the potential market value of an area by, for example, improving the tenant mix and
therefore the perception and market performance of an area. The remit of active management is to
outperform, and so therefore the fund manager will set a performance target against a benchmark, such
as 12-month all property returns published by the Investment Property Databank.
Approaches to active property fund management include structure setting, stock selection, and asset
management.
Structure setting involves assessing how much to invest in each category of asset based on perfor-
mance by reference to data such as the Investment Property Databank Monthly Property Index. This
type of management is known as naïve diversification – the fund is only concerned with the type of
stock, rather than individual properties themselves. It is a strategy adopted by larger funds, but the dis-
advantage being that one cannot reasonably expect to consistently select properties with above average
expected returns in this way and it is more of a speculative and longer-term strategy.
Stock selection focuses on assessment of the individual assets within the portfolio, whereby fund
managers will target assets with above average expected performance. This is a high risk strategy
for smaller funds whereby the specific risks of particular impacts can have much greater impacts on
income. Traditional management is interested only in stock selection, and there is little explicit analysis
of the structure of the portfolio or regard to outperformance of a benchmark. Properties are selected
based purely on their individual over average performance.
Finally, asset management adds value to existing stock by improving the asset through means such as
lease re-gearing, refurbishment, redevelopment etc. to maximise returns.
Modern management involves a combination of stock and structure analysis to inform asset
selection and active management to ensure that the maximum income is being realised by the
portfolio. Value is added by positioning against a benchmark, actively managing individual stock,
and using pricing models to identify individual assets to buy and sell. At the outset, a clear state-
ment of objectives details the benchmark, expected outperformance (overall return) within a
specified timescale, and an indication of anticipated risk. The structure of the portfolio is then
analysed before individual assets are considered and an active management strategy is then estab-
lished for each individual property and how that will contribute to the overall income and value
of the portfolio.
Individual properties can be actively managed in a number of ways: lease re-gear; surrender and
re-let; refurbish and re-let; attract/improve the quality of tenants; or change the use of a property.
Lease re-gearing is usually carried out towards the end of a tenancy or when a break option is
approaching. In order to maintain income, the landlord might offer an incentive, such as a rent-free
period, or the forfeiture of a break clause, in order to retain the tenant for a longer term.
Surrender and re-let is used when a tenant wishes to vacate all or part of their demise while still
within the term of the lease, for example if a business is struggling financially. In order to do so, the
tenant must pay a capital sum to the landlord to compensate for the loss in income and for any empty
rates that may be payable for the vacant property. The premium paid to the landlord will greatly
depend on the re-letting prospects of the property, however the potential benefits to the landlord are
to secure a tenant on superior terms and increased income stream.
Refurbishment is typically carried out when a tenant is vacating and provides an opportunity to
upgrade and modernise existing premises in order to command a higher rent. This is most relevant for
office properties where there is a high rate of obsolescence. It is the balance of the cost of the refurbish-
ment versus the uplift in rental value and how easily the refurbished space will be re-let, since better
quality space is more likely to attract better covenants and longer lease terms.
Tenant mix is particularly important for retail parades and shopping centres, but also relevant to
other sectors. The landlord will seek to attract the best-quality tenants to improve the overall quality
 Investment 199
of the tenant mix in order to maintain strong covenants willing to pay higher premiums. However,
higher quality retailers will require significant incentives to relocate, and so there must be a careful
balance to ensure that the short-term loss of income from a rent-free period, for example, is balanced
by a long-term uplift in income on superior terms.
Changing the use of a property is another way that income and value can be increased. The high
capital outlay for converting a property from say an office to a residential property must be balanced by
a significant increase in income. There is also the issue of negotiating and securing planning permission
which can significantly delay the benefits of the conversion project and therefore change of use is a
relatively high-risk management strategy. However, the rewards can be significant: residential values
can be up to double those of commercial, depending on location and specification, for example in the
West End of London.

Further reading
Ball, M., Lizieri, C. and MacGregor, B. D. (1998) The Economics of Commercial Property Markets, Routledge, London,
chs. 10 and 11.
Baum, A. (2009) Commercial Real Estate Investment:A strategic approach, 2nd edn, Routledge, Abingdon, chs. 2 and 5.
Hoesli, M. and McGregor, B. D. (2000) Property Investment Principles and Practice of Portfolio Management, Longman,
Harlow, ch. 9.
Isaac, D. and O’Leary, J. (2011) Property Investment, 2nd edn, Palgrave Macmillan, Basingstoke, chs. 6, 7 and 9.

8.11 Residential property investment and buy-to-let

Key terms: rental income; capital value; mortgage; landlords; mortgage interest rates
Residential property investment is undertaken to some extent by everyone who buys a house or
apartment. The decision to buy confers consumption benefits (from having somewhere to live) and
investment benefits as the value of the property increases over time. Since home ownership in the
UK has reached about 67 per cent of all households, most people have some experience of residential
property investment. On the whole these investments are very satisfactory – as house prices rise over
time people are better off in terms of the assets they own. A few of these investors get into difficulties
with defaults on mortgage payments and negative equity if they buy shortly before a market downturn;
but for most home buyers the investment is a profitable one.
In other parts of the world, investing in apartment blocks as part of a portfolio including offices,
retail properties, industrial properties and hotels is quite common. In the UK this has not been the
case and most residential investment has been by small investors rather than by institutions. This
may be because of the incentives that have been offered to home ownership by successive govern-
ments. One area where investors do branch out beyond home ownership is into the buy-to-let
market.
Buy-to-let investment is the investment strategy of buying a residential property to be let for profit.
The benefits for a buy-to-let landlord can include a stable income from rental receipts, as well as a
capital gain if house prices go up over time. Rising house prices in the UK have made buy-to-let a
relatively safe way to invest in normal times. The main risk occurs where the landlord takes a loan to
buy the property, with the expectation that rental income will meet or exceed the cost of the loan
and that the house can be sold later for a higher price. If the landlord cannot meet their mortgage
repayments, however, then the bank will ‘repossess’ the property and sell it to try to get their money
back. The broad popularity of buy-to-let investments has made a large number of new (inexperienced)
landlords in the UK.
The 1988 Housing Act made investment in residential property more attractive to landlords when
it introduced a new type of tenancy giving landlords more control over their properties, and there has
200 Ernie Jowsey and Hannah Furness
been a substantial recovery in the private rented sector since then. The availability of loans for buy-to-
let purchasers has also increased the appeal of owning rental property.
Since the mid-1990s in the UK there has been a surge in demand for rental property. Low interest
rates and soaring house prices helped fuel the appeal of buy-to-let, together with changes in legisla-
tion which made it easier for landlords to deal with sitting tenants. Historically, buyers of property to
let were surcharged or forced to borrow at commercial rates and potential rental income was not taken
into account for servicing the borrowings. Since the introduction of the Assured Shorthold Tenancy
in the mid-1990s, however, rights have changed more in favour of the landlord and mortgage lenders
have been more willing to provide finance.
This led to a rapid expansion in the amount of mortgage finance available with schemes specifically
designed for amateur and professional landlords that became known as ‘buy-to-let mortgages’. Lenders
supporting buy-to-let schemes brought their interest rates into line with the rates for owner occupa-
tion and took rental income into account for servicing the loan. This policy switch was encouraged
because professional letting and property management agents were more involved in the selection of
suitable properties for the rental market, in the selection of tenants and in the management of proper-
ties. This enhanced the security and creditworthiness of buy-to-let investments. From only 4 per cent
of mortgages in 2000, buy-to-let mortgages increased in number to 29 per cent of all mortgages in
2006, according to the Council for Mortgage Lenders website. At the height of the boom in property
and buy-to-let investment in 2006–7, some investors bought property more as ‘buy-to-leave’ – relying
solely on the appreciation in value of the property and not renting it out. Clearly if this type of activity
became commonplace it would have consequences for communities where there were a number of
empty properties, and would almost certainly increase the problem of homelessness.
The credit crunch recession, however, has caused most UK lenders to limit buy-to-let mortgages.
The part of the buy-to-let market hardest hit by the downturn of 2006–8 was that for new inner-city
flats. These were often purchased with high mortgages taken out using inflated valuations. This risky
and highly speculative part of the market ended with the downturn in prices for city-centre apartments
from 2006 onward.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.
www.cml.org.uk/cml/consumers/guides/buytolet (accessed 05/12/2013).

8.12 Mortgage-backed securities

Key terms: securitisation; asset-backed security; collateralised debt obligation; sub-prime lending;
repossessions; foreclosures
Securitisation is the process of creating securities by pooling together various income-producing finan-
cial assets. These securities are then sold to investors. Any asset may be securitised as long as it produces
an income. The terms asset-backed security (ABS) and mortgage-backed security (MBS) reflect the
assets behind the security.
A MBS is an ABS that is secured by a parcel of several mortgages. The mortgages are held by
or sold to a financial institution that packages the loans together into a security that can be sold to
other financial institutions or investors. Shares of this security, called tranches are sold to investors
who buy them and ultimately collect the dividends in the form of the monthly mortgage payments.
These tranches can be further repackaged and sold again as other securities, called ‘collateralised debt
obligations’ (CDOs).
The mortgages of a MBS can be residential or commercial (CMBS). Residential MBS carry a risk
of prepayment. This is where the mortgage is repaid early, thus depriving the MBS holder of some of
 Investment 201
the interest. This is less likely to happen with CMBS because commercial mortgages are more rigid in
their terms and conditions.
Of course, if mortgage providers are selling on their mortgages in this way they are not at risk if
the borrower defaults on their repayments. There is then a temptation to issue mortgages without
due diligence. As a result, many mortgages were issued in 2004–7 in the United States to borrowers
with poor credit histories, and possibly even to unemployed borrowers. This has become known
as ‘sub-prime’ lending and has been blamed for the credit crunch crash and recession of 2008–9.
A large proportion of the mortgages taken out by sub-prime borrowers were adjustable rate mort-
gages. These loans had a discounted fixed interest rate for a number of years and then reverted to
a higher rate. A homeowner could find the monthly payments doubled after the rates adjusted and
defaults and ultimately repossessions (‘foreclosures’ in the US) increased dramatically. As a result,
the average CDO/MBS lost about half of its value between 2006 and 2008 and the most risky sub-
prime ones became worthless.
Since then in the US there has been a wave of repossessions in the housing market and the first
national decline in house prices since the 1930s. The chronic depletion of capital in banks involved
with mortgage lending or MBS has meant a massive reduction in house buying. The Federal National
Mortgage Corporation and the Federal Home Loan Mortgage Corporation (known as Fannie Mae
and Freddie Mac), the government-sponsored mortgage corporations, made losses of at least $15 bil-
lion. This led to a severe recession in the US and because the MBS were traded around the world,
banks in many other countries also suffered severe losses and the financial collapse and recession
became widespread (see Concept 6.23).

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 6.

8.13 Land banking

Key terms: undeveloped land; planning permission; speculative holding; land hoarding; externalities
In the UK land banking refers to the practice of buying undeveloped land with or without planning
permission and retaining it until planning permission is granted or the market conditions are right.
Many reputable building companies engage successfully in land banking for future building projects
and regard it as necessary in order to achieve continuity in their business. Building companies and
developers tend to keep land banks for several years in order to secure housing supply needs. Some of
this land will be held speculatively in the hope that planning restrictions will be relaxed in the future.
They can use the land as collateral to obtain loans and they need a reserve of land to remain in busi-
ness; if they ran out of land they would have to buy from competitors at higher prices. Unfortunately,
the term land banking has also been used to describe two other situations that are more disreputable.
The first such situation we can describe as ‘land hoarding’, where a company retains undeveloped land
with planning permission in the expectation that its value will rise over time. The practice has been high-
lighted in recent years in London where housing shortages persist and yet developers are sitting on a large
number of sites with planning permission. Speculative hoarding of government released land is regarded as
one of the main obstacles to achieving housing affordability in Australia and the government there is moni-
toring the holding of large parcels of undeveloped land by foreign owners. In the United States, land banking
refers to the practice of counties or cities buying up derelict land that is a blight on neighbouring areas.
The second situation is a ‘scam’ where someone buys a large area of undeveloped land and divides
it up into smaller plots to sell on to unsuspecting investors at much more than market value. The
schemes claim that the plots have good investment value as big profits will be made in the expectation
of future development when planning permission is granted.
202 Ernie Jowsey and Hannah Furness
The Land Registration Act of 2002 enabled companies to purchase land sites and easily divide them
into smaller plots. The company can then offer these plots for sale to individual investors, often claim-
ing that they will make considerable returns. This practice in the UK does not fall under the control
of the FSA, although collective investment schemes are regulated. Typically, land bankers buy land
for less than £10,000 an acre and divide it into plots of 0.1 acres, selling these for £8000 to £20,000
each, making profits of between £80,000 and £200,000 an acre. The selling companies often go into
liquidation leaving the buyers with virtually unsaleable plots. In reality, the land may be totally unsuit-
able for development and have little hope of ever getting planning permission. The land often ends up
abandoned and neglected.
In 2008 the FSA ordered UK Land Investments to be wound up as it constituted an unregulated
collective investment scheme. UKLI owed £70.8 million to creditors and 4,500 people had bought
5,000 plots of land. The same owner operated Regents Land and St James’s Land, which continued
trading. Several other land banking companies have been put into compulsory liquidation by the
Insolvency Service Companies Investigation Branch. As a result of increased regulation, many land
banking companies – some still selling UK plots – have moved outside the European Union.
Such schemes do more than trick investors out of their money; they lead to considerable costs
or externalities for society. The land can no longer be used for farming or forestry because of
the multiple ownership. No one is responsible for its maintenance and the plot owners have no
interest in its use or management. The land will slowly become derelict and subject to unlawful
activities such as fly-tipping. Local authorities find it difficult to enforce clean up or to take action
against the landowners because of multiple ownership of small plots. Recombining the plots in
order to make the land usable again is extremely difficult unless some form of compulsory pur-
chase can be used.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 16.

8.14 Property indices

Key terms: Investment Property Databank (IPD); property index; weighting; base year
An index number is a number showing the size of some variable relative to a given base (usually 100).
It is a method of expressing the change in a number of variables through the movement of one num-
ber. The procedure is: select a base (year) and give it a value of 100 – express all subsequent changes
as a movement of this number.
Because the variables differ in relative size/value within the data set, they need to be ‘weighted’
according to their relative importance, e.g. in the IPD UK Annual Property Index all property has a
value of 100; within that, retail has a value of 50.7, office of 29.5 and industrial of 14.5, reflecting the
relative importance of these sectors within the UK property investment market. The index number is
usually a weighted average of the index numbers for the various components:

● a base weighted index (Laspeyres Index) uses weights from the base period;
● a current weighted index (Paasche Index) uses weights from the current period.

There is a trend to create passively managed mutual funds based on market indices – index funds, and
it is believed these beat actively managed funds (see Concept 8.10). Index funds attempt to replicate
the holdings of an index and so they remove costs of active management and have a lower ‘churn rate’
(turnover of stock/securities). Typically, pension funds will set the IPD annual return as a benchmark,
that is the widely accepted return available from the market.
 Investment 203
Tables 8.14.1 to 8.14.4 show the IPD UK Annual Property Indices for 2010.

Table 8.14.1 IPD indices

Capital value (in portfolio) Total return Income return Capital growth
(%)
Retail 50.7 16.0 6.2 9.3
Office 29.5 15.8 6.3 9.0
Industrial 14.5 10.8 7.2 3.3
Residential – – – –
Other 5.3 15.0 6.3 8.2

Table 8.14.2 IPD indices – capital growth of all property 2010

Sector Capital growth Weighting (%) Capital growth ×

weighting
Retail 9.3 50.7 4.7
Office 9.0 29.5 2.6
Industrial 3.3 14.5 0.5
Other 8.2 5.3 0.4
Total +8.2%

Table 8.14.3 IPD indices – income growth of all property 2010

Sector Income growth Weighting (%) Income growth ×

weighting
Retail 6.2 50.7 3.1
Office 6.3 29.5 1.8
Industrial 7.2 14.5 1.0
Other 6.3 5.5 0.3
Total +6.2%

Table 8.14.4 IPD indices – total return of all property 2010

Sector Total return Weighting (%) Income growth ×

weighting
Retail 16 50.7 8.1
Office 15.8 29.5 4.6
Industrial 10.8 14.5 1.5
Other 15.0 5.3 0.8
Total +15.0
204 Ernie Jowsey and Hannah Furness
To re-base an index
Total return index 1980 = 100 (this is the base year; 2009 = 1219.4; 2010 = 1403.4).
It may be that you think the base year (IPD 1980) is getting a little distant in time. If you want to re-base
the index, then for each year:
Old base year
× 100 = new index value
Required base year

So if 2010 is now the base year (=100) calculate the index value for 1980 and 2009:

100 (old base year figure)

1980 : × 100 = 7.12
1403.4 (required base year 2010)

1219.4
2009 : × 100 = 86.8
1403.4

1403.4
2010 : × 100 = 100
1403.4

Further reading
See: IPD.com/UK (accessed 27/11/2013).

8.15 Discounting and discount rates

Key terms: present value; compound interest; discount rate; long-term projects
Discounting is the valuation in present day terms of the future costs and benefits arising from a project. It
progressively reduces the present value of future costs and benefits. The reduction is greater as distance into
the future increases and as the discount rate increases. Discounting is done because people have a positive
time preference – they prefer benefits now rather than later, perhaps because of impatience or because they
expect to be richer in future. A further justification of discounting comes from the productivity of capital
– money makes more money. £1 invested now will be worth £1 plus interest by the end of the year. So
equal money amounts have lower present values (PVs) the further into the future they are received.
Money received now produces more money in the future, so an equal amount of received money
in the future must have a reduced present value. For example:

– Suppose £1000 is invested for one year at an interest rate (i) of 10%. This will be £1100 at the end
of the year.

£1000(1.1) = £1100 or
PV(1 + i) = B1
where PV = present value; i = interest rate; and B1 = benefits at end of year.
– At the end of 2 years, the £1000 becomes, with compound interest:

£1000 (1.1)(1.1) = £1210

 Investment 205
and PV(1 + i)(1 + i) = B2
or PV(1 + i)2 = B2
And to discount:

B2
PV =
(1 + i)2

⎡ £1210 ⎤
⎢Check £1000 = (1.1)2 ⎥
⎣ ⎦
The future value of benefits at end of year 1 can be related to its present value (discounted) by rewrit-
ing as:

B1
PV =
(1 + i)

⎡Check £1000 = £1110 ⎤

⎣⎢ 1.1 ⎥⎦

A general discounting equation relating benefits in any year (t) to their present value is:

Bt
PV =
(1 + r)t

For an investment yielding benefits over many years (t=0, 1, 2, … n)

B0 B1 B2 Bt
NPV = + + +…+
(1 + r) (1 + r) (1 + r)
0 1 2
(1 + r)t

The further into the future we go, the discount factor increases, causing PV to fall; and as the dis-
count rate increases, PV decreases. A high discount rate for returns far in the future significantly
decreases present values. This can be appropriate as risk increases the further into the future the
income stream goes, but it disadvantages long-term projects such as infrastructure that is expected
to last for decades.

Further reading
Isaac, D. and O’Leary, J. (2011) Property Investment Markets, Palgrave Macmillan, Basingstoke, ch. 5.
206 Ernie Jowsey and Hannah Furness
8.16 International property investment
Key terms: diversification; information costs; transaction costs; prime property; transparency; investable stock
International real estate investment increased rapidly in the 1980s with globalisation of commerce and
multinational business operations. Financial institutions became landlords for prime commercial prop-
erty. Growth in international investment practices enabled investors to look outside their own countries
for better performing properties. Floating exchange rates from 1971 increased foreign exchange risks and
led to more international financial instruments, e.g. currency futures. Telecommunications and comput-
ers enabled stock, option and commodity exchanges to trade globally, creating a global financial market
(24 hour and instantaneous). Deregulation of financial markets in the 1980s allowed global borrowing
and lending and increased diversification of investment. ‘Prime’ investment quality real estate began to
appear after 1980 in cities throughout the world – not just London and New York.
The rapid growth of cross-border investment in commercial property took two forms: direct foreign
investment in the private property market to receive a rental income stream and capital appreciation
(sometimes as a joint venture with a company in the host country); or indirect investment in publicly
traded vehicles, e.g. property company shares, funding of property projects and purchases of securitised
debt (Jowsey, 2011).
Investors consider real estate to be an important component of their global portfolios. Real estate
is regarded as an illiquid, long-term asset class, more suited to investors without short-term liabilities.
The stable income streams from property rents or dividends from listed real estate securities appeal
to pension funds and sovereign wealth funds (government investment funds). There is diversification
potential, given the low correlation of real estate with other asset classes, such as equities and bonds.
Measuring international real estate investment flows can be difficult because although records are kept
for direct international property investment, they are not for special purpose vehicles and some corporate
acquisitions are recorded as domestic transactions. Corporate sector real estate investment takes place for
operational or strategic reasons. The main problems with international property investment are:

● information costs – these can be considerable because of different legal systems and variations
in methods of valuation between countries (Jones Lang Lasalle compiles a Global Transparency
Index to combat this);
● cultural barriers and possible restrictions or regulations concerning foreign ownership;
● management and maintenance costs;
● adverse currency movements that affect investment performance;
● international variations in transaction costs that can be considerable;
● political instability affecting rents and capital values;
● market inefficiency – especially in smaller emerging markets.

International property investment may offer higher returns than those available in the national market of
the investor and there may not be sufficient opportunities for high quality real estate investment in the
home market. International real estate investment also takes place in order to diversify investment port-
folios although there is now evidence that the correlation between many international real estate markets
is surprisingly high and international property returns move in the same direction, at least in developed
countries. This is because real estate is affected by much the same fundamental economic variables that
affect GNP. The near simultaneous downturns in the office markets of major financial centres such as New
York, London and Toronto in the early 1990s and in 2007 confirm this. There is also a very close correla-
tion between changes in nominal rental values for offices in major North American and European cities.
The largest global real estate investors are pension funds, insurance companies and sovereign wealth
funds. Real estate is estimated to be 50 per cent of the total value of world assets but that is not invest-
able stock (stock that is of sufficient quality to become the focus of institutional investment). DTZ in
their 2012 Money into Property global report estimated total investable stock at $21 trillion (US dollars), of
 Investment 207
which $8.6 trillion is owner-occupied and $12.3 trillion is invested in. The individual countries with the
greatest investable stock of real estate in terms of world share are the US with 30 per cent, Japan with 17
per cent and the UK with 11 per cent. The sectoral breakdown of investable real estate assets is: 34.8 per
cent offices; 25.1 per cent apartments; 23.9 per cent retail; 14.3 per cent industrial; 1.9 per cent hotels.

Further reading
DTZ (2012) ‘Money into Property’, available at: http://www.dtz.com/Global/Research/Money+into+Property+
2012+UK (accessed 03/06/2014).
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 18.

8.17 Transparency index

Key terms: transparent markets; market fundamentals data; environmental sustainability
International property markets vary in the amount of accurate information that is available to prospective
investors and corporations seeking property for business. Some markets are ‘opaque’ in the sense that there
is very little useful information about investable property in that country. As might be expected, the most
transparent markets with easily available accurate information are to be found in developed countries.
Jones Lang LaSalle (JLL) and LaSalle Investment Management produce a Global Real Estate Transparency
Index, which is a unique biennial survey covering 97 markets worldwide. It aims to help real estate players
understand important differences when transacting, owning and operating in foreign markets.
The 2012 listing of the most transparent countries is shown in Table 8.17.1.

Table 8.17.1 2012 Transparency Index

2012 Ranking Country

1 United States
2 United Kingdom
3 Australia
4 Netherlands
5 New Zealand
6 Canada
7 France
8 Finland
9 Sweden
10 Switzerland
Source: joneslanglasalle.com

The transparency index is compiled by assessing the following areas in each country:

● direct property indices

● listed real estate securities indices
● unlisted fund indices
● market fundamentals data
● financial disclosure
● corporate governance
● regulation
208 Ernie Jowsey and Hannah Furness
● land and property registration
● eminent domain
● sales transactions
● occupier services
● debt regulation
● valuations.

JLL show that transparency improved in more than 90 per cent of countries between 2010 and
2012. Improving market fundamentals data and performance measurement, combined with better
governance of listed vehicles, have led to transparency progress over the 2 years. Much improved
performance data have been made available in Brazil, emerging Asia, Mexico, and central and eastern
Europe (CEE). Market fundamentals data have been enhanced in most markets (joneslanglasalle.com).
There is still room for improvement of course, but there is growing recognition in many emerging
economies that the current lack of performance indicators and accurate market information hinders
inward investment and holds back development of competitive domestic real estate sectors.
The issue of environmental sustainability is gradually moving to the forefront of real estate
investor and corporate occupier concerns. JLL have launched a separate Real Estate Sustainability
Transparency Index for a subset of 28 countries, covering such issues as energy benchmarking and
Green Building rating systems. The United Kingdom, Australia and France are the top-scoring
countries in this new index.

Further reading
joneslanglasalle.com
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 18.

8.18 Corporate real estate asset management

Key terms: strategic management; cost effectiveness; sale and leaseback; corporate relocation;
sustainability
The aim of corporate real estate asset management is to add value to a company through strategic
management of real estate assets. Property is both an investment asset and an operational asset. Strategic
management of real estate is crucial for both investors and occupiers of property. The value of any
business can be enhanced through strategic management of the property that supports the business.
Many corporations are not aware of the importance of property even though it is the second highest
cost after labour. Commercial property comprises 30–40 per cent of total costs in the balance sheets
of most UK companies (Bootle and Kalyan, 2002) and 75 per cent of corporate borrowing in the UK
is secured against property. In the private sector, if the importance of property in the total asset valu-
ation of the corporation is underestimated by the owners, the result might be a hostile takeover bid
and possible asset stripping. In the public sector, lack of awareness of property assets can lead to missed
opportunities, e.g. a hospital on a prime city-centre site could realise the value of assets to relocate to
a larger suburban site with easier access and parking.
The corporate property manager should prepare a corporate plan for the property that flows from
and feeds into the corporate business strategy (Table 8.18.1). The property manager must:

● manage property for maximum value;

● understand occupier’s objectives;
● understand activities the property supports;
● develop extra plans for capital value, rents received, operating costs and security of income.
 Investment 209
Table 8.18.1 Alternative real estate strategies
Occupancy cost minimisation Cost effectiveness
Flexibility Facilities and workplaces are adaptable
HR objectives Acknowledging that the workplace impacts on productivity
Promoting marketing message Using the buildings and environment as a marketing (image) tool
Promote sales Locate for high footfall
Facilitate and control production, operations, Locations should link with suppliers and customers
service delivery
Facilitate managerial process Physical workspace should be designed to enhance knowledge
working
Capture the real estate value creation of business e.g. A major retailer acting as anchor tenant for a shopping centre

Source: adapted from Haynes and Nunnington (2010).

A major decision to be made is whether business premises should be freehold or leasehold. Owning
the freehold has been the historic choice of many organisations – for cultural reasons (desire to have
control) – for financial reasons (capital growth) – and for business reasons (specialist premises might be
difficult to obtain under a standard lease). The main arguments for leasing are:

● to finance growth opportunities;

● to have a lower level of debt when leasing is reported as off balance sheet financing;
● to obtain lower rental costs where capital allowances are passed on by landlords;
● to increase efficiency by treating property as a cost and managing it more efficiently.

As a result of these perceived advantages there is a growing trend towards ‘sale and leaseback’ (Table
8.18.2). This is where the owner of a property sells that property to a third party and simultaneously
takes a lease on that property from the third party. Examples include:

● 2004 – 38 off-licences from Thresher Group for sale at auction by Allsopps on a sale-and-lease-
back basis;
● 2005 – Debenhams £495m sale and leaseback to British Land;
● 2009 – Unite Group £21.5m sale and leaseback of student accommodation to M&G Secured
Property Income Fund.
Table 8.18.2 Sale and leaseback

Advantages Disadvantages
Frees up capital to fund merger and acquisition activity Potential loss of capital allowances
or to invest in core business
Tax benefits by offsetting lease costs as an operating Exposure to rent increases and upward only rent reviews
expense (in UK)
Seller remains in operational control of property Partial loss of control of asset
Improvement in balance sheet through exchange of Loss of any capital growth potential
fixed assets for cash
One-off profit and loss account benefit of profit realised Uncertainty at end of lease term
over book value
Transfers property value risk to a third party Loss of an asset that can be used to secure further borrowing
Source: adapted from KPMG and Haynes and Nunnington (2010).
210 Ernie Jowsey and Hannah Furness
Another part of corporate real estate asset management is the corporate location (or relocation) decision.
Strategic decisions to be made include:

● macro location (country)

● macro location (city)
● micro location (options within selected city)
● micro location (characteristics of selected location)
● the building specification
● the building configuration
● specific operational requirements
● sustainability or green building considerations.

Further reading
Bootle, R. and Kalyan, S. (2002) Property in Business – A Waste of Space?, The Royal Institution of Chartered Surveyors,
London.
Haynes, B. P. and Nunnington, N. (2010) Corporate Real Estate Asset Management, EG Books, Oxford.
www.kpmg.com/global/en/industry/real-estate/ (accessed 27/11/2013).
9 Land management
Dom Fearon and Ernie Jowsey

9.1 Archaeological sites

Key terms: PPG 16; site evaluation; preservation in situ; Sites and Monuments Record
The term ‘archaeological site’ covers a wide range of land – from an area where a single historical
object was found, to the remains of monuments such as Stonehenge.
As archaeological sites can be damaged by any ground disturbance, managing them on cultivated
land is very difficult. If their location is known, they can be managed to prevent damage occurring.
However, although some archaeological sites are easily recognisable, such as large monuments, many
cannot be seen as they are buried below the level of normal ploughing, and regular cultivation can
damage any hidden remains.
Indicators of an archaeological site on arable land include:

● objects brought to the surface by ploughing – such as pottery, burnt clay, flint tools or metalwork;
● patches of stony ground and building materials, which indicate the presence of disturbed walls or
roads;
● darker or lighter patches in a field, which indicate buried features – such as ditches;
● differences in crop growth caused by buried archaeological features – crops grow better in pits and
ditches because the soil is deeper and wetter, whereas reduced soil depth over patches of stone,
together with restricted water, can lead to stunted growth and early ripening.

Prevention of damage to archaeological sites requires careful site management. The best way to protect
a ploughed archaeological site is to remove it from cultivation as permanent grass or long-term, non-
rotational set-aside. If removing the land from cultivation is not viable, there are measures that can be
taken to minimise damage from agricultural practices. If possible, the landowner should:

● avoid tilling;
● use minimum cultivation techniques;
● maintain current plough depth to avoid new damage;
● avoid sub-soiling, pan busting, stone cleaning or new drainage operations;
● avoid growing potatoes, sugar beet, short rotation coppice or turf;
● avoid any harvesting operations that involve rutting, soil removal, significant soil compaction or
soil erosion.

Planning Policy Guidance 16 (PPG 16) advised that archaeological remains are a finite and irre-
placeable resource and that their presence should be a material consideration in applications for new
development. It accepted that development will affect archaeological deposits and that this effect must
212 Dom Fearon and Ernie Jowsey
be mitigated. PPG 16 stresses the importance of the evaluation of a site for its archaeological potential
in advance of development in order to inform future management decisions. This evaluation may
involve non-intrusive methods such as a desk-based study and/or a more direct method such as trial
trenching.
Following the results of the initial evaluation, PPG 16 offered two solutions for preserving any
significant archaeological deposits found to be on a development site. The first, and explicitly pre-
ferred, method involves preservation in situ whereby the archaeology is left untouched beneath a new
development through methods such as adaptation of foundation design and architectural layout of the
proposed new development, or by raising the level of the development with made ground so that its
foundations do not reach the archaeological level. Where nationally important remains are encoun-
tered, this method of preservation is strongly preferred.
If preservation in situ is not feasible then PPG 16 permits preservation by record. This involves
archaeological fieldwork to excavate and record finds and features (thereby destroying them). This
may involve a full excavation, further trenching in specific areas or an archaeological watching brief
that involves an archaeologist monitoring ground works for the new development and recording any
finds or features revealed as construction continues.
All forms of archaeological investigation undertaken through PPG 16 are funded by the developer.
The work is intended to be undertaken in advance of any planning consent being granted but often
happens to satisfy a planning condition placed on an application for development.
Because of the potential for destruction of significant remains, PPG 16 prefers evaluation to take
place in advance of any planning decision being made. A developer tenders for the work to be done
and chooses an archaeological organisation to retain. The work is monitored by a curator, normally
the county archaeologist, who is nominated by the local planning authority (LPA) as an adviser and
who also identifies sites where archaeology might be threatened by development. Following sub-
mission of a satisfactory site report and demonstration that a site’s archaeological potential has been
properly safeguarded and/or recorded, the curator will usually advise that development can continue.
A Sites and Monuments Record or SMR is kept by curators; this is a database of known archaeo-
logical sites and is often used to inform decisions on archaeological potential. Areas of archaeological
potential are often drawn on GIS maps which can indicate any potentially damaging development
automatically.
PPG 16 has resulted in an explosion in archaeological fieldwork in the UK. Developer fund-
ing has led to dozens of archaeological organisations competing for work along with archaeological
consultants working for developers to oversee projects. This has contributed to the growing profes-
sionalisation of archaeology.

Further reading
www.gov.uk/sites-of-special-scientific-interest-and-historical-monuments (accessed 05/12/2013).

9.2 Coastal and marine heritage

Key terms: coastal heritage; marine planning; English Heritage; Marine Management Organisation
Coastal and marine heritage includes: submerged remains of prehistoric landscapes, such as historic
shipwrecks; the archaeology and built heritage of major ports and minor harbours; and coastal defence
systems. Since the 2002 National Heritage Act, English Heritage (EH) has responsibilities for archaeo-
logical remains below mean low water within UK territorial waters adjacent to England. Scottish
National Heritage does this for Scotland and Natural Resources Wales does this for Wales.
EH aims to secure the preservation of ancient monuments in, on or under the seabed, and to pro-
mote the public’s enjoyment of and knowledge of ancient monuments in, on or under the seabed.
 Land management 213
Natural erosion, flood and coastal erosion and commercial developments all pose risks for coastal
heritage assets. English Heritage provides advice on the implications of these factors for the historic
environment at a strategic and scheme-specific level. The Marine Management Organisation (MMO)
is another important organisation, established by the Marine and Coastal Access Act 2009 with respon-
sibility for preparing marine plans for the English inshore and offshore waters. It has a duty to take
decisions on proposed developments in the plan area in accordance with the Marine Policy Statement
(MPS) and marine plans, unless relevant considerations indicate otherwise. The MMO must:

● design a planning process suitable to deliver marine plans;

● work to integrate and balance all the current marine and future activities into a comprehensive
plan;
● deliver a marine plan for each marine plan area;
● monitor and review plans on a regular basis.

The MMO is responsible for marine planning around the UK coastline which currently contributes
about £50 billion to the economy and has the potential to contribute significantly more. The MMO
administers a range of statutory controls (other than oil and gas licensing) that apply to marine projects,
including:

● seabed and foreshore construction;

● coastal flood risk management works;
● navigation and aggregate dredging;
● the disposal of waste materials in the sea.

This is done on behalf of the Secretary of State Defra, and covers the UK marine area, not subject to
devolved administration.

Further reading
www.helm.org.uk/managing-and-protecting/coastal-and-marine-heritage (accessed 05/12/2013).

9.3 Farm buildings

Key terms: barn conversion; local planning authority; permitted development rights; Town and
Country Planning (General Permitted Development) Order 1995; Town and Country Planning (Use
Classes) Order 1987; English Heritage
Farm buildings no longer required for agricultural purposes can often provide a landowner with a variety
of potential reuse and/or development opportunities. While this is usually seen as a positive, landown-
ers should be aware that if they wish to continue using and occupying surrounding areas for agricultural
or business purposes, this can cause some conflict between the existing and proposed uses. The obvious
choice, and one that has become very popular over the last few decades, is a ‘barn conversion’ for resi-
dential purposes that can be sold or let separately from the main farm steading or used as a supplementary
income, e.g. holiday let, bed and breakfast accommodation or camping barn. More recently, in addition
to residential use, we have seen larger rural estates convert redundant buildings and whole farm stead-
ings to office space and/or small, light industrial business space for local rural businesses. These are just a
few examples of reuse, but there is clearly more potential, especially in light of the current government’s
intention to relax certain planning policies in a bid to simplify and speed up the current planning process.
Critics may argue this form of development can be harmful to the countryside and rural villages,
and there is usually much debate and many hurdles to be crossed in terms of planning approval
214 Dom Fearon and Ernie Jowsey
before these developments can go ahead, if at all. The regulations concerning change of use for farm
buildings are further discussed below. In its favour, reuse is inherently sustainable. Some farm build-
ings represent a historical investment in materials and energy, and contribute to environmentally
benign and sustainable rural development. The concept of reuse is not a new one. Farm buildings
have often been adapted over a long period to accommodate developing farming practices and tech-
nologies. Some have a greater capacity to accommodate change or a new use than others, and a small
number are such historically or architecturally significant elements of our heritage that they should
be conserved with minimal or no intervention. This is traditionally where the role of the LPA takes
its part in the process.
Traditionally, under planning legislation, agricultural buildings had certain permitted development
rights. These rights are basically a right to make certain changes to a building without the need to apply
for planning permission. These derive from a general planning permission granted from Parliament in
The Town and Country Planning (General Permitted Development) Order 1995 (SI 1995/418) (the
1995 Order), rather than from permission granted by the LPA. Schedule 2 of the Order sets out the
scope of permitted development rights. It is worth noting here many traditional farm buildings are
listed – meaning listed building consent will most likely also be required. Again, traditionally under
planning legislation, The Town and Country Planning (Use Classes) Order 1987 puts uses of land and
buildings into various categories known as ‘use classes’. The categories give an indication of the types
of use that may fall within each use class.
More recently changes to permitted development rights (PDRs) came into effect in May 2013,
offering an easier process for changing the use of farm buildings in England. Changes to the PDRs
came into force on 30 May 2013 and allow the change of use of small farm buildings in England with-
out formal approval subject to the following:

● The changes apply to agricultural buildings with a floor space of up to 500 sq m, which were in
sole agricultural use as of 3 July 2013.
● They can be changed to an alternative use without the need for detailed planning permission for
that change of use.
● Any building converted under the new rules after this date must have been in agricultural use for
a minimum of 10 years to be eligible.
● Note that the PDRs apply only to change of use – changes that physically alter the building may
still need building consent or planning permission.
● Also, for some changes of use to buildings larger than 150 sq m, the LPA will need to refer propos-
als to statutory consultees such as the Highways Authority and or the local Environmental Health
Department.

PDR change of use includes conversion of farm buildings into shops, restaurants, cafés, offices, light
industrial units and hotels without detailed planning permission being needed. They also allow some
farm buildings already in alternative uses to be changed to a further alternative use. Please note, at
present these changes do not include changes to residential use although the government opened a
consultation, which ended on 15 October 2013, looking at the reuse of existing agricultural buildings
for a dwelling house. These specific proposals are for up to an additional three dwellings with an upper
limit of 150 sq m for each dwelling.
When considering the conversion of traditional farm buildings there is good guidance provided
to landowners and developers via English Heritage, which includes their document The Conversion of
Traditional Farm Buildings. To understand the character and significance of the farm building and its
landscape setting English Heritage have provided a summary of good practice for conversion proposals
comprising some of the following actions:
 Land management 215
● A thorough understanding of the farm building’s historical, structural and spatial attributes is
needed to inform the possible future use of the farm building and subsequent design work.
● Try to understand as much as possible about the way the building is constructed and its condition
before undertaking significant works of repair/alteration.
● A comprehensive measured survey in plan section and elevation together with an accurate survey
of condition is essential before embarking on the works.

Further reading
English Heritage (2006) The Conversion of Traditional Farm Buildings, available at: www.english-heritage.org.uk/
publications/conversion-of-traditional-farm-buildings (accessed 22/11/2013).
www.gov.uk/planning-permissions-for-farms (accessed 22/11/2013).
www.gov.uk/government/consultations/greater-flexibilities-for-change-of-use (accessed 22/11/2013).

9.4 Fishing and fishing rights

Key terms: riparian rights; Land Registry; Salmon and Freshwater Fisheries Act 1975; national byelaws;
regional byelaws

Fishing rights: the law in England and Wales

Many estates or sizeable landholdings are likely to include at least one river or watercourse and it is
therefore important to understand the legal framework that governs them.
There are laws that govern fishing in England and Wales. Like many other activities these laws have
developed over time, and there are different laws for tidal waters (e.g. the sea) and non-tidal waters
(e.g. lakes and rivers).

● For tidal waters, members of the public have a right to fish in the sea below the mean high water
mark of tidal waters. Anyone can fish either from the bank, a pier or by boat assuming there is
suitable public access. You may, however, require a licence to fish salmon or sea trout in a tidal
estuary. Fishing at sea is subject to controls over the manner in which fish can be caught, the
minimum size of the fish and the size of the mesh in the nets. In addition, European Union quotas
are applicable to commercial fishing.
● For non-tidal waters, the arrangement is a little more complicated. There are two parts of property
in a river that can be owned: these comprise the river bed and the fishing rights. The right to fish
in a river, commonly called ‘fishing rights’ is a class of legal interest called a profit à prendre and is
often the most valuable part of the river. It is not an interest in the land as such, like being the
owner of it, or having a tenancy of it, but rather the right to do something with a certain part of
the land; in this case, the water. The fishing rights can be bought, sold and leased independently
of the land or together with it, depending on what the owner wants to do. The fishing rights can
also be registered with their own, independent title at the Land Registry.
● The owner of the land adjoining one side of a natural river or stream owns the exclusive
fishing rights (often called riparian rights) on their side of the bank. These rights extend up to
the middle of the water. If there is an island in the river then it is also owned by the riparian
owner whose side of the river it falls in, or, if both, it is again split along the imaginary mid-
dle line between the two banks. If the river lies wholly in their ownership, then they own all
of it. However, as this can sometimes be a presumption, express wording to the contrary will
negate it. This can mean that by agreement, one owner can own all of the bed of the whole
river and the adjoining owner’s interest may start on the opposite bank. This can occur when
216 Dom Fearon and Ernie Jowsey
a large estate is split up and sold in parts to third parties. The whole of the river and usually
the fishing rights are often kept by the estate.
● Although you may have fishing rights, a riparian owner is still subject to the general laws protect-
ing close seasons for fish. These are set down in the Salmon and Freshwater Fisheries Act 1975.
Just because one has the right to access a river, stream, lake or any other water body, one does not
automatically have the right to fish in it.
● Byelaws protect fish stocks and fisheries in England and Wales. They apply to all waters whether
they are owned by angling clubs, local authorities or private individuals. Owners may impose
additional rules, but they cannot dispense with any byelaws that apply to their water. There are
national byelaws that apply across the whole of England and Wales and regional byelaws that only
apply locally. Both national and regional byelaws need to be adhered to and these are available
from the Environment Agency (EA).

Further reading
www.environment-agency.gov.uk (accessed 13/11/2013).
www.landregistryservices.com (accessed 13/11/2013)

9.5 Trees and forestry

Key terms: Forest Authority; felling licence; Tree Preservation Order (TPO); Conservation Area;
Town and Country Planning Act 1990; Town and Country Planning (Trees) Regulations 1999
Trees, woodland areas and forests are of particular landscape and conservation importance both in
the countryside and in our towns and cities, and accordingly they have a number of special laws and
regulations. From a property and/or development perspective, trees can have many benefits. They can
slow down wind and therefore reduce heating bills; give shade and reduce summer electricity (e.g. air
conditioning) bills; absorb pollution; stabilise sloping sites; and muffle noise. In some cases, trees on
site may also provide sustainable crops of timber and other craft materials that can be used in the con-
striction process. Trees are able to provide shelter and food for wildlife, especially if they form ‘green
corridors’, connecting the site to other trees and woods nearby. Trees can soften the hard edges of
property development, giving pleasure to the people who live and work on the site. They can often
enhance the development, thereby helping with marketing/sale or letting of the site. In the long term
the benefits may include superior property values compared to those with limited landscaping, so long
as regular maintenance of the trees is upheld.
However, not all trees are planted, or have been planted by human means. Some existing trees may
need to be removed or pruned; as trees grow, you need to think ahead to avoid direct or indirect dam-
age to new buildings. Some trees may be unsafe, and to make the site suitable for building you may
need to remove them or have tree surgery done to make them safe. If potentially hazardous trees are
left on site, purchasers may be able to claim for damage or for unnecessary tree surgery costs. Building
works can easily damage trees, especially the roots. This can be digging with an excavator near the
roots or via compaction of the roots by storing building materials close to trees. As a result, and usually
after a period of time, the trees may then die back and become unsafe. You need to plan, before even
designing the site, which trees to keep and how to protect them, and consider where new planting
would be appropriate and would not pose a future risk to people or buildings. Further guidance on
trees and development sites can be found in British Standard (BS) 5837.
With regard to felling large numbers of trees and commercial forestry, everyone needs permission
from the Forest Authority (a part of the Forestry Commission) to fell growing trees unless the opera-
tion is exempt. For exemptions to this rule see below. There is a public register of applications for
 Land management 217
felling licences. All applications have to rest there for 4 weeks and any person or body can comment
on them. This facility can be found at the Forestry Commission’s Public Register website.
Exemptions – For mainly commercial purposes, landowners are allowed to fell up to 5 cubic metres
of timber on their property without a licence, so long as no more than 2 cubic metres are sold. For
smaller-scale tree operations, the following exemptions to licences apply:

● lopping and topping, including most tree surgery, pruning and pollarding;
● felling fruit trees, or trees growing in a garden, orchard, churchyard or other designated public
open space;
● felling trees that, when measured at a height of 1.3 m from the ground, have a diameter of 8 cm or
less; or
– if thinnings (trees removed from among other trees to allow their growth) have a diameter of
10 cm or less; or
– if coppice or underwood (trees as part of a layer below the main forest canopy) have a diam-
eter of 15 cm or less;
● felling trees immediately required to implement a planning permission;
● felling trees for work carried out by some service providers (e.g. electricity or water) and that is
essential to carry out those services;
● felling necessary to prevent the spread of disease and done in accordance with a notice served by
the Forest Authority.

To find out whether your or your neighbour’s trees are protected, contact the Local Planning Authority
(LPA) for further advice. If your trees are protected, you need written permission to remove them or
to do any work to them. If you remove protected trees or do work to them without permission, you
could be prosecuted. Trees have protection if they are within a Conservation Area or subject to a Tree
Preservation Order (TPO). The owner or the tree contractor can usually apply for work to protected
trees on standard forms. You will usually receive a decision within 6 weeks for Conservation Areas
and 2 months for TPOs and planning conditions. Trees within a Conservation Area are not strictly
protected, but there is a requirement that the owner gives notice to the council of their intention to
do works. If you want to remove trees, you may be required to plant replacements of the same species
and in the same location. It should be noted that not all mature trees are protected so it is wise to check
with the planning authority in the first instance.
TPOs are made under the Town and Country Planning Act 1990 and the Town and Country
Planning (Trees) Regulations 1999. A TPO is made by the LPA to protect specific trees or a particular
woodland from deliberate damage and destruction. Making a TPO is a ‘discretionary’ power, which
means that the Council doesn’t have to – it may choose to make them or it may not. However, once
they have decided, they do have a duty to enforce it. Although, it is possible to make TPOs on any
trees, in practice they are most commonly used in urban and semi-urban settings, for example, gardens
and parklands. A TPO is to protect trees for the public’s enjoyment. It is made for the amenity value
of the tree and this can include the nature conservation value but more often means its visual amen-
ity. There are presently four types of TPO, although any one order can contain any number of items
which can be of one or more types. The types are as follows:

1 Individual: can be applied to an individual tree;

2 Group: can be applied to a group of individual trees, which together make up a feature of amenity
value;
3 Area: covers all trees in a defined area at the time the order was made;
4 Woodland: covers all trees within a woodland area regardless of how old they are.
218 Dom Fearon and Ernie Jowsey
Further reading
British Standard BS 5837: 2012 Trees in Relation to Construction.
The Forestry Commission – www.forestry.gov.uk/forestry (accessed 21/11/2013).
Naturenet – www.naturenet.net/trees (accessed 21/11/2013).
The Planning Portal – www.planningportal.gov.uk/planning/appeals/otherappealscasework/treepreservation (accessed
21/11/2013).

9.6 Historic parkland

Key terms: The 1983 Heritage Act; English Heritage; Registered Park; Sites and Monuments Records;
Historic Environment Records; National Planning Policy Framework
Most historic parkland today is the product of several phases of design over several centuries. Some origi-
nated as, and retain elements of, mediaeval deer parks; others retain remnants of the pre-park agricultural
landscape and others contain scheduled monuments and other archaeological features. Historic parks are
deemed to be an integral part of the English countryside, making a unique contribution to its character,
its biodiversity and cultural heritage. Many historic urban parks and other designed landscapes such as
cemeteries have drawn inspiration from the country house park, and many local authority-owned and/
or managed country parks were once former country house estates and parklands.
While historic parks may have started from native woodland, they are now considered artificial
or man-made landscapes having adapted to different management techniques and different own-
ers over the centuries. The owners of parks were the nobility and gentry, bishops and religious
houses. A park usually formed part of a large or medium sized manor. The importance of historic
parks can therefore be categorised in many ways in terms of their association with individu-
als, sites of archaeological importance, architectural buildings but also in more recent times as
landscapes to enjoy for leisure and tourism purposes. It is therefore essential that these sites are
protected for future generations to enjoy.
The 1983 Heritage Act empowered English Heritage to manage the Register of Parks and
Gardens of Special Historic Interest in England. The Register includes a diverse range of designed
landscapes including urban parks, allotments, hospital grounds, cemeteries and post-war designs.
As with listed buildings, the sites are graded, but the Register has no equivalent statutory powers
or consent scheme. However, the Register is a material consideration in the determination of
planning applications, which can help to deter inappropriate development, and most development
plans now incorporate protection policies. Each Register entry comprises a written description,
together with a map showing the boundary of the registered land. The entry includes a summary
history and a description of the site as existing, highlighting its special features and characteristics.
Register descriptions and maps can be obtained from English Heritage’s National Monuments
Record Centre.
The Register only records sites of historic importance in a national context. Many more are impor-
tant locally or regionally, and a number of local authorities and county gardens trusts have compiled
or begun to compile local lists of parks and gardens, which may or may not also be subject to develop-
ment plan policies.
Many county Sites and Monuments Records (SMRs) or Historic Environment Records (HERs)
contain information on parks and gardens and their archaeological features.
Parkland is likely to be of historic interest if it contains:

● a listed principal house;

● plantations, avenues, clumps or specimen trees over a hundred years old;
● features such as follies, eye-catchers, lodges, ha-has, old boundary walls, gates or fences.
 Land management 219
Similar to listed buildings, historic parks are vulnerable and require ongoing maintenance to protect
them from unnecessary neglect and damage. The principle of parkland conservation is to protect and
retain the original historic fabric where possible. It is desirable that management should conserve the
design and special parkland characteristics as well as accommodate new uses to meet the challenge
of sustainability. Examples of changes that can affect the original fabric include lack of maintenance,
harm or loss of trees, abandonment of park buildings and monuments, poorly sited or unsympathetic
development such as new buildings within or close to the park boundary.
To afford further protection for these parkland sites local authorities can provide HERs. These
records are maintained by LPAs; they are used for planning and development control as well as
for public benefit and educational use. Access to consistent, up-to-date and high quality informa-
tion about the historic environment through HERs is an important requirement for the delivery
of Heritage Protection Reform (HPR) and the National Planning Policy Framework (NPFF). The
NPFF sets out the requirement for LPAs to maintain or have access to a HER and to ensure HERs
are used as a matter of course in planning and development matters.
Advice on how to protect historic parklands or relevant grant schemes is currently available from
the following organisations: Department for Environment, Food and Rural Affairs (Defra), English
Heritage, County Gardens Trusts and the Garden History Society, Local Authority Archaeologists or
Conservation Officers.

Further reading
www.algao.org.uk (accessed 13/11/2013).
www.defra.gov.uk (accessed 13/11/2013).
www.english-heritage.org.uk (accessed 13/11/2013).
www.magic.gov.uk (accessed 13/11/2013).
www.wapis.org.uk (accessed 13/11/2013).

9.7 Protected landscapes

Key terms: National Parks; Areas of Outstanding Natural Beauty; Heritage Coasts; National Parks
and Access to the Countryside Act (1949); Statutory Designations; Non-statutory Designations;
International Union for Conservation of Nature; National Planning Policy Framework
It is important to realise that not only are large areas of our towns and cities, together with their his-
toric buildings and structures, afforded protection from unnecessary change of use and development,
large areas of the UK landscape are also protected in a similar way. For example, National Parks and
Areas of Outstanding Natural Beauty (AONBs) together cover nearly a quarter of England and rep-
resent some of the country’s finest landscapes. The rationale for this protection can be traced back to
the mid twentieth century. Two defining documents, The Hobhouse Report and The John Dower Report,
were commissioned by the government to respond to the wish of the public to have access to land for
recreation purposes. Following these reports, an Act of Parliament was passed, The National Parks and
Access to the Countryside Act (1949) in order to conserve and enhance the most sensitive landscapes
in the UK. These landscapes are not chosen or designated purely for their natural beauty as their natu-
ral elements have generally been shaped by industry, farming and human settlement. It is how they
have evolved and been shaped that leads to their ‘special qualities’ which affords their protection. The
main three landscapes that are generally protected either by national law or by local authorities are:

● National Parks – large areas designated by law to protect their special landscape qualities and pro-
mote outdoor recreation. National Parks have their own authorities, which among other areas,
control planning.
220 Dom Fearon and Ernie Jowsey
● Areas of Outstanding Natural Beauty – protected by law because of their special landscape quali-
ties, wildlife, geology and geography. They have more protection than other areas under the
planning process and, in terms of landscape and scenery, are equal to National Parks.
● Heritage Coasts – these include stretches of outstanding, unspoilt coastline, usually cared for by
local authorities and/or charities such as the National Trust.

Landscapes are protected by a range of mechanisms including statutory and non-statutory designations,
national planning policies and European conventions.
Statutory designations – as mentioned above, the National Parks and Access to the Countryside Act
(1949) set out to conserve and enhance certain areas for their natural beauty, with areas designated
as National Parks or Areas of Outstanding Natural Beauty. Approximately 23 per cent of England is
currently protected by one of these two designations, the purposes of which are supported by strategic
management plans prepared by the lead local authorities. The importance of the designations has been
noted through the planning system, most recently through the National Planning Policy Framework.
The legislative system in England and Wales is supported by international guidelines and sharing of
experience of designations through the International Union for Conservation of Nature (IUCN) and
the European Federation. The England and Wales designation system for designation for National
Parks and AONBs is recognised as falling within the parameters of the IUCN’s Category V Protected
Landscape definitions. The statutory duties/powers for designating new National Parks and AONBs
in England and reviewing existing boundaries reside with Natural England.
Non-statutory designations – Heritage Coasts are identified for national purposes of conservation and
enhancement of the natural beauty of the coastline, its terrestrial and marine flora and fauna, and heritage
features. They also have objectives to:

● facilitate and enhance the public’s enjoyment of these resources;

● maintain and improve the environmental health of inshore waters affecting heritage coasts and
their beaches.

In delivering these objectives account must be taken of the needs of land management activities and
local communities. Heritage Coast designation currently extends across a third of the English coast-
line, often running in tandem with National Parks and/or AONB designations. An important tool for
conserving Heritage Coasts is having supportive policies in LPA development plans. A large propor-
tion of these coastlines have already been incorporated within designation management plans, making
it simpler for developers and the local communities to understand the reasons for ongoing protection
for future generations.

Further reading
English Heritage, ‘Protected Landscapes’, available at: www.english-heritage.org.uk/professional/research/landscapes-
and-areas/protected-landscapes/ (accessed 19/11/2013).
English Heritage, ‘A strategy for English Heritage’s Historic Environment Research in Protected Landscapes’,
available at: www.english-heritage.org.uk/publications/historic-environment-research-in-protected-landscapes/
protlandstrat.pdf (accessed 19/11/2013).
Natural England, ‘National Parks’, available at: www.naturalengland.org.uk/ourwork/conservation/designations/
nationalparks/ (accessed 19/11/2013).

9.8 Religious buildings

Key terms: Church of England; listed buildings; listed building consent; conservation area consent;
‘ecclesiastical exemption’; total demolition; partial demolition; repair grants for places of worship.
 Land management 221
Places of worship of all faiths and religions include many of the most important historic buildings in the
UK. They often play a fundamental role within their communities and provide a link to the region’s
local history. It is estimated that approximately 45 per cent of all Grade I listed buildings are churches.
People generally feel strongly about them whether or not they are active members of a worshipping
congregation. With this in mind, it is clear to see that these buildings require considerable care in terms
of their architectural, archaeological, artistic, historic and cultural interest.
Since the Reformation of the sixteenth century, the Church of England has by far the most of
England’s oldest and finest churches. Only in the nineteenth century did other denominations such
as Anglican and Catholic, and more recently Jewish and Muslim communities, have the financial
resources to build on a similar scale. For this reason, the Church of England properties will be dis-
cussed in most detail below. The situation in Scotland is also not covered within this text.
The word ‘church’ means a place of worship of Christian or non-Christian denominations. As previ-
ously mentioned, many Church of England churches are Grade I or II* listed and numerous churches are
situated in conservation areas. As such, alteration to these buildings would be subject to planning control,
especially listed building consent and conservation area consent. These requirements normally mean that:

● listed building cannot be demolished, altered or extended so as to affect its character without con-
sent, according to section 7 of the Planning (Listed Buildings and Conservation Areas) Act 1990
(hereafter PLBA 1990);
● permitted development is often restricted in conservation areas and demolition of unlisted build-
ings needs consent (s.74 PLBA 1990).

However, because of what is known as the ‘ecclesiastical exemption’, the requirement for listed building
consent does not extend to: ‘any ecclesiastical building which is for the time being used for ecclesiastical
purposes or which would be so used but for the works of demolition, alteration or extension.’
The exemption dates from 1913 when the Church sought independence in its own affairs and
was opposed to interference from the State in the form of secular control over alteration to church
buildings. Since this time there has been much legislation and case law concerning exemption and
listed buildings with the present situation being as follows. Under the Provisions of the Ecclesiastical
Exemption (Listed Buildings and Conservation Areas Order) 1994 the exempt denominations are:

● The Church of England

● The Church in Wales
● The Roman Catholic Church
● The Methodist Church
● The United Reformed Church
● The Baptist Union.

Section 60(1) PLBA 1990 gives exemption to: ‘any ecclesiastical building which is for the time being
used for ecclesiastical purposes’.

Exemption is from:

● listed building consent;

● building preservation notices;
● temporary listing (urgent cases);
● compulsory acquisition (of listed buildings in need of repair);
● execution of urgent works for unoccupied listed buildings;
● criminal liability for damaging listed buildings.
222 Dom Fearon and Ernie Jowsey
You will have noticed that the exemption does not cover planning permission. Therefore, any works
to an ecclesiastical building that involve ‘development’ will need planning permission. Neither does
the exemption cover listed structures within the churchyard, for example, monuments and grave-
stones, which may require listed building consent.
With regard to demolition, as far as ecclesiastical buildings were concerned, the law used to distin-
guish between:

● total demolition (outside the exemption); and

● partial demolition (within the exemption).

This position has been complicated by the House of Lords decision Shimizu (UK) Ltd v Westminster
CC (1997).
Total demolition of a church will require:

● listed building consent (if appropriate);

● conservation area consent (if appropriate).

It will not require planning permission following the Town and Country Planning (Demolition –
Description of Buildings) (No. 2) Direction 1992.
However, it should be noted that a ‘redundant church’ does not require listed building consent for
demolition works (s.60(7) PLBA 1990). The ecclesiastical exemption is therefore not relevant here.
There may be circumstances in which state intervention is needed, for example if a redundant church
is in a conservation area and/or there are objections to the demolition by:

● the local planning authority;

● the church commissioners;
● a national amenity group.

Due to their age, a large number of churches will invariably have deteriorated in their condition and
state of repair over time. Since the seventeenth century, the Church of England has had a system
of regular inspections of its churches, now referred to as ‘quinquennial inspections’. The Church
Buildings division of the Archbishops Council publishes a useful booklet, A Guide to Church Inspection
and Repair. With regard to the availability of grants for repair for places of worship, English Heritage
provides guidance and a flow chart on current grant schemes.

Further reading
www.english-heritage.org.uk/caring/places-of-worship/ (accessed 13/11/2013).
www.hlf.org.uk/GPOW (accessed 13/11/2013).
www.spabfim.org.uk (accessed 13/11/2013).

9.9 Waste disposal sites

Key terms: landfill; recycling; Environment Agency; Health Protection Agency
In 2011, the UK disposed of 49 per cent of waste to landfill, with 25 per cent recycled, 14 per cent com-
posted and 12 per cent incinerated. Household recycling has risen from just 11 per cent in 2001 to 43
per cent in 2013 and over half of business waste is now recycled. Around 300 million tonnes of waste is
produced each year in England and Wales, and all of it must be managed in a way that protects people
and the environment. Much of this waste is reused or recycled, but some of it still needs to be disposed of.
 Land management 223
The European Environment Agency warned that many countries will fail to meet the European Directive
on the Landfill of Waste (1999) target of recycling 50 per cent of waste by 2020. Some countries, such as
Germany, Austria and Belgium, already recycle more than half of their waste, but others, in particular those
in south-eastern Europe, are far behind: Greece only recycles 18 per cent, up from 9 per cent in 2001,
while Romania recycles just 1 per cent. In a few cases, countries have gone backwards, with Norway’s rates
falling from 44 per cent to 42 per cent, and Finland’s dropping from 34 per cent to 33 per cent.
As well as reuse and recycling, other techniques and technologies are being developed to reduce the
amount of rubbish sent to landfill each year. These include producing energy from waste by incineration or
by anaerobic digestion. One consequence of complying with the European directive on recycling has been
a number of serious fires across Europe at recycling plants. In the UK there have been serious fires at recy-
cling plants in Smethwick (July 2013), Wellingborough (September 2013), East Stoke, Dorset (October
2013), Llandow, Wales (November 2013), and many others. Such fires can burn for many days and give
out noxious fumes that can endanger the health of nearby residents, who are often advised to stay indoors.
A landfill site is an area of land used to dispose of rubbish, either directly on the ground or by fill-
ing a hole in the ground. For example, a disused quarry is often used as a landfill. Up until the 1980s,
policies of successive governments had endorsed the ‘dilute and disperse’ approach, but the UK has
since adopted the appropriate European legislation and landfill sites are generally operated as full
containment facilities. However, many dilute and disperse sites remain throughout Britain. The local
authority decides through the planning process whether to allow the development of a landfill site. It
checks the need for the site against waste plans, and sets conditions on size, location and restoration.
Local authorities and industry take waste to landfills.
Landfill Tax is a tax on the disposal of waste. It aims to encourage waste producers to produce less
waste, recover more value from waste, for example through recycling or composting and to use more
environmentally friendly methods of waste disposal. The tax is charged by weight and there are two
rates. Inert or inactive waste is subject to the lower rate of £2.50 per tonne in 2013; active waste is
subject to the higher rate of £72 per tonne in 2013.
There are three kinds of operational landfill sites categorised by the types of waste they are author-
ised to take. These are:

● Inert wastes – these sites take only inert wastes such as excavation wastes. They have a low impact
on the environment. Inert wastes are unlikely to react with other wastes.
● Non-hazardous wastes – these sites take a mix of inert wastes and biodegradable wastes. They may
also be allowed to make special provision for some hazardous waste such as asbestos.
● Hazardous wastes – these sites take hazardous wastes such as contaminated soils and asbestos to
landfill. As they do so they produce gas, which is known simply as landfill gas. As rainwater seeps
through the landfill a liquid is formed, known as leachate. Landfill gas and leachate must be safely
extracted and treated.

There was a landfill disaster in Loscoe, Derbyshire in the 1970s – no one died, but a cottage was blown
to pieces due to landfill gas escaping from a nearby capped site. Landfill gas (methane and carbon dioxide)
built up in the capped landfill. The air pressure dipped and, as the site had no venting mechanism, the gas
followed the least line of resistance through the geology (coal seams) and up into the houses nearby. A spark
in one of these ignited the explosive mixture, destroying a bungalow completely and injuring the occupant.
This disaster led to the introduction of key legislation and government guidance and much research
into best practice. Over time, landfill sites were designed to vent gas to the atmosphere, then to burn off
methane and eventually, in the most productive, to turn the gas into electricity using gas turbines that
supply the national grid. Heathfield landfill site in South Devon (Viridor) is a good example. Monitoring
of landfill gases must now take place where public housing is 250 m from the site, with reporting of
results to the EA – the regulator – and strategies put in place for evacuation should it be necessary.
224 Dom Fearon and Ernie Jowsey
The EA is responsible for regulating over 2,000 landfills:

● 465 of these are operational sites with a Landfill Directive compliant permit.
● 812 sites have stopped taking waste since July 2001 when the Landfill Directive came into
effect. These sites closed in accordance with the Directive requirements.
● 979 sites stopped taking waste before the Landfill Directive came into effect, but continue to have
permits from previous regimes.
● about 75 per cent of the EA regulated sites no longer take any waste. However, many of them will
continue to pose a risk to the environment for many years to come.

The EA ensures that the operator only takes appropriate waste, that water nearby is not polluted and
that nuisance such as odours, waste blowing across the site, noise, and vermin such as gulls do not
affect communities in the area. When a site is up and running it is inspected regularly to make sure
it is operating within the conditions of the permit and the EA advise on necessary improvements,
and may enforce the permit by issuing a warning, serving a notice taking away permission or by
prosecuting the operator. When it is time to close the site the operator has to agree with the EA
how they are going to do this and agree a plan for its monitoring and management. This aftercare
will continue until the EA are satisfied that there is no risk to the environment. Aftercare can last a
hundred years or more.
Most waste in the UK has traditionally been disposed of to landfill sites. These can generate
considerable public concern about the health effects of emissions and there have been suggested
links to a range of health effects including cancer and birth defects. The Health Protection Agency
(HPA) recognises that the practice of disposing of waste materials to landfill can present a pollu-
tion risk and a potential health risk. Modern landfills are subject to strict regulatory control which
requires sites to be designed and operated such that there is no significant impact on the environ-
ment or human health. An assessment of the health risks posed by landfill sites and other forms of
waste management was published by Defra in 2004, incorporating a review of the assessment by
the Royal Society. The HPA carried out a review of more recent research into the suggested links
between emissions from landfill sites and effects on health. This review encompassed the results
of a number of epidemiological studies, detailed monitoring results from a major project funded
by the EA, and advice sought from the Committee on Toxicity of Chemicals in Food, Consumer
Products and the Environment. The HPA concluded that there has been no new evidence to
change the previous advice that living close to a well-managed landfill site does not pose a signifi-
cant risk to human health.
All landfill sites must operate without causing pollution of the environment or harm to human
health. They are carefully managed to keep risks to a minimum. Anyone who operates a land-
fill site must have an environmental permit to do so. Landfill operators must now comply with
the European Directive on the Landfill of Waste, the Environmental Permitting Regulations
(England and Wales 2010) and some additional directives. Other regulations apply in Scotland and
Northern Ireland. Regulations set standards for the location, design, monitoring and operation of
landfills.

Further reading
www.environment-agency.gov.uk/business/sectors/108918.aspx (accessed 06/12/2013).
www.hpa.org.uk/Publications/Radiation/DocumentsOfTheHPA/RCE18ImpactonHealthofEmissionsfrom
LandfillSites/ (accessed 06/12/2013).
 Land management 225
9.10 UK National Parks
Key terms: moorland; wetlands; lakes; rivers; woodlands; forests; meadows and grasslands
The UK has 15 National Parks (10 in England, two in Scotland and three in Wales), which are areas
of protected countryside where visitors are encouraged and where people live and work. They are
protected areas because of their beautiful countryside, wildlife and cultural heritage. The first were
designated as National Parks in 1951 (Peak District, Lake District, Snowdonia and Dartmoor). A large
proportion of land within the National Parks is owned by private landowners. Farmers and organisa-
tions such as the National Trust are some of the landowners, along with the thousands of people who
live in the villages and towns. National Park authorities sometimes own bits of land, but they work
with all landowners in all National Parks to protect the landscape.
All National Parks are funded from central government. In Wales and Scotland the money is
allocated by the Welsh and Scottish Governments. The main areas of expenditure are: planning –
controlling development (15 per cent); planning – policies and communities (9 per cent ); promoting
learning and understanding (24 per cent); wardens, estate workers and volunteers (21 per cent ); and
running the organisation (17 per cent) (Table 9.10.1).
Moorlands are managed and protected by the National Parks, which give advice and grants to land-
owners to burn heather, graze animals and control the growth of bracken and trees. There have been
increases in the numbers of rare birds such as golden plover and merlin on some moorland. Heather
is burnt after 12 years so that new growth of young shoots can grow and feed wildlife. Biodiversity
action plans list the measures taken to protect rare moorland areas and species.
Wetlands, lakes and rivers are kept clear of mud and unwanted vegetation. Cattle and sheep are
fenced in to keep them away from water, fish are encouraged and clean water is monitored. Salmon
and water voles are protected in rivers.

Table 9.10.1 National Park expenditure (£)

Authority 2010–11 2011–12 2012–13 2013–14

Brecon Beacons 3,302,269 3,215,500 3,402,253 3,387,834
Broads 4,229,502 4,002,149 3,774,799 3,547,447
Cairngorms 4,946,000 4,756,000 4,646,000 TBC
Dartmoor 4,739,642 4,484,867 4,230,095 3,975,321
Exmoor 3,978,580 3,764,715 3,550,853 3,336,989
Lake District 6,921,279 6,549,233 6,177,190 5,805,144
Loch Lomond and The Trossachs 7,122,000 6,768,000 6,648,000 6,499,987
New Forest 4,028,096 3,811,570 3,595,046 3,378,520
North York Moors 5,428,266 5,136,475 4,844,687 4,552,897
Northumberland 3,311,334 3,133,337 2,955,341 2,777,344
Peak District 8,298,814 7,852,720 7,406,630 6,960,536
Pembrokeshire Coast 3,462,640 3,368,100 3,554,853 3,540,433
Snowdonia 4,435,091 4,316,400 4,503,153 4,488,733
South Downs 7,290,000 11,373,133 10,981,271 10,589,405
Yorkshire Dales 5,398,563 5,108,369 4,818,178 4,527,984

Source: UK National Park Authority.

226 Dom Fearon and Ernie Jowsey
Woodlands and forests are managed in order to encourage biodiversity. Soil conditions are analysed
and different trees planted in different places where they will grow best:

● rowan and birch on steep sides of mountain streams;

● ash and alder on flat, wet areas of ground;
● oak and hazel on grassy banks of streams;
● juniper, hawthorn and blackthorn around the edges of woods.

Fences are built around new woods to keep out grazing animals and any dead trees are removed and
replanted. Other plants that might inhibit the growth of the trees are removed.
Meadows and grasslands are improved in order to encourage biodiversity. Modern farming uses
artificial fertiliser to increase the amount of grass that grows, and the grass is harvested and used over
winter to feed sheep and cows. But the grass grows so quickly and so high that other species such as
meadow flowers can’t compete, so the fields are just full of grass, which is bad for biodiversity. Farmers
get grant money to increase biodiversity in their fields. Only using a little organic fertiliser such as cow
manure means the grass still grows, but not as quickly, so lots of other plants can also grow. Cutting
the plants later in the year gives the plants time to set seed, meaning plants grow again next year. Hay
meadows with lots of different flowers in them are great habitats for insects, birds and other animals
too. There are some plants that only grow in upland hay meadows in areas such as the Yorkshire
Dales, Northumberland and the Peak District.

Further reading
www.nationalparks.gov.uk/home (accessed 06/12/2013).
10 Law
Rachel Williams and Simon Robson

10.1 Contracts
Key terms: agreement; consideration; deed; intention to create legal relations
A contract is an agreement that is legally binding. This means that if there is a failure to perform con-
tractual obligations then there are legal remedies.
There are three key components to a contract:

● agreement;
● consideration or made as a deed; and
● intention to create legal relations.

Agreement is normally defined as offer and acceptance; once an offer is accepted the agreement is formed.
An offer is an indication of willingness by one person to enter into an agreement on specified terms.
An offer needs to be differentiated from an invitation to treat which is an invitation to others to make
offers. Examples of invitations to treat include goods displayed in a shop window, advertisements and
‘For Sale’ or ‘To Let’ boards outside properties. An offer needs to contain all the principal terms of the
agreement or else there is insufficient certainty as to what is agreed. For example, if an agent proposed
to someone that they act for them on the sale of their house but did not specify the rate of commission
this would be characterised as an invitation to treat as the terms of the offer are not established.
The response to an offer may be acceptance, in which case an agreement is formed. For the reply
to an offer to be treated as an acceptance the person who receives the offer must accept all the terms
of the offer. Frequently the response to an offer is a counter offer, for example the other person might
be happy with the other terms suggested but proposes a lower price. The effect of a counter offer is to
extinguish the original offer which is no longer capable of acceptance. There may be a series of counter
offers made and received before agreement can be reached. For an example of how these principles
apply to real estate consider the auction room:

● The auctioneer asking for bids is making invitations to treat.

● The people making bids are making offers.
● The auctioneer saying ‘sold to’ and hitting the gavel down is indicating the acceptance of the suc-
cessful bidder’s offer, at which point an agreement is formed.

There are agreements that are not legally enforceable because they lack the requisite consideration
or the parties did not intend to be legally bound. The concept of a contract includes the notion
that some kind of bargain or deal must have been reached. It is a requirement that both parties
exchange something but it need not be of equal value. This requirement is easily satisfied in most
228 Rachel Williams and Simon Robson
real estate transactions; for example, in the sale of land, the seller is providing the land and the buyer
the purchase price. It is possible to make agreements that are one-sided (i.e. gifts) legally binding by
ensuring that the agreement takes effect as a deed. A deed is a more formal legal document that has
particular execution requirements.
In some instances there are agreements that are supported by consideration but where the parties do
not intend the agreement to have legal force. These types of agreement generally arise between family
members and friends. In commercial dealings correspondence is often marked ‘subject to contract’ to
indicate at that stage in the negotiations the parties do not intend to be contractually bound.
Generally under English law contracts can be made orally or in writing. There are a number of
exceptions to this rule of which real estate transactions are probably the most important example.
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that all contracts deal-
ing with interests in land can only be made in writing in an agreement that incorporates all the terms
of the transaction and is signed by both parties or their agents. The exceptions to this rule are auction
sales and leases for less than 3 years. In Cobbe v Yeoman’s Row Management Ltd (2008) UKHL 55 an oral
agreement was reached between a property owner and developer. After the developer secured plan-
ning permission for the site the owner reneged on the terms of the deal and the developer sought to
enforce the agreement. The developer was unsuccessful: as the agreement did not meet the statutory
requirements it was not legally binding.

Further reading
Galbraith, A., Stockdale, M., Wilson, S., Mitchell, R., Hewitson, R., Spurgeon, S. and Woodley, M. (2011) Galbraith’s
Building and Land Management Law for Students, 6th edn, Butterworth-Heinemann, Oxford.
Wood, D., Chynoweth, P., Adshead, J. and Mason, J. (2011) Law and the Built Environment, 2nd edn, Wiley-Blackwell,
Chichester.

10.2 Legal definition of land

Key terms: land; airspace; mines and minerals; incorporeal hereditaments
It is essential for property professionals to understand how the word ‘land’ should be construed in legal
documents governing the ownership, use and occupation of land.
The definition of land provided by Section 205(1)(ix) of the Law of Property Act 1925 encompasses
both a description of physical property (land includes ‘land, and mines and minerals … buildings or
parts of buildings’) and intangible rights in the land (‘also a manor, an advowson, and a rent and other
incorporeal hereditaments, and an easement, right, privilege, or benefit in, over or derived from land’).
This section is concerned with the physical aspects of land.
The definition above does not give a complete explanation of what is meant by the word ‘land’. There
is a thirteenth-century saying that is still recognised as a good explanation of landownership today: cujus
est solum, ejus est usque coelum et ad inferos, meaning that the owner of the soil is presumed to own every-
thing ‘up to the sky and down to the centre of the earth’ (Megarry and Wade, 2012: 53).
Since the advent of air travel the maxim referred to above has had to be adapted and has been the
subject of litigation. In Bernstein of Leigh (Baron) v Skyviews & General Ltd (1978) Q.B. 479, a claim
for trespass was brought against a company that took aerial views of houses to sell the photographs to
the homeowners. The claim was unsuccessful as it was held that an owner’s rights to airspace above
his land extend only to such height as is necessary for the ordinary use and enjoyment of the land. A
wide dispensation to aircraft has since been granted under the Civil Aviation Act 1982. In a number
of cases involving the development of land it has become an established principle that it is not permis-
sible to swing a crane over another person’s land without consent; see for example Anchor Brewhouse
Developments Ltd v Berkley House (Docklands Developments) Ltd (1987) 2 EGLR 173.
 Law 229
In relation to subterranean areas the starting point is that the owner of the surface of the land is
also the owner of the mines and minerals beneath it; however, there are a number of exceptions to
this. The Crown is entitled to all gold, silver and petroleum, and all interests in coal are now vested in
the Coal Authority (Coal Industry Act 1994). Unlike the rules regarding airspace the physical extent
of ownership does not seem to be limited to what is necessary for the reasonable enjoyment of the
land. In Bocardo SA v Star Energy UK Onshore Ltd (2010) UKSC 35, the defendants were held to have
trespassed when oil drilling pipelines were constructed beneath the claimant’s property (without its
consent) at depths ranging from 800–1,300 ft to around 2,900 ft which had no impact on the claim-
ant’s use and enjoyment of the land.
Under the Treasure Act 1996 all treasure is vested in the Crown and anyone finding something
they believe to be treasure has a duty to inform the coroner for the district (s. 8). Treasure includes
(s. 1, 3) gold or silver coins that are at least 300 years old and other objects that are at least 200 years
old and have outstanding historical, archaeological or cultural importance.
Under Section 132(1) of the Land Registration Act 2002 ‘land’ includes land covered by water.
The definition of land also includes any plants growing on the land whether or not they are cultivated.
During their lifetime wild animals cannot, by definition, be anyone’s property but if they are lawfully
killed they become the property of the landowner.
The extent to which buildings, and parts of the buildings, form part of the land, is discussed in
Concept 10.3.

Further reading
Gray, K. and Gray, S. (2011) Land Law, 7th edn, Oxford University Press, Oxford.
Megarry, R. and Wade, W. (2012) The Law of Real Property, 8th edn, Sweet & Maxwell, London.

10.3 Fixtures and chattels

Key terms: fixtures; chattels; degree of annexation; purpose of annexation
As seen in Concept 10.2 the legal definition of land includes buildings and other structures attached to
it. It can often be challenging to identify what items at a property are included within this definition.
It is particularly important to be able to do so when dealing with the transfer of land (identifying what
is and is not included in the sale or gift), assessing liability for Stamp Duty Land Tax (SDLT is only
payable on land), dealing with mortgages of land and determining the extent of landlords’ and tenants’
obligations (maintenance responsibilities, status of items at the end of the term etc.).
In Elitestone Ltd v Morris (1997) 1 WLR 687 three categories of objects in, on or under the land
were identified:

1 things that are ‘part and parcel’ of the land that are impossible to remove intact, for example a
house of conventional construction;
2 fixtures that are capable of being physically removed from the land but are treated in law as part
of the land; and
3 chattels that may be removed from the land and are not considered part and parcel of the land.

It is therefore necessary to consider how to differentiate between fixtures and chattels. The two main
tests that have evolved to determine whether or not an object should be treated as part of the land or
as a chattel are:

(a) the degree of annexation; and

(b) the purpose of annexation.
230 Rachel Williams and Simon Robson
The first element of the test described above requires us to consider to what extent the object is physi-
cally connected to the land or building. If something is fixed to the land in a way that it cannot be
removed without causing damage to the property it will normally be treated as a fixture.
The purpose of annexation has become the primary test and it is an objective question to be deter-
mined on the ‘externally observable circumstances of the case’ rather than the subjective purpose of
the person who attached the item (Gray and Gray, 2011: 12). An object may be physically attached to
a building but this may be for the better enjoyment of the object rather than as a way of enhancing the
building; for example, it was held by the House of Lords in Leigh v Taylor (1902) AC 157 that although
some tapestries had been annexed to a building it was for the purpose of viewing the tapestries rather
than improving the building and so they were determined to be chattels. The distinction is well illus-
trated by Blackburn J. In Holland v Hodgson (1872) L.R. 7 C.P. 328 at 335:

blocks of stone placed one on top of another without any mortar or cement for the purpose of
forming a dry stone wall would become part of the land, though the same stones, if deposited in a
builder’s yard and for convenience sake stacked on top of each other in the form of a wall, would
remain chattels.

In the case of a leasehold property the starting point is that all fixtures attached by the tenant belong to
the landlord (as part of the land) and therefore must be left at the property at the end of the term of the
lease. However, certain fixtures which are known as ‘tenant’s fixtures’ may be removed by the tenant
provided that any damage is made good; these consist of: trade fixtures, some ornamental fixtures and
some agricultural fixtures. Set out below are a couple of examples of where the designation of an item
at a property caused problems for those involved in the transaction TSB Bank plc v Botham (1996) EGCS
149. After the home owners defaulted on their mortgage repayments the mortgagee elected to exercise
its power of sale but a dispute arose as to whether or not a range of items at the house were fixtures (and
therefore subject to the mortgage) or chattels (in which case the mortgagor could remove them).
In the case of Orsman v HMRC (2012) UKFTT 227 (TC), a house was sold for £250,000 with an
additional £800 to cover the cost of some fitted units in the garage. The SDLT return for the purchase
was £2,500 (1 per cent of the price of the land) on the basis that the units were not part of the ‘land
transaction’. HMRC took a different view and argued that the fitted units were fixtures and therefore
part of the land in which case the transaction moved into the next band of SDLT where 3 per cent of
the purchase price is payable, which meant that a payment of £7,524 was due. The First Tier Tribunal
Tax Chamber applied the two-stage test above and agreed that due to their degree and purpose of
annexation they were fixtures and therefore subject to tax.

Further reading
Gray, K. and Gray, S. (2011) Land Law, 7th edn, Oxford University Press, Oxford.
TSB Bank plc v Botham (1996) EGCS 149.

10.4 Ownership of land

Key terms: freehold; leasehold; commonhold
Our current system of landownership can date its roots back to the Norman Conquest. Essentially
under English law all land is owned by the Crown and landowners own an estate in land rather than
the land itself. Gray and Gray (2011: 16) explain that the doctrine of estates means that each landholder
owns a ‘slice of time in the land’. In medieval times there were a variety of estates, however, in modern
times only two remain under section 1(1) Law of Property Act 1925:
 Law 231
1 freehold (also known as a fee simple absolute in possession); and
2 leasehold (a term of years absolute in possession).

The key difference between a freehold estate and a leasehold estate is that a leasehold estate exists for a
period of time whereas a freehold is infinite. In Walsingham’s Case (1573) 2 Plowd. 547, it was held that
he ‘who has a fee-simple in land has a time in the land without end, or the land for time without end’.
In English law freehold ownership is the closest that anyone (other than the monarch) can get to
absolute ownership of land and except on rare occasions the Crown’s role is not apparent. There are
a few hundred cases of escheat a year (Gray and Gray, 2011: 121), which is where land reverts to the
Crown because the freehold is no longer held by anyone; this can arise where someone dies without
leaving any successors, or when a company is insolvent or an individual is bankrupt and the insolvency
practitioner exercises their statutory powers to disclaim ‘onerous property’.
Generally, leasehold estates are regarded as inferior to freeholds; however, as Megarry and Wade
(2012: 40) argue, a rent-free lease for 3,000 years may be as valuable as a freehold estate. There are
three main types of lease: fixed term, periodic and tenancies at will or sufferance. A fixed term lease
can be for any period of time although some conventions have arisen especially within the residential
property market where long leases are commonly 99, 125 or 999 years. A periodic lease is one for an
initial fixed period but allows the lease to continue until terminated by either landlord or tenant in
accordance with the lease, for example a tenancy from month to month could by ended by either party
upon giving a month’s notice. A tenancy at will is quite rare – either party can end the agreement on
demand so it does not satisfy the needs of most property investors or occupiers and is not classed as
a leasehold estate in land. If a lease is for an uncertain term then it is invalid, see for example Lace v
Chantler (1944) KB 368 in which case the term was granted ‘until the war ends’.
Commonhold is a special type of freehold that was introduced by the Commonhold and Leasehold
Reform Act 2002. It was introduced to deal with multiple unit properties such as apartment blocks and
mixed use schemes that would otherwise be set up by granting leases to the purchasers. In common-
hold schemes individual unit owners own the freehold of their unit and a share in the commonhold
association that owns and manages the common parts of the development. In particular, it was hoped
that commonhold would address the following problems:

● tenants finding the value of their property reducing as the residue of the term of the lease
diminishes;
● enforceability of positive covenants (see Concept 10.8 on freehold covenants); and
● the enforcement of obligations between unit holders (in a more traditional freehold–leasehold
structure only the landlord can enforce tenant covenants).

There have been very few commonhold schemes created so far (Fetherstonhaugh, 2007) It appears
that this reform, which aims to create a type of condominium ownership that is popular in other parts
of the world such as Singapore, has not been a success. Last decade there was considerable debate
among academics and practitioners as to why there had been so little use of commonhold schemes, but
in the last few years even the discussion of commonhold appears to have faded away.

Further reading
Fetherstonhaugh, G. (2007) ‘Developers need a nudge in the right direction’, Estates Gazette, October (Online), available
at: www.egi.co.uk/Articles/Article.aspx?liArticleID=662085&NavigationID=466, (accessed 20/11/2013).
Gray, K. and Gray, S. (2011) Land Law, 7th edn, Oxford University Press, Oxford.
Megarry, R. and Wade, W. (2012) The Law of Real Property, 8th edn, Sweet & Maxwell, London.
232 Rachel Williams and Simon Robson
10.5 Trusts and co-ownership of land
Key terms: joint tenancy; tenancy in common; overreaching
Land may be held on trust by trustees for a variety of reasons:

● For individuals who are entitled to the land in succession. For example, X by her will leaves the
family home to her second husband, Y, for life (he has a life interest) and after his death to her
children (this is known as an interest in remainder).
● For individuals who hold an interest in land at the same time. For example, where business part-
ners hold their premises jointly or couples own their homes together.
● For an individual where other people are appointed to manage the property on the individual’s
behalf; this is known as a ‘bare trust’. This may arise where the person establishing the trust feels
that the individual they would like to have the property would benefit from someone more
experienced or cautious having control of it. However, if the beneficiary calls for the land to be
transferred to him/her then the trustee must comply and the trust will come to an end (Saunders
v Vautier (1841) 4 Beav. 1 15).

Under Section 6(1) of the Trusts of Land and Appointment of Trustees Act 1996 (TLATA) trus-
tees ‘have all the powers of an absolute owner’. They can therefore sell, lease or mortgage the land.
However, in doing so they must take into account the rights of the beneficiaries and are also under
a duty to consult beneficiaries aged eighteen or over (ss 6(5) and 11(1) TLATA). Trustees must also
ensure that they do not act in breach of trust or their fiduciary duties, for example selling the trust
property to themselves would not be lawful (Megarry and Wade, 2012: 470).
Co-ownership is the most common type of trust in modern times. The co-owners hold the property
on trust as trustees for themselves as beneficiaries. There are two main types:

1 joint tenancy; and

2 tenancy in common.

The use of the word tenancy here can be misleading – it relates to co-ownership and not leases. In the
case of a joint tenancy the co-owners hold the entire property together and upon the death of a joint
tenant the surviving joint tenant(s) automatically acquires the deceased’s interest in the land. In the
case of a tenancy in common the property is held in undivided shares and the owners can leave their
interest to whoever they choose. This is illustrated in the examples below.

Trustee(s)
hold the land or other assets

Beneficiary/beneficiaries

Figure 10.5.1 Trustee holding.

 Law 233
Joint tenancy
Mr and Mrs Smith hold the property together in one holding (Table 10.5.1).

Table 10.5.1 Joint tenancy (1)

Trustee John Smith and Jane Smith

Beneficiary John Smith and Jane Smith

John Smith dies and Jane is the sole surviving joint tenant (Table 10.5.2).

Table 10.5.2 Joint tenancy (2)

Trustee Jane Smith

Beneficiary Jane Smith

As a consequence the trust comes to an end and Jane is the sole owner of the land.

Tenants in common
Mr and Mrs Smith buy a house together but as Mr Smith contributed a greater amount towards the
purchase price it is agreed that they will own the property as tenants in common with John having a
75 per cent share of the land and his wife 25 per cent (Table 10.5.3).

Table 10.5.3 Tenants in common (1)

Trustee John Smith and Jane Smith

Beneficiary John Smith 75% Jane Smith 25%

John Smith dies (Table 10.5.4).

Table 10.5.4 Tenants in common (2)

Trustee Jane Smith

Beneficiary Person who inherits under John’s will or Jane Smith 25%
person entitled to inherit under the rules
of intestacy (which apply if someone dies
without making a will) 75%

After a property is acquired the co-owners’ situation might change, for example a relationship may
break down, and the co-owners may no longer want to own the property on a joint tenancy basis.
They can at this stage choose to sever the beneficial joint tenancy; this has the effect of transforming a
joint tenancy into a tenancy in common. Severance can occur in a number of ways including:

● serving a statutory notice (s36(2) Law of Property Act 1925);

● a joint tenant disposing of their interest in the land during their lifetime;
● by mutual agreement of the joint tenants;
● on the bankruptcy of a joint tenant; and
● if one joint tenant criminally kills another.
234 Rachel Williams and Simon Robson
Resulting and constructive trusts are a form of implied co-ownership that can arise when the behaviour
of the legal owner of the land and another person gives rise to the implication that the owner is hold-
ing the property on behalf of him/herself and another. The most common situation where this arises is
where a couple is co-habiting but the family home is only in one partner’s name. Behaviour that would
lead to a presumption that the property is held on trust includes contributions towards the purchase price,
acquisition costs or mortgage payments or meeting other household expenses, enabling the legal owner
to pay the mortgage (Dyer v Dyer (1788) 2 Cox Eq. Cas. 92, Gissing v Gissing (1971) AC 886).
If on every occasion co-owned and trust property was sold the buyer had to investigate the details of
the trust and the rights of the beneficiaries it would add further delays to the conveyancing process. In
order to simplify the investigations that a prospective purchaser of land needs to undertake, the law pro-
vides (ss 2 and 27 of the Law of Property Act 1925) that if the proceeds of sale are paid to two or more
trustees then the interests of the beneficiaries of the trust are said to have been overreached, which means
that the rights of the beneficiaries are detached from the land and attached to the sale proceeds and any
action by the beneficiaries would be against the trustees rather than a third party purchaser.

Further reading
Megarry, R. and Wade, W. (2012) The Law of Real Property, 8th edn, Sweet & Maxwell, London.
Stroud, A. (2010) Making Sense of Land Law, 3rd edn, Palgrave Macmillan, Basingstoke.

10.6 The lease/licence distinction

Key terms: exclusive possession; interest in land; statutory protection
This is a potential trap for the unwary. Documents under which someone is granted the right to use
and occupy land for a period of time usually in return for payment are sometimes labelled as licences
when in reality they are leases. In the leading cases on this topic, Street v Mountford (1985) AC 806,
Lord Templeman referred to these types of agreement as ‘sham devices’ and held that in determining
whether or not a document creates a lease or a licence it is necessary to look at the substance rather
than the form of the contract. The reasons that it is important to be able to distinguish between leases
and licences are:

● A lease creates an interest in land whereas a licence is a personal/contractual right. As a con-

sequence, a lease will bind people beyond those who were parties to the original contract; for
example if someone acquires the landlord’s interest they will have to observe the terms of the
lease, whereas a licence is not an interest in land and in the event of a sale of a property subject to
a licence the new owner is not normally bound by the terms of the licence.
● Stamp Duty Land Tax is payable on some leases but not on licences.
● Generally only tenants under leases benefit from statutory protection such as the security of tenure
provisions of the Landlord and Tenant Act 1954. Licensees do not normally benefit from such rights.

It is therefore of essential importance to be able to distinguish between a lease and a licence. The key
characteristic of a lease is that the tenant (even if they are referred to in the contract as a licensee) will
have been granted the right to exclusive possession of the land. Exclusive possession means that they
have the right to exclude all others, including the landlord (except for rights under the lease to inspect
or repair) from the land.
In order to grant exclusive possession there must be a clearly defined area available for exclusive
use. In Clear Channel UK Ltd v Manchester City Council (2005) EWCA Civ 1304, an agreement relat-
ing to the erection and use of advertisement hoardings was held not to be a lease because there were
undefined areas in which the concrete bases and hoardings could be placed.
 Law 235
In Antoniades v Villiers (1990) 1 A.C.417, the property owner granted two separate ‘licences’ to a
co-habiting couple. Each licence provided that the small flat was to be shared with anyone designated
by the owner. In reality none of the parties intended that anyone other than the couple should live in
the flat and it was held that the couple had a joint tenancy as they were together entitled to exclusive
possession of the property.
However, according to Megarry and Wade (2012: 757):

where a contract has been negotiated between parties of equal bargaining power, with the benefit
of legal advice, the courts are generally reluctant to go behind express provisions clearly indicating
the parties’ intentions as to the legal effect of the agreement they have executed.

For example, in Cameron Ltd v Rolls-Royce Plc (2007) EWHC 546 Ch, it was held that there were
exceptional circumstances in which one party could be enjoying exclusive possession of a property for
a rent but a lease was not created. In this case Rolls-Royce had been allowed to occupy the premises
under a document described as a licence pending the completion of a formal lease. Mann J determined
that despite the fact that the defendant was enjoying exclusive possession the interest granted to them
was only a licence.
Pankhania v London Borough of Hackney (2004) EWHC 323 Ch is a case that should serve as a
warning of the consequences of not understanding (and acting appropriately) on this distinction. In
Pankhania the Council was selling a land at auction which was marketed as a development site and
described in the auction catalogue as being sold ‘subject to a licence’ in favour of NCP. When the
successful bidder gave notice to NCP to quit the site they were advised by NCP’s solicitors that NCP
had a lease and was therefore protected by the Landlord and Tenant Act 1954. After paying NCP
£78,931.25 compensation and a delay of about 15 months Pankhania successfully brought a claim for
misrepresentation against the seller and was awarded £500,000 in damages. Subsequently, the seller
brought a claim against their solicitor and agent who prepared the auction catalogue (Rowe, 2006) but
the outcome of these proceedings has not been reported and it is surmised that this matter will have
been settled out of court.

Further reading
Megarry, R. and Wade, W. (2012) The Law of Real Property, 8th edn, Sweet & Maxwell, London.
Rowe, S. (2006) ‘Nelson Bakewell sued for auction misrepresentation’, Estates Gazette, February, available at: www.
egi.co.uk/Articles/Article.aspx?liArticleID=631666&NavigationID=466 (accessed 20/11/2013).

10.7 Land registration

Key terms: registered land; unregistered land; indemnity; sale prices; prescribed clauses
Land registration in England and Wales started in the nineteenth century but our current system of
land registration dates back to the Land Registration Act 1925 which has now been replaced with the
Land Registration Act 2002.
The Land Registry has registered more than 23 million titles and they estimate that title to around 70
per cent of land in England and Wales is registered. Initially, land registration was voluntary but later cer-
tain transactions triggered compulsory registration, e.g. the sale of a freehold or the grant of a long lease.
The reason that title to a significant portion of land is unregistered is that there may not have been any
trigger events since compulsory registration applied across the whole of England and Wales (1 December
1990, SI 1989/1347). This is particularly likely to be the case with rural land, and trust or corporate prop-
erties. There is a campaign by the Land Registry, RICS and the Law Society to promote the advantages
of voluntary first registration and there are fee incentives to encourage this.
236 Rachel Williams and Simon Robson
The system used is a title registration system rather than a land registration system. This means that
for one parcel of land there may be more than one title, e.g. a freehold title and a leasehold title. Since
1990 the land register has been open to public inspection. If someone is investigating some land and
they do not know the title number they can look this up using the post code on the Land Registry’s
website or carry out a search of an Index Map.
In the past the Land Registry issued Land Certificates and Charge Certificates (if the property was mort-
gaged) as evidence of title; however, these are no longer issued as the Land Registry has opted for a paperless
system and anyone can order a copy of a title online or through the relevant District Land Registry.
Once title is registered it has a state guarantee which means that if there is a mistake on the register and
someone suffers a loss as a consequence they will be indemnified for their loss by the Land Registry. In
Prestige Properties Ltd v Chief Land Registrar (2002) EWHC 330, Lightman J found that a certificate issued
following a search of the Land Registry incorrectly included 5 square metres of land that were not part of
the property being sold. It was a term of the sale contract that there would be a retention of part of the
purchase price so that if the buyer was unable to register title to the entire property within 6 months of
the sale then the seller (Prestige) would reduce the purchase price. When the buyer was unable to register
the erroneously included 5 square metres they relied on this contractual provision. The seller then suc-
cessfully brought a claim against the Land Registry and was awarded £400,000 compensation.
The register of the title for a property consists of three parts:

● Property Register – this section describes the land, defines the extent of the property by reference
to the title plan and identifies any rights that the property has the benefit of, for example rights of
way and of light.
● Proprietorship Register – this part of the Register identifies the owner of the property and includes
any restrictions on the owner’s powers to dispose of the property, for example in relation to trust
or mortgaged property. For any disposals since 1 April 2000 it may also include the price paid for
the property.
● Charges Register – this includes details of any mortgages, easements and covenants or other
encumbrances that the property is subject to.

In order to try to standardise the information available to those searching the Land Registry and pro-
mote transparency, prescribed clauses for registrable leases were introduced so that key information
about the lease such as the term and break options are displayed at the start of the lease.

Further reading
www.landregistry.gov.uk (accessed 20/11/2013).

10.8 Freehold covenants

Key terms: dominant and servient tenements; positive and negative covenants; ‘run’ with the land;
unity of ownership; indemnity insurance
Freehold covenants are defined by Dixon (2012: 323) as ‘promises made by deed (“covenant”) between
freeholders, whereby one party promises to do or not to do certain things on their own land for the
benefit of the neighbouring land’.
The difference between covenants and ordinary contractual provisions that seek to impose obligations
relating to the use of land is that in some circumstances covenants ‘run’ with the land and as such they
are capable of benefitting and burdening landowners who were not party to the original deed. In order
for a covenant to exist there must be two parcels of land in separate freehold ownership (Table 10.8.1).
 Law 237
Table 10.8.1 Dominant and servient land

Plot one Plot two

The person who has made the promise and The person who has the benefit of the promise (e.g. their
accepted the burden of the covenant (e.g. their property has the benefit of a covenant – the right to enforce
property is subject to a covenant) is known as the the obligation on the neighbouring land) is known as the
covenantor. covenantee.
His/her land is known as the servient land/tenement. His/her land is known as the dominant land/tenement.

Covenants can only be created by deed and are negotiated for a number of reasons, including:

● Someone selling part of their land wants to restrict the way the sold land is used so that it does not
have a detrimental impact on the use, enjoyment and value of the retained land.
● Someone might want to prevent a property they are selling being used for a business in competition
with their own. A covenant of this nature may breach the provisions of the Competition Act 1998
and therefore would not be enforceable.
● Someone might want to impose a covenant restricting development in the hope that in the future
the owner of the servient land may be willing to pay the dominant owner additional money in
order to allow the covenant to be released or modified.

Covenants can be positive or negative in nature. Examples of some common covenants are shown
in Table 10.8.2. Some covenants ‘run’ with the land and bind and benefit future owners of the land
and the benefit of a covenant can also be expressly assigned under s136 Law of Property Act 1925
(Table 10.8.3).

Table 10.8.2 Positive and negative covenants

Positive Negative
To build and maintain a boundary feature Not to erect any buildings without the consent of the
dominant landowner
To contribute towards the maintenance costs of To only use the property for residential/office/agricultural
a shared access purposes

Table 10.8.3 Covenants ‘running with the land’

Does it run? Dominant land (benefit of the covenant) Servient land (burden of the covenant)
Positive covenant In order for the benefit to run with the The burden does not run
land the covenant must:
1 ‘touch and concern’/benefit the land;
and
2 the person seeking to enforce the
covenant holds a legal estate in the
dominant land
Negative covenant As above The burden will run if all the criteria set
out in Tulk v Moxhay (1848) 2 Ph 774
are satisfied
238 Rachel Williams and Simon Robson
As can be seen in Table 10.8.3, the burden of a positive covenant does not run with the land. This
can pose a problem for landowners. If we take the example of financial contributions towards a shared
amenity it is essential that the dominant landowner can enforce payment from the original covenan-
tor’s successors in title. A range of solutions are employed in these circumstances which include
preventing disposals of the servient land without the consent of the dominant landowner (such consent
is only given if the buyer of the servient land enters into a new covenant) and making the right to
exercise rights over the shared resources conditional upon making a financial contribution.
If the servient landowner wishes to do something in breach of covenant (for example the covenant
restricts any development of the land and they want to build a couple of houses) he/she has a number
of options:

1 Ignore the covenant. The dominant landowner could bring a claim against the servient owner for
an injunction and/or damages. Even if the dominant owner does nothing it will be very difficult
to raise finance for the development or sell the completed houses as the prospective lender and
purchasers will not normally be willing to run the risk of the covenant being enforced.
2 Approach the dominant landowner and seek to negotiate a deed of release or modification. This will
normally involve a payment to the dominant landowner and may be difficult to secure, especially if
the dominant land has been subdivided, in which case there may be multiple dominant landowners.
3 Acquire the dominant land. This may or may not be practical but unity of ownership of the domi-
nant and servient land will extinguish a covenant.
4 Apply to the High Court for a declaration under s84 (2) Law of Property Act 1925 as to whether
or not the covenant is still enforceable.
This can be a useful tool if there are grounds for thinking the covenant is unenforceable but it
is quite a lengthy process.
5 Apply to the Upper Tribunal of the Lands Chamber under s84 (1) to modify or discharge the covenant.
This can be done if it can be shown that the covenant is obsolete, unduly obstructive or of no real
benefit. If a claim is acceptable compensation will normally be payable to the dominant landowner.
6 Indemnity Insurance. In some circumstances insurance may be available against the risk of
enforcement of the covenant. This course of action will not remove the covenant and cover is
not normally available if the servient owner has already attempted to use methods 2–5 above.
However, it can be a quick and cost-effective way of dealing with the problem.

Further reading
Dixon, M. (2012) Modern Land Law, 8th edn, Routledge, Abingdon.
Stroud, A. (2010) Making Sense of Land Law, 3rd edn, Palgrave Macmillan, Basingstoke.

10.9 Easements and profits à prendre

Key terms: dominant and servient tenements; implied easements and easements of necessity; prescriptive
rights; abatement; abandonment; unity of ownership
An easement is the right to use land in one person’s ownership for the benefit of a piece of land owned
by another person. Common examples of easements are rights of way, rights to install and keep service
apparatus, and rights of light.
It is essential that an easement has a dominant and a servient tenement (two pieces of land) in separate
ownership.
In Table 10.9.1 A has granted B an easement over A’s land consisting of a right of way over a road
to allow B (and B’s successors in title) to access property B.
 Law 239
Table 10.9.1 Example of an easement

Plot A Plot B
The The private road within A’s property This is the dominant land; it has the benefit of
Highway the easement over the servient land.
This is the servient land; it is subject to the
burden of the easement (the right of way).

If the benefit of the right of way was attached to a person rather than a parcel of land then it would
normally exist as a licence or a lease.

● The right must make the dominant land a better and more convenient property and the dominant
and servient land must be close but not necessarily adjacent.
● The right must be of a type that can be recognised in law as an easement. Some examples of rights
that have been held not capable of existing as easements are the right to an unspoilt view (William
Aldred’s Case (1610) 9 Co. Rep. 57b) and the right to receive television or radio signals (Hunter v
Canary Wharf Ltd (1997) AC 655).

There are a number of ways in which an easement can be created:

● The most common way is in a deed when someone is disposing of part of their property and needs
to either reserve rights over the land that they are selling to benefit the retained land or grant rights
to the land being sold so that both parcels of land can be used and enjoyed after they are severed
from each other.
● In some circumstances if rights have not been expressly granted or reserved they may be implied.
● Easements of necessity may arise where it is impossible to use the land retained or sold as there is
no way of accessing it.
● Acts of Parliament and Compulsory Purchase Orders.
● Easements can also be created by presumed grant or prescription which can arise where a right has
been enjoyed for a long time (generally 20 years) without the use of force, secrecy or the permis-
sion of the servient landowner.

Disputes frequently arise about the exercise of easements. If someone is prevented from enjoying their
easement they can bring a claim against the dominant landowner seeking a declaration of their rights,
an injunction or damages or a combination of these remedies. The dominant landowner may also try
and resolve the problem through a self-help remedy known as abatement; provided that they only use
reasonable force they can remove anything obstructing their right to enjoy the easement, for example
by cutting a chain padlocking a gate restricting access to their right of way.
If a servient landowner wishes to change the way they use their land or develop the property they
have a number of options:

1 Ignore the easement. The dominant landowner could bring a claim against the servient owner for
an injunction and/or damages. Even if the dominant owner does nothing it will be very difficult
to raise finance for the development or sell the completed scheme as the prospective lender and
purchasers will not normally be willing to run the risk of the easement being enforced.
2 Approach the dominant landowner and seek to negotiate a deed of release or modification. This
will normally involve a payment to the dominant landowner and may be difficult to secure, espe-
cially if the dominant land has been subdivided, in which case there may be multiple parties to
negotiate with.
240 Rachel Williams and Simon Robson
3 Abandonment. The servient landowner may seek to claim that the dominant landowner has
abandoned the easement. This is very difficult to prove, for example, in Benn v Hardinge (1992)
66 P & CR 246, 175 years non-use was insufficient evidence that the dominant landowner had
abandoned the right.
4 Acquire the dominant land. This may or may not be practical but unity of ownership (the domi-
nant and servient land being in the same ownership) extinguishes an easement.
5 Indemnity Insurance. In some circumstances insurance may be available against the risk of the
enforcement of an easement. This course of action will not remove the easement and cover is not
normally available if the servient owner has already attempted to use methods 2–4 above; how-
ever, it can be a quick and cost-effective way of dealing with the problem.

A profit à prendre (profit) is a right to take something from another person’s land; for example, timber
and peat. A profit can exist in the same way as an easement (the right to take something from the
servient land benefits the dominant land) but can also exist ‘in gross’ which means without a dominant
tenement. Profits are not frequently created in modern times as it is more common to use a contrac-
tual licence but historic rights, in particular sporting rights (hunting, shooting and fishing) and pasture
rights, should not be overlooked when appraising land.
The Law Commission’s (2011) report, Making Land Work: Easements, Covenants and Profits à Prendre,
recommended that the rules regarding the creation of easements by prescription be simplified and
that the Upper Tribunal (Lands Chamber) be given additional powers to modify or discharge ease-
ments that no longer serve any useful purpose. To date the government has not implemented these
proposals.

Further reading
Great Britain Law Commission (2011) Making Land Work: Easements, Covenants and Profits à Prendre, Report 327 (Online),
available at: http://lawcommission.justice.gov.uk/docs/lc327_easements_summary.pdf (accessed 20/11/2013).
Stroud, A. (2010) Making Sense of Land Law, 3rd edn, Palgrave Macmillan, Basingstoke.

10.10 Easements – rights to light

Key terms: right to light; easement; injunction; damages; Law Commission consultation
The ability to access daylight and sunlight from within a building is important for a number of reasons
including general amenity, and the health and well-being of occupants. The availability of natural
lighting and warmth also supports the sustainability agenda by reducing the energy demands associated
with providing artificial light and heating to a building.
The loss of sunlight to a building resulting from a proposed development constitutes a material con-
sideration that planning authorities will take into account when determining a planning application.
Planning authorities apply the methodology set out in the Building Research Establishment guide on
site layout planning for daylight and sunlight (Littlefair, 2011). The applicant may be required to sub-
mit a report carried out in accordance with the guidance, depending on the potential of a proposal to
reduce daylight or sunlight levels.
Irrespective of whether planning permission is granted or not a legal right of light may exist which
planning permission cannot override.
A right to light is a negative easement. In England and Wales a right to light is most commonly
acquired under the Prescription Act 1832. Under the Act a right to light automatically occurs when
light has been enjoyed through defined apertures of a building for a period of 20 years without inter-
ruption or consent. A right of light can also be acquired by express grant. Care must be taken to
 Law 241
carefully check conveyancing documentation that may grant a right to light; it should be noted how-
ever that such documentation may also exclude rights.
To determine whether a right to light has been infringed the test is how much light remains rather
than how much has been taken away. In Colls v Home and Colonial Stores (1904) Lord Lindley stated:

An owner of ancient lights is entitled to sufficient light according to the ordinary notions of
mankind for the comfortable use and enjoyment of his house as a dwelling-house, if it is a dwell-
ing-house, or for the beneficial use and occupation of the house if it is a warehouse, a shop, or
other place of business.

Sufficient light is generally considered to be 1 lumen per square foot at table top height over half of
the room in question.
Specialist rights to light surveyors are able to calculate whether an exiting or proposed development
infringes or will infringe a right to light. If an interference with a right to light has occurred, or will
occur if a development goes ahead, a Court may issue an injunction ordering a developer not to start
a development, to stop building or to demolish a building. An alternative to an injunction is for the
Court to order the payment of compensation to the party suffering the infringement.
In the majority of cases a negotiated settlement can be arrived at. The owner of the right to light
holds the upper hand in such negotiations as the extreme option of an injunction is normally available.
The British Property Federation is lobbying for the introduction of a protocol to provide an agreed
basis for negotiating loss on the basis of the loss of amenity.
Because of increasing concerns that rights to light can cause extra cost and delay to major develop-
ments, the Government has referred the matter to the Law Commission who published a consultation
paper in February 2013. The provisional proposals are as follows:

● In the future it should no longer be possible to acquire rights to light by long use (known as
‘prescription’).
● The introduction of a new statutory test to clarify the current law on when courts may order a
person to pay damages instead of ordering that person to demolish or stop constructing a building
that interferes with a right to light.
● The introduction of a new statutory notice procedure requiring those with the benefit of rights to
light to make clear whether they intend to apply to the court for an injunction.
● A process for extinguishing rights to light that are obsolete or have no practical benefit, with pay-
ment of compensation in appropriate cases.

Subject to the outcome of the consultation the Government intends to publish a draft Bill in late 2014.
For clarification, access to sunlight and daylight conferred either by the planning system or by
virtue of a legal right to light does not give the occupant of a building the right to a view. In Phipps v
Pears (1965), Lord Denning stated that if a neighbour decides to despoil a view that has been enjoyed
for many years by building up and blocking it there is no redress in the law. Guidance issued by the
Department for Communities and Local Government on determining planning applications makes it
clear that the loss of a view is not a material consideration.

Further reading
Law Commission (2013) Consultation Paper 210 ‘Rights to Light’, available at: http://lawcommission.justice.gov.uk/
docs/cp210_rights_to_light_version-web.pdf (accessed 21/11/2013).
Littlefair, P. (2011) Site Layout Planning for Daylight and Sunlight: A guide to good practice, 2nd edn, BRE Press, Bracknell.
242 Rachel Williams and Simon Robson
10.11 Manorial land and chancel repair liability
Key terms: overriding interests; sporting rights; mines and minerals; registration
Manorial rights have their roots in feudalism and are the ancient rights of lords of the manor. Examples
of manorial rights are sporting rights, rights to mines and minerals and rights to hold fairs or markets.
The rights are held separately to the freehold owner of the land and conflicts can arise between the
way the freehold owner of the land wishes to use the land and the right holder’s requirements. These
rights can still be very valuable today, especially mining rights.
Most of the manorial rights that exist today arise where the land was formerly copyhold or the land
was the subject of an inclosure award. Copyhold land was a type of property ownership where the
tenants held the land from the lord of the manor who normally retained sporting rights and the right to
minerals in the land. Copyhold land was abolished in 1926 when all copyhold interests were converted
into freehold ownership but the rights of the lord of the manor were preserved. During the eighteenth
and nineteenth centuries when land was being inclosed the awards sometimes made provision for the
reservation of manorial rights.
Chancel repair liability dates from a time when church rectors were responsible for the repair
of the chancel of the church which was maintained using the income from ‘glebe’ lands. Over
time the former glebe lands were sold off but the liability to contribute towards the cost of the
chancel repairs remained attached to the land. In modern times these rights were regarded as an
archaic anomaly that was no longer significant until the judgment in Parochial Church of Aston
Cantlow and Wilmcote and Billesley, Warwickshire v Wallbank (2003) UKHL 1 AC 546. In that case
the Wallbanks had inherited some former glebe land and then received a bill for almost £200,000
for chancel repairs. The Wallbanks disputed their obligation to pay for the repairs but after a long
legal battle were ultimately held liable to pay the full amount. The case was very controversial and
was a catalyst for reform.
The position under the Land Registration Act 1925 was that both manorial rights and chancel
repair liability took effect as overriding rights. This meant that even if no details of the rights were
registered against the title to the property (and therefore the owner could be ignorant of their exist-
ence) they would still be enforceable against the freehold owner. The Land Registration Act 2002 has
changed the law so that if someone has the benefit of a manorial right or a right to enforce payment of
chancel repair liability and has not registered it against the title of the land (or, in the case of unregis-
tered land, registered a caution against first registration) which is subject to the burden of those rights
by 13 October 2013, then the rights will be unenforceable against future purchasers of the land. The
reform of the land registration rules will, however, not be of assistance to those who already owned
the burdened land in October 2013, who will remain bound by these rights regardless of registration.

Further reading
Mocatta, J. (2009) ‘Medieval relic causes a modern hangover’, Estates Gazette (online) available at: www.egi.co.uk/
Articles/Article.aspx?liArticleID=705519&NavigationID=466 (accessed 25/11/2013).

10.12 Wayleaves
Key terms: utilities; private land; service apparatus; wayleave fee
Wayleaves are a common tool for granting utility providers rights to install and keep their apparatus
in, on or under third party land. There is no statutory definition of a wayleave; they are normally
characterised as a contractual licence and are therefore a personal right rather than an interest in land
and cannot be registered at the Land Registry.
 Law 243
Northern Powergrid (no date) advise that the standard provisions of one of their wayleaves would
include the right to:

● install and keep installed the electric line(s);

● use, inspect, maintain, adjust and remove the line(s);
● cut, lop, trim or fell trees and hedges; and
● enter the land at all reasonable times.

In exchange for granting a wayleave the landowner will normally receive a small fee that could be a
one-off payment or annual charge. The amount of the payment is generally based on agricultural land
values. Most wayleaves are for a fixed term or include provisions for the termination of the agreement.
If someone buys land that has utility apparatus situated in/on/under it, in accordance with a way-
leave agreement the new owner of the land will not be bound by the terms of the wayleave as it is a
licence rather than a lease or an easement. However, implied wayleaves are frequently created if the
new owner accepts the wayleave payments.
If a statutory undertaker is unable to negotiate a new wayleave with a property owner, or if a new
owner requests that apparatus is removed or if a property owner seeks to terminate a wayleave agree-
ment, the utility companies benefit from statutory powers. For example, an electricity undertaker
can apply to the Secretary of State for Energy and Climate Change who can grant a wayleave under
Schedule Four of the Electricity Act 1989 if it is ‘necessary and expedient to do so’. Before granting
such a wayleave the Secretary of State must arrange for a ‘necessary wayleave hearing’ to be held to
provide the landowners an opportunity to be heard. If a wayleave is granted the landowner is entitled
to compensation under section 5 of the Land Compensation Act 1961.
While wayleaves remain a popular choice for electricity apparatus, other statutory undertakers are
making increased use of easements and leases instead as these provide the utility company with greater
security of tenure. The utility providers also benefit from compulsory purchase powers under which
they can acquire easements to allow them to install their equipment.

Further reading
National Powergrid (no date) ‘Frequently Asked Questions’, available at: www.northernpowergrid.com/som_
download.cfm?t=media:documentmedia&i=1087&p=file (accessed 20/11/2013).
O’Brien, G. and Hamer, C. (2007) Electricity Wayleaves, Easements and Consents: Litigation, practice and procedure, EG
Books, Abingdon.

10.13 Common land and town and village greens

Key terms: rights of common; commons search; Commons Act 2006
The origins of town and village greens (TVGs) and common land lie in customary law. TVGs and
common land are subject to the rights of the public but can often be in private ownership.
According to Defra (2013) around 550,000 hectares of land in England and Wales (4 per cent of
the total land area) is registered as common land. Common land is subject to the rights of the public to
exercise rights of common over it which includes grazing livestock and cutting turf or wood for fuel.
If someone wants to carry out any development of common land they need to secure the consent of
the Secretary of State to do so. Failure to obtain consent is a criminal offence.
Most common land was established as such hundreds of years ago and can be protected by registra-
tion under the Commons Act 2006. New areas of common land are only created as a replacement
for common land that has been lost through compulsory purchase or by the landowner applying for
deregistration and exchange of land under section 16 of the Commons Act 2006. Town and village
244 Rachel Williams and Simon Robson
greens are land that has been used by people in the locality for public recreation for a long time. The
registration of land as TVGs has caused a certain amount of controversy in recent years. It has been
asserted that applications to register land have been used as a weapon against developers. Once land is
registered as a TVG it is a criminal offence to enclose it or carry out any building works or disturbance
other than works carried out to promote the enjoyment of the land as a TVG. Under Section 15 of
the Commons Act 2006 anyone can apply to register land as a TVG and they need to prove that:

● it has been used by local people for at least 20 years;

● the use has been for recreational purposes; and
● the use has been ‘as of right’ (without force, secrecy or permission).

Due to the concerns about the use of these applications the laws relating to TVGs have been reformed.
The Commons Act 2006 was amended in 2013 to restrict people’s ability to apply for registration of
TVGs. Landowners can now make a statement and register it with their county or unitary authority
which has the effect of preventing the use of the land continuing ‘as of right’ (Sections 15A and 15B
of the Commons Act 2006). Section 15C prevents anyone submitting an application for registration
when a ‘trigger event’ has occurred. Trigger events include applications for planning permission or
inclusion of the site in a draft local plan.
If someone wants to ascertain whether land is common land or TVG they can carry out a Commons
Search with the local authority. This search is routinely carried out when a property is being purchased
which includes unenclosed land. The search however, will not reveal whether there is a risk of a TVG
application being made so an inspection of the land and enquiries of the owner would need to be
undertaken in order to ascertain whether there is any danger of a TVG application being made.

Further reading
Defra (2013) ‘Common Land and Village Greens’, available at: www.gov.uk/common-land-village-greens (accessed
22/11/2013).

10.14 Highways
Key terms: passage; stopping up; adoption; privately maintained
A highway is the name for any piece of land over which the public has a right to pass and re-pass. They
are sometimes referred to as ‘public highways’ but the word public is superfluous in that expression.
It is obviously very important for anyone dealing with the sale, lease, development or valuation of
land to identify whether or not the land can be accessed directly from the highway. This information
can be obtained from the highway authority (Highways Agency for motorways and trunk roads or the
county or unitary authority in all other cases) and is part of the enquiries included in the Local Search
which is routinely carried out in residential and commercial conveyancing.
Some highways pass over private land and are not maintainable at public expense. In most cases highways
are maintainable at public expense either because they were created before 1836 or adopted since then.
When a developer is constructing a new scheme they will normally enter into a Section 38 Agreement
under the Highways Act 1980 under which the new roads are constructed to the highway authority’s speci-
fication, maintained for a year after completion and then adopted by the highway authority. The interest of
the highway authority in a highway maintainable at public expense is in ‘the top two spits of the road’ (Tithe
Redemption Commission v Runcorn Urban District Council (1954) Ch 383) the subsoil of the road belongs to the
adjoining owners; it is a rebuttable presumption that they own the land up to the centre of the highway.
It is a criminal offence to obstruct the highway in a way that endangers the use of it (section 137
Highways Act 1980). In order to allow property owners and developers the opportunity to maintain
 Law 245
and enhance land a number of activities are regulated by licensing; these include skips, scaffolding,
tables and chairs licences.
Highways can be created by the highway authority or by the dedication of the route by the
landowner and acceptance by the public (this only relates to non-vehicular use). Dedication and
acceptance can arise when the public has used a route for 20 years or longer without consent and as if
they had the right to be there (section 31(1) Highways Act 1980).
When a new development is going to have a significant impact on the existing highway network a devel-
oper can be required to carry out or make a financial contribution towards off-site highway works. ‘Once a
highway always a highway’ is an established legal maxim. However, it is possible to divert or stop up (extin-
guish) a highway under the rules contained in the Town and Country Planning Act 1990 and Highways Act
1980 where there is an equally convenient route or it is necessary to allow development to proceed.

Further reading
Denyer-Green, B. and Ubhi, N. (2013) Development and Planning Law, 4th edn, Routledge, Abingdon.
Hancox, N. and Wald, R. (2002) Highways Law & Practice, Butterworths, London.

10.15 Option agreements

Key terms: exclusivity; call options; put options; preconditions; option fee
An option has been defined as:

[A] unilateral right, created by contract, enabling one of the parties, if he so wishes and the cir-
cumstances are covered by the terms of the contract, to exercise a right to do something or require
the other party to do (or refrain from doing) something in the future.
(Parsons, 2004)

Options are typically used by a property development company to secure an interest in land that it
believes has the potential for development, but currently has no planning permission in place. The
option gives the developer a period of exclusivity in which to secure planning permission and then
the right to trigger the purchase of the land at a pre agreed price. Options can be described as ‘call’
options or ‘put’ options. ‘Call’ options are the most common and enable the developer to require the
landowner to sell (a call for the land). ‘Put’ options are rare in a property context and enable the seller
to require the buyer to go ahead with the purchase on the occurrence of some event.
The main components of an option agreement are as follows:

● The names of the parties involved in the agreement.

● The subject matter – a description of the land involved, normally accompanied by a plan.
● The period of the option.
● The preconditions that will trigger the option. This will normally be the grant of planning permis-
sion but could also be the allocation of the subject land in a development plan.
● The option fee or premium – this is the payment made by the developer to secure the option.
This may or may not be returnable if a planning application is unsuccessful. The payment reflects
the fact that the option agreement has sterilised the land for the length of the option period.
● The agreed purchase price of the land. This may be a fixed amount or could be tied to the value
of the land at the date the option is exercised. The purchase price will normally be less than the
full market value to reflect the acceptance of risk by the developer. If the price is related to the
market value of the land the agreement will identify how this will be determined – normally by
an independent valuer acceptable to both parties.
246 Rachel Williams and Simon Robson
There are various advantages of entering into options. For developers they enable risk to be spread
over a number of potential sites. The developer can work on a number of planning applications (or
plan promotions) simultaneously in the hope that unsuccessful applications may be offset by successful
ones. Options to purchase also help facilitate the purchase of sites in multiple ownership. An exam-
ple could be a site in four different ownerships, all of which are required to make a viable site. If the
developer acquired the freehold in three of the sites the fourth landowner could hold the developer
to ransom and seek a price significantly above market value to part with their land. If the developer
acquired options in the various parcels of land triggerable when all the necessary options are agreed this
will reduce the risk of being held to ransom.

Further reading
Parsons, G. (2004) The Glossary of Property Terms, 2nd edn, Jones Lang LaSalle and Estates Gazette, London.

10.16 Conditional contracts

Key terms: conditions; satisfactory search results; waiver; longstop date
A conditional contract is a form of contract used when an agreement has been reached for the sale of
land or a lease but the buyer does not want to commit to the purchase unless and until certain issues
relating to the property are first resolved. Common conditions you will encounter are that the sale is
dependent on the grant of satisfactory planning permission or other consent or permit, securing vacant
possession of the land, obtaining landlord’s consent and receipt of satisfactory search results/survey/
soil tests.
The reason that conditional contracts are used rather than just waiting for the issue the condition
relates to being resolved is greater certainty for buyer and seller. A buyer will not want to commit to
the cost of securing of planning permission without the land being ‘under contract’ as that would allow
the seller to sell to the highest bidder and the buyer’s efforts and expense might all be in vain. Similarly,
from the seller’s perspective, if they have agreed a sale and ceased marketing the property to allow the
buyer time to address the problem they will not want to allow the buyer the freedom to walk away
from the deal if the market has fallen or they have changed their mind as this would mean the seller
would have tied up the land for months or even years without any financial gain.
Conditional contracts generally contain the following provisions:

● An obligation on the buyer to purchase and for the seller to sell the property if the condition is
satisfied or waived.
● Specification of the price or a mechanism for determining the price. If it is anticipated that the
condition will be satisfied within a few months of the contract, e.g. satisfactory search results or
landlord’s consent, then the price will normally be fixed in the contract. On the other hand, if it
is likely to take longer to satisfy the condition or the outcome is less certain, for example if it is
conditional upon securing planning consent, then the contract will normally provide for the buyer
to pay the market value of the land with consent.
● An obligation on the buyer to pay a deposit either on exchange of contracts or when the condi-
tion is satisfied.
● An obligation on one or both the parties to try and satisfy the condition. For example, if the con-
tract is conditional on obtaining planning permission then the buyer will normally be obliged to
use reasonable endeavours to secure the consent whereas if the sale was conditional upon gaining
the landlord’s consent the obligation would be on the seller to try and satisfy the condition.
● A provision allowing the buyer to waive the condition so that they can elect to proceed with the
purchase even if the condition is not satisfied.
 Law 247
● A longstop date so that if the condition is not satisfied by a specified date the contract will come
to an end, otherwise the contract could exist in perpetuity.

One of the drawbacks of conditional contracts over other contracts that could be used instead such
as options is that they can be very complicated and have often been the subject of litigation. This has
been very much in evidence in recent years when eager developers entered into conditional contracts
when the market was at its peak in 2006–7 but by the time the condition had been satisfied property
values had fallen and finance for development had become increasingly difficult to secure.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
Vara, B. (2009) ‘Killing off enthusiasm’. Estates Gazette, April, available at: www.egi.co.uk/Articles/Article.aspx?liArti
cleID=699265&NavigationID=466 (accessed 20/11/2013).

10.17 Promotion agreements

Key terms: joint venture; risk; development value; profit split
Option agreements and conditional contracts, which were discussed in Concepts 10.15 and 10.16, are
the two well-established types of contract that are entered into by developers and landowners for prop-
erties that have development potential but for which planning permission has yet to be granted. Both
mechanisms have advantages and disadvantages for developers and landowners. Since the economic
downturn in 2007 and the problems that have arisen with obtaining development finance, a third way
of dealing with the developer–owner relationship has become popular;: promotion agreements.
Promotion agreements are essentially a special form of joint venture. They generally work as shown
in Figure 10.17.1.

• The land owner owns a potential development site but lacks the expertise
and/or finances to pursue a planning application.
• The developer has the expertise but cannot afford/does not want to
purchase any land.

• The developer uses their best endeavours to secure planning consent

for the site.
• The land owner enters into a planning obligation if required.

• Once planning permission is granted the development site is marketed

by the owner and developer and once the site is sold the profit is split
on a pre-determined basis between the land owner and developer.

Figure 10.17.1 Main terms of a promotion agreement.

248 Rachel Williams and Simon Robson
One of the advantages of this method for the landowner is that the developer is incentivised to
obtain the planning permission that leads to the highest value of the site. When conditional contracts
and options are used, the price paid by the developer is affected by planning consent and they may
therefore not pursue the highest value scheme, in order to keep the purchase price as low as possible.
From a developers’ perspective it means that they do not have to find the finance upfront for an option
fee or deposit under a conditional contract.
As the developer is taking on less of the risk of the development the rewards may not be as great as
under the more traditional methods. Ultimately, whether or not it is a good option for the developer
and owner will depend on the nature of the site, expected timescales for obtaining planning permission
and the profit split agreed.

Further reading
Gay, W. (2011) ‘A helping hand for developers’, Estates Gazette, available at: www.egi.co.uk/Articles/Article.aspx?liA
rticleID=732529&NavigationID=466 (accessed 28/11/2013).

10.18 Overage/clawback
Key terms: development profits; overage period; land banking; restrictive covenant; ransom strips
Overage and clawback refer to the right of a seller of property to receive from the buyer further pay-
ment on the occurrence of a certain event following completion of the sale.
The term ‘overage’ is used where the development of the land following sale is in accordance
with the planning permission in existence at the time of sale. Overage refers to an agreement by the
developer to pay the original landowner a percentage share in the price obtained on the sale of the
development above an agreed threshold level. Overage is offered by a developer to make a land acqui-
sition more attractive to a seller. In essence it represents the prospect of a seller to participate in the
future profitability of a development over and above that which was known at the time of the sale.
The term ‘clawback’ is generally used to represent the agreement by the developer to pay the seller
of land a sum of money related to the enhancement in the value of a development site, usually triggered
by the granting of planning permission. The payment will generally be a percentage of the difference in
value between the site with the planning status at the time of the sale and the value of the site with an
enhanced planning permission. Clawback is often used by public authorities (subject to audit) to ensure
that land is not sold for an under value. A clawback clause will encourage the sale of development land
but also incentivise the buyer to obtain a more valuable planning permission if possible.
Overage and clawback are payable by the buyer and any successors in title. This can be secured
contractually via the initial conveyance and registered at the Land Registry. The payment of overage is
triggered by the disposal of properties during the overage period. The ‘overage period’ will be defined
in the initial agreement.
Clawback is generally payable on the date a trigger event occurs. The precise details of the trigger
are negotiable between the parties to the agreement. A seller will prefer the trigger to be the granting
of planning permission whereas the buyer will prefer the trigger to be the implementation of planning
permission. This will allow the buyer to procure finance and let construction contracts etc.
The length of overage and clawback obligations will vary. Such obligations will be time lim-
ited as buyers will require release after a period of time to avoid titles being burdened indefinitely.
Conversely, sellers will want to avoid the period being too short thereby encouraging land banking.
The seller will need to ensure the potential overage payment is secured in some way. This can be done
in a variety of ways or combinations of such. The normal approach is secure payments via contractual
obligations. This is a basic approach that relies on the covenant strength of the buyer. The main advan-
tage of this method is that it does not muddle the legal title. Other approaches to secure payment include:
 Law 249
● Parent company/bank guarantee: although these can be used buyers are generally reluctant to offer
either because of the expense involved.
● Restrictive covenant: this method can be used if there is adjacent land that can benefit from the cov-
enant. As this is rarely the case its use is limited. This was illustrated in Cosmichome v Southampton City
Council (2013). Southampton City Council transferred a property to the BBC to use as a regional
broadcasting centre. The transfer contained a restrictive covenant requiring the payment of £505
of any increase in value following a change of use. Cosmichome acquired the property in 2004 and
sought a declaration that the restrictive covenant was not enforceable against them as successors in
title. The Court found that the covenant did not bind Cosmichome because when it was imposed
it did not benefit the Council’s retained land and had purely been imposed for financial reasons. It is
critical that to secure overage obligations they should be registered at the Land Registry.
● Grant of a long lease: this method is sometimes used by local authorities and involves the grant of a
long lease with freehold being transferred on the payment of the overage.
● Ransom strips: these can be used to prevent future development on adjoining land. The seller will agree
to release the ransom strip on the payment of a sum representing the market value of the retained land.
● Option to repurchase: this method allows the seller to repurchase the land at an agreed price if the
buyer defaults on any obligations.

Further reading
Harvard, T. (2008) Contemporary Property Development, 2nd edn, RIBA Publishing, pp. 128–9.

10.19 Pre-emption rights

Key terms: first refusal; family/trust land; sales of part; put option
Pre-emption rights are often characterised as a right of first refusal. If a landowner chooses to sell their
land they must first offer it to the pre-emption rights holder and give them the opportunity to buy the
land before marketing it more widely.
These rights are often created if someone is selling part of their land holding and want the option
to buy it back in the future should the buyer choose to sell. As such they most commonly arise in
sales of family/trust land and in disposals by local authorities and other government bodies. They
can also arise if a developer is seeking to assemble a site but the owner is currently unwilling to sell;
it is a way of preventing any competitors acquiring the land if the owner changes their mind about
selling in the future.
The main aspects of pre-emption rights are as follows:

● The rights apply for a fixed period of time often 10, 20 or 30 years.
● If the owner decides they want to sell the land they must notify the right holder and give them
time to decide whether or not they want to proceed with the purchase, commonly 21 or 28 days.
● If the rights holder does not respond within the time limit or advises the owner they are not inter-
ested in purchasing the land the owner is free to dispose of the land.
● If the rights holder responds to the notice in the manner specified in the contract indicating that
they intend to buy the land, then a contract is formed for the sale of the land.
● There is a mechanism for determining the purchase price which normally states market value with
a dispute resolution procedure if the parties cannot reach agreement on market value.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
250 Rachel Williams and Simon Robson
10.20 False statements and misleading omissions
Key terms: misrepresentation; Consumer Protection from Unfair Trading Regulations 2008; Business
Protection from Misleading Marketing Regulations 2008
This concept is concerned with the law affecting acts and omissions made by sellers/landlords and their
agents in the course of marketing and negotiating sales and leases of property.
The starting point under English law has always been caveat emptor – let the buyer beware. It was
the buyer’s responsibility to fully investigate the property and ensure that they were getting a good
deal. However, the introduction of the Consumer Protection from Unfair Trading Regulations 2008
(CPR) and Business Protection from Misleading Marketing Regulations 2008 (BPR) has created addi-
tional duties for agents and other businesses selling property to disclose important information about
the properties they are marketing.
The Property Misdescriptions Act (PMA) 1991 was repealed in October 2013. Under the PMA
it was an offence for an agent to make false or misleading statements in the course of a property
sale. Under the CPR and BPR this remains an offence but the duties imposed by CPR and BPR
are greater as they also make it an offence to make a misleading omission. The duty under CPR on
property businesses is to provide the ‘material information’ that an ‘average consumer’ needs to make
a decision about the transaction (e.g. whether to make an offer, what price to offer etc.). While the
agent is not under a duty to investigate matters that will be researched by other parties involved in
the transaction (conveyancers and surveyors) once they become aware of a material issue they must
disclose it. For example, if they were marketing a property and a buyer pulled out of a purchase when
they received the results of their survey and learned that there were major subsidence problems the
agent would be under a duty to share this information with other prospective purchasers.
If a business is convicted of an offence under the CPR or BPR they face a fine or imprisonment for
up to 2 years. A consumer or business who is aggrieved by a property business’s actions could complain
to an approved redress scheme or Trading Standards.
If someone has entered into a contract as a consequence of misleading statements made in the
course of negotiations by the seller or their agents they may be able to bring a civil claim for breach of
contract or misrepresentation. The buyer would only be able to bring a claim for breach of contract if
the statement is included as a term of the contract, for example if the area of the land was written in
to the contract and it was late discovered to be incorrect.
If a statement has not been incorporated as a term of the contract the buyer may be able to claim
misrepresentation if they can prove:

● that a false statement of fact has been made (this does not normally include misleading omissions);
● that the buyer relied upon the false statement; and
● that the false statement induced the buyer to enter into the contract.

In order to protect sellers from claims of misrepresentation many contracts for the sale of land include
a statement that the buyer’s decision to enter the contract is based on their own research and enquir-
ies and not in reliance on anything said by the seller or their agents. Any clause that seeks to limit
or exclude liability for misrepresentation is subject to a test of reasonableness under section 3 of the
Misrepresentation Act 1967.
The remedies for misrepresentation are damages and/or rescission (terminating the contract). The
availability of remedies depends on whether or not the statement was made fraudulently, negligently
or innocently.
One of the most notorious property misrepresentation cases is Sykes and another v Taylor-Rose and
another (2004) EWCA Civ 299. The house at the heart of the dispute had been the scene of a vio-
lent murder. Mr and Mrs Taylor-Rose bought the house without knowing of its history, but after
 Law 251
receiving an anonymous letter enlightening them of what had happened they decided to sell it. They
took legal advice as to whether or not they were obliged to disclose the house’s history when they
were selling it and were advised that they need not disclose it but if directly asked they should not lie.
The Sykes bought the house from the Taylor-Roses also ignorant of its past. They learned about what
happened there through a television documentary and decided that they could no longer live there but
they could also not in conscience keep the information from prospective purchasers. Ultimately they
sold the house for £75,000 but believed its true market value (disregarding its history) was £100,000.
The Sykes sought to recoup their losses by bringing a claim for misrepresentation against the Taylor-
Roses. In particular, they argued that in answer to question 13 on the Sellers Property Information
Form (‘Is there any other information which you think the buyer may have a right to know?’), which
had been answered in the negative, was a false statement. However, the Taylor-Roses were able to
successfully defend the claim on the grounds that it was an honest answer as they had been profession-
ally advised that the buyer did not have a right to this information.

Further reading
Galbraith, A., Stockdale, M., Wilson, S., Mitchell, R., Hewitson, R., Spurgeon, S. and Woodley, M. (2011) Galbraith’s
Building and Land Management Law for Students, 6th edn, Butterworth-Heinemann, Oxford.
Office of Fair Trading (2012) ‘OFT Guidance on Property Sales’, available at: www.oft.gov.uk/shared_oft/estate-
agents/OFT1364.pdf (accessed 22/11/2013).
11 Planning
Andy Dunhill, Hannah Furness, Paul Greenhalgh, Carol Ludwig,
David McGuinness and Rachel Williams

11.1 Legislation and planning policy

Key terms: strategic planning; development management; National Planning Policy Framework; Local
Development Plan
The planning system is defined by a range of statutes, regulations, circulars and policy guidance.
The planning function within local planning authorities (LPAs) is divided into two key areas: plan
making (also known as strategic planning), which involves the preparation of planning policy; and
development management, which involves the implementation of that policy when making planning
decisions (see Concept 11.4).
Some of the key pieces of legislation relating to planning are set out below:

● Ancient Monuments Protection Act of 1882

● Town and Country Planning Acts of 1932, 1945 and 1947
● Civic Amenities Act 1967
● Town and County Planning Act 1990
● Planning (Listed Buildings and Conservation Areas) Act 1990
● Planning and Compensation Act 1991
● Planning and Compulsory Purchase Act 2004
● Planning Act 2008
● Localism Act 2011.

The planning system is plan led (Cullingworth and Nadin, 2006). As such, planning law requires
that applications for planning permission must be determined in accordance with the development
plan, unless material considerations indicate otherwise (see Sections 38(1) and (6) of the Planning and
Compulsory Purchase Act 2004). In addition to the above key pieces of legislation, the plan-led system
incorporates a hierarchy of national policy/guidance and local development plans.

National planning policy guidance

As part of major government reforms designed to make the planning system less complex and more
accessible, the Conservative–Liberal Democrat Coalition Government published the National
Planning Policy Framework (NPPF) on 27 March 2012. The NPPF is prepared by the Department
for Communities and Local Government (DCLG) and is a material consideration in planning deci-
sions (see Section 38(6) of the Planning and Compulsory Purchase Act 2004 and section 70(2) of the
Town and Country Planning Act 1990). The NPPF replaces most of the topic-based Planning Policy
Statements (PPS) and Guidance Notes (PPG) (44 separate guidance documents) with a single docu-
ment of under 60 pages. Most PPS/PPGs were superseded by the NPPF except PPS10 on Waste.
 Planning 253
While the NPPF shortens national policy and brings it helpfully into one, more useable document, it
nevertheless removes some of the detailed guidance that helped to clarify the policy. To try to over-
come this limitation, on 28 August 2013, the Government published the National Planning Practice
Guidance website which is intended to add detail and flesh out some of the policy contained within
the NPPF.

NPPF purpose and role

The NPPF is intended to not only make planning more transparent and accessible, but also to help
LPAs plan positively for future growth. As set out in the Foreword of the document: ‘The purpose
of planning is to help achieve sustainable development’, and there must be a ‘presumption in favour
of sustainable development’ (DCLG, 2012: i). As such, the NPPF sets out the Government’s plan-
ning policies for England and how these are expected to be applied in a positive manner. Moreover,
‘it provides a framework within which local people and their accountable LPAs can produce their
own distinctive local and neighbourhood plans, which reflect the needs and priorities of their com-
munities’ (DCLG, 2012: 1). For instance, it lists the things Local Development Plans must consider,
including policies on economic growth, housing, transport, community facilities and climate change.
As a material consideration, the NPPF ‘must be taken into account in the preparation of local and
neighbourhood plans, and … in planning decisions’ (DCLG, 2012: 1).
Other important national policy/guidance:

● Statutory Instruments and National Government Circulars;

● Planning Policy Statement 10 Planning for Sustainable Waste Management;
● Rafts of topic-specific guidance (for example guidance published by other national bodies such as
English Heritage or the Environment Agency).

Local policy
Local policy is produced by the LPA in consultation with the community. It becomes the Local
Development Plan for the LPA’s administrative area. As highlighted above, section 38 of the Planning
and Compulsory Purchase Act 2004 provides the Local Development Plan with statutory force.
As such, this plan is the most important consideration in deciding planning applications. All Local
Development Plans need to conform to national policy (as set out above); otherwise they will not be
approved and could be open to legal challenge. They also need to meet particular legal requirements,
for example they must conform to the Equality Act 2010 and Human Rights legislation.
The Local Development Plan may be one single document (i.e. a Local Plan) or comprise many
documents (i.e. a folder of shorter documents such as the Local Development Framework, or LDF).
The LDF suite of documents may include development plan documents (DPDs), Supplementary
Planning Documents (SPDs), Area Action Plans (AAPs) and/or Master Plans. All LPAs are also
required by law to publish a Statement of Community Involvement (SCI) in advance of preparing
their Local Development Plan. This document must set out who the LPA will consult as part of plan
preparation as well as how they will be consulted and when. LPAs are also required by law to consider
the environmental, economic and social needs of the area, in a Sustainability Appraisal (SA).

What strategic policies should a Local Development Plan include?

Every Local Development Plan will include strategic, high-level policies that set out the long-term
vision and strategic priorities for the administrative area. This part of the Local Development Plan is
often called a Core Strategy. Some of the strategic elements will include:
254 Dunhill, Furness, Greenhalgh et al.
● spatial vision and objectives
● spatial strategy
● settlement role and function (see Planning concept, Settlement Hierarchy)
● development principles in relation to:
1 housing, employment, retail, leisure and other commercial development;
2 infrastructure for transport, telecommunications, waste management, water supply, waste-
water, flood risk and coastal change management, and the provision of minerals and energy
(including heat);
3 health, security, community and cultural infrastructure and other local facilities;
4 climate change mitigation and adaptation, conservation and enhancement of the natural and
historic environment, including landscape.
(DCLG, 2012: 38)

What should a Local Development Plan seek to do?

According to the NPPF (DCLG, 2012: 38), Local Development Plans should:

● Plan positively; preferably with a 15-year time horizon and they should be kept up to date.
● Be based on co-operation with neighbours and stakeholders.
● Be informed by a proportionate evidence base.
● Indicate broad locations for strategic development on a key diagram and land-use designations
on a proposals map.
● Allocate sites to promote development and flexible use of land, bringing forward new land
where necessary, e.g. they must identify a 5 year supply of housing plus a ‘buffer’ of between 5
per cent and 20 per cent.
● Provide detail on form, scale, access and quantum of development where appropriate.
● Identify areas where it may be necessary to limit freedom to change the uses of buildings (e.g.
conservation areas).
● Identify land where development would be inappropriate (e.g. green belt).

The process of local plan making usually takes 3 years and is summarised in Figure 11.1.1.

Complexity of local policy

It is important to note that the local planning policy context can be quite complex and may vary
from one LPA to another depending on speed of plan preparation. While the Labour Government
introduced Local Development Frameworks (LDF) in 2004 through the Planning and Compulsory
Purchase Act, LPAs have been progressing their plans at varying speeds. It has taken a long time for
the ‘new’ system to bed in and indeed at the end of 2013 only 174 of 352 LPAs had an adopted Core
Strategy (Planning Inspectorate, 2013).
As such, the local policy context requires careful scrutiny in order to adhere to the correct, valid
policies operating in an area. Figure 11.1.2 clarifies visually this complex local policy context.

Saved policies
Many LPAs also have a set of ‘saved policies’ in operation in their administrative area. The Planning
and Compulsory Purchase Act 2004 automatically saved LPAs’ local planning policies from their old-
style local plans for 3 years from either
 Planning 255

LPAs prepare a Statement of Community Involvement – this will

include a period of public consultation (usually 6 weeks).

LPAs collect a proportionate amount of evidence to inform plan preparation.

This will include gathering information and carrying out assessments.

LPAs prepare an Issues and Options document which will

undergo public consultation (usually for a period of 6 weeks).

LPAs prepare a Pre-Submission document which will also

undergo public consultation (usually for a period of 6 weeks).

LPA submits the draft Local Plan for Examination

(reviewed in public by the Planning Inspectorate).

An Examination in Public (EiP) will take place whereby any controversial issues
will be scrutinised. The Planning Inspectorate will hear any objections and consider
whether the Plan is sound. The EiP will usually last several days.

The Planning Inspectorate will issue a report setting out recommendations.

LPA publishes the Local Plan.

Figure 11.1.1 Local plan-making process.

Source: adapted from Planning Aid (2012).

● the date of commencement of the Act, or

● the date the plan was adopted.

Following this 3-year period, LPAs were then able to apply to the Secretary of State to extend this
period of ‘saved’ policies if they had yet to get their new plans in place. The saved policies could
be extended only if the saved policies were deemed necessary and did not repeat national guidance.
As such, a number of LPAs currently have ‘saved policies’ (which form part of the adopted Local
Development Plan for the area) and which are used to make planning decisions, while they work on
preparation of new policies. Where saved policies are deemed no longer up to date or do not echo the
policies of the NPPF, LPAs are compelled to give those policies reduced weight in planning decisions
256 Dunhill, Furness, Greenhalgh et al.

Pre 2004: From 2004 From 2012

OLD STYLE (Planning and (National Planning
LOCAL PLANS Compulsory Policy Framework
(Borough/ Purchase Act): (NPPF)):
District councils) LOCAL
DEVELOPMENT (re)introduction of
and FRAMEWORK (LDF) NEW-STYLE
LOCAL PLAN
UNITARY (Portfolio of documents,
DEVELOPMENT including SPDs) (many LPAs now need
PLANS (UDP)/ to review and
STRUCTURE PLANS Key Strategic consolidate their LDF)
(County Level) document in LDF is the
CORE STRATEGY

Figure 11.1.2 Demystifying the local policy context.

Source: Ludwig (2013).

(see Concept 11.4). Where this is the case, the NPPF (DCLG, 2012: 4) makes it clear that planning
applications should be granted planning permission unless:

1 Any adverse impacts of doing so would significantly and demonstrably outweigh the benefits,
when assessed against the policies in the NPPF taken as a whole; or
2 Specific policies in the NPPF indicate development should be restricted.

Regional policy
It is also important to note that the regional layer of planning policy has recently been removed with
the abolition of Regional Spatial Strategies (RSS). It has, however, been shown that the RSS evidence
base used to justify housing targets, for example, may continue to play an important role when LPAs
lack up-to-date Local Development Plans (Geoghegan, 2013).

Further reading
Cullingworth, J. B. and Nadin, V. (2006) Town and Country Planning in the UK, 14th edn, Routledge, London.
DCLG (2012) National Planning Policy Framework, DCLG, London.
DCLG (2013) ‘Plan making manual’, available at: www.pas.gov.uk/40-clg-plan-making-manual (accessed
25/11/2013).
Geoghegan, J. (2013) ‘Regional housing targets have weight post-abolition’, 9 April 2013, available at: www.
planningresource.co.uk/article/1177313/regional-housing-targets-have-weight-post-abolition (accessed 25/11/
2013).
Planning Aid (2012) A Handy Guide to the English Planning System, Urban Forum, London.
Planning Inspectorate (2009) ‘Development plan document examination: Procedural advisory notes’, available at:
www.planningportal.gov.uk/planning/planningsystem/localplans#letter (accessed 25/11/2013).
Planning Inspectorate (2013) ‘Preparation and monitoring of local plans’, available at: www.planningportal.gov.uk/
planning/planningsystem/localplans#dclg (accessed 25/11/2013).
Planning Portal website: www.planningportal.gov.uk
 Planning 257
11.2 Strategic planning
Key terms: wider future development; regional planning; Local Enterprise Partnerships
It is argued that effective strategic planning is necessary at UK-wide, national, regional and subregional
(local) levels in order to guide development, land use change, and a number of other activities that
exist across wider spatial areas that have some clear socio-economic, cultural or ecological identities.
The approach recognises that a number of development schemes and initiatives will have impacts
and influences across areas that are wider than a single local authority area. These strategic plans serve
to ensure that there is a coordinated approach to planning that encompasses a wide range of sectoral
and departmental concerns and policies at all levels of governance. Strategic planning is typically con-
cerned with the development of an understanding or ‘vision’ for an area, including all of its social,
economic and environmental issues that goes beyond just considering land use planning. It is effec-
tively a tool for guiding the wider future development of a spatial area.
In terms of core elements, the Town and Country Planning Association (2003) believe that a stra-
tegic plan should be:

● visionary as well as practical;

● aimed at long-term viability in terms of ‘sustainable development’ criteria;
● prescriptive, not solely informative;
● binding, not just advisory;
● a combination of top-down and bottom-up approaches;
● spatial, relating to specific locations;
● sectoral, relating to specific sectors and areas of activity;
● achievable, in terms of resources and processes of implementation;
● well founded in terms of research and understanding;
● comprehensive in terms of the range of coverage, but not too detailed;
● consistent in content and application;
● open and accessible, with wide consultation, public participation and direct involvement of the
stakeholders;
● cyclical, through monitoring and review;
● medium and long term in timescale; and
● accountable to an elected authority, assembly, or parliament at national/regional level.
(TCPA, 2003)

Spatial planning was the mechanism used to develop Regional Plans, prior to the removal of the
regional tier by the Coalition Government when it came into power in 2010. These underpinned the
remit of the Regional Development Agencies’ Economic Strategies.
Although no longer relevant at the regional level, the concept of strategic planning is still evident
in the strategies that are currently being developed by Local Enterprise Partnerships and Combined
Authorities.

Further reading
TCPA (2003) TCPA Policy Statement Strategic and Regional Planning, TCPA, London.
258 Dunhill, Furness, Greenhalgh et al.
11.3 Green belt
Key terms: urban sprawl; conservation; environment; housing; rural planning
Definition and history
The ‘green belt movement’ was brought about by groups such as the Campaign for the Protection
of Rural England (CPRE) lobbying during the 1920s and 1930s to safeguard the countryside against
urban sprawl and so-called ‘ribbon’ development. Green belts were initially introduced around London
in the 1940s and then adopted around other major towns and cities after the publication of the Green
Belt Circular 42/55 in 1955 (introduced by Duncan Sandys, Conservative MP).
Development pressure was great after 1945, with massive house building and rising car ownership.
The green belt was designed to halt urban sprawl by creating protective ‘green barriers’ around cities
to stop towns merging. The Town and Country Planning Act 1947 gave permission to local planning
authorities to include proposals for green belts in their development plans.
Green belts are one of the most well-known and supported planning concepts. Though often mis-
applied to refer to the countryside in general, the green belt refers to specific areas of rural land where
development is restricted through adoption of planning policy. The green belt in England is actually
much smaller than most people would assume; England has 14 green belts around major cities, making
up just 13 per cent of total land in England. Developing in the green belt still causes a massive furore
today and there is considerable tension between overwhelming demand for new homes and the sig-
nificant public support for protection of existing green belt land.
Planning Policy Guidance 2 (PPG2) provided guidance on green belt policy until it was scrapped
with the development of the NPPF by the Coalition Government. Much of the NPPF cherry picks
policy from previous PPGs and PPSs. In reality little has changed in terms of green belt policy over
the last 50 years.
The purpose of the green belt is:

1 To check the unrestricted sprawl of large built-up areas.

2 To prevent neighbouring towns merging into one another.
3 To preserve the setting and special character of historic towns.
4 To assist in urban regeneration, by encouraging the recycling of derelict and other urban land.
5 To assist in safeguarding the countryside from encroachment.
(DCLG, 2012: 19)

The purpose of the green belt has largely remained unchanged over the past 60 years. The final aim
of the green belts to assist urban regeneration was added in 1984 to counteract deindustrialisation fol-
lowing the loss of major industries (coal, steel, shipbuilding etc.). The final aim of safeguarding the
countryside was added in 1988 as a response to a growing trend of the flight from city centres to more
suburban and rural locations.

Case study
Newcastle City Council built on green belt land at the Great Park – part of the reason given was
to reduce urban flight. Newcastle was losing residents to neighbouring local authority areas (e.g.
North Tyneside) because of the lack of affordable three and four bedroom family homes within the
Newcastle City Council boundary. Due to lack of space for development, Newcastle City Council
is contemplating releasing a further 10 per cent of its existing green belt in its latest draft of the One
Core Strategy. Relaxing green belt boundaries and releasing sections of the green belt is a dilemma
that faces many local authorities if they are to meet the inexorable demand for affordable housing,
especially within the south of England.
 Planning 259
Future issues for green belt policy include:

● the challenge of NIMBYs (Not In My Back Yard) – people opposed to development near their
homes;
● building on just 2 per cent of the green belt could provide 8 million homes – desperately needed
especially in the South East;
● do we still need green belts in England – there is an argument that green belt has hindered devel-
opment and stifled growth. It reaffirms the British self-image as a country of rural, pastoral idylls
that, in reality, the majority of Britons no longer live in – it is outdated;
● ‘New Green Belts should only be established in exceptional circumstances’ (NPPF, 2012: 19: 82).

The Policy Exchange, a right-wing think tank has advocated paying resident to accept development
on green belts. The Coalition has gone some way to accepting this idea with its initiative to allow a
proportion of Community Infrastructure Levy (CIL) payments to be ring fenced and to be kept for
the host community to utilise.

Further reading
CPRE and Natural England (2010) Green Belts: A greener future, CPRE and Natural England, London.
DCLG (2012) National Planning Policy Framework, available at: www.gov.uk/government/uploads/system/uploads/
attachment_data/file/6077/2116950.pdf (accessed 30/11/2013).
Rydin, Y. (2011) The Purpose of Planning, Policy Press, Bristol, ch. 6.

11.4 Planning decision making

Key terms: principle of development; material considerations; planning process
LPA planning functions are divided into strategic planning (policy makers) and development manage-
ment (those who implement the policies by using them to make informed decisions about planning
applications). Those informed decisions are part of a formal planning decision-making process, gov-
erned by many operational rules and regulations.

Establishing the principle of development

When considering planning applications or making strategic planning decisions, section 38(1) and (6)
of the Planning and Compulsory Purchase Act 2004 requires that applications for planning permission
must be determined in accordance with the development plan, unless material considerations indicate
otherwise. The LPA’s Local Development Plan is therefore the starting point for considering planning
applications and making planning decisions.

Material considerations in decision making

It is important to note that other material considerations are important aspects of decision making;
however, the term remains rather ambiguous. Any consideration that relates to the use or develop-
ment of land is capable of being a material consideration, but other circumstances such as personal
hardship and fears of affected residents can be considered in exceptional cases (the House of Lords in
Great Portland Estates v Westminster City Council (1985)). Government planning policy (the NPPF) is
one of the most important material considerations other than the Local Development Plan.
Table 11.4.1 summarises what may/may not be deemed material considerations in planning deci-
sion making.
260 Dunhill, Furness, Greenhalgh et al.
Table 11.4.1 Considerations in planning decision making

Material considerations Non-material considerations

Previous planning decisions (including appeal Loss in property value

decisions) Loss of a private view
Proposals/policies in the Local Development Plan Private disputes between neighbours, e.g. land ownership
National guidance Restrictive covenants
Loss of light/overshadowing Fence lines/boundary positions
Loss of privacy to a room through distance Personal morals or views about the application
Visual amenity Ownership disputes
Adequacy of parking/loading/turning Applicant’s motives
Highway safety, road layout/access Competition
Noise and disturbance resulting from use Issues covered by other legislation, e.g. Highways Act
Hazardous materials; Odours
Traffic generation
Loss of trees/green space
Landscaping
Impact upon a listed building or a conservation area
Design, appearance and materials
Disabled access
Nature conservation
Archaeology

The planning decision-making process

Is it a planning issue?
It is first important to establish whether a proposal requires planning permission. If proposed activity
constitutes ‘development’ it is likely to require planning permission and therefore a planning decision.
Development is defined by section 55 of the Town and Country Planning Act 1990: ‘“development”
means the carrying out of building, engineering, mining or other operations in, on, over or under
land, or the making of any material change in the use of any buildings or other land.’
Building operations include the following:

a demolition of buildings;
b rebuilding;
c structural alterations of or additions to buildings; and
d other operations normally undertaken by a person carrying on business as a builder.

Not all development, however, requires planning permission, and thus a planning decision. There are
two important pieces of secondary legislation: the Use Classes Order 1987, which sets out the vari-
ous categories of planning uses and the General Permitted Development Order (GPDO) 1995. Both
have been amended many times but are important documents that confirm whether development
requires planning permission or not. Development that does not require planning permission is called
permitted development. If unsure whether planning permission is required, it is advised to contact the
relevant LPA.

Pre-application discussions
Where planning permission is required, the Government encourages a detailed process of negotia-
tion and pre-application discussion. This process is now seen as a key part of a modern development
management service. Many LPAs now have formal pre-application advice services that attract fees.
 Planning 261
Despite the costs involved, pre-application discussions offer applicant’s an early insight into the plan-
ning decision-making process and highlight from the outset whether the proposal has any planning
issues that need to be overcome. The outcome of such pre-application discussions is usually more
appropriate applications which are far more likely to meet planning aspirations for development in the
area, are more sustainable, and are ultimately more likely to achieve planning permission.
A great number of LPAs now operate what is termed the Development Team approach. This is an
approach whereby a group of key officers likely to be central to considering the development proposal
are assembled early on during the pre-application stage to help a proposal through from inception to
post-application delivery.

Submitting the application

Validation
Once submitted, planning applications are validated to ensure that all the necessary forms, plans and
documents have been submitted. The general process is controlled by the Town and Country Planning
(Development Management Procedure) Order 2010, which sets out what needs to be submitted with
an application and how the process should be conducted.
Once the planning application has been validated, the LPA will start the determination process
(Planning Portal, 2013).
If a planning application is deemed invalid, the LPA will notify the applicant and make clear what
documents are required. Additional supporting information will only be requested where it is deemed
relevant, necessary and material to the application in question.
Once an application has been validated and registered, the LPA will then publicise and consult on
it (Planning Portal, 2013).

Consultation
It is the responsibility of the LPA to notify neighbours and/or put up a notice on or near the site.
Applications may also be advertised in a local newspaper. This gives the public the opportunity to
make comments. The parish, town or community council will also be directly notified, as well as other
bodies such as the Environment Agency for example.
Any comments received on the planning application during the consultation period will be a mate-
rial consideration in the planning decision-making process. In other words, comments will be collated,
assessed, and where relevant will inform decision making. As a result of the comments received, the
LPA may suggest minor changes to the application to overcome any issues raised.

The decision
The decision to grant permission or reject a planning application may either be taken by the
LPA’s planning committee, which is made up of elected councillors, or will be determined by
the Chief Planning Officer, through delegated powers. To determine whether the decision will
be made by planning committee or will be delegated, the LPA usually have a set of criteria,
‘based on size and nature of development’ (Planning Aid, 2012: 23). More complex, conten-
tious and/or major developments will usually be determined by the planning committee. Where
a decision is to be made by planning committee, the LPA must prepare a report outlining the
proposal, and an assessment of the issues raised. The report will culminate in a recommenda-
tion for approval or refusal. The report and any background papers (for example, comments of
consultees, objectors and supporters) will normally be made available at least three working days
before the committee meeting.
262 Dunhill, Furness, Greenhalgh et al.
The decision-making process up to this point usually takes 8 weeks (minor applications) and 13
weeks for major or complex applications.

Permission granted
The LPA will send a notification letter to applicants informing them of the outcome of the process.
The decision will be to either grant permission, grant permission subject to planning conditions (and
in some cases subject to the signing up to a section 106 planning obligations agreement) or to refuse
the application.
Applicants have three years from the date that planning permission is granted to begin the devel-
opment. If development has not commenced within the required timescale, applicants will need to
reapply for planning permission.

Permission refused or delayed

If the LPA refuses planning permission or if the applicant disagrees with the planning conditions
attached, applicants may appeal up until 6 months from the date of the application decision letter
(or in the case of non-determination, 6 months from the date the decision should have been made).
Appeals, however, are intended as a last resort and may take several months to decide. It may therefore
be more appropriate to discuss with the LPA whether there are any changes to your proposal which
would make it more acceptable or, in cases of non-determination, when your application might be
decided if you choose not to appeal. If your application has been refused, you may be able to submit
another application with modified plans free of charge within 12 months of the decision on your first
application (Planning Portal, 2013).
The application process is summarised in Figure 11.4.1.

Further reading
General Permitted Development Order (GPDO) (1995), HMSO, London, available at: www.legislation.gov.uk/
uksi/1995/418/contents/made (accessed 25/11/2013).
Planning Aid – Royal Town Planning Institute (2012) available at: http://www.rtpi.org.uk/media/6312/Good-
Practice-Guide-to-Public-Engagement-in-Development-Scheme-High-Res.pdf (accessed 04/06/2014).
Planning Jungle: http://planningjungle.com/ (accessed 25/11/2013).
Planning Portal (2013) ‘How applications are processed’, available at: www.planningportal.gov.uk/planning/
applications/decisionmaking/process (accessed 25/11/2013).
Town and Country Planning (Development Management Procedure) Order (2010), HMSO, London, available at:
www.legislation.gov.uk/uksi/2010/2184/contents/made (accessed 25/11/2013).
Use Classes Order 1987, HMSO, London, available at: http://legislation.data.gov.uk/uksi/1987/764/made/data.
htm?wrap=true (accessed 25/11/2013).
 Contact the planning department of your
local planning authority for advice

Apply online via the Planning Portal or in

paper format to the Local Planning Authority

Outline application
(submit ‘reserved Full application
matters’ later)

Submit application with correct fee

and necessary supporting documents

Local planning authority validates application

and requests missing documents

Local planning authority acknowledges

vaild application

Local planning authority publicises

and consults on application

Application considered by Planning Officer

or Planning Committe

Application Permission
Permission Permission
not decided granted with
refused granted
in 8 weeks conditions

Start work
Change proposal Right of appeal
within the limit
and submit to the Secretary
and comply
new application of State
with conditions

Permission Permission
refused granted

Figure 11.4.1 The planning application process

Source: Planning Portal www.planningportal.gov.uk/uploads/plan_flow_chart_eng.gif.
264 Dunhill, Furness, Greenhalgh et al.
11.5 Listed buildings and conservation areas
Key terms: listing system; architectural interest; historic interest; conservation areas
Listing buildings
The Statutory Listing system is based around a hierarchy of ‘listing’ at Grade I (buildings of exceptional
importance, around 2.5 per cent of all listed buildings), Grade II* (particularly important buildings of
more than special interest) or Grade II (buildings of special interest – see the Planning (Listed Buildings
and Conservation Areas) Act 1990.) The ‘special architectural or historic character of the building’ is
the prime determinant of its inclusion in the list (Tait and While, 2009: 722). Given the focus on ‘the
building’, particular emphasis is given to special methods of construction and/or aesthetic elements
that lend it its special architectural character (Turnpenny, 2004). Moreover, the ensuing ‘art historical’
approach to listing decisions means that, ‘individual iconic’ buildings (and ‘iconic’ architects) are often
prioritised for designation (While, 2007: 658).

Principles of selection
While the criteria used to select buildings for listing have remained relatively stable since the emer-
gence of the Statutory List, they have nevertheless been subtly amended over time. The most recent
revisions are set out in the Department for Culture, Media and Sport’s (DCMS) Principles of Selection for
Listed Buildings, published in 2010 Sections 9 and 12–15 of which are summarized below.

Section 9: Statutory criteria

The Secretary of State uses the following criteria when assessing whether a building is of special inter-
est and therefore should be added to the statutory list:

● Architectural interest. To be of special architectural interest a building must be of importance in

its architectural design, decoration or craftsmanship; special interest may also apply to nationally
important examples of particular building types and techniques (e.g. buildings displaying techno-
logical innovation or virtuosity) and significant plan forms.
● Historic interest. To be of special historic interest a building must illustrate important aspects of the
nation’s social, economic, cultural, or military history and/or have close historical associations
with nationally important people. There should normally be some quality of interest in the physi-
cal fabric of the building itself to justify the statutory protection afforded by listing.

Further to these two high-level guiding principles set out above, decisions to list a building or structure
are based on several other general principles:

Section 12–15: General principles

Age and rarity. The older a building is, and the fewer the surviving examples of its kind, the more likely
it is to have special interest. The relevance of age and rarity will vary according to the particular type of
building because for some types, dates other than those outlined below are of significance. However,
the general principles used are that:

● before 1700, all buildings that contain a significant proportion of their original fabric are listed;
● from 1700 to 1840, most buildings are listed;
● after 1840, because of the greatly increased number of buildings erected and the much larger
numbers that have survived, progressively greater selection is necessary;
 Planning 265
● particularly careful selection is required for buildings from the period after 1945;
● buildings of less than 30 years old are normally listed only if they are of outstanding quality and
under threat.

Aesthetic merits. The appearance of a building – both its intrinsic architectural merit and any group
value – is a key consideration in judging listing proposals, but the special interest of a building will
not always be reflected in obvious external visual quality. Buildings that are important for reasons of
technological innovation, or as illustrating particular aspects of social or economic history, may have
little external visual quality.
Selectivity. A building may be listed primarily because it represents a particular historical type in order
to ensure that examples of such a type are preserved. Listing in these circumstances is largely a com-
parative exercise and needs to be selective where a substantial number of buildings of a similar type
and quality survive. In such cases, the Secretary of State’s policy is to list only the most representative
or most significant examples of the type.
National interest. The emphasis in these criteria is to establish consistency of selection to ensure that
not only are all buildings of strong intrinsic architectural interest included on the list, but also the most
significant or distinctive regional buildings that together make a major contribution to the national his-
toric stock. For instance, the best examples of local vernacular buildings will normally be listed because
together they illustrate the importance of distinctive local and regional traditions (DCMS, 2010).

Evolution of listing principles

The notion of significance in the historic environment is an evolving concept that has broadened over
the last decade. Most notable changes include the recognition of industrial and post-war heritage in
listings’ frame of reference (Stratton, 2000; Orbasli, 2007; Pendlebury, 2009). When national listing
was first established during the 1940s, the system was largely restricted to buildings built before 1840.
The practical effect of the 1840 threshold was the exclusion from the statutory lists of the building
stock associated with the Industrial Revolution (Boland, 1998). Yet in 1987 a government Statutory
Instrument opened up the possibility for post-war listing by extending the period of eligibility for
listing to any building at least 30 years old. This ‘30-year rule’ enabled constant extension, and addi-
tionally included further provision to list buildings over 10 years old if they were deemed, ‘outstanding
and threatened’ (While, 2007: 650). Since then the remit of conservation planning has gradually been
further extended (Delafons, 1997).
For instance, prior to the 1970s, ‘only the finest examples of Victorian and Edwardian architecture were
eligible for inclusion’ (While, 2007: 651). Brunskill’s (1971) Illustrated Handbook of Vernacular Architecture,
however, paved the way for an array of vernacular listings (Robertson, 1993). Indeed, even unexpected
structures such as a pigeon cree in Sunderland have been listed (Howe, 1998: 9). In the twenty-first cen-
tury, listing has continued to evolve, evidenced by the recent statutory listing of the Abbey Road zebra
crossing in London, England (2010). This is a prime example of further social-philosophical adjustments
to the identification and interpretation of significance, as the Grade II listed zebra crossing is deemed
important because of its historical association with The Beatles, gained through its international fame on
the cover of their 1969 Abbey Road album (English Heritage, 2013). Notwithstanding this, such examples
are rather atypical, which explains why they receive much media attention.

Objectives of listing
Listed buildings are a finite resource and are irreplaceable assets. As such, their statutory status (as impor-
tant examples of national history, tradition and culture) is intended to ensure that great care is taken
when proposing any changes to them or to buildings/structures in their vicinity. There are two prime
266 Dunhill, Furness, Greenhalgh et al.
objectives to listing. First, listing ensures that any proposed development activity is carried out sensitively
and does not cause harm to the listed buildings. This is therefore particularly useful for LPAs carrying out
their planning functions. Second, the listing of a building provides a legal basis that prevents its demoli-
tion or any alteration that would materially alter it. Listed Building Consent is required from the LPA for
any demolition, alterations, (including internal alterations) or extensions that would affect the character
of the building. Listed Building Consent is a separate application process to the usual planning consents.
Since 2005, English Heritage have assumed sole responsibility for the administration of listed build-
ings and while suggestions about what to list are made by English Heritage, proposals for listing can
also be made by any member of the public (While, 2007: 648).

Conservation areas
The 1967 Civic Amenities Act was the first to impose a duty on local authorities to designate con-
servation areas. The duty was to, ‘designate as conservation areas any areas of special architectural or
historic interest’, and this same duty is today imposed in Section 69 of the Planning (Listed Buildings
and Conservation Areas) Act 1990. While notions of ‘architectural’ and ‘historic interest’ are still
organising concepts underpinning conservation area designation (English Heritage, 1997), there are a
number of additional aspects to consider that make the remit for conservation area designation wider
than that for statutory listing.

Principles of selection
One key difference between listed building and conservation area designation is that LPAs, rather
than central government, are responsible for designating conservation areas. As such, conservation
areas tend to have a wider remit, focusing more on the notion of local distinctiveness. Local factors,
such as a commitment to the preservation of local historic character and/or the industrial heritage, are
important factors for conservation area designation. Indeed, PPG15 (now superseded by the NPPF)
was the first to make clear that it is reasonable to take account of a wider range of factors when con-
sidering conservation area designation than are applicable to listing. For instance, ‘special interest’ can
derive from, ‘an area’s topography, historical development, archaeological significance and potential,
the prevalent building materials of an area, its character and hierarchy of spaces and the quality and
relationship of its buildings’ (DoE/DNH, 1994: 4.4).
PPG15 was also first to urge a move towards the drawing up of formal character assessments in order
to underpin and justify conservation area designations. Again, this represented a positive opportunity
to move beyond narrow considerations of artistic or architectural quality and towards an understanding
of the evolution of an area and the key interrelationships of all its historic components (Boland, 1998).
Moreover, conservation area planning encouraged increased levels of public participation in conservation
activity through the creation of conservation area advisory committees (MHLG, 1968: 18–22).

Objectives of conservation areas

When a conservation area has been designated, special attention has to be paid in all planning deci-
sions to the preservation or enhancement of its character and appearance. It is therefore of particular
importance to understand the character of the conservation area in order for this to be preserved or
enhanced. Many LPAs prepare Conservation Area Character Appraisals and associated management
plans which become a material consideration when making planning decisions (see Concept 11.4).
While demolition of all buildings (unlisted as well as listed) is controlled, owners of unlisted buildings
usually have permitted development rights. These, however, can be withdrawn by LPAs through the use
of an Article 4 direction. Where an Article 4 direction is in place, planning permission must be sought.
 Planning 267
Further reading
Boland, P. (1998) ‘The role of local lists in the conservation of the historic environment: An assessment of their current
status and effectiveness’, unpublished thesis (MSc), Oxford Brookes University.
Brunskill, R. W. (1971) Illustrated Handbook of Vernacular Architecture, Faber & Faber, London.
DCLG (2012) National Planning Policy Framework, DCLG, London.
DCMS (2010) Principles of Selection for Listed Buildings, TSO, London.
Delafons, J. (1997) Politics and Preservation: A policy history of the built heritage 1882–1996, Spon Press, London.
DoE/DNH (1994) Planning Policy Guidance Number 15: Planning and the historic environment, HMSO, London.
English Heritage (1997) Conservation Area Appraisals: Defining the special architectural or historic interest of conservation areas,
English Heritage, London.
English Heritage (2008) Conservation Principles, Policies and Guidance, English Heritage, London.
English Heritage (2013) ‘List entry’, available at: http://list.english-heritage.org.uk/resultsingle.aspx?uid=1396390
(accessed 10/07/2013).
Howe, J. (1998) ‘Not a cree – more a listed building’, Newcastle Journal, 27 March.
MHLG (1968) Old Houses into New Homes, Cmnd 3602, HMSO, London.
Orbasli, A. (2007) Architectural Conservation: Principles and practice, Wiley-Blackwell Publishing, London.
Pendlebury, J. (2009) Conservation in the Age of Consensus, Routledge, London.
Robertson, M. (1993) ‘Listed buildings: The national resurvey of England’, Transactions of the Ancient Monuments Society,
37: 21–38.
Stratton, M. (2000) Industrial Buildings: Conservation and regeneration, Spon Press, London.
Tait, M. and While, A. (2009) ‘Ontology and the conservation of built heritage’, Environment and Planning D: Society
and Space, 27: 721–737.
Turnpenny, M. (2004) ‘Cultural heritage, an ill-defined concept?: A call for joined-up policy’, International Journal of
Heritage Studies, 10(3): 295–307.
While, A. (2007) ‘The state and the controversial demands of cultural built heritage: Modernisation, dirty concrete, and
postwar listing in England’, Environment and Planning B: Planning and Design, 34(4): 645–663.

11.6 Neighbourhood planning

Key terms: localism; neighbourhood; community; planning; grassroots
Neighbourhood planning is part of a wider shift of governance towards the local level that has been
by pursued by the Coalition Government. The seeds of this paradigm shift can be found in the Green
Paper (Open Source Planning) that was released by the Conservatives in opposition in 2010. The
Localism Act 2011 introduced the new statutory level to local plan making called neighbourhood
planning. The legislation allows residents and businesses in a neighbourhood to do two things, if there
is sufficient demand:

● develop a small-scale plan for their neighbourhood;

● propose that a particular development or type of development should automatically get planning
permission in their area (via a Neighbourhood Development Order).

The government described neighbourhood planning as a new way for communities to decide the
future of the places where they live and work, choose where they want new homes, shops and offices
to be built, allow them to have a say on what those new buildings should look like, grant planning
permission for the new buildings they want to see go ahead, influence types of housing and where they
are built or lobby for more housing.
Planning at the neighbourhood level is not completely new, as under previous governments
local communities could develop parish plans but they were not part of legal framework (statutory).
However, in terms of real freedom to make choices for local communities, it has been questioned
whether the reality of choice under neighbourhood planning matches the government’s rhetoric, as
268 Dunhill, Furness, Greenhalgh et al.
neighbourhood plans must be aligned with wider strategic priorities for an area, such as the local plan
and must have regard for the NPPF. In reality this means a neighbourhood plan cannot promote less
housing than envisaged in a local plan; although it can comment on issues such as the type of housing,
and where it should be built, or say that more housing is required.
A speech in 2010 by the then planning minister Greg Clark summarises the Coalition’s aspirations
for neighbourhood planning:

When people know that they will get proper support to cope with the demands of new devel-
opment; when they have a proper say over what new homes will look like; and when they can
influence where those homes go, they have reasons to say ‘yes’ to growth.

However, it is too early to tell whether this will be the case; it is equally likely that communities may
take a NIMBY stance and that the neighbourhood planning process may be dominated/hijacked by
people who are opposed to development, especially in rural and suburban green belt areas.

Who can start a neighbourhood planning process?

The Localism Act states that neighbourhood plans and neighbourhood development orders can
be initiated by either an existing parish or town council, or (where there is no existing parish or
town council) a group that has been designated as a neighbourhood forum. Neighbourhood plans
and neighbourhood development orders can be either resident led or led by the local business
community.
Currently there are in excess of 8,500 neighbourhoods that have parish or town councils in England.
To be eligible to create a plan, a neighbourhood forum must have at least 21 members and member-
ship must be open to all those who live, work or represent the area as councillors, and the forum must
have a written constitution. Neighbourhood planning is supposed to be open to all people who live
in an area, so it is imperative that forums are open and inclusive.

What can be included in a neighbourhood plan?

Advice from the Department of Communities and Local Government states that there is no fixed for-
mat or template for a neighbourhood plan and that they are not intended to be mini local plans. The
government envisages that communities should concentrate on a few policies that could have a major
impact on their area, e.g. density issues/housing for older people. There is no checklist of evidence
or additional reports that a neighbourhood plan must contain but the key is it should be appropriate,
proportionate and up to date. The local planning authority must support the process but limited addi-
tional central government funding is available. It is estimated that to get national blanket coverage in
excess of 10,000+, neighbourhood plans would be needed.
In keeping with the ethos of localism, the focus of neighbourhood plans can vary depending on the
context of the local area. They can set out a vision and a set of objectives for the future of the area, or
they may be more detailed, setting out planning policies for the development and use of land in that
neighbourhood.
The process for developing and agreeing a neighbourhood plan or neighbourhood development
order is relatively straightforward:

● First, local authorities need to agree the boundaries of the neighbourhood area, and to check that
the boundaries don’t overlap with another proposed neighbourhood planning area. A neighbour-
hood plan can cover more than one town/parish council area but there must be agreement.
 Planning 269
● A neighbourhood forum group must apply to the local authority who will check they meet the
necessary requirements. Only one neighbourhood forum can exist in any designated neighbour-
hood area; there cannot be competing neighbourhood forums.
● When agreement is reached the parish/town council or neighbourhood forum will draft the
neighbourhood plan or neighbourhood development order. It must be publicised and make avail-
able for comments to all people within the neighbourhood for a period of at least 6 weeks.
During this consultation period the partnership developing the neighbourhood plan must contact
Statutory Consultees.
● When the consultation process has taken place the neighbourhood plan is formally submitted to
the LPA for their consideration. The LPA will check that all the relevant supporting information
that needs to accompany the draft plan or order has been submitted.
● Finally, the neighbourhood plan and development orders are then submitted to an independent
qualified inspector for examination to check the neighbourhood plan and/or neighbourhood devel-
opment order is in line with local and national planning policy. If the plan is found to be sound by the
examiner, the local authority then organises a community referendum, where all people living in the
area covered by the neighbourhood plan or neighbourhood development order registered to vote in
local elections will be entitled to vote. If it receives the majority of votes of those voting, the neighbour-
hood plan or neighbourhood development order is passed, and incorporated into the local plan.

Alternative viewpoint given in a presentation by a former President of the Royal Town

Planning Institute
For successful neighbourhood planning, communities need consistent and long term engagement.
The position we have at the moment is drip feeding of funding and neighbourhoods competing.
Perhaps rather than focusing on neighbourhood plans, neighbourhoods should focus on under-
standing/documenting the issues in their area and trying to influence the LPA and the local plan.

Further reading
CLES (2011) ‘Localism – a raw deal for local government’, available at: www.cles.org.uk/wp-content/uploads/2011/01/
RR-18-Localism.pdf (accessed 30/11/2013).
Conservative Party (2009) ‘Open Source Planning’, Green Paper, available at: www.conservatives.com/~/media/
Files/Green%20Papers/planning-green-paper.ashx (accessed 30/11/2013).
DCLG (2011) ‘Plain English guide to the Localism Bill’ available at: www.communities.gov.uk/publications/
localgovernment/localismplainenglishupdate (accessed 30/11/2013).
DCLG (2012) ‘Neighbourhood Planning’, available at: www.communities.gov.uk/planningandbuilding/
planningsystem/neighbourhoodplanningvanguards/ (accessed 30/11/2013).
Gallant, N. and Robinson, S. (2012) Neighbourhood Planning: Communities, networks and governance, Policy Press, Bristol.

11.7 Transport and infrastructure planning

Key terms: transport networks; connectivity; National Planning Policy Framework
Transport is a means of providing access. Transport networks enable us to get from one place to
another and there are a range of forms of travel that enable us to do this: walking, cycling, and travel-
ling by car, bus, train, tram, sea or air.
It has been established that transport developments can have positive impacts on populations’ welfare,
productivity and, ultimately, on GDP. Thus, effective transport systems are fundamental to economic
success. For this reason, developments in transport technology have been a key determinant in the spatial
distribution of industry and commerce, dictating areas of economic activity and productivity.
270 Dunhill, Furness, Greenhalgh et al.
Since property and land are static commodities, the influence of transport and industry can be very
significant, because it provides the necessary connections to link areas of economic activity, and enable
populations to access them. It is this connectivity that is an enabler of economic growth.
Transport planning involves consideration of the relationship between different land uses, and the
feasibility of different transport mechanisms and networks within and around these. It is argued that it
should consider the relationship between different modes of transport and their relative effectiveness
in meeting economic, financial, social and environmental goals.
Increased levels of development in the UK will continue to place strain on the existing road infra-
structure. Previously, under PPG13, any developments that carried traffic implications were subject to
a Transport Assessment in order to reduce the impact of new developments. The guidance required
developments to reduce the growth in and length and number of motorised journeys; encourage alter-
native means of transport that would have less environmental impact, and therefore reduce reliance on
the private car. The Transport Act (2000) introduced further measures including providing half price
buses for pensioners and disabled people; and giving powers to Local Authorities to implement road
user charging and workplace parking charging, and to reduce the provision of city centre parking.
With the introduction of the NPPF, the UK planning system is undergoing seismic changes, and
a number of current policies are in flux. Core principles within the NPPF include ‘Promoting sus-
tainable transport’, and ‘Supporting high quality communications and infrastructure’. In addition,
the National Infrastructure Plan (October 2010; updated 2012) sets out a vision for investment in
infrastructure in the UK up to 2020, and identifies a pipeline of over 550 planned public and private
infrastructure projects worth over £310bn. Infrastructure, as defined in the plan, encompasses: major
roads, rail, airports and ports; electricity and gas; communications; water, sewerage and waste; and
flood defences.

Further reading
Cullingworth, J. B. and Nadin, V. (2006) Town and Country Planning in the UK, 14th edn, Routledge, London, ch. 11.
National Infrastructure Plan (October 2012; updated 2012) available at: www.gov.uk/government/uploads/system/
uploads/attachment_data/file/221553/national_infrastructure_plan_051212.pdf (accessed 30/11/2013).
National Planning Policy Framework (2012) available at: www.gov.uk/government/uploads/system/uploads/
attachment_data/file/6077/2116950.pdf (accessed 30/11/2013).

11.8 Minerals planning

Key terms: National Planning Policy Framework; aggregates; coal; environmental impact; minerals
safeguarding areas
Minerals have been worked in the UK for thousands of years but increased in significance with the
industrial revolution in the nineteenth century. Even where surface activity has been on a small scale
and worked largely with pick and shovel, the adverse impact on the environment has been consider-
able, as can be seen to this day in parts of Cornwall, north Wales and the Pennines. In the twentieth
century, as a result of technological advance and growing demands, mineral extraction became much
greater in scale. However, only after the Second World War through the Town and Country Planning
Act 1947, did mineral working become subject to the operation of planning controls as we know them
today.
Even after the 1947 Act some mineral sites, particularly in the ironstone industry, were given plan-
ning permission by statutory order without detailed consideration of individual sites. Such permissions
often covered extensive areas of land, far exceeding the operators’ immediate requirements. Only
rudimentary provisions were made relating to working methods, waste disposal and site restoration;
and environmental controls on such aspects as noise, dust or traffic were virtually unknown.
 Planning 271
In response to public pressure, control over new mineral workings was subsequently tightened,
especially regarding the imposition of conditions; but mineral operators also showed an increasing
awareness of the need to make their operations more environmentally acceptable. At the same time,
however, the scale of mineral working increased substantially – in particular in relation to meeting
demand for aggregates and this resulted in pressure for working on sites close to urban areas or on high
grade agricultural land, increasing the conflict between mineral working and the environment.
The production of planning policy and guidance in the UK has been largely fragmented and piecemeal
and evolved gradually from the original Town and Country Planning Act in 1947. Successive govern-
ments have published very extensive policy and guidance on minerals, through the publication of a series
of Mineral Policy Statements (MPSs), separate from the main series of Planning Policy Statements. The
over-arching MPS (Planning and Minerals – MPS1) was published in 2006 and was accompanied by a
practice guide offering examples and principles of good practice and background information. Before
this, MPS2 (Environmental Effects of Mineral Working) had been published in 2005.
Prior to the publication of MPS1 and MPS2, mineral planning policy and advice was provided in
a series of 15 Minerals Planning Guidance Notes, published between 1988 and 2004. These covered
general mineral planning matters; guidance on specific minerals including coal (MPG 3), aggregates
(MPG 6), peat (MPG 13) and silica sand (MPG 15); and guidance on specific topics such as reclamation
(MPG 7) and noise control (MPG 11). This resulted in there being some 1,300 pages of national planning
policy by 2009. An aim of the new Government in 2010 was to simplify national planning policy and
this was achieved through the publication of the NPPF in March 2012 which has only 59 pages.
The special place of mineral planning is recognised by the NPPF devoting a separate chapter to the
subject of ‘Facilitating the sustainable use of minerals’. The policy states (paragraph 142):

[M]inerals are essential to support sustainable economic growth and our quality of life. It is there-
fore important that there is sufficient supply of material to provide the infrastructure, buildings,
energy and goods that the country needs. However, since minerals are a finite natural resource,
and can only be worked where they are found, it is important to make the best use of them to
secure their long-term conservation.

The NPPF then sets out a list of requirements for LPAs in preparing Local Plans and a similar list of
requirements for them in determining planning applications. Mineral planning authorities (MPAs) are
required to plan for a steady and adequate supply of aggregates and industrial minerals. An essentially
restrictive policy continues to apply in respect of coal extraction (paragraph 149):

Permission should not be given for the extraction of coal unless the proposal is environmentally
acceptable, or can be made so by planning conditions or obligations; or if not, it provides national,
local or community benefits which clearly outweigh the likely impacts to justify the grant of
planning permission.

The Government also published ‘Technical Guidance to the National Planning Policy Framework’
in March 2012. This contains additional policy on the proximity of mineral working to communi-
ties; dust emissions from mineral workings including the health effects of dust; noise emissions from
mineral workings; stability in surface mine workings and tips; the restoration and aftercare of mineral
sites; and land banks for industrial minerals.
Aggregates are the most commonly extracted and used construction materials in the UK, compris-
ing about 75 per cent by tonnage of all land-won mineral extraction. In 2009, 119.1 million tonnes
were consumed in England and Wales including 10.8 million tonnes from marine landings. Although
the mineral planning system in the UK applies to all minerals, the foundations of the system relate to
aggregates.
272 Dunhill, Furness, Greenhalgh et al.
A very different approach applies in relation to coal mining. The NPPF (paragraph 149) states:

[P]ermission should not be given for the extraction of coal unless the proposal is environmentally
acceptable, or can be made so by planning conditions or obligations; or if not, it provides national,
local or community benefits which clearly outweigh the likely impacts to justify the grant of plan-
ning permission.

This represents a continuation of the essentially restrictive policy that has applied to coal extraction
for many years.
Opencast coal mining has been a particularly controversial form of mineral working since it began
as a wartime emergency measure in 1942. Opencast coal operators have unsuccessfully lobbied for the
presumption against development to be removed in recent years. They considered that many MPAs were
refusing opencast applications for non-planning reasons and that because of the ‘presumption against’
appeal decisions also were being unfairly influenced. This, together with the reduced demand for indig-
enous coal in the face of competition from overseas coal and indigenous gas, has resulted in significantly
reduced opencast production, although there are recent signs of renewed interest by operators as world
coal prices increase and the Government has sought a more diversified pattern of energy supply. Three
major appeals in Derbyshire, Leicestershire and Northumberland were won by the industry in 2007.
Safeguarding of proven mineral resources against incompatible surface development is a key
requirement in the NPPF, and MPAs are required to ‘define Minerals Safeguarding Areas and adopt
appropriate policies in order that known locations of specific minerals resources of local and national
importance are not needlessly sterilised by non-mineral development’ (paragraph 143).
Mineral Planning Authorities are County Councils in those parts of England where there continue to
be two tiers of local government. Elsewhere Unitary Authorities are the Mineral Planning Authorities for
their area. County Councils are required to prepare development plan documents (DPDs) for minerals
and waste. They may prepare DPDs dealing solely with minerals (or waste) or DPDs dealing with both
minerals and waste. Unitary Authorities may also prepare separate DPDs dealing with minerals and/or
waste but would normally include minerals and waste together with other subjects in their DPDs.
The protection of mineral resources from unnecessary sterilisation by other development has been
a theme of the planning process since the Town and Country Planning Act 1947. The concept of
Mineral Safeguarding Areas (MSAs) is relatively new in minerals planning. It is the purpose of the
planning system to address competing demands on land use, but until recently it gave little weight
to the protection of mineral resources in comparison with that afforded to environmental assets. As a
result, there have been many instances where minerals were needlessly sterilised.
The NPPF (2012) at paragraph 143 states that LPAs in preparing Local Plans should:

define Mineral Safeguarding Areas and adopt policies in order that known locations of specific
minerals resources of local and national importance are not needlessly sterilised by non-mineral
development, whilst not creating a presumption that resources defined will be worked: and define
Mineral Consultation Areas based on these Mineral Safeguarding Areas.

It continues in paragraph 144 by stating that, when determining planning applications, LPAs should
‘not normally permit other development proposals in mineral safeguarding areas where they might
constrain potential future use for these purposes’.
The NPPF also makes provision for the safeguarding of essential minerals infrastructure including ‘exist-
ing, planned and potential rail heads, rail links to quarries, wharfage and associated storage, handling and
processing facilities for the bulk transport by rail, sea or inland waterways of minerals, including recycled
and secondary aggregate material’. In addition it states that ‘existing, planned and potential sites for concrete
batching, the manufacture of coated materials, other concrete products and the handling, processing and
distribution of substitute, recycled and secondary aggregate material should be safeguarded’ (paragraph 143).
 Planning 273
The concept of Mineral Safeguarding Areas is relatively new in minerals planning although the pro-
tection of mineral resources from unnecessary sterilisation by other development has been a theme of the
planning process since the Town and Country Planning Act 1947. MSAs were promoted through MPS
1 and have been given renewed emphasis by their inclusion in the new NPPF. The British Geological
Survey (BGS) in collaboration with partner organisations has prepared good practice guidance to assist
LPAs in mineral safeguarding and the minerals industry in preparing planning applications.
A number of authorities are now well advanced with plan preparation and examples of their approaches
to safeguarding have been referred to in this paper. With the assistance of the BGS broad areas of economic
geology are being identified. The policy of pre-extraction, however, presupposes that the minerals within
a particular development area are commercially viable during the plan period. This will not always be the
case and may lead to the delay or prohibition of surface development to safeguard deposits that may never
be capable of commercial extraction, assuming of course that the ‘practical’ and ‘environmentally accept-
able’ tests can also be met. An effective MSA policy framework should be capable of assessing the merits of
safeguarding particular minerals on a site by site basis within a broad area of economic geology.
Environmental impact assessments (EIAs) are frequently required to support mineral planning applications
(see Concept 16.8). The purpose of EIA is to ensure that full consideration is given to the environmental,
economic and social effects of a proposed development during the determination process. The EIA is
compulsory for many types of development, including most new mineral sites. Information detailing the
likely effects or impacts of a development is assembled and analysed and collated into an Environmental
Statement that supports application. This information is reviewed by the LPA, relevant statutory and non-
statutory consultees and the general public prior to the formal determination of a planning application.

Further reading
Communities and Local Government, ‘National Planning Policy Framework’, March 2012, available at: www.gov.uk/
government/publications/national-planning-policy-framework--2 (accessed 24/10/2013).

11.9 Settlement hierarchy

Key terms: Local Planning Authorities; National Planning Policy Framework (NPPF); sustainable
development
A settlement hierarchy is the organisation of settlements, usually by size, accessibility and level of ser-
vice provision, to facilitate a sustainable pattern of development. It enables LPAs to plan positively for
new development, ensuring that growth is directed towards the most sustainable locations according
to the ‘hierarchy’ or ‘order’ of settlements. The NPPF (see Concept 11.1) recommends that a ‘pre-
sumption in favour of sustainable development’ should be the basis for every plan and every planning
decision (DCLG, 2012: i). A key aspect of recognising sustainable locations for new development is
to identify accessibility and proximity to services and sustainable transport options. As such, the NPPF
(DCLG, 2012: 7) recommends undertaking research to understand the role of each settlement to
define a network and hierarchy of centres that is informed by evidence. Creating a settlement hierar-
chy is therefore a fundamental part of local plan making and carrying out this research is a key part of
the evidence base required for a new Local Development Plan.

Purpose: planning positively for sustainable development

Plan-led strategies and policies should be underpinned by a robust, yet proportionate evidence base
that enables development to be directed towards the most sustainable locations. As Mills (2004: 71)
explains, ‘at the settlement scale, the measures of sustainability focus on the efficiency of the urban
system of which a key aspect is the movement of materials and people’. As such, a key purpose of the
274 Dunhill, Furness, Greenhalgh et al.
settlement hierarchy is to bring housing, employment and other services closer together in and around
settlements. This approach contributes to the vitality and sustainability of the settlements by:

● supporting existing and new services and facilities

● helping to create vibrant and lively places, and
● increasing accessibility for all sections of society – thus reducing the need for people to travel
by private motor vehicle, bringing multiple environmental and quality of life benefits.
(Guildford Borough Council, 2013: 2: 1.1.6)

Typical methods
To create a settlement hierarchy typically involves collecting data to enable settlements to be grouped by
level of services, functions and characteristics. Methodologies may vary from one LPA to another, but a
common approach is to score and rank each settlement based on an assessment of the level of accessibil-
ity that each settlement has to a range of services and facilities including shops, schools and employment.
Sustainability indicators may be created to assist this process and these may relate to, for example:

● the presence of shops, schools and community facilities located in or in the vicinity of the
settlement;
● access to public transport;
● access to employment opportunities.

For rural areas, it is also important to assess how well the village functions as a community.
These sustainability indicators will also be supplemented with area profiling work that contains
contextual information about each settlement including its size and character, and other economic,
social and environmental characteristics (PAS, 2013). Preliminary data relating to each settlement’s
capacity to accommodate additional development (i.e. from service providers such as water and energy
companies) will also be fed into this process.
The score for each settlement will then be used to categorise the settlements into those that are consid-
ered the most sustainable for future growth (such as the main towns and services centres) as well as those
considered least sustainable for future growth (such as disconnected, remote rural villages and hamlets).
Such groupings may be arranged as follows:

● ‘principal towns’ (also called ‘main towns’, with a wide range of services and opportunities for
employment, retail and education; high levels of accessibility and public transport provision);
● ‘secondary/key service centres’ (mid-size settlements with a range of services and opportunities for
employment, retail and education with some good public transport links);
● ‘local service centres’ (smaller settlements with a limited range of services and opportunities for
employment, retail and education and a lower level of access to public transport); and
● ‘other settlements’ (smaller, often rural, inaccessible settlements with no employment or retail
opportunities).

The tiers established by the settlement hierarchy are then associated with a set of development princi-
ples deemed suitable to that tier. Figure 11.9.1 illustrates this hierarchy.
The settlement hierarchy will not only be used to plan where future development in the area will
be located, but it will also be used when assessing speculative planning applications. LPAs will use the
hierarchy as a tool to enforce a sequential approach to development. This means that applicants must
demonstrate that they have assessed all other deliverable and developable sites and that no other more
sustainable locations can be found.
 Planning 275

Most planned 1 Principal towns – the focus for new development and the
development location for planned housing and employment urban extensions.
2 Secondary Service Centres – development that maintains and
strengthens the role of the settlement as a service centre is
permitted.
3 Local Service Centres – small-scale development, in-fills,
change of use and conversions to meet defined needs and to
maintain or enhance local services and facilities is permitted.
4 Other Settlements – the priority in these settlements is the re-use
of existing buildings or conversions only.

Figure 11.9.1 Settlement hierarchies in action.

Further reading
DCLG (2012) National Planning Policy Framework, DCLG, London.
Guildford Borough Council (2013) Settlement Hierarchy, Guildford Borough Council, Guildford.
Mills, G. (2004) ‘Progress toward sustainable settlements: A role for urban climatology’, Theoretical and Applied
Climatology, 84: 69–76.
PAS (2013) ‘Area profiling’, available at: www.pas.gov.uk/ (accessed 25/11/2013).

11.10 Planning obligations

Key terms: planning gain; Section 106; mitigation; Community Infrastructure Levy
As we have seen in Concept 11.4, planning permission is usually granted on a conditional basis.
Generally, when considering how to regulate a development the preference is to use conditions,
but there are some circumstances where it is not possible to use a condition; for example, you
cannot impose a planning condition requiring someone to make a payment. Planning authorities
use agreements with developers to further regulate the development and to address any negative
impacts arising from it, for example, pressure on school accommodation, local traffic, and avail-
ability of play spaces. These agreements are made under Section 106 of the Town and Country
Planning Act 1990 and are generally referred to as section 106 agreements or planning obligations.
Examples of typical planning obligations are the provision of affordable housing, the transfer of land
for play areas or other public uses and financial contributions towards public open spaces/public
art/security etc.
Regulation 122 of the Community Infrastructure Levy Regulations 2010 (as amended) and para-
graph 204 of the NPPF provide that planning obligations must:

● be necessary to make the proposed development acceptable in planning terms;

● directly relate to the development; and
● fairly and reasonably relate in scale and kind to the development.

As part of the formulation of their development plans authorities have and continue to specify what
types of obligation they would seek (e.g. what proportion of affordable housing would be sought) and
how any financial contributions would be calculated. These policies are the starting point of negotia-
tions with the developers who will seek to minimise the level of obligations. There will frequently be
arguments as to viability. Sometimes developers will offer or agree to accept obligations that do not
directly relate to their development. This gives rise to implications of bribery and to suggestions that
276 Dunhill, Furness, Greenhalgh et al.
planning permissions can be bought and any permission granted in connection to such an obligation
could be the subject of a judicial challenge.
Section 106 agreements are normally negotiated and completed before planning permission is issued
but are conditional upon the granting of permission. These agreements ‘run with the land’ and the
planning authority will therefore ensure that everyone with an interest in the land is a party to the
agreement to ensure that it can be enforced. In some cases the developer will sign a unilateral under-
taking – this usually arises in planning appeals where the authority is opposed to the principle of
development or cannot reach agreement as to the extent of the obligations.
Under Section 106A of the TCPA 1990 a person can apply to the LPA to modify or discharge a plan-
ning obligation provided that it has been at least 5 years since the obligation was entered into. If the LPA
does not determine the application within the appropriate time period (normally 8 weeks) or refuses to
modify or discharge the agreement or undertaking, then there is a right to appeal to the Secretary of State.
The Growth and Infrastructure Act 2013 introduced a new application and appeal procedure for the review
of planning obligations on planning permissions that relate to the provision of affordable housing.
There have been a number of proposals to reform the planning obligation system, notably the
Barker Review, Planning Gain Supplement and the Planning Charge. Some of the main complaints
levelled at the section 106 system is that it is a slow, uncertain and potentially costly (in terms of
professional fees) process. In 2007 the Government decided to introduce CIL which is discussed in
Concept 11.11. The introduction of CIL does not mean that section 106 agreements will cease to
exist. CIL is to be used to fund infrastructure with a wide definition that could be used for a number
of purposes that section 106 agreements are currently used for, including school extensions and play
areas. However, it cannot be used for the provision of affordable housing, and planning obligations
will still be required where the developer is providing land. CIL is in its infancy so we will have to
wait and see how CIL and planning obligations work together.

Further reading
Moore V. and Purdue M. (2012) A Practical Approach to Planning Law, Oxford University Press, Oxford.
Planning Portal (no date) ‘Conditions and obligations’, available at www.planningportal.gov.uk/planning/applications/
decisionmaking/conditionsandobligations (accessed 27/11/2013).

11.11 Community infrastructure levy

Key terms: tax; planning obligations; infrastructure
Community Infrastructure Levy (CIL) is a levy that local authorities in England and Wales can choose
to charge on new development in their area (Communities and Local Government, 2013). It was
introduced by the 2008 Planning Act to address a long-held recognition that planning obligations in
the UK have often struggled to contribute to large-scale infrastructure requirements or the cumulative
infrastructure needs resulting from incremental development.
The statutory purpose of CIL, as set out in Part 11 of the 2008 Planning Act, is ‘to ensure that costs
incurred in providing infrastructure to support the development of an area can be funded, wholly or
in part, by owners or developers of land’. Subsequent regulations (HoC 2010, 2011 and 2012) make
it clear that, while (Section 106) planning obligations should aim to secure necessary requirements
that facilitate the granting of planning permission for a particular development, CIL contributions
are for general infrastructure needs. Thus CIL sits beside and is in addition to Section 106 obligations
(see Concept 11.10) which are contributions to specific infrastructure or other works to mitigate
the impact of a particular consented development. CIL excludes affordable housing, which is often
included in S106 agreements, consistent with the general principle that developers and landowners
should not be charged twice for the same development. It is not a tax on land value uplift.
 Planning 277
CIL operates by local authorities opting to charge a levy on new development in their area by
introducing a charging schedule that identifies taxable development. This is achieved by setting out
the types of development on which a charge is to be levied e.g. residential, office, retail etc., the
areas in which a charge is to be levied and the rate at which each type is charged. It is only charged
on new development that constitutes construction of new buildings, and thus excludes telecom-
munication and utility based construction. Some developments are excluded because of their type
(e.g. social housing or charitable activity) or location or, indeed, because the local authority has
opted not to levy CIL. The rate should not put at risk overall development and must strike a balance
between funding infrastructure from the levy and the potential effects of the imposition of CIL on
the viability of development in an area.
The proceeds raised by CIL are to be spent on local infrastructure and charging authorities must
identify an infrastructure gap that may be filled by a selection of indicative infrastructure projects that
underpin the development plan. The charging authority must spend the money on funding infrastruc-
ture to support development of its area or may pool funds with other LAs to fund conurbation or
region-wide projects.
In practice, a landowner or lessee must determine whether they are liable for CIL and serve an
assumption of liability notice on the charging authority, which responds with a liability notice.
The landowner or lessee would then serve a commencement notice on the charging authority
after which they would receive a demand notice from the charging authority. The CIL rate is
determined at the point at which planning permission first permits chargeable development to take
place.
In theory, according to the Department of Communities and Local Government (2013), CIL
should deliver the benefits for the following stakeholders:

1 for local authorities – freedom to set their own priorities regarding what the money should be
spent on and a predictable funding stream to allow them to plan ahead more effectively;
2 for developers – greater certainty from the outset about how much money they should expect to
contribute;
3 for local communities – greater transparency, as local authorities must report what they have spent
the levy on each year, and potential to reward the communities that receive new development
with a share of the proceeds of the CIL levy collected in their area (15 per cent to 25 per cent
dependent on whether they have a Neighbourhood Plan).

The actual impact of CIL is uncertain for two main reasons: first, the voluntary nature of the levy,
such that some local authorities will choose not to charge the levy on new development in their area,
which may have consequences for neighbouring authorities that do opt to charge the levy, and second,
variable rates for certain types of development, both of which potentially will have spatial implications
and consequences.

Further reading
DCLG (2010) The Community Infrastructure Levy: An overview, DCLG, London.
DCLG (2013) Community Infrastructure Levy Guidance, DCLG, London.
Planning Portal (2013) ‘Community Infrastructure Levy: about the Community Infrastructure Levy’, available at:
www.planningportal.gov.uk/planning/applications/howtoapply/whattosubmit/cil (accessed 14/10/2013).
278 Dunhill, Furness, Greenhalgh et al.
11.12 Planning appeals
Key terms: planning appeals; written representations; informal hearings; public inquiries
Introduction: rationale for planning appeals
Planning appeals provide the opportunity for planning decisions to be challenged in an independent
and impartial environment. The planning appeal system is underpinned by the notion of natural jus-
tice, openness and fairness. As such, appealing against a decision not only provides an opportunity to
challenge planning decisions, but also enables particular issues of contention and vague and/or contra-
dictory policy to be fine-tuned and clarified, setting a precedent for future decision making.

Criteria for appealing

Appeals to the Secretary of State can be made by an unsuccessful planning applicant under Section 78
of the 1990 Town and Country Planning Act.
The main reasons to make an appeal are as follows:

1 refusal of planning permission;

2 appeal against (unacceptable) planning conditions attached to permission (e.g. hours of opening);
3 appeal against non-determination (where a LPA has failed to give a decision within the prescribed
time period);
4 appeal against enforcement notices (such as to remove a building structure or cease a use).

The last resort

The Planning Inspectorate is an independent group of qualified planning inspectors, appointed nation-
ally by the Government, and these are responsible for planning appeals. The Planning Inspectorate,
also known by the acronym ‘PINS’, do not encourage appeals. Instead, they advise parties initially
to attempt to resolve issues through dialogue and negotiation. If such mediation proves unsuccessful,
only at this stage should the appeal system be considered. Even once an appeal process has been com-
menced, PINS encourage that open communication channels are maintained to attempt to narrow
down areas of dispute where possible. Such communication can save vast amounts of time and money.

Appeal process
The Planning Inspectorate provides detailed advice and guidance for making an appeal (PINS, 2010).
This publication replaces PINS 01/2009, first introduced on 6 April 2009 and the suite of Good
Practice Advice Notes which were published in 2009. More information can also be found on the
Planning Portal website: (www.planningportal.gov.uk/planning/appeals/online/makeanappeal).
Appeal forms can be completed online (see the link to the Planning Portal website above). The
appellant must outline the grounds for appeal and respond directly to the reasons for refusal given in
the LPA’s decision notice/letter. The main areas of dispute should be highlighted and explained in
clear planning terms. Note that an appeal against a successful application cannot be lodged by a third
party objector to the scheme.
There are clear deadlines for making an appeal which must be adhered to. Applicants have:

● 12 weeks to appeal against a householder application;

● 6 months for other cases from the date on the decision notice; or
● 6 months from the expiry of the period which the LPA had to determine the application;
● 28 days in respect of an enforcement notice.
 Planning 279
Once the Planning Inspectorate has received the appeal form and confirmed validity, they will decide
how the appeal will be heard. Section 319A of the Town and Country Planning Act 1990 gives the
Planning Inspectorate/Secretary of State the statutory power to determine the procedure.

Modes of planning appeal

There are three different ways in which an appeal can be assessed (see Figure 11.12.1).
The following summarises the key aspects of each method, together with the main advantage/dis-
advantage of each.

1 Written representations
● Suitable for minor cases – straightforward planning issues such as most household appeals,
cases of low public interest and little complexity.
● Appellant and LPA submit a written report to the Planning Inspector to consider. The
Inspector will conduct a site visit.
● Approximately 80–85 per cent of all appeals are conducted using this method.
● Advantage: allows for a quick and relatively low cost decision (in terms of professional fees).
● Disadvantage: little chance to argue your case and challenge the case of the LPA.
2 Hearing
● Inquisitorial – less formal than a Public Inquiry but enables Planning Inspector to ask questions.
Highly complex legal, technical issues are unlikely to arise.
● A ‘half way house’ between written representations and public inquiries (1-day hearing suit-
able for small-scale development with little or no third party interest).
● Site visit, exchange of written evidence.
● No formal cross examination. Instead Inspector facilitates roundtable debate.
● Approximately 15–20 per cent of all appeals are conducted using this method.
● Advantage: allows for debate and allows appellants to challenge/respond to the LPA’s decision
making verbally.
● Disadvantage: more costly and requires more time than written representations.
3 Public inquiry
● Adversarial – suitable for major, controversial and complex cases.
● Format involves the questioning and cross examination of evidence, with expert witnesses
called (third party input, i.e. Highways, Environment Agency, English Heritage).
● Proceedings are managed by an independent Planning Inspector, but barristers take a lead role
in cross-examination of witnesses.
● The LPA must publicise the inquiry through local newspapers and post notices close to the
site, etc.

1 Written representations Quickest/cheapest

2 Informal hearing

3 Public inquiry Longest/most expensive

Figure 11.12.1 Assessment of appeals.

280 Dunhill, Furness, Greenhalgh et al.
● Approximately 5 per cent of all appeals are conducted using this method.
● Advantage: thorough, open, impartial and fair consideration of issues.
● Disadvantage: most expensive in terms of professional/legal fees and time consuming (average
appeal lasts 29 weeks). Parties must be sure of the strength of the case because costs will need
to be covered.

The decision
The Planning Inspector will make one of the following decisions:

1 Allow the appeal (with conditions; overturns the LPA’s decision) or

2 Dismiss the appeal (confirms the LPA’s decision).

Recent changes to planning appeal procedures

On 1 October 2013, the ‘Review of Planning Appeal Procedures’, undertaken by the Department
for Communities and Local Government (DCLG) came into effect. The review includes a number
of measures intended to make the planning appeals process faster and more transparent. Key changes
include:

● frontloading the procedures: appellants submit full case statement at the very start of the process
and an agreed ‘Statement of Common Ground’ (SCG) must be submitted to PINS within 5 weeks
(relevant for both hearings and inquiries);
● faster start dates: new target dates for commencement of appeal;
● faster decision times: 80 per cent of written representations and hearing appeals to be decided
within 14 weeks, and 80 per cent of inquiries to be decided within 22 weeks.

Further reading
HOC (2012) ‘Planning Appeals Policy’, available at: www.parliament.uk/briefing-papers/SN01031 (accessed
4/12/2013).
Moore, V. and Purdue, M. (2012) A Practical Approach to Planning Law, Oxford University Press, Oxford.
PINS (2010) ‘Procedural guidance – Planning appeals and called-in planning applications’, available at: www.
planningportal.gov.uk/uploads/pins/procedural_guidance_planning_appeals.pdf (accessed 4/12/2013).
PINS (2012) ‘Making your appeal’, available at: www.planningportal.gov.uk/uploads/pins/enforcement_making_
your_appeal.pdf (accessed 4/12/2013).
Planning Portal (2013) ‘Technical review of planning appeal procedures’, available at: www.planningportal.gov.uk/
planning/appeals/news (accessed 4/12/2013).
Ratcliffe, J., Stubbs, M. and Keeping, M. (2009) ‘Urban Planning and Real Estate Development’, Routledge, Abingdon.
Tait, M. (2012) ‘Building trust in planning professionals: Understanding the contested legitimacy of a planning decision’,
Town Planning Review, 83(5): 597–618.
12 Property asset management
Cheryl Williamson, Dom Fearon and Kenneth Kelly

12.1 Property asset management

Key terms: real estate; adding value; physical changes; re-gearing; additional revenue streams
The role of the real estate asset manager in connection with real estate portfolios is to ensure that the
value is retained and to increase value where possible. If a client purchases a portfolio worth £5 million
today, then in a year’s time they would want it to be worth more than that to cover inflation and to make
a capital profit. This is a relatively easy job when the markets are hot but during economic downturns and
for poorer quality portfolios, the adding value part can be much more difficult. On a day-to-day basis the
surveyor needs to ensure that the portfolios are managed prudently – the leases need to be ‘policed’. This
means that the tenants are paying their rents promptly, maintaining the buildings and complying with
their covenants in the lease. Hard decisions can need to be made on whether it is better to keep a tenant
even if they are struggling to pay their rent and avoid costs such as empty business rates, or whether a
new tenant of a better covenant strength can be found as a replacement.
A further role for the real estate asset manager is to add value to the portfolio. This can be achieved
by moving funds between different investment groups/opportunities. The returns from different
investments will be compared and then decisions will be taken on buying or selling the portfolios.
The aim here is often to purchase at the bottom of the market and sell at the top to maximise returns.
However, actually being able to spot these opportunities is not always easy. On a smaller scale, inves-
tors can realign their portfolios by selling off the poorer stock and purchasing better quality properties.
These may have better quality tenants with stronger covenant strengths, better leases, and improved
quality of buildings or better locations. Other ways of adding value involve physical changes to the
buildings. Existing properties can be demolished and rebuilt to modern standards, achieving higher
rental levels and better tenant covenants, although the decision will depend upon the balance between
costs and value. If the buildings cannot be demolished, then existing buildings can be merged or split
to provide more valuable space that the market requires. Finding more valuable uses for the portfolio
is another way to add value. The surveyor needs to look at the planning situation and whether there
is a possibility of obtaining a change of use to a more valuable use. Examples of this are the current
developments of old 1960s office blocks into residential units or the proposed changes from obsolete
retail units into small-scale residential units. In many areas residential use is more valuable than office
or retail particularly if the other uses are obsolete in that area. Changes like this can add considerable
value to a portfolio.
Refurbishment of existing buildings can also add value to a portfolio. Discussions need to be held
on costs versus any uplift in price as a landlord will not want to spend money if there is no return;
however, refurbishment can make a building more marketable which is an advantage in a recession-
ary market. This means that it can reduce the amount of time that a landlord has no income from the
property while having to pay the outgoings.
282 Cheryl Williamson, Dom Fearon and Kenneth Kelly
As can be seen from the above the real estate asset manager’s role is to review the portfolios and find
a variety of ways to add value from physical changes and improvements. In addition, another way of
adding value to a portfolio is to look at the leases and the tenants to see ways of making changes that
can add value. This is known as lease re-gearing. Negotiations between landlords and tenants can result
in both parties obtaining something of value; an example of this would be a tenant giving up a break
clause in a lease in return for a reduction in their rent. The landlord would be given more certainty of
income for a longer period and the tenant would reduce its outgoings, thus both parties would benefit
from the new arrangement. Landlords can also look for additional revenue streams and the asset man-
agers need to ‘think outside the box’. This income stream can come from a variety of sources such as
advertising space on gable walls, allowing concessions to have space in a shopping centre or renting
space on high buildings for telecommunication equipment.
An asset manager needs to have a good knowledge of property management principles together
with the added ability to seek out value in a portfolio in a variety of ways.

Further reading
Edwards, V. and Ellison, L. (2004) Corporate Property Management, Blackwell, Oxford.
Haynes, B. P. and Nunnington, N. (2010) Corporate Real Estate Asset Management, EG Books, Oxford.
Scarrett, D. (2011) Property Asset Management, Routledge, Oxford.
www.isurv.com (accessed 14/11/2013).
www.rics.org/uk (accessed 14/11/2013).

12.2 Leases in commercial property

Key terms: legally binding contract; exclusive possession of the property; leasehold interest; full repair-
ing and insuring lease; building insurance
In commercial property, i.e. retail, offices, industrial and leisure, a commercial property lease or busi-
ness lease is a legally binding contract between the legal owner of the property (landlord) and the
occupier (tenant) of the property. As the lease is a legally binding contract, failure by either party to
comply with the terms of the agreement could result in court action. In some cases, the landlord is
also the tenant of another owner which may restrict the flexibility of the terms the landlord can offer.
If this is the case, the landlord should always state in advance and provide a copy of the current lease
between themselves and the superior landlord. It should be remembered that most commercial leases
are generally drafted on behalf of, and very much to the advantage of, landlords, therefore a tenant
should take great care before entering into such a lease agreement.
A key distinguishing element of a commercial property lease is that it grants exclusive possession of
the property upon the tenant. This means that the landlord cannot enter the property except in certain
prescribed circumstances as set out within the lease. A lease is a contractual obligation but it also creates
an interest in property. This is known as a leasehold interest as opposed to a freehold interest in property.
It must therefore be granted for a distinct period of time but can carry on beyond the fixed term as set
out in the contract (lease). If this happens the tenant is referred to as ‘holding over’ on the lease and
the lease becomes a Tenancy of Will which is then terminated by notice.
Most commercial property leases are of a particular type, being either FRI (full repairing and
insuring) leases or IRI (internal repairing and insuring) leases. It is important for a tenant at the out-
set to understand the difference between these leases and the financial implications each one offers.
Under an FRI lease, tenants will be responsible for the repair and maintenance of the whole of the
property. This becomes especially important when the lease relates to an older/listed or unusually
designed or specialist property where costs can be higher. Under an IRI lease tenants will only be
responsible for internal areas of their demise (‘demise’: the area occupied under the terms of the
 Property asset management 283
lease) with the landlord being responsible for the main parts of the property being the foundations,
structural walls and roof of the building. Obviously, most tenants would prefer the less risky obliga-
tions of an IRI lease, while the landlord would prefer the tenant take full repairing liability under
a FRI lease. Often the type of lease offered is negotiated between both parties and has a direct link
to the rental sum offered. Generally speaking, because of the repairing obligations, a tenant would
expect to pay less rent per annum for a FRI lease and slightly more rent per annum for an IRI lease.
In large, multi-occupied buildings such as office blocks and shopping centres, landlords will request
from tenants, an IRI lease with the addition of a service charge to cover additional costs towards
common areas of the property.
Insurance provisions under an FRI/IRI lease vary, depending on the type of premises being leased.
In the majority of cases, the landlord insures the property with the tenants repaying the premium to
the landlords. The landlord will usually insist on insuring the property as they are then in control and
can ensure that the property is properly insured at all times. If, unusually, the tenants are to insure the
premises, the lease will contain provisions to ensure that the tenants insure the property to the level
required by the landlord.
In both situations the lease should say what risks will be insured against. The insured risks are impor-
tant as they relate directly to the repairing obligation. If any damage is caused that is not an insured risk
the tenants will have to repair or reinstate the property. Likewise, if the tenants breach the insurance
policy, they will be required to reinstate the property. The insurance provision discussed above refers to
building insurance against risks of fire, flooding and damage to the building which is separate to contents
insurance which is usually the responsibility of the tenant for their own stock, fittings etc.
The other key terms typically found in a commercial property lease which, as above, are generally
open to negotiation between the parties, are as follows:

● length of term
● rent payable
● payment dates
● VAT
● lease costs
● business rates
● service charge
● rent review provision
● break clause
● transfer (by way of assignment or subletting)
● fitting out/alterations
● dilapidations
● use of the premises.

The Code for Leasing Business Premises in England and Wales 2007 provides a framework within
which a prospective tenant can reasonably expect a landlord to operate. As a prospective tenant, you
should not expect a landlord or landlord’s agent to always comply with this code as it provides guid-
ance or best practice rather than full legislation. The government, however, takes a keen interest in
ensuring the property industry complies with this voluntary code.

Further reading
The Code for Leasing Business Premises in England and Wales 2007, available at: www.leasingbusinesspremises.co.uk
(accessed 20/11/2013).
284 Cheryl Williamson, Dom Fearon and Kenneth Kelly
12.3 Breach of covenant
Key terms: breach of covenant; remedies; court action; forfeiture; specific performance; injunction
It is one of the main responsibilities of the asset manager to ensure that the portfolio is protected by
‘policing’ the leases. This means ensuring that the tenants all abide by the covenants in their leases;
if they don’t then they are in breach of their lease. At this point the landlord or their agent can take
action against the tenants in a variety of ways. There is a process to go through that needs to be
thought through at the beginning. Once a landlord is aware of a breach then he must be careful not to
‘waive’ it, which means accepting the breach. One of the ways that a landlord could waive a breach is
to accept rental payments and this will be discussed later in this section.
Once the breach is known, then the landlord must ask a series of questions: Is the breach important
or significant? Will it impact on the value of my portfolio either today or in the future? Does it affect
the property itself? Will it have an effect on neighbouring tenants? Is it important that something is
done about the breach? If the answer to any of the above is yes then the next question needs to be
asked and that is can the breach be remedied? This means can the situation be put back to what it was
originally? Breaches can be once and for all or continuing, capable of being remedied or not. An illegal
assignment or subletting is a once and for all breach that cannot be remedied, however disrepair of a
property can be continuing and capable of being put right. So, if a breach of covenant is significant
then further action may be required. It is also important to understand that landlords can also be in
breach of covenant and tenants can also take action against them.
Breaches of covenant can be breach of the repairing clause, unlawful assignment or subletting,
unauthorised alterations or an unauthorised change of use. In fact any covenant or clause in the lease
if not complied with is technically a breach; however, some may not have much of an effect on the
property and could be ignored and documented.
The main remedies available to either a landlord or a tenant where there is a breach of covenant are
as follows:

1 Action for damages

This is the most common remedy for non-performance of a covenant. The amount of damages
awarded to the plaintiff will be on the basis that he will be in a similar position after receipt of the
damages to where he would be had the breach not occurred.
2 Distress
This is a remedy available to landlords when the tenant has not paid the rent. It allows the landlord
to enter the premises and take goods to the value of unpaid rent and hold them until the tenant
pays the due sums. Failure to pay the due sums means the landlord can sell the goods and keep the
proceeds up to the value of outstanding rent. This will now be regulated by Commercial Rent
Arrears Recovery (CRAR) with effect from April 2014.
3 Forfeiture
Provided the lease contains a forfeiture clause for a tenant’s breach of covenant under certain cir-
cumstances, the landlord can seek to forfeit the lease. This means that if the landlord is successful
he will generally be left with vacant premises and no one to pay the rent. This can be a Pyrrhic
victory for the landlord and should only be used after a great deal of consideration. Prior to for-
feiting the lease he will have to serve a S.146 notice of the Law of Property Act 1925. The notice
must specify the breach, and require it to be remedied within a reasonable time. The breach must
be capable of being put right. The landlord can ask for damages.
4 Specific performance
This is not a usual remedy but may be available where damages would not achieve the objective.
For example, a covenant to provide services could be remedied by specific performance as it is unjust
 Property asset management 285
to expect the tenant to continue working in unheated premises because the landlord is failing to
provide heating to the building. Specific performance tries to make a party actually do something.
5 Injunction
This is a discretionary remedy and not often used in the field of landlord and tenant as the majority
of breaches of covenant can be compensated for by the payment of damages. It may, very unusu-
ally, be used to force a tenant to stay open for business at specific times (for example if the tenant
was trying to assign the lease, he should continue trading). An injunction tries to stop a party
doing something.

Breach of covenant can be a difficult area of property law to understand and deal with, particularly as
other legislation such as the Leasehold Property (Repairs) Act 1938 interacts with the law concerning
breach of covenant. In addition it is important to look at the remedies in light of the economic climate,
the local market conditions, the type of tenant, the effect of the breach on the property and other ten-
ants. The decision about what action to take is individual to each set of circumstances.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).
www.insolvencyhelpline.co.uk.

12.4 Commercial service charges

Key terms: multiple occupation; budget; RICS Code of Service Charges in Commercial Property;
apportionment methods; sinking fund; reserve fund
Service charges are defined as charges and associated administrative costs properly incurred by an
owner in the everyday running of the property, including maintenance, repair, replacement (where
beyond economic repair) of the building, plant, equipment and other materials. A service charge for
a building will vary depending on the size and type of building. Obviously a service charge for a large
shopping centre will have more headings within it and a higher overall cost than a service charge for a
small industrial estate. They are used in properties where there is multiple occupation and the separate
units are normally let on an IR (internal repairing) basis with the landlord recovering costs for the
external repair, common areas and services provided by way of the service charge. Details of what is
included in the service charges and how they will be recovered will be included in the lease.
The landlord will set a budget for a service charge year usually taking into account the costs for
the previous year and adding any additional costs that may occur in the following year, for example,
legislation changes affecting health and safety requirements. The budget should where possible use
industry standard cost headings which make it easier for service charges to be compared. This budget
figure will then be charged to each tenant one quarter in advance for the next service charge year.
Where there are any vacant units within the building the landlord will have to pay the service charge
for those units as they are not allowed to pass the costs on to the other tenants. There are various ways
of apportioning out the service charge to the tenants but whichever method is used the landlord must
be fair and reasonable, as demonstrated in the RICS Code of Service Charges in Commercial Property
third edition which came into effect from February 2014. One way is to base the apportionment on
the amount of floor space occupied by the tenant as a percentage of the total floor space. So if the ten-
ant’s unit occupies 10 per cent of the total floor space of the building then they would pay 10 per cent
of the service charge. This appears to be a fair system, but tenants who occupy large amounts of space
286 Cheryl Williamson, Dom Fearon and Kenneth Kelly
feel that this is an unfair system and they prefer a weighted floor area basis. This zones the space into
areas, for example the first 1,000 sq m would pay the full price per sq m, the next 1,000 sq m would
pay half the rate, the next 1,000 sq m would be at a quarter of the rate and anything over that would
pay at an even lower rate. The problem with this is that the tenants occupying smaller units pay pro-
portionately more for their units. A final method that is sometimes used is to base the apportionment
on RVs.
At the end of the service charge year, the accounts will be audited and it is good practice for an
external auditor to be used, although the person responsible for managing the service charge also has
a duty of care to certify and sign off the audit under the new code. This is called the service charge
reconciliation. The actual expenditure will be ascertained and apportioned on the same basis as before
and if the budget has overspent the tenant will be asked for more money and if it is underspent then
landlords will credit the tenant’s account. A full explanation of the expenditure should be given to the
tenants. According to the code this should be achieved within 4 months of the year end.
Service charges in commercial properties can be contentious between landlords and tenants over
the amounts of money spent and services provided. As part of this, tenants prefer service charge
rates to remain stable and do not like wide variances in the rates and this is sometimes difficult for
landlords if unforeseen expenditure arises. One way to try to smooth out wide variances in the level
of the service charge is to use a sinking fund or a reserve fund. A sinking fund collects monies over
a period of time for specific items of repair or replacement, for example, if a building needs a new
roof in 5 years’ time at a cost of £50,000 then a sum of £10,000 would be put into the sinking fund
every year. Then, after 5 years when the roof needs to be renewed the monies are already there to
pay the bill rather than adding £50,000 to that particular service charge year. A reserve fund works
in the same way but is usually used for works of a recurring nature – an example would be repaint-
ing external paintwork. While both funds are useful, they have problems with VAT recovery for
tenants and other problems.

Further reading
Forrester, P. (2004) Service Charges in Commercial Property, 2nd edn, RICS Books, Coventry.
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com
www.rics.org/uk/servicechargecode.

12.5 Rent
Key terms: rent; negotiated agreement; market rent; concessionary rents; headline rents; stepped rents;
turnover rents
Rent can be described as:

● The amount of money that a landlord and tenant agree reflects the terms of the agreement which
they have reached for the use of the premises. It reflects who does the repairs, who pays the insur-
ance and who pays the rates etc.
● The amount of money that gives the landlord a return on the capital he has invested in the prop-
erty concerned but enables the tenant to trade from the premises and generate enough profit so
that he can stay in business.
● Freely negotiated between the parties. There is no compulsion on either party to agree to a rent
that they are not happy with and there is no legislation to decide what the level of rent should be
(except sometimes in the case of residential property).
 Property asset management 287
So, rent is a freely negotiated sum of money paid by the tenant (occupier) to the landlord (investor) so
that the tenant can occupy premises and run a business from them. If the landlord and proposed tenant
cannot come to an agreement about rental terms, they can agree to disagree and no letting will take place.
However, once an agreement is reached and the amount of rent is stated in the lease document, the
tenant is legally bound to pay it in the agreed way until the lease expires, the rent is reviewed or some
other mutually acceptable action happens.
Generally the rent agreed between the landlord and the tenant is based on market value as defined
by the International Valuation Standards Council VS.3.2 and comparable evidence is used to ascertain
the value of the property. This is not the only way that rental levels can be set, there are other methods
that will be outlined below.
A concessionary rent is lower than market value and can be used by the landlord to encourage an
anchor tenant to take a lease in a new shopping area or to get lettings in an office block or on an indus-
trial estate. Once tenants take space in buildings it can be easier to attract further tenants. Sometimes
concessionary rents can be used if an existing tenant is struggling to pay a market rent, so it can be a
useful tool for a landlord. A premium rent is really the opposite to a concessionary rent as it is higher
than market value. It is an artificial rent that sometimes occurs when a tenant has to overbid for a par-
ticular property or it might reflect an unusual rent review pattern.
During difficult markets landlords may want to protect their investments and will not want the
market rental levels to reduce as this will have an effect on their investments. At the same time it is
difficult for them to attract tenants, and tenants understanding their strong bargaining position often
negotiate lower rents, longer rent-free periods and other lease advantages or inducements. It is not
uncommon for a headline rent, i.e. the asking rent, to be declared but details of inducements to be
kept confidential. The inducements will have an effect on the rental level, normally reducing it, so the
landlord will want the headline rent to be used to keep the value of the investment higher, particularly
if they have more tenancies either in the building or in the surrounding area.
Sometimes landlords have poorer quality properties within their portfolios that are difficult to
let and may only attract poorer covenants or tenants who have no business history. These types of
tenants may find it difficult to immediately pay a market rent. A landlord may then use a stepped
rent as shown in Table 12.5.1. The tenant pays a lower rent in the early years of the lease until their
business is more settled and able to pay a market rent. This can be a useful tool for both the landlord
and tenant.

Table 12.5.1 Stepped rent

Year 1 Year 2 Year 3 Year 4 Year 5

£8,000 £8,500 £9,000 £10,000 £10,000

The final type of rent that can be used by landlords is a turnover rent. It is commonly used in shop-
ping centres, airports and petrol stations. It is where the tenant pays a percentage of their takings as
rent. It can be either based on a pure turnover basis or on the sum of a base rent plus a percentage of
the turnover.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.bpf.co.uk (accessed 20/11/2013).
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).
288 Cheryl Williamson, Dom Fearon and Kenneth Kelly
12.6 Rent reviews
Key terms: upward only; time of the essence; arbitrator; independent expert; assumptions; disregards
Historically, if a landlord let a building to a tenant, they agreed on the rent to be paid and it was only
reviewed if or when the lease was renewed. However, once the economy was affected by inflation
then the initial rental levels became less valuable to the landlord as inflation ate away at the income.
To stop this happening landlords began to insert rent review clauses in their leases, which gave them
the right to review the rent at certain points during the lease. The original rent review pattern was
multiples of 7 years but this reduced to a 5-year pattern, although some landlords have 3-yearly review
patterns. Landlords used what was called an upward rent review, this meant that the rent either stayed
at the same level as the existing rent or went up to a higher level. The rent could never reduce and
it meant in times of recession when rental levels can drop that tenants were stuck paying rents higher
than market rents. The Code of Leasing Business Premises talks about using upward and downward
rent reviews as a fairer system for both parties and this view is backed by many property organisations.
Modern forms of lease usually include a rent review schedule and this gives details of when the rent
is to be reviewed, how the procedure starts and what happens if the landlord and tenant cannot agree
on the new rent. Occasionally a rent review may be ‘time of the essence’ and this means that if there is
a timetable laid down in the schedule that it must be abided by, otherwise the landlord loses their right
to review the rent (United Scientific Holdings v Burnley Borough Council 1978). This can be a complex area
so it is usually a good idea to take further advice on this matter. If the rent cannot be agreed, then the
lease will normally specify that it will be determined by either an arbitrator or an independent expert.
Their roles are slightly different, although both will decide what the new rent will be. The arbitrator
is governed by the Arbitration Act 1996 and has a quasi-judicial role. They can ask for disclosure of
documents and subpoena witnesses just like a judge. Evidence to support the rental figure is provided
by both parties and the arbitrator bases their decision on this information; they are not allowed to make
a decision based on anything not raised by either party. They cannot be sued for negligence and there
are very limited grounds on which to appeal the decision. The arbitrator can award costs which means
that if they feel one party was not being professional then they can make them pay more of the costs.
The independent expert does not have quasi-judicial powers. They decide the rental level by looking
at the evidence put before them but they are allowed to use their own knowledge when making the
decision. They can be sued for negligence (none have been successfully sued) and they cannot award
costs unless the lease allows them to. Both the landlord and tenant can agree on who to appoint, but
if there is a disagreement it is usual for the president of the RICS to make the appointment. Once the
rent is agreed either between the landlord and tenant or by a third party (arbitrator or independent
expert) it is documented in a rent review memorandum which is then attached to both copies of the
lease.
In the majority of cases the intention at rent review is to get the rent to a level that reflects the rent the
landlord would be able to achieve and the tenant would be willing and able to pay if the property was
on the open market. The rent review schedule will try to reflect this situation and give details of what is
to be valued. Generally, there will be a list of assumptions to be made by the surveyor. For example:

● the length of the lease;

● that the property is vacant;
● that it is fit for immediate use and occupation;
● obligations under the lease;
● any consents required.

All of these may have an effect on the market value of the property and can be the subject of debate
between the two parties. Leases can also include matters that the surveyors must not take into account
 Property asset management 289
when valuing the property, these are commonly known as the S.34 disregards and include things
such as the occupation of the tenant or any improvements that they have made to the property. This
method is the most common way of reviewing rents; however, there are other ways that can be used.
Fixed rent reviews can be agreed when the lease negotiations are taking place which gives both the
landlord and the tenant certainty of future income and expenditure. Reviews can be linked to a par-
ticular index such as the Retail Price Index or can be geared to another type of property use.

Further reading
Code for Leasing Business Premises in England and Wales 2007, available at: www.leasingbusinesspremises.co.uk
(accessed 20/11/2013).
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).

12.7 Proactive management to recover rent

Key terms: income stream; breach of covenant; proactive management; CRAR; enforcement agents;
court action; forfeiture
It is one of the main responsibilities of the asset manager to protect the income stream and to ensure that
the income is collected on the due dates. The better the quality of the portfolio, the easier this task is, as
blue chip tenants usually make their payments on time, but the poorer the portfolio, the more difficult
this can be and the more time intensive. On large portfolios for pension funds or property companies the
collection time for obtaining rents is often used as a key performance indicator (KPI) to judge the abilities
of the asset managers and their companies. Therefore, it is important that the asset manager understands
all the processes/methods available in dealing with this area of debt recovery. In multi-let buildings the
asset manager will also be responsible for the collection of the service charges and again this is an impor-
tant area for the asset manager to ensure that the monies are collected on time.
This is the most common breach of covenant and it can be dealt with in a slightly different way
from most other breaches. There are a variety of methods of dealing with tenants with rent arrears;
some are very ‘light’ touch while others have serious implications for tenants. First, check the lease. If
the tenant has provided a guarantor then ask them to make the payment.
Are there previous tenants? If yes, check the lease; is it an old or new lease? Is there an Authorised
Guarantee Agreement (AGA)? If the lease has been assigned, then serve a S.17 notice under Landlord
and Tenant (Covenants) Act 1995, within 6 months of the debt arising. If the property has been sublet
and the head tenant is withholding the rental payments the landlord can serve a notice on the subten-
ant requesting that they pay the rent directly to the landlord. This is covered by S.6 of the Law of
Distress Amendment Act 1908.

Commercial Rent Arrears Recovery

Changes to the way that landlords could recover their arrears of rent were first decided under the
Tribunal, Courts and Enforcement Act 2007; however, the detail of these changes was not completed
until the Taking Control of Goods Regulations became a Statutory Instrument on 30 July 2013. The
changes to the procedures will take effect from 6 April 2014. From this date the remedy of distress will
be abolished and CRAR will take its place. This applies only to commercial property where the regu-
lations provide for landlords being still able to seize tenants’ goods where tenants have not paid their
rent. Landlords are now only able to recover any rent arrears but cannot use this process to recover
arrears of service charge or non-payment of an insurance premium.
290 Cheryl Williamson, Dom Fearon and Kenneth Kelly
Under S.76 of the Tribunal, Courts and Enforcement Act 2007, a landlord can only use CRAR if
there is a legal or equitable lease in place, which is in a written format. Seven days net rent including
VAT and interest must be in arrears for CRAR to also apply. The processes have been standardised
and enforcement agents (previously known as bailiffs) can enter commercial premises between the
hours of 6 a.m. and 9 p.m. and take enforcement action on Sundays. Only enforcement agents can
undertake this work. Before they can take action a notice has to be sent to the tenant giving 7 clear
days’ notice that they will be calling. On arrival at the property if the tenant is still unable to make the
payment, the enforcement agent will take ‘possession’ of goods under a controlled goods agreement.
A further 2-day written notice must be given before the goods can be collected and removed. Then a
further 7 days must elapse before the goods can be sold at auction.
The new regulations will make it more difficult for landlords to recover rent arrears from tenants
and may lead to the Courts being used for the recovery of other debts such as service charges which
can no longer be recovered even if reserved as rent in the lease.

Court action
This is probably more effective as a threat and it is worth writing to the tenant explaining that if the
matter proceeds to court that there will be additional costs and they risk having a court judgement
awarded which will affect their credit worthiness. If this does not produce a payment then it is prob-
ably better to use the small claims court rather than involve solicitors if the debt does not exceed
£5,000. Debts over that amount can still go through the small claims court under the Fast Track or
Multi-Track systems, but may require legal input. The factors to take into account when deciding
whether to pursue this course of action are:

1 the odds of receiving the monies owed;

2 the slowness of the court system;
3 the possibility that the court will be sympathetic to the tenant;
4 whether it is more cost effective to write off the debt;
5 what message is sent to other tenants if the debt is not pursued.

As with many real estate issues this is not a simple solution and requires a great deal of thought before
action is taken.

Forfeiture
At the present time landlords can still peaceably re-enter commercial premises for non-payment
of rent, provided that there is an express clause within the lease. Forfeiture brings the lease to an
end but does not obtain the rent arrears, so it should only be used as a final solution to poor tenant
behaviour.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.hmcourts-service.gov.uk (accessed 20/11/2013).
www.insolvencyhelpline.co.uk (accessed 20/11/2013).
www.isurv.com (accessed 20/11/2013).
 Property asset management 291
12.8 Landlord and Tenant Act 1954 part 2
Key terms: service of S.25 and S.26 notices; time limits; interim rents; contracting out; security of tenure
The termination of business leases is significantly affected by statute. A lease of business premises will
not normally come to an end through effluxion of time as a positive action has to be undertaken to
bring it to an end. The main legislation dealing with this is the Landlord and Tenant Act 1954 part 2,
as amended by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.
The Act describes itself as: ‘An Act … To enable tenants occupying property for business, profes-
sional or certain other purposes to obtain new tenancies in certain cases … and for purposes connected
with matters aforesaid’ (Landlord and Tenant Act, 1954). The original legislation has remained very
much untouched since 1954, although changes have been enacted in the Regulatory Reform (Business
Tenancies) (England and Wales) Order 2003. These changes were aimed at making lease renewals
quicker, easier and cheaper for all parties. The basis of the act did not change, only certain processes
and procedures.
The scope and purpose of the act is that:

1 It ensures the continuation of the tenancy/lease until proper steps are taken to terminate them.
2 It grants the tenant a right to apply for a new tenancy/lease.
3 It specifies the limited grounds upon which the landlord can oppose the grant of a new tenancy/
lease.
4 It covers the terms of a new tenancy/lease if not agreed between parties.
5 It lays down a basis for compensation.

Not all commercial leases/tenancies come under the umbrella of this act. In order for the act to apply
there are three main areas that have to be satisfied:

1 There must be a tenancy – it must not be an excluded tenancy, examples of which are agricultural
leases, fixed term tenancies, tenancies at will or licences. If the tenancy is not excluded from the
act then it may fall within the protection of the act.
2 There must be occupation – the tenant must be in occupation, although this can be through an
agent or manager. If premises are sublet then the tenant is not in occupation and cannot claim the
security of the act.
3 There must be a trade, profession or business use in the premises. The business does not have to be a
profit-making organisation. If the premises are of a mixed use then the business use has to be significant.

If the lease or tenancy is not on the excluded list, the tenant is in occupation and uses the premises for a
business, then their lease is protected by this legislation. This means that the tenant has a right to a new
tenancy and that the landlord has limited grounds to prevent this happening. This makes it difficult for
landlords to asset manage portfolios in terms of moving tenants.
The timing of the process of lease renewal can be started by either the landlord or the tenant. The
landlord serves either a S.25 LT1 or LT2 notice depending upon whether the landlord is offering new
lease terms or is opposing the grant of a new lease. The notices are in a prescribed format and if a S.25
LT1 notice is served then it must include some of the new terms being offered by the landlord. If a
S.25 LT2 notice is being served it also gives full details of the seven grounds (S.30) that a landlord can
use to try to obtain possession of their premises at the end of a lease, together with information on lease
renewals and compensation issues.
Rather than wait for a landlord to serve a notice a tenant can serve a S.26 notice requesting a new
lease. If the landlord is unwilling to grant a new lease then they have 2 months in which to counter
notice stating which of the seven grounds they are relying upon.
292 Cheryl Williamson, Dom Fearon and Kenneth Kelly
In order to bring the lease to an end on the lease expiry date, using any of the above notices, it must be
served no more than 12 months and no less than 6 months from the expiry date. Once either the S.25 or
26 notices have been served, either party can make an application to the courts. The tenant must make an
application to court before the date in the notice in order to gain security of tenure. This means that the
landlord cannot make them leave without the courts approval and they have the legal right to a new lease.
Interim rents (S.29A) deal with the situation where the tenant has applied to court and has secu-
rity of tenure. A situation could arise where rental levels have risen or fallen since the rent was last
reviewed under the lease and the tenant would still pay the existing rent until the matter was settled.
Depending on the rise or fall in rental levels, one of the parties could be disadvantaged so this process
allows landlord or tenant to apply for an interim rent which is normally open market rent.
Contracting out is possible under S.38 of the legislation. This means that the tenant will have no
rights to renew their lease when it expires. The important point to remember here is that the contract-
ing out process must happen before the lease is completed.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).

12.9 Squatters and adverse possession

Key terms: squatters; civil law; IPO or court action; Land Registration Act 2002; possessory title; non-
possessory title; rights of light
Owners of property portfolios need to protect their properties from a variety of dangers both physical
and financial as these can have a serious effect on the value of the portfolio and in certain circum-
stances the landowner can lose possession of their property. The first threat to a landlord’s portfolio
can come from squatting, which means that people occupy property without the permission of the
owner. Recent changes in the law have made squatting in residential properties illegal (S.144, Legal
Aid, Sentencing and Punishment of Offenders Act 2012). It is now a criminal offence with fines and
potentially a prison sentence. Squatting, however, in commercial properties is not included within the
legislation and it remains a civil problem. If squatters enter a property either as fly traders or to live
there then it is difficult for landlords to regain possession. Trying to regain possession physically, and
using violence or threatening to, is a criminal offence, so a landlord can only enter if the property is
temporarily absent. Professional squatters are usually aware of their rights and will ensure that landlords
are not given an opportunity to regain possession.
The landlord has two avenues to pursue – either through possession proceedings or an Interim
Possession Order (IPO). If a trespass is discovered within 28 days of it starting the landlord can
apply to court for an IPO, and the squatters have to vacate within 24 hours until the court hearing.
Alternatively, the landlord can apply for a possession order through the normal court process which
can take a length of time and allows the squatter/trespasser to remain in possession of the property until
the court makes a decision. This applies to both land and buildings.
Prior to the Land Registration Act 2002 coming into force, a person using land or property without
the permission or knowledge of the landlord could after 12 years apply for the legal title to it. This is
known as possessory title. Since the act came into force there have been procedural changes that partly
protect landlords (the land must be registered at the Land Registry). If land or buildings are being
occupied, the ‘illegal’ occupier must after 10 years apply to the Land Registry who then advise the
landowner. They can then accept the claim or take no action at all. In either of these situations the title
transfers to the squatter. If the landowner objects then the squatter has to make a case under certain
 Property asset management 293
circumstances to prove that the title should transfer to them. It should also be noted that this can affect
air space around the land, as well as any foundations from adjoining buildings. So it is important to
check building plans for adjoining buildings to see whether parts of the building will overhang or
whether the foundations will encroach onto the land, as legal steps need to be taken at an early stage.
Another way in which rights can be acquired is through prescriptive rights. This is the acquisition of
non-possessory interests in land through long continuous use of the land. The use needs to be open,
and continuous for more than 20 years and can be rights of way, access rights or drainage rights. To
prevent these being acquired it is important that notices are erected giving people permission to use
the land. It is common to see ‘permission’ notices on large landed estates where there are bridle paths
and walks through the land giving the public permission to use the right of way or bridle path without
allowing them to obtain legal rights.
Rights of light are another form of rights that can be acquired to the disadvantage of the landowner
through the Rights to Light Act 1959. These are acquired once light has been enjoyed through
defined apertures of a building for an uninterrupted period of 20 years. The amount of light is worked
out by way of a formula and if these rights are infringed upon then neighbours can claim compensa-
tion or, in one recent case, the developer was made to remove the top two floors of the recently built
office block – an expensive infringement for the developer.
Generally it is more efficient for the landowner or landlord to ensure that rights are not acquired by
other parties and a variety of strategies need to be put in place to prevent this happening.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.hncourts-service.gov.uk/infoabout/housing/occupants/squatters (accessed 20/11/2013).
www.squatter.org.uk (accessed 20/11/2013).

12.10 Alienation
Key terms: privity of contract; privity of estate; assignment; subletting; pre/post 1 January 1996; S.19
(1)a and S.19 (1)A
There are instances when tenants need to be able to rid themselves of their lease liabilities. Obviously
this is possible if break clauses are contained within the lease or if negotiations to surrender the lease are
successful. However if these options are not available to the tenant then their only option is to either
assign, sublet or part with or share possession. There must be an express clause in the lease allowing
this. It is known as alienation and gives a tenant flexibility to leave their premises.
However, from a landlord’s point of view (investor), the important thing is to maintain a qual-
ity income flow and maintain the tenant mix quality or quality of the occupier generally. The way
in which the legislation is applied by the landlord must always bear these considerations in mind.
Sometimes the legal outlook and the estate management outlook are at loggerheads and a landlord is
not allowed to prevent an assignment on estate management grounds alone.
The legal position regarding assignments has been radically altered with effect from 1 January 1996
with the introduction of the Landlord and Tenant (Covenants) Act 1995. This Act removes the priv-
ity of contract between the landlord and the original tenant, for all leases granted on or after 1 January
1996 in return for giving the landlord more control over the assignment process.

Before 1 January 1996

For ‘old’ leases, the main legislation governing the grant of assignments is the Landlord and Tenant
Acts 1927 and 1988. These Acts put the onus on the landlords to prove that they are being reasonable
294 Cheryl Williamson, Dom Fearon and Kenneth Kelly
in refusing consent to the assignment (S.19 (1)(a). The 1988 Act also requires the landlord to make a
decision in ‘reasonable time’ when he has been approached for the consent to an assignment.
Various grounds have been held by the courts to be valid reasons for refusal:

● serious breach of repairing covenant by the tenant;

● objection to the proposed user;
● status of the assignee;
● lack of information from the assignee;
● reduction in value of the landlord’s reversion;
● no suitable surety available.

After 1 January 1996

On granting the lease, the landlord is entitled to include circumstances in which the landlord may
withhold his consent and conditions subject to which an assignment would be acceptable (S.19 (1)
(A)). These circumstances and conditions must be fact and not opinion. If they must be determinable
by the landlord or any other party, then the tenant must have the right to challenge this determination
by asking a third party to determine absolutely, or else the landlord or other specified party must be
required to act reasonably. These will normally be included within the AGA.
Examples of circumstances might be:

● The proposed assignee must, in the landlord’s reasonable opinion, be of equal tenant strength.
● The proposed assignee must have a trading profit equal to 2 years rent.
● The proposed assignee must be a public limited company.
● No assignment may take place within the first or penultimate years of the term.

An example of conditions might be:

● The proposed assignee will pay a rent deposit equal to 6 month’s rent at the then current rate.

It is important that the landlord, on granting the lease, thinks very seriously about the circumstances
or conditions to be included in the lease, as these will have an impact on the rent at review and the
initial rent offered by the tenant. Issues of tenant mix may be crucial if the letting is of retail premises
in a shopping centre.
It is still possible to have an absolute ban on assignment but this will obviously depress the amount
of rent offered by the tenant.
The 95 Act also affected the position of the landlord on the transfer of their lease to another land-
lord. As from 1 January 1996 the landlord has to serve a S.8 notice on the tenant informing them of
the assignment and requesting a release from the landlord’s covenants within the lease.

Subletting
On occasions a landlord may not be happy with a proposed assignment but may be happy to agree
to a subletting of the lease. This allows the existing tenant to move to new premises but keeps them
responsible for the property via the existing lease; the subtenant occupies the property and pays the
rent to the tenant. Additionally, a tenant may decide to sublet the property with consent from the
landlord to suit their own property and business strategy. A landlord will usually seek to exercise very
strict control over the subletting and the terms of the sublease. This is due to the fact that the subten-
ant may become a direct tenant at a later date and any change to the rental levels agreed could affect
 Property asset management 295
values as this provides evidence. Landlords try to ensure that the rent for the subletting is the same as
the rent being paid by the tenant and this can produce problems for tenants who are in over-rented
properties. The British Property Federation (BPF) is campaigning to stop landlords insisting on this
clause in leases. See Allied Dunbar Assurance plc v Homebase Ltd (2002) and other case law for more
details on this subject.
Parting with or sharing possession of premises by tenants are usually prohibited within the terms
of the lease. Parting with possession means that the tenant is no longer in physical possession of the
premises while sharing possession means that another person or company is also using the premises.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
Scarrett, D. (2011) Property Asset Management, 3rd edn, Routledge, Abingdon.
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).

12.11 Exit strategies

Key terms: exit strategies and methods of terminating leases; forfeiture; surrender; break clauses; efflux-
ion of time
The role of the real estate asset manager in connection with real estate portfolios is to ensure that value
is retained, value is added and flexibility is built in, depending on whether they are acting for a landlord
or tenant. Landlords may want to move or remove tenants and tenants may want to leave before their
leases expire however leases are legally binding contracts so there are limited ways to terminate them.
The various methods are considered below.

Forfeiture
This is a way of terminating leases for landlords. In order to forfeit a commercial lease there needs to be:

(a) a breach of covenant;

(b) an express clause in the lease allowing forfeiture.

For the majority of breaches of covenant a S.146 notice needs to be served and leave of the court is
required before the landlord can re-enter the premises and terminate the lease. The exception to this
is breach of covenant for non-payment of rent. At the moment a landlord can still serve a notice of
forfeiture on a tenant, enter the premises and change the locks, thus bringing the lease to an end. Care
must be taken if the tenant is still in possession as it is an offence to use force to evict the tenant. In
these circumstances a court order should be sought.
Landlords have to be careful not to waive the right to forfeit by performing some act that is deemed
to be an acknowledgement of the continuance of the lease. An example would be accepting rent
where it was known that there had been an illegal subletting.
Under S.146(2) Law of Property Act 1925 a tenant has a statutory right to request the reinstatement
of their lease through the courts upon full payment of arrears up to 6 months after the forfeiture.
This method of terminating leases is obviously adversarial and with the tenant’s right of relief gives
landlords an element of uncertainty for a period of time after the forfeiture. The question to ask is, is
this the correct course of action to take in these circumstances? Or is there another way of terminating
the lease that is more effective? The market, the property and the economic climate will all be factors
to be taken into account in the decision making. Also it must be remembered that once the lease is
296 Cheryl Williamson, Dom Fearon and Kenneth Kelly
forfeited, it comes to an end and the landlord then becomes responsible for the outgoings including the
empty rates. This needs to be thought through and discussed with the landlord before action is taken.

Surrender
This can be used by landlords and tenants. A lease can only be surrendered by agreement, so this is a
non-adversarial method of bringing leases to an end. It is a useful tool for both parties. A payment can
be made by a tenant to a landlord to surrender their lease if the lease is now surplus to their require-
ments or if there are problems paying the rent. Equally, a landlord can make a payment to a tenant in
return for the tenant surrendering their lease. This may allow the landlord to re-let the premises to a
better covenant, on better lease terms or at a higher rent, or to proceed with a redevelopment scheme.
There are two ways of surrendering a lease:

(a) express surrender

(b) operation of law.

Express surrender is by deed. The lease is surrendered by a conveyance of the leasehold interest to
the landlord. Once the lease is surrendered all obligations come to an end. It is important that any
conditions or payments to be made are included within the agreement. The asset manager needs to
check that the conditions have been complied with and needs to liaise with the solicitor throughout
the process.
Surrender by operation of law occurs when the landlord and tenant act in a way wholly inconsistent
with the continuation of a tenancy. An example would be where a tenant gives up possession of the
property and a landlord re-lets it. A tenant returning keys does not constitute a surrender of the lease!
A surrender of a head lease does not bring a subletting to an end.

Break clauses
Again, both landlords and tenants can have break clauses inserted into the lease. These are specific
clauses allowing landlords or tenants to bring leases to an end at specific times during the lease. This
often gives both parties flexibility in certain circumstances.
Often if a landlord has allowed a break clause in favour of the tenant it will be a conditional break
clause. This means that the break will be subject to the tenant having to do something, i.e. comply
with repairing covenants, making an additional payment and often adhering to a strict timetable. If
there are conditions, then tenants must comply with them and if they fail to do this then the right to
break can be lost. See Avocet Industrial Estates LLP v Merol Limited (2011), a recent case that demon-
strates how critical it is for tenants to ensure that all the conditions are met. It is quite normal for the
tenants’ break clause to be tied in with their rent reviews, on the basis that if the rent is too high at
review they can leave the premises. This gives the tenant flexibility in their business. A tenant may also
be prepared to pay more for the lease initially if a break clause can be negotiated. A landlord may want
a break clause inserted into a lease if there is potential for a development at a later date. This could be
a fixed term break or a floating break on giving a certain notice period. If a landlord negotiates a break
clause during the lease negotiations then it is more likely that the tenant will reduce their rental bid as
they have lost certainty in their lease term.

Effluxion of time
Under common law a lease granted for a fixed period of time should expire on the last day of the lease;
however, this position has been affected by statute, particularly for business premises. Leases that are
 Property asset management 297
‘contracted out’ under section 38 (4) of the Landlord and Tenant Act 1954 pt 2 do come to an end
on the last day of the lease.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.bpf.org/uk (accessed 20/11/2013).
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).

12.12 Health and safety

Key terms: Health and Safety Executive; duty of care; reasonably practicable; Sections 2, 3 and 4 of
HSAW Act 1974; risk assessments
All landlords will have some responsibility for the health and safety of their tenants, visitors, contrac-
tors and even trespassers. They have to ensure that the premises are safe to use by all of the different
groups and this is further complicated by the leases and the different uses within the building. The
main legislation controlling health and safety is the Health and Safety at Work Act 1974 which is the
primary legislation in the UK and is enforced by the Health and Safety Executive (HSE), together
with other legislation and Statutory Instruments. The HSAW Act, gives employers and landlords a
duty of care towards a variety of groups from employees, visitors/contractors through to the general
public. Section 2 of the Act gives a general duty of care to employees and the employer must where
reasonably practicable ensure the health, safety and welfare of the employees. This means that employ-
ers must have a health and safety policy which is reviewed and revised when necessary and that risk
assessments must be carried out and adequate controls put into place. Employers must be aware of
other legislation that affects this particular section, for example, the Personal Protective Equipment
Regulations 2002 whereby employers must ensure that all staff carrying out work on a construction
site have the appropriate safety equipment to wear. In addition they must ensure where possible that
the equipment is used properly.
Section 3 of the act gives an employer a duty of care to other people who are not direct employ-
ees, which includes contractors. The employer must ensure where reasonably practicable that they
can carry out any works in the building without risk to their health and safety. For example it is a
legal requirement under the Control of Asbestos Regulations 2006 for an asbestos register to be kept
showing all the known locations of asbestos within a building. A contractor before starting work on
the building must be advised of these locations. An employer would be considered negligent if they
allowed window cleaners to work at heights without using the appropriate safety harnesses.
Section 4 of the act covers the general duty of persons concerned with premises to other people.
Again, where reasonably practicable, that person has a duty of care to ensure that the premises includ-
ing plant and machinery, are safe for people to use. Responsibilities include ensuring that the water
quality is regularly tested to prevent Legionnaires’ disease and that regular cleaning of shopping malls
is carried out to help prevent people slipping and falling. Risk assessments need to be carried out to
identify the possible risks and then an action plan needs to be put in place that addresses the risks and
the actions required to either eliminate the problem or to minimise the chance of it happening. For
example if a member of staff worked in an area of loud noise then ear protectors would be issued to
protect their hearing, but in a nightclub how would bar staff be able to hear customers’ orders if they
wore ear protectors? A reasonable step would be to ensure that the noise level was kept within any
legal standards or that staff were moved round into areas where the noise levels were lower.
In addition to the above act the following legislation can also impact on the health and safety of
people:
298 Cheryl Williamson, Dom Fearon and Kenneth Kelly
● Corporate Manslaughter and Corporate Homicide Act 2007
● Management of Health and Safety at Work Regulations 1999
● Regulatory Reform (Fire Safety) Order 2005
● Control of Substances Hazardous to Health Regulations 2002
● Electrical Equipment (Safety) Regulations 1994
● Gas Safety (Installation and Use) Regulations 1998
● Construction (Design and Management) Regulations 2007
● Work at Height Regulations 2005
● Occupiers Liability Act 1957 and 1984.

This is not an exhaustive list of legislation affecting health and safety in the UK – a full list can be found
on the HSE website at www.hse.gov.uk.

Further reading
www.hse.gov.uk (accessed 20/11/2013).
www.isurv.com (accessed 20/11/2013).

12.13 Dilapidations
Key terms: Full Repairing and Insuring (FRI); Internal Repairing and Insuring (IRI); repair clauses;
yielding up clause; schedule of condition; interim and terminal schedules; Civil Procedure Rules and
the Dilapidations Protocol; RICS Dilapidations Guidance Note 6th edition; Law of Property Act
1925; Landlord and Tenant Act 1925; Leasehold Property (Repairs) Act 1938
Dilapidations are the disrepair items that a tenant is liable for on a property when they have agreed
lease obligations within their lease that require them to keep the property in good repair and condi-
tion. This liability for repair comes from the lease and there will be differing levels of repair arising
from the wording in the lease. FRI leases mean that the tenant is responsible for all the repairs, both
internal and external to the property, IRI + S/C means that the tenant is responsible for all the inter-
nal repairs but that the landlord recovers the costs of the external repairs through the service charge.
Effectively the tenant pays for the complete repair of the property. IRI means that the tenant is only
responsible for the internal repairs of the property. The wording of the repairing clause and the yield-
ing up clause has an effect on the responsibilities of the tenant and what a landlord can claim as does
any alteration clause. Dilapidations claims can be made at the end of the lease, known as a terminal
schedule of dilapidations, or during a lease if a tenant is in breach of their repairing liability. This is
known as an interim schedule of dilapidations. Dilapidation claims can also be brought by landlords
when leases are terminated by way of forfeiture or break clauses. Tenants can also start the procedure
if a landlord has a repairing liability to them and they are in breach of their responsibility. A schedule
of dilapidations is a document that identifies the lease covenants and obligations of the tenant/landlord,
alleged breaches of covenant, remedial works required and costs to rectify the breach.
Failure to comply with repairing liabilities is a breach of covenant and this gives a landlord and ten-
ant certain ways to put the situation right. The repair works could be carried out to put the property
back into repair or the repair works could be quantified and paid as damages. In the past this area has
been contentious between landlords and tenants and has resulted in expensive court cases. In a bid to
change this, the Civil Procedure Rules and the Dilapidations Protocol came into effect from 1 January
2012 with its aim to effectively resolve disputes regarding dilapidations. Failure to comply with the
Protocol may result in the party deemed to be ‘guilty’ having to pay additional costs. The Protocol
aims to give clarity to the process as it lays down how the dilapidations disputes are to be run prior to
a claim and to ensure that all parties now know exactly what their obligations are. The majority of the
 Property asset management 299
content of the above Protocol is now incorporated into the RICS Dilapidations Guidance Note 6th
edition. The main points included are as follows:

● Reasonable conduct – both parties must have a genuine intention to reach an agreement and
surveyors must act in an objective, honest and professional manner.
● Endorsements – both landlords and tenants have to provide endorsements on future intentions for
the property and a response to the quantified demand.
● Quantified demand – a complete statement of all the costs being claimed including all ancillary
and consequential losses.
● Glossary of terms – to clarify certain terms and ensure that all parties are using the same terms in
the correct way.
● ADR – alternative dispute resolution should be used and court action should only be taken as a
last resort.

The main legislation affecting this area is the Law of Property Act 1925, Landlord and Tenant Act
1927 and the Leasehold Property (Repairs) Act 1938.

Further reading
Williams, D., Shapiro E. and Thom, J. (2005) Handbook of Dilapidations, Sweet & Maxwell, Andover.
www.isurv.com (accessed 20/11/2013).
www.rics.org/uk (accessed 20/11/2013).

12.14 Insolvency
Key terms: debtors; creditors; bankruptcy; IVA; liquidation; administration; receiverships; Insolvency
Act 1986; Enterprise Act 2002
An individual or organisation can be insolvent but it doesn’t necessarily always end up in bankruptcy
or liquidation as sometimes steps can be taken to stop this from happening. It is a very complex area,
often requiring properly qualified practitioners, but there are certain basics that can be understood
and some of these are outlines in this concept. The legislation that affects insolvency is mainly the
Insolvency Act 1986, as amended, and the Enterprise Act 2002.
A debtor is the person or organisation that owes money to other people and organisations, which
are called creditors. There are secured and non-secured creditors, the difference being that if a person
or organisation becomes bankrupt or goes into liquidation and their assets do not cover the amount
owed, then only secured creditors get a share of any money. For example, if a person owed £25,000
to their creditors, that person would need to sell everything they owned (their assets). If the money
raised was only £5,000, then only secured creditors would get some or all of their money back. If
their assets were worth £25,000 then they could repay all of their creditors. An example of a secured
creditor would be a bank where a secured loan had been taken out.
An individual can enter into bankruptcy or an IVA, which stands for individual voluntary arrange-
ment. For bankruptcy, there has to be a personal minimum debt of £750. The Official Receiver (a civil
servant) deals with the case until a Trustee in Bankruptcy is appointed at the creditors’ meeting – this
can be either the Official Receiver or a licensed insolvency practitioner. The debtor can be released
from their debt after 1 year but being made bankrupt means that they lose their assets and it will affect
their credit rating in the future. An IVA is an alternative to bankruptcy and it is a formal debt repay-
ment scheme. A licensed insolvency practitioner helps to draw up a set of proposals on how to repay the
creditors and how long it will take to do this. A creditors meeting is then held and if 75 per cent of the
creditors agree to the proposals then all creditors are bound. Again the credit rating will be affected.
300 Cheryl Williamson, Dom Fearon and Kenneth Kelly
If the debtor is an organisation then there are various ways in which creditors can begin insolvency
proceedings to recover their debts. A company can enter into a compulsory liquidation which is ordered
by the court, usually when a creditor has petitioned the court to do this. The liquidator is appointed and
their job is to ‘realise’ the assets of the company, agree what the total owed is and distribute the liquid-
ised assets, either in total or by way of a dividend. A creditors’ voluntary liquidation is commenced by
the company to deal with its own insolvency and it has a duty to realise the assets, agree the claims and
distribute the liquidised assets as before. A members’ voluntary liquidation is a ‘solvent’ liquidation used
when a company is being wound up, as all the creditors are paid in full and the company has sufficient
funds to meet all their liabilities for the following 12 months. Instead of liquidation, a company can elect
to enter into a company voluntary arrangement (CVA) which allows the company to reach an agreement
with their creditors to pay back their debts over an agreed period of time. Again, as in an IVA, 75 per
cent of the creditors have to agree to the proposals and this then binds all the creditors.
A company can also enter into administration, which was set up to help ailing companies and give
them some time to sort the problems out without fear of the creditors forcing liquidation or taking
other routes to collect their debts. Administration is a short-term intensive care plan. An application
is made to court and if this is agreed the court appoint an administrator whose job is to manage the
company and help it trade out of its difficulties. If the company can be saved it will leave the adminis-
tration or if it cannot be saved it will go into liquidation. Recently there have been ‘pre-pacs’ where a
company goes into administration and is sold before news of the administration is public. The reasons
for ‘pre-pacs’ are that it is a relatively smooth transfer, it minimises a loss of suppliers and customers and
keeps jobs. The arguments against are that the process is not transparent and negotiations take place
without being tested in the open market.
Where there are secured creditors either by way of a fixed charge asset or a floating charge, then in
the event of the loan not being repaid a receiver is appointed to seize and sell the assets. If the loan is
guaranteed by a specific asset or a fixed charge, then a LPA Receiver is appointed under the Law of
Property Act 1925 to do this. Where a floating charge has been taken before 15 September 2003, then
an Administrative Receiver is appointed to collect the debt. These last cases will become less common
due to time passing.

Further reading
Rodell, A. (2013) Commercial Property, College of Law Publishing, Guildford.
www.isurv.com (accessed 20/11/2013).
www.insolvency.gov.uk (accessed 20/11/2013).
www.insolvencyhelpline.co.uk (accessed 20/11/2013).

12.15 Facilities management

Key terms: facilities management, core function, Private Finance Initiative, efficiencies, hard and soft
services
The Facilities Manager is now a fully recognised professional individual within the construction indus-
try. A short time ago the same role, although probably less technical, would have been called an
Estate Manager. The new role is seen as more proactive and offers a cohesive approach to work–space
management and the operational process within an enclosed space, as well as managing the various
traditional aspects of keeping a building or estate viable. Below are two definitions seeking to condense
the role into a manageable statement:

Facilities Management is the active management and co-ordination of an organisation’s non core
business services, together with the associated human resources and its buildings (including their
 Property asset management 301
systems, plant, IT equipment, fittings and furniture) necessary to assist that organisation to achieve
its strategic objectives.
(RICS, 2013)

Facilities management is the integration of processes within an organisation to maintain and

develop the agreed services which support and improve the effectiveness of its primary activities.
(British Institute of Facilities Management, 2013)

Facilities management (FM) includes all of the services orientated towards supporting the core busi-
ness functions, i.e. their purpose for being, what they are there to do, be it manufacturing, health care,
education etc.
It can sometimes be difficult to decipher the core from the non-core functions as they can be intrin-
sically linked; for instance, could Nissan be a car manufacturer without buildings in which to facilitate
this core function?

Drivers for change

Cost-cutting initiatives emerged in the 1970s and 1980s which saw the beginning of companies con-
tracting out or outsourcing non-core services to allow managers to concentrate on the core function of
the organisation. Further professionalising of the emerging FM sector saw dedicated FM organisations
coming to the market with the introduction of private finance initiatives (PFIs) and public–private
partnerships (PPPs). These were seen as a new way for private finance to manage, replace and upgrade
outdated public sector facilities and infrastructure without the need for public financing the large capi-
tal sums required for the construction of such projects; however, there are significant revenue costs to
the public purse (see Concept 3.3).
Statistics show that companies’/organisations’ overheads for the property they occupy could be as
much as 50 per cent of their total overhead costs. A good facilities manager is thought to be able to
reduce this by up to 10 per cent. This is done through effective management of an organisation’s assets,
be it in house or outsourced to an external organisation (therefore transferring the risk).
Many organisations view a building as a vehicle that allows them to conduct their business.
Therefore, efficient use of the buildings and in particular space can improve organisations’ efficiencies
and enable them to achieve their business plans, strategies and ultimately reduce building-related costs.
This is a key driver within facilities management.
Organisations are keen to enable new working styles and processes in a bid to create a more flexible
and content workforce that can invariably lead to better productivity. Modern methods of work-
ing are becoming more of the normal within many of today’s businesses and can include the likes of
‘hot-desking’ and working remotely or at home, thus freeing up space within the workplace. FM has
a major role to play in facilitating these practices by providing a more flexible workplace with the
knowledge gained in the post occupation management of buildings.
Facilities managers are using this expertise along with the knowledge gained and are becoming
increasingly involved within the design phase of new construction or refurbishments. The areas of
beneficial input are:

● space planning;
● asset tracking;
● future maintenance;
● life cycle costing;
● energy management.
302 Cheryl Williamson, Dom Fearon and Kenneth Kelly
Clearly, although important, cost saving alone will not result in a smooth-running organisation. There
are other elements of the built environment and operational procedures and services that will come
under the scrutiny of the facilities manager to support the organisation’s core function/s. This will
include all hard, i.e. building maintenance, PPM etc. and soft services, i.e. cleaning, catering, security,
logistics etc.
As construction related or employment focused legislation is enacted, new responsibilities are com-
ing under the remit of the facilities manager who must assume responsibility for compliance. In recent
years the areas this has encompassed are:

● The Regulatory Reform (Fire Safety) Order 2005;

● Control of Asbestos Regulations 2012;
● Water Hygiene including Legionella Control;
● Waste;
● Display of Energy Certificates (DECs);
● Carbon Reduction Scheme (CRC).

This is not an exhaustive list and is subject to frequent change.

In summary: FM is there to seamlessly support the core business function and to have a dedicated
person, department or external organisation to manage buildings related services, allowing managers
to concentrate on the core functions of the business.
The main areas where these skills can be beneficially employed are recognised to be:

● health and safety monitoring – legislative compliance;

● component specifications;
● systems and software;
● services – both hard and soft.

Further reading
Atkins, B. and Brooks, A. (2009) Total Facilities Management, 3rd edn, Blackwell, Oxford.
British Institute of Facilities Management (2013) Facilities Management: an Introduction, available at: http://www.bifm.
org.uk/bifm/about/facilities, (accessed 20/10/2013).
RICS (2009) The Strategic Role of Facilities Management in Business, RICS Books, Coventry.
RICS (2013) Strategic Facilities Management, 1st edition, RICS Books, Coventry.
13 Quantity surveying
Glenn Steel

13.1 Measurement and quantification

Key terms: drawings; specification; bill of quantities; standard methods of measurement
The ability to measure, and thereby quantify, the work a contractor must provide in the construction
of a building is regarded as a core skill of the quantity surveying profession. In recent times, advances
in computer technology have seen the development of automated measurement systems producing
quantities without the traditional manual input of the quantity surveyor (QS).
Despite the potential demise of the measurement aspect of the QS role, measurement skills are still
in demand by the construction industry. The establishment and promotion of collaborative strategies
through methodologies such as building information modelling (BIM), which rely on technological
solutions to measurement, have changed the role of the QS from the manual/technical function it
once was to a more interpretive and analytical task.
To understand the importance and necessity of measurement and quantification, it is necessary to
go back in history where ‘traditional’ methods of construction procurement were used – the word
traditional implying that a building design would be completed in totality before contract documents
were produced and the construction process commenced.
For any construction project a design team designs the building and the production team (i.e. the
contractor) construct it. Traditionally, the design team consists of an architect, structural engineer,
building services engineer and quantity surveyor, each responsible for producing different types of
design information. The design team communicate design information to the production team that
explains what has to be built.
Conventional design information represents recognisable design features of the building – the
components and materials that the contractor must bring to the construction site and assemble. The
materials and components are provided and assembled by the contractor using appropriate labour and
plant resources, but the design team tell the production team neither what labour and plant resources
to employ nor how to deploy the resources. This decision is left to the contractor.
Design information is usually communicated to the production team via one or more of the follow-
ing project documents (Figure 13.1.1):

● Drawings – a drawing is a pictorial representation or diagrammatic schedule of the required mate-

rials and components.
● Specification – a specification is a statement of the required quality of the materials and compo-
nents and of the workmanship associated with them.
● A bill of quantities (BoQ) is an ordered list of items consisting of worded descriptions of the design
features on the drawings. Each description is accompanied by a quantity measured from the design
features on the drawings. BoQ production is invariably the responsibility of the quantity surveyor.
304 Glenn Steel

Design team / Design information

Drawings:

Design information

Communicated to
production team
Pictures and schedules

package
Specification:
Products and standards

Drawings:
Description and quantities

Figure 13.1.1 Design information.

Source: Dr Alan Davies, Northumbria University.

The BoQ does not always possess legal status and is of debatable utility to anybody but the QS
and the contractor. A distinction must be drawn between a project document and a contract
document. A contract document has legal status enforceable in a law court. It legally defines
what the parties to the construction contract must provide. The BoQ does not legally define
these things. If there is doubt, the parties invariably refer to the drawings and specification,
which invariably have legal status. The role of the BoQ is merely a project document. Its status
is ‘quasi-legal’ in that the building contract frequently defines the administrative functions for
which it should be used.
In the BoQ, the QS measures the finished products that the contractor has to furnish. This is an
important distinction. To achieve this, the QS must apply the rules contained in a standard method of
measurement (SMM).
SMMs provide:

● rules for what to measure and what not to measure;

● rules for what units of measurement to express;
● accepted technical phraseology in which to write descriptions of what has been measured;
● definitions of the legal meanings of these item descriptions and of what work the contractor
should allow for when pricing them.

There are several types of SMM, drafted to cater for different specialist types of construction work. For
example SMM7 is for building work whereas CESMM4 (Civil Engineering Method of Measurement, 4th
edition) relates to civil engineering work. The parties to the contract are deemed to understand the
technical phraseology and rules contained in the SMM that is being used. The QS is deemed to have
obeyed the rules contained therein when measuring the items and the contractor is assumed to have
obeyed them when pricing them.
The SMMs have been revised and reviewed over the years since the first edition (known as SMM1)
which was published in 1922, up until SMM7 which was introduced in 1988 and reissued in 2000.
The most recent version (issued for use in 2013) represents a radical shift in approach where the stand-
ard method has been issued in three distinct volumes. The documents have been renamed ‘New Rules
of Measurement’ (see Concept 13.2).
 Quantity surveying 305
Further reading
Ashworth, A. and Hogg, K. (2007) Willis’s Practice and Procedure for the Quantity Surveyor, 12th edn, Blackwell, Oxford.
Cartlidge, D. (2013) Quantity Surveyor’s Pocket Book, 2nd edn, Taylor & Francis, London.
Ramus, J. W., Birchall, S. and Griffiths, P. (2006) Contract Practice for Surveyors, 4th edn, Butterworth Heinemann,
London.

13.2 New Rules of Measurement

Key terms: measurement rules; bill of quantities; NRM1, 2 and 3.
The New Rules of Measurement (NRM) is a suite of documents issued by the RICS to provide a
globally acceptable set of measurement rules that are useful to and applied by any party involved in a
construction project. Despite the principles being based on UK practice, the need for a coordinated set
of rules that can be applied in an international situation is seen as being beneficial to the industry. The
previous set of measurement rules, SMM7, had been found by the RICS to be used by different par-
ties in the industry in different ways. The key output from the application of SMM7 was the BoQ and
the industry has been found to have moved away from this ‘traditional’ approach. Although the use of
them still exists, it is considered that due to the wide variety of procurement routes being adopted (for
example, the increase in the use of design and build procurement) other methods were being used to
obtain tender/quotation prices in the industry (e.g. the use of drawings and specifications).
Paradoxically, the move away from ‘general’ contracting to subcontracting has resulted in contrac-
tors using a BoQ approach much more than clients in respect of main contracts. However, the format
of these documents was not ‘pure’ SMM7 and was rather more a ‘builder’s quantity’ approach, this
emphasising the need to reflect reality in the industry and to move towards measurement standards
that could be used by all involved. Indeed, the focus on the increase in the subcontracting element of
works is reflected in the fact that subcontracting organisations were involved in the design of NRM
and not main contractors.
The other perceived weaknesses were the lack of a standardised measurement approach to the esti-
mating stage of the construction process. This was remedied by the introduction of NRM1, which
has been generally accepted by the industry as a useful development. There will be a clear link from
NRM1 to NRM3 (which is to be published in 2014) to allow recognition of issues related to sustain-
ability and life cycle costing (see Concept 13.4). The coordination of the NRM volumes is seen as a
positive contribution to the successful delivery of value to clients.
NRM2 is more directly developed from the old SSM7 document and is concerned with the meas-
urement of construction work in detail. Initial consultation on NRM2 suggested that this would be
a radical departure from the principles of SMM7, but it can be said that NRM2 is a significant devel-
opment of SMM7 instead – many of the basic principles created in SMM7 have been retained in the
new rules. One immediate observation is the length of the document, which exceeds 300 pages – a
significant increase in volume. This is because the number of trades included has increased to reflect
the reality of the industry.
In summary, the NRM suite comprises three volumes. The three guides together will provide
industry professionals with reliable guidelines in terms of quantifying and measuring capital, mainte-
nance and renewal works on existing built assets.

NRM1: Order of cost estimating and cost planning for capital building works
NRM1 provides guidance on the quantification of building works for the purpose of preparing cost
estimates and cost plans. Guidance is given on quantifying other construction project costs which are
not reflected in the measurable building work items (for example, preliminaries, overheads and profit,
306 Glenn Steel
project team and design team fees, risk allowances, inflation, and other development and project costs).
This is seen as a very positive development. The intention is to enable better cost advice to be given
to clients and other project team members and to facilitate better cost control. The second edition
became operative on 1 January 2013.

NRM2: Detailed measurement for building works

NRM2 provides guidance on the detailed measurement and description of building works for the
purpose of obtaining a tender price. The rules address all aspects of BoQ production, including setting
out the information required from the employer and other construction consultants to enable a BoQ
to be prepared, as well as dealing with the quantification of non-measurable work items, contractor
designed works and risks. The first edition of NRM2 became operative on 1 January 2013 and SMM7
will run alongside it until the latter is removed from publication in due course.

NRM3: Order of cost estimating and cost planning for building maintenance works
The alignment of NRM1 and NRM3 will allow the cost estimating, cost planning, cost reporting
and benchmarking of the total cost of capital building and maintenance works. It makes use of a com-
mon format aligned with capital building costs and is regarded as a groundbreaking development. In
particular, agreement has been struck with the Chartered Institution of Building Services Engineers
(CIBSE) and the Building and Engineering Services Association (B&ES) to adopt the new NRM3 cost
structure. This implies that NRM3 may realise significant benefits for the construction industry (and
for related maintenance industries). It will enable comparison of costs on a like-for-like basis. Together
with NRM1 and 2, NRM3 will provide a basis for life cycle cost management.

Further reading
Cartlidge, D. (2013) Quantity Surveyor’s Pocket Book, 2nd edn, Taylor & Francis, London.

13.3 Cost planning and cost control

Key terms: early stage estimate; outline/detailed cost plan; cost checks
Cost planning, in the context of a construction project, is concerned with planning the cost of a pro-
posed project in advance of it being built. It is a widely used term, meaning different things to different
people. The term can be used in a general way, covering all aspects of costing a project from beginning
to end, or in a narrower way, relating to a specific part of the design and construction process. For
example, a cost plan could be produced for one or more of the following reasons:

● a detailed estimate for a client, as part of the design process;

● a detailed breakdown of anticipated costs, as part of a tender submission;
● as a basis for cost control of a project on site;
● as a basis for planning ‘whole life’ costs over the anticipated lifetime of a building once it is in use.

Therefore, to avoid confusion it is important to be clear about the type of cost planning under exami-
nation. This section focuses on cost planning during the design stage of a project. Using the design
stages of the RIBA Outline Plan of Work as a framework, a simple outline of the cost planning pro-
cedure is shown in Table 13.3.1.
 Quantity surveying 307
Table 13.3.1 Cost planning procedure

Design stage QS tasks Deliverable

Feasibility Prepare feasibility study/early stage estimate Budget/estimate
Outline proposals Prepare cost plan (perhaps of different Outline cost plan
possible solutions)
Scheme design Detailed estimates of project elements Detailed cost plan
Detail design Cost checks Reconciled cost plan

In practice the various tasks and deliverables shown in Table 13.3.1 are unlikely to be one-off activi-
ties, but are more likely to be iterative, the tasks being revisited as often as necessary while the design is
being developed. As such, the activities are not always as clearly delineated as the table might indicate.
However, due to the need for certainty in a project, there will usually be definite points or milestones
in the design process, where a firm estimate and a detailed cost plan are required.
The following introduces the principles of estimates, cost plans and cost checks in turn. However,
it is important to remember that they can overlap in practice.

Early stage estimate

The minimum information required to produce an estimate for a proposed construction project in the
early stages of the design process is as follows:

● Knowledge of the proposed project, including:

– the type of building (e.g. a hotel or a warehouse or an office development);
– the anticipated quality of specification (often implicit in the type of building, but still highly
variable and a big influence on cost); and
– an indication of size or quantity (e.g. m2 of office floor space, or number of bedrooms in the
hotel).
● Cost information, relevant to the proposed project. This could be available from a number of
sources, including information from similar past projects, published information from reliable
sources and quotations upon request from specialist sources (although the latter is more likely to
occur during detailed design later on in the process).
● Adjustment factors, to update and adjust the cost information so that it can be applied to the pro-
posed project with as much confidence as possible.

Cost information
Surveyors generally prefer to use cost information from their own ‘in-house’ sources, usually based on
past projects familiar to them. Sometimes this is not sufficient and other sources in the public domain
are used.

Adjustment for time and location

The effect of inflation on costs and prices over time is well known in general terms. Inflation in con-
struction costs and prices is no different. Several indices are published that track the movement of
construction costs and prices over time. An example is an all-in TPI (tender price index) published by
the BCIS (Building Cost Information Service).
308 Glenn Steel
In practice, a surveyor may prefer to use information about adjustments for time that are derived
from the organisation’s own sources about the movement of tender prices, rather than using published
information that may be considered too general, but the principle is the same.
Construction costs and prices for similar work also vary between locations. In a similar way to the
TPI, an index can be used to compare the construction costs and prices between different locations.
In the UK, BCIS also publish location factors for this purpose. These factors can change over time but
are generally stable.

Other adjustments
The adjustments for time and location are mechanical and fairly easy to calculate, providing the sur-
veyor is confident in the indices being used. However, there will be other adjustments to make that are
more subtle and require the surveyor to exercise professional judgement in their application. Factors
influencing this judgement may include (this list is not exhaustive):

● size of site
● existing buildings on the site
● existing ground conditions
● progress of the design.

Other potential factors that may influence the estimate include planning constraints, access to the site
(easy or difficult), number of storeys and storey height requirements. Again, this list is not exhaustive,
but does demonstrate that each project is unique and professional judgement is required when consid-
ering the impact of all potential factors on the estimate.

Price and design risk

Because of these uncertainties, a percentage allowance called ‘price and design risk’ is usually applied to esti-
mates produced at the early stages in the design period. The less certain the brief and available information
about the proposed project, the higher is the likely percentage addition for price and design risk. A common
addition for price and design risk is 2.5 per cent , but this will obviously vary, as described above. This figure
acts as a kind of contingency allowance for ‘extras’ that may emerge as the design develops.
Given the level of uncertainty that may surround an estimate, the surveyor should not ‘gloss over’
this fact when communicating with the client. All assumptions made in pricing an incomplete design
should be stated, with any exclusion clear and explicit. Again, given the uncertainty, the surveyor
would be quite justified in stating a ‘confidence range’ within which it is felt the project cost will fall.
However, this rarely occurs in practice, with the estimate presented to the client usually becoming the
target figure for development.

Outline/detailed cost plan

Whereas an estimate is a statement that predicts how much money will be needed for a project, a cost
plan, by comparison, is a statement that provides a basis for managing how this money will be spent.
As stated above, ‘cost planning’ is often used as a catch-all term covering all aspects of costing a
project from beginning to end. However, in the strict sense of the term, a cost plan is a management
tool, with the following objectives:

● to decide upon the distribution of the budget that best reflects the client’s needs;
● to provide the design team with cost, quality and quantity parameters;
 Quantity surveying 309
● to set cost targets for the elements of the project – this will provide a basis for checking and adjust-
ments as necessary as the design proceeds.

While any suitably detailed breakdown of an estimate may be called a ‘cost plan’, the industry has
found it useful to be able to refer to a standard set of elements when preparing cost plans.

Cost checks
Cost checking could be defined as the process of calculating the costs of specific design proposals and
comparing them with the cost plan during the whole design process. The objectives of cost checking are:

● to confirm that, as the design develops, the cost remains within the budget;
● to manage changes to the design if the cost checks indicate that the budget is likely to be exceeded.

Cost checking may be carried out on one or more elements of a project, or perhaps the entire project
depending on the scope of the project and the information available. Cost checks can be produced
using any suitable method, depending on the information available:

● ‘Approximate quantities’ may be measured, which together with suitable prices will allow a more
detailed estimate for an element to be produced.
● Element unit quantities and rates may be used. BCIS provides data in this format.
● For specialist work, quotations may be obtained from suitable sub-contractors/suppliers.

Approximate quantities
The techniques for producing approximate quantities are not based on an agreed method of meas-
urement. The level of detail will depend on the information available. The quantities for these items
would be measured from drawings, while the prices would be gathered from similar work elsewhere
or possibly from published price books (e.g. Spon’s) or specialist quotations.

Element unit quantities and rates

If the quantity of an element can be expressed in a single figure (e.g. m2 of wall) and a suitable unit
price for that element can be sourced (e.g. £/m2 for that specification of wall), then a cost check for
an element could be produced. The BCIS database contains this type of information, with some past
projects providing actual element unit quantities (EUQs) and rates (EURs), as shown in the example
below (the services elements, missing here, rarely have element unit quantities).
The element unit quantity allows the cost of the element to be represented as an element unit rate,
which directly relates to the quantity of the element, rather than the cost per square metre, which
relates to the gross internal floor area. This information (element unit rate) may then be applied to
elements in proposed projects that have a similar specification (although much care and judgement is
needed in using cost information in this way).
BCIS also provides average prices for element unit rates. The rates are derived from all of the similar
projects in the BCIS database that actually provide element unit information. Rates are presented in
a statistical format, with the spread of prices indicating the high level of variation between projects,
depending on the specification. Therefore, these prices can only provide a guide. A more specific
specification and associated rate, perhaps obtained from an individual past project analysis as above, are
more likely to be of use in practice.
310 Glenn Steel
Reconciliation with cost plan
Whatever method is used for the cost checking of one or more elements, the result must be compared
with the targets in the cost plan and suitably reconciled. If the cost check suggests that an element is
likely to cost more than the allowance in the cost plan, then either the specification must be examined
to see whether there is scope for a saving, or any savings or contingencies elsewhere in the cost plan
may be used to make up the difference. Sometimes a situation of ‘swings and roundabouts’ will occur
where increases in one element can be offset by savings from another as the design progresses, but
clearly this needs careful monitoring and management. The surveyor will not usually be in a position
to suggest that the budget should be increased to cover anticipated increases in the overall estimate.

Further reading
Ashworth, A. (2010) Cost Studies of Buildings, 5th edn, Pearson, Harlow.
Kirkham, R. J., Ferry, D. J. and Brandon, P. S. (2007) Ferry and Brandon’s Cost Planning of Buildings, 8th edn, Blackwell,
Oxford.

13.4 Life cycle costing

Key terms: whole life costing; BREEAM; embodied carbon; sustainability
Life cycle costing (LCC), also referred to as whole life costing, could be defined as the systematic
consideration of all relevant costs and revenues associated with the acquisition, use, maintenance and
disposal of an asset. It is concerned with predicting the costs of a building over its entire lifetime, not
just its initial construction.
In recent times, LCC has become vital with the advent of long-term methods of procurement, such
as PFI projects, and the international focus on global warming and the efforts to reduce the ‘carbon
footprint’ of buildings. When it is considered that 40 per cent of total energy consumption and green-
house gas emissions are attributable to constructing and operating buildings, the importance of whole
life costing of buildings becomes apparent. Furthermore, it is estimated that for a typical office block
with a lifespan of 30 years the ratio of construction to maintenance to running costs is approximately
1 : 5 : 200. In other words, the capital cost of construction (where most attention is focused!) is rela-
tively insignificant.
There is now a significant focus on issues related to sustainable construction. This term is essentially
very vague and a practitioner needs to be clear about the area of sustainability that they are referring
to. For example, clients and designers currently focus on achieving a high score on the BREEAM
(Building Research Establishment Environmental Assessment Method) which is intended to increase
the environmental performance of a building. Whereas the objectives are sound and have been readily
adopted by the industry, the resulting building may not necessarily be energy efficient. This is because
BREEAM ‘points’ are gained for other ‘sustainability’ related practices such as provision of bike racks
and locating the building near public transport routes (thus reducing carbon).
A developing area of research is into the issue of embodied carbon. This refers to the fact that the
construction phase of the building will use significant amounts of carbon in both manufacturing the
building materials and in the construction process. This includes the amounts of carbon used to trans-
port to site – for example, the use of Italian marble as a floor finish is very durable and therefore has a
positive impact on LCC, but transporting from Italy incurs a significant ‘carbon cost’ in the construc-
tion process. Therefore, embodied and operating carbon is a significant sustainability issue where a
difficult ‘balance’ needs to be struck.
However, LCC does carry some risks. It requires different skills that may be lacking and clients
themselves are often unable to adequately describe how they expect the building or asset to be used.
 Quantity surveying 311
Furthermore, LCC is not an exact science as practitioners are attempting to model costs over a pro-
tracted period into the future. The future can be predicted to some extent but is in effect ‘unknowable’.
It cannot be predicted how (and more importantly when) significant change will occur that will affect
the building. For example, legal changes related to sustainability and energy efficiency are predicted
to alter in the coming years. Governments will inevitably change in the coming years. Technological
change is accelerating. All of these issues make LCC more difficult.
LCC techniques require ‘estimates’ of the likely life expectation of a variety of components, materi-
als and equipment. Furthermore, the calculations require predictions of future interest rates and cash
flow requirements, which will be educated guesswork at best. However, weaknesses in the techniques
can be overcome by calculating a range of possible outcomes using sensitivity analysis.
Overall, there is no doubt that LCC is of fundamental importance to clients and the future sustain-
ability and carbon reduction in buildings. The key attributes of successful application of LCC can be
seen as:

● Effective risk assessment – particularly if an alternative form of construction is proposed.

● Applying LCC as early as possible in the construction process. The development of the New
Rules of Measurement by the RICS is seen as a significant benefit in forcing clients to consider
LCC from the inception of the project. NRM1 ensure consideration of LCC at the concept/
budget estimating phase and this flows through into NRM3 which considers maintenance and
operation of the building upon completion (see Concept 13.2).
● Knowing the long-term use and predicted year of disposal of the building, which is central to
LCC, so a strategy in this area is crucial.

The developing importance of sustainability in the built environment implies that LCC is crucial in
the investment process. Skills in this field are developing quickly through the application of technol-
ogy and the advent of building information modelling (BIM) techniques (see Concept 13.19).

Further reading
Cartlidge, D. (2011) New Aspects of Quantity Surveying Practice, 3rd edn, Spon, London.
Potts, K. (2008) Construction Cost Management: Learning from case studies, Spon, London.

13.5 Construction law

Key terms: subcontracting; bespoke contracts; Technology and Construction Court; adjudication
The term construction law refers to a body of law that has developed rapidly over the years and
covers building, engineering and the oil and gas industries. It has a far reaching involvement in com-
mon, statutory and regulatory law and its complexity stems from the range of activities it covers. The
word ‘construction’ itself hides the range of types of project that can be subject to legal proceedings.
Projects can include the erection, repair and demolition of a diverse range of building types such as
house, shops, offices, hospitals as well as engineering projects such as dams, bridges and motorways.
Furthermore, the scale of projects can vary enormously, from small domestic extensions to ‘mega-
projects’ such as the Olympic Games.
Further complexity is introduced when one considers the fragmented nature of the industry. In
construction, there are approximately 250,000 companies registered in the UK, of which over 93 per
cent can be regarded as small companies (employing 13 people or fewer). This makes the industry very
complex. Contracting organisations tend to subcontract 75–90 per cent of the work on projects, thus
creating a long and complex supply chain to serve construction clients. It is this chain of contracts and
associated liabilities that is at the core of the expansion in construction law. In addition to the ‘supply’
312 Glenn Steel
side of the industry, fragmentation prevails on the ‘demand’ side as there is an increasing range of pro-
fessional disciplines involved in projects caused by advances in technology and associated specialists.
Despite the majority of the multitude of contracts administered in the industry being based on
standard forms (see Concept 13.7), still around 10 per cent of contracts are ‘bespoke’ in nature (see
Concept 13.8) and by implication this will lead to an increase in disputes and therefore recourse to
the law in some form. The use of bespoke construction contracts is particularly prevalent in the con-
tractor/subcontractor relationship (and for subcontractor/sub-subcontractor contracts) and also in the
professional service side of the industry where almost half of appointment contracts are bespoke.
The quantity of cases reaching court developed into something of a crisis in the 1970s and 80s. This
resulted in the establishment of the Technology and Construction Court (TCC) in October 1998. Until
this time the court was known as the Official Referees’ Court but had no jurisdiction and simply reported
to The Queen’s Bench Division. Upon the implementation of new Civil Procedure Rules by Lord Woolf
in 1999 the industry developed more of a focus on alternative dispute resolution (see Concept 13.6).
In addition, the Latham report of 1994 (see Concept 13.11) led directly to The Housing Grants,
Construction and Regeneration Act 1996 (known as the Construction Act 1996) and this had a sig-
nificant impact on dispute resolution in the industry and a reduction in cases reaching the TCC. The
proliferation of adjudication following its introduction did give the court an additional role in enforcing
adjudication decisions. The Construction Act gives parties to a ‘construction contract’ a right to refer
matters to adjudicators, with the aim of aiding cash flow in the construction sector by allowing disputes
to be settled without the need for lengthy and costly court proceedings. Changes to the Construction
Act 1996 brought in by the Local Democracy, Economic Development and Construction Act 2009,
are likely to see even more disputes referred to adjudication before reaching the TCC.
The development of legislation with a specific focus on the construction industry brings into focus
another developing aspect of construction law. There is an increasing rate of development in this field.
For example, the Construction Design and Management Regulations (CDM) were introduced in
1994 and these were revised substantially in 2007. There are proposals to revise them again in 2014.
In both cases it would seem that the industry fails to implement change to the level that satisfies the
legislature. The changes to the CDM Regulations coupled with the revisions to the Construction
Act reflect an increasing preparedness for Government to influence the construction industry, thereby
affecting the developing field of construction law.

Further reading
Adriaanse, J. (2010) Construction Contract Law, 3rd edn, Palgrave McMillan, Basingstoke.
Murdoch, J. R. and Hughes, W. (2008) Construction Contracts: Law and management, 4th edn, Taylor & Francis, London.

13.6 Alternative methods of dispute resolution

Key terms: disputes; negotiation; alternative dispute resolution; Dispute Resolution Boards; adjudication
Construction contracts in the distant past were much more simply constructed than they are today.
They were generally concluded with a handshake, but underlying such agreements was an essential set
of values of competence, fairness and honesty. Unfortunately, the industry has developed a complex
and onerous set of conditions that attempt to cover every eventuality and in so doing create loopholes
from which the legal professions earn a substantial living. Construction contracts need to become less
adversarial and more simply constructed.
Disputes can usefully be divided into two distinct types:

1 those that rely on the involvement of the parties alone or with a ‘non decision making’ third party
facilitating the settlement of the dispute – i.e. alternative dispute resolution (ADR);
 Quantity surveying 313
2 those that involve a third party in making a decision that is, to greater or lesser extent, binding on
the parties, i.e. the involvement of an ‘umpire’ who decides on the issue.

Resolution of disputes
Accordingly, it can be said that there are three separate genres of dispute resolution methods – those
that are resolved:

● by the parties themselves;

● with help from a third party who plays a neutral facilitative role, but does not make a decision
about the dispute;
● where a third party acts as an ‘umpire’ and makes a decision based on evidence presented by the
parties in relation to the dispute, in a similar way that an umpire in tennis or cricket decides the
outcome.

These alternatives are represented in Figure 13.6.1, the key point being whether or not the dispute
resolution process remains under the control of the parties.

Negotiation
This is often not regarded as a dispute resolution technique – however, this method of dispute resolu-
tion is undertaken often without realising it or without a conscious decision to do so being made by
either party.
It is a form of joint decision making that progresses from antagonism in the early stages to coordination
in the later stages. Outside factors, such as the threat of long and expensive dispute resolution methods
such as litigation and arbitration can be used as a ‘lever’ to persuade an opponent to continue negotiation.

Alternative dispute resolution

Alternative dispute resolution is the term used to describe a number of formal, non-adversarial
methods of resolving disputes without resorting to the courts or arbitration. It is claimed to be
a less expensive, fast, effective and more palatable alternative to litigation and arbitration. It is
also less threatening and stressful. ADR offers the parties who are in dispute the opportunity to
participate in a process that encourages them to solve their differences in the most amicable way
that is possible.

Is a neutral third No Negotiation

party involved?

Does power to settle Yes ADR

remain with parties?

No Does third party Yes Umpiring

impose a decision?

Figure 13.6.1 Resolution of disputes.

Source: Adapted from Gould et al (1999: 44).
314 Glenn Steel
As with arbitration and litigation, the processes involve a third party. However, unlike arbitration
and litigation, the role of the third party is not to sit in judgement, but to act as a neutral facilitator to
a negotiated settlement between the parties.
Before the commencement of an ADR negotiation the parties who are in dispute should have a
genuine desire to settle their differences without recourse to either litigation or arbitration. They must,
therefore, be prepared to compromise some of their rights and move from their stated position in order
to achieve a settlement. Proceedings are non-binding until a mutually agreed settlement is achieved.
Either party can resort to arbitration or litigation if the ADR process fails.
The advantages of ADR can be termed the four Cs. These are:

1 Consensus – this approach requires the agreement of all parties to a resolution of the dispute. The
emphasis is on finding a business, rather than a legal or adversarial, solution to the dispute.
2 Continuity of business relations – the processes are concerned with resolving disputes within the
context of, and without permanently damaging, ongoing business relations.
3 Control – resolution of the dispute remains in the control of the parties to it. The parties can
concentrate on forging a settlement that focuses on commercial issues rather than the letter of the
law and may thus be less damaging for all parties. Once a dispute is referred to the courts or to
arbitration, the parties effectively lose control of the process.
4 Confidentiality – the proceedings are not published, and therefore the damage resulting from
adverse publicity is avoided.

One of the requirements of ADR is that it must be non-binding. If the process is not working,
recourse to litigation or arbitration, as appropriate, must be available. If agreement is not reached, the
process will seldom have been a waste of time, effort and expense. It will probably have clarified or
narrowed the scope of a dispute. Where an agreement is reached using one of the alternative methods
of dispute resolution, it should be formalised into a written agreement between the parties. Some of
the methods of ADR are described briefly below (this is not exhaustive!).

Conciliation
Conciliation and mediation are confused as methods of dispute resolution. Conciliation is a pro-
cess where a neutral adviser listens to the disputed points of each party and then explains the views
of one party to the other. An agreed solution may be found by encouraging each party to see the
other’s point of view. With this approach the neutral adviser plays the passive role of a facilitator.
Recommendations are not made by the adviser. Any agreement to settle their differences is reached
by the parties themselves. Where an agreement is achieved, then the neutral adviser will put this in
writing for each of the parties to sign.
Conciliation is a similar process to mediation. The distinction is that a conciliator will actively par-
ticipate in the discussions between the parties, offering views on the cases put forward. There are no
private meetings between the conciliator and individual parties to the dispute. It is more informal than
mediation, perhaps aimed at getting the parties to discuss differences. Should the parties fail to reach
agreement, it is common for the conciliator to recommend how the dispute should be settled.

Mediation
Mediation has come to great prominence in the construction industry, particularly since the introduction
of mediation into Joint Contracts Tribunal (JCT) contracts. Within these contracts, an express (written)
provision has been introduced which makes mediation one of a range of three possible dispute resolu-
tion methodologies available to parties to the contract. The other two are arbitration and adjudication.
 Quantity surveying 315
In mediation, the neutral adviser listens to the representations from both parties and then helps
them to agree upon an overall solution. An active role is played by the adviser by putting forward sug-
gestions, encouraging discussions and persuading the parties to focus upon the key issues. Within the
generic term ‘mediation’ there is a range of possible options. The most well used are:

● facilitative mediation (mediator does not make recommendations);

● evaluative mediation (mediator makes recommendations as to outcome).

Under mediation, the parties in dispute select an independent third party to assist them in reaching
an acceptable settlement to their dispute. This mediator should be skilled in problem solving and
preferably have expertise relative to the dispute in question. The role of the mediator is not to make
a judgement of the dispute, but to facilitate a settlement between the parties. The normal process
involves the mediator meeting with the parties to agree the format and programme. The sessions usu-
ally begin jointly with each of the parties presenting their case, informally, to the mediator. This is
followed by private sessions, known as ‘caucuses’, between the mediator and each of the parties. The
mediator’s role will be to get each of the parties to focus on their main interests and to get them to
move to a common position. The mediator will move between caucuses, often passing offers from
one party to the other. As he or she will be in a position of knowledge, confidentiality and impartiality
are essential.

Dispute resolution boards

A Dispute Resolution Board normally comprises a panel of three independent technical experts jointly
selected by the employer and the contractor. Where an issue is not resolved by negotiation between
the contracting parties, it is formally referred to the Board which is required to present a recommenda-
tion within a short period of time. The recommendation is usually non-binding.
Dispute boards are a relatively new form of dispute resolution and generally exist in one of two
forms: a dispute review board (DRB) or a dispute adjudication board (DAB). They differ only in
the fact that those recommendations made by a DAB are binding, and must be immediately imple-
mented unless overturned by arbitration or litigation. Both are financed at contract level, and made
up of a panel of usually three experienced and impartial reviewers who, in an ideal scenario, are
appointed before a contract begins, to reign in and where possible, prevent problems before they
arise!

Expert determination
In expert determination, an independent third party considers the claims made by each side and issues
a binding decision. The third party is usually an expert in the subject of the dispute and is chosen by
the parties, who agree at the outset to be bound by the expert’s decision. Therefore, this approach is
suitable for the construction industry as the ‘expert’ can appreciate and understand the technical aspects
of a complex dispute.

Adjudication
Adjudication has risen to prominence in the construction industry owing to the implementation
of adjudication as a statutory right due to the passing of the Housing Grants Construction and
Regeneration Act 1996. In effect, adjudication, if not specifically included in a construction con-
tract, will be implied into that contract with standard clauses provided in an instrument known as the
Scheme for Construction Contracts (England and Wales) Regulations 1998.
316 Glenn Steel
Whereas ‘the Scheme’ is applied across all projects, commercial adjudication is much more narrow.

● Adjudication is a statutory procedure by which any party to a construction contract has a right to
have a dispute decided by an adjudicator.
● It is intended to be quicker and more cost effective than litigation or arbitration.
● It is normally used to ensure payment (although most types of dispute can be adjudicated).
● The adjudicator must generally decide the dispute in less than 42 days.

The decision is temporarily binding until a party decides to proceed to arbitration or litigation.
However, adjudicator’s decisions are usually upheld by the Courts.

Further reading
Ashworth, A. and Hogg, K. (2007) Willis’s Practice and Procedure for the Quantity Surveyor, 12th edn, Blackwell, Oxford.
Gould, N., Capper, P., Dixon, G. and Cohen, M. (1999) Dispute Resolution in the Construction Industry, Thomas
Telford, London.
Uff J. (2009) Construction Law: Law and practice relating to the construction industry, 10th edn, Sweet & Maxwell, London.

13.7 Standard forms of contract

Key terms: Joint Contracts Tribunal; New Engineering Contract; amendments
There has been a steep increase in the number and range of standard forms of contract available in
recent years. The advance of collaborative construction strategies has resulted in different types of
contract coming to market. The advent of technology and the ease with which documents can be
published have resulted in nationally recognised bodies such as the CIOB and Constructing Excellence
producing their own ‘offerings’ to the range of contracts available. The predominant forms of contract
used in the industry over the years, certainly since the 1960s have been those published by the JCT.
The current list of standard contracts published by the JCT now stands at over 50 as they produce
many different versions for different purposes – for example, the main contract, a subcontract and a
sub-subcontract form.
In recent years, JCT has become less popular in favour of NEC3 (New Engineering Contract)
which was promoted by being mentioned by Sir Michael Latham in his seminal report Constructing
the Team (see Concept 13.11). Parties are generally free to choose their own terms of contract. In
practice, however, it is a lengthy and expert process to write a contract (see Concept 13.8) and it is
rare for either the employer or the contractor to have the desire or ability to work out all the detailed
terms and conditions that are required to govern their contract. Therefore a number of standard forms
(or ‘conditions of contract’) are published and available for use in construction projects. Independent
groups who represent the interests of the various disciplines and groups within the industry are usually
responsible for publishing them.
The general layout of standards forms does not vary greatly, but the detail in the clause and their
interpretation vary immensely.

Advantages of standard forms of contract

● Economy of production and use: it is a lengthy and expert process to write a contract for even an
averagely complex construction project. A standard form can be used ‘off the shelf’ rather than
starting from scratch with every new project.
● Should a party to a contract draft their own terms and these are considered to be harsh or badly
written, courts are likely to find against them under the principle of ‘contra proferentem’.
 Quantity surveying 317
● Similar projects demand similar contract conditions.
● Familiarity: with repeated use on different contracts, the parties become familiar with the forms
and therefore more confident in using the forms over time.
● Common understanding of risk allocation: this should be one of the benefits of familiarity,
i.e. a common knowledge of how the contract apportions risk between the parties. However
because this is implicit in most forms, it is not very easy to assess whether or not the risk is
apportioned in a manner that is suitable for the particular proposed project. An employer (or
a contractor) may be taking on a higher level of risk than intended without even knowing
about it.
● Tender comparisons are made easier since the risk allocation is the same for each tenderer. Parties
are assumed to understand this and therefore their prices can be accurately compared.
● Industry-wide consensus and recognition: this is through frequency of use rather than through a
voted mandate. Standard forms are often a compromise solution representing a balance of interests
across the industry.

Problems in using standard forms of contract

● A universal standard form of contract is unrealistic: different standard forms are needed for differ-
ent types of project. This has led to a plethora of forms and it is not always obvious which is the
most suitable one to use.
● The forms are often cumbersome, written in legal jargon and complex, leading to lack of ability
to understand them. However, some (are written in simpler language e.g. NEC3) and this leads
to doubts whether clauses would bear the scrutiny of the courts in the event of legal disputes.
● Narrow understanding of the law: use of one standard form can lead to a narrow understanding
of the contractual issues involved and perhaps a failure to appreciate the wider legal issues. The
answer to this potential problem is to understand the principles of contract law first and then con-
sider the allocation of risk within the standard forms.
● Amendments: it is common practice to amend the published version of a standard form of
contract (by striking out some clauses and adding others). Such amendments are often minor,
but occasionally they are onerous and result in a disadvantage to one or other of the parties.
This practice can be unfair and deceptive; it is therefore not normally advisable. However,
some employers wish to change the balance of risk contained in a standard form for genuine
reasons and there is nothing to prevent the parties from altering the terms and conditions to
suit themselves if they so wish.

Which form of contract?

There are many influences on which form of contract to choose for use on a particular construction
project, including:

● client objectives;
● type of client (public or private sector);
● procurement method;
● the extent to which the design is complete before tender, and the extent to which bills of quanti-
ties are used to describe and quantify the work for the purposes of tendering;
● the extent of design by the contractor (rather than the client’s consultant);
● method of pricing and payment;
● The size and complexity of the project.
318 Glenn Steel
Further reading
Adriaanse, J. (2010) ‘Construction Contract Law’, 3rd edn, Palgrave McMillan, Basingstoke.
Murdoch, J. R. and Hughes, W. (2008) Construction Contracts: Law and management, 4th edn, Taylor & Francis, London.

13.8 Bespoke contracts

Key terms: precedent; contract; rules of interpretation
The literal meaning of bespoke is ‘made to order’, the most obvious example being that of a tailor
making a made-to-measure suit. In the construction and property industries, making a contract fit
the clients’ requirements is a key function of the chartered surveyor. A bespoke contract establishes a
contract where no precedent exists. The principle of precedence is central to the English legal system
which can be defined as a ‘previous example or occurrence taken as rule’.
It could be argued that all contracts are bespoke to some extent in that no project is the same as
another. Indeed, all standard contracts need to be altered in some fashion even if the amendments are
required for changes in name, choices of alternative optional clauses etc. It is rare that a contract will
need no amendment at all.
In drafting conditions of contract, there are effectively two starting points – take an existing con-
tract (precedent) as a ‘model’ or start from scratch. Companies will adopt different solutions depending
on their in-house expertise and time pressures. Careful scrutiny of model contracts as precedents is
required to match the aims and objectives of the drafting organisations (client or contractor). Major
areas that can cause problems are payment, termination and default, dispute resolution and variations
clauses. These need to be carefully considered to ensure comprehensive coverage of key items is pro-
vided as well as being drafted with clarity and certainty in mind.
Quantity surveyors have been involved in drafting contracts ‘from scratch’ for a diverse range of
projects. In particular, in the 1990s, contracts were required in local government for service areas
ranging from refuse collection to legal services and in some authorities the ‘in-house’ QS professional
played a key role in exposing such service to competition with the private sector under Compulsory
Competitive Tendering legislation. Furthermore, the public sector required bespoke contracts for the
maintenance of public facilities, although standard forms of contract (see Concept 13.7) now exist for
these (e.g. measured term contracts).
The construction industry, in particular, has faced significant problems in the contractor/subcon-
tractor relationship due to harsh and draconian terms of contract imposed in bespoke contracts – i.e.
contracts written (often from scratch) where the terms favour one party over another. This resulted
in the introduction of the Housing Grants, Construction and Regeneration Act 1996 and the Local
Democracy, Economic Development and Construction Act 2009 (known as the Construction Acts
1996 and 2009) both of which outlawed harsh contractual terms related to payments to subcontractors
– which had resulted in small companies being starved of cash.

Attributes of good contract conditions

A good contract clause should be understandable to anyone who is looking at the contract and it
should be clear what the contract requires. Contracts in the construction industry have become very
‘legalistic’ in approach (e.g. the JCT suite of contracts) and it is arguably difficult to understand the
meaning behind the words. A contract that has attempted to alter this trend is the NEC3 suite of con-
tracts which has been drafted in plain English. It remains to be seen whether the perception that using
simple language will lead to more disputes due to ‘loose’ wording.
A good contract will be organised in a logical fashion and will introduce certainty and clarity
into the administration of the contract. If any vagueness is introduced into the contract, it is done so
 Quantity surveying 319
deliberately – for example the use of the word ‘reasonable’. The text should be broken up by using
paragraphs and sub-paragraphs and each clause should relate to a separate issue. Clauses should be
arranged in a logical fashion and be numbered for ease of use. For example, the versions of JCT con-
tracts since the 1998 edition have undergone a significant review of clause numbering to make the use
of the contract easier and more logical.

Rules of interpretation
When drafting contract clauses, whether it be a contract from scratch or individual amendments to
clauses from a standard form, a number of legal issues need to be taken into account:

● The Unfair Contract Terms Act, 1977 which states that contracts should not impose restrictive or
onerous terms upon a party, or exclude right and remedies for that party.
● Contra proferentem – this is a legal principle that provides that a court will regard the ‘drafter’ of
a contract less favourably than the other party. The view of the courts is that the drafter had
the opportunity to be fair/accurate/unambiguous through their choice of words. Therefore, any
issues with a contact may be resolved by the court in favour of the other party.
● Implied terms – if the contract is silent in respect of some issues that are in dispute the court can
‘imply’ clauses into the contract as if they were written therein. Implied terms can come from
law (a good example is the adjudication provisions of the Construction Act – see Concept 13.6),
custom (i.e. usual business practice) or simply by the court itself.

Further reading
Isurv (2013) ‘Non-standard bespoke contracts’, available at: www.isurv.com/site/scripts/documents.aspx?categoryID=70
(accessed 13/12/2013).

13.9 Contractual claims

Key terms: claim; contractual quantum; disruption; prolongation; acceleration
In the construction industry the word ‘claim’ is commonly used to describe any application by the
contractor for payment that arises other than under the ordinary contract payment provisions. All
standard forms of contract contain terms and conditions that define the ways in which contractors are
paid by their clients – the most common are clauses that state how work in progress is paid (interim
valuations) and how variations to the contract (e.g. changes in specification) are valued and paid. A
claim is made by a contractor for reimbursement of expenditure and loss caused by the client for which
the contractor would not normally be paid via these clauses.
The word ‘claim’ is defined as a demand for something as due (Oxford English Dictionary). This basic
definition provides a clear perspective concerning one of the key attributes of contractual claims – a
contractor must demand or claim their rights under the terms and conditions of a construction contract.
These rights occur where they have suffered disruption, low productivity, loss and/or expense for
something that the client has done and must take responsibility for under the terms of that contract.
A claim can involve a demand for reimbursement of such costs or allowance for more time or both.
In a legal sense, by doing something that results in the contractor losing money, or spending more
than they planned (or both), the client has breached the contract with the contractor. The calculation
of the amount of the claim that becomes payable is therefore equivalent (no more and no less) to the
amount the contractor would have received in court under the process of common law. Indeed, should
the contractor be unable to persuade the client of their entitlement to reimbursement under the terms
of the contract, the contractor will reserve the right to proceed to court if necessary.
320 Glenn Steel
A claim is often seen as a ‘dirty’ word by a client as it is likely to lead to their budget being exceeded.
Whereas a client may see a claim as a way in which a contractor can exploit the weak position a client
may find themselves in, it is clear that a claim is an entitlement under the form of contract. The terms
and conditions of contract in fact define those items for which the client takes the risk – in other words
if the client follows a particular course of action that costs the contractor time and/or money and those
actions are defined in the contract then it is inevitable that the contractor will seek to recover the costs
(related to the disruptive impact of the client’s actions) and the time lost (to prevent the client deducting
liquidated and ascertained damages for a late finish).

Legal criteria of claims

All standard contracts lay down in express terms the procedure to be adopted by the contractor in pursu-
ing a claim. This normally commences with giving ‘notice’ to the client that an event has taken place
that is likely to result in the contractor taking more time and/or incurring loss and expense. Such notices
are vital in contracts and this issue has been tested in courts many times. It is normally the case that unless
a contractor satisfies the condition to submit a notice first, then they lose their rights/entitlement to a
claim. This is a legal principle called ‘condition precedent’ – in others words a written notice must be
given by the contractor and then a lack of notice will be fatal to their rights under the contract. If a con-
tractor does not comply they may be required to carry out the actions instructed by the client (e.g. carry
out different work to that defined in the contract documents) but would lose the right to additional time
and additional money. Therefore, payment to the contractor by the client will not take place unless the
contractor follows the requirements of that contract.
Courts have established the types of loss and expense a contractor is allowed to claim – many of
these items have changed over time due to courts reconsidering each legal position establishing a new
‘precedence’ in court. Courts have established the following:

● Contractors must prove that loss and expense has been suffered.
● A claim must show that the loss arises from the items listed in the contract that the client takes
responsibility (risk) for. This list is an express term of the contract.
● A claim must be ‘Direct’ – in others words, the loss and expense (costs) and time delays giving rise
to the claim must flow directly from the actions of the client.
● The act of the client (as listed in the contract) must be shown to be the cause of the costs and
delays, not simply a contributory cause.
● The contractor is under a contractual ‘burden of proof’ to show a link between the event (cause)
and delay to completion (effect).

Contractual quantum
Once the contractor has established his right to a claim (time and/or money) the contractual quantum
(how much?) of the claim must be established. As discussed above, a fundamental rule of common law
is where a party suffers loss (by breach of contract) – they are placed in the same situation, with respect
to damages, as though the contract had not been performed. The damages in this case of a claim equate
to the damages the contractor would have obtained in court. It should be noted that a contractor is not
entitled to earn additional profit on a claim.
It is almost certain that the event for which the client takes responsibility will cause the contractor
disruption. A dictionary definition of disruption is ‘to interrupt or impede the progress, movement, or
procedure of’. This is a reasonably accurate representation of disruption in construction contracts. In
effect, this means that the actions of the client have resulted in the contractor’s planned works being
rendered impossible (wholly or in part) in terms of their intended sequence, duration of activities and/
or loss of productivity of labour, mechanical plant, supervision and any or all of them.
 Quantity surveying 321
Types of claim
There are three types of claim a contractor can make:

1 Disruption
Whereas all claims have disruption at their heart, certain actions by the client will result in an
activity or series of activities being disrupted without them taking any longer in terms of time. For
example, if the client changes specification of external walls from brick/block to concrete cladding
panels, the time may be the same (or even less!). However, the disruptive impact will be related to
the fact that the contractor’s method of working will be totally changed, different subcontractors
will be required, work will be carried out in a different sequence, alternative items of mechani-
cal plant and equipment will be required. All of this leads to loss of productivity, loss of money
already spent (loss) and additional expenditure (expense).
2 Prolongation
This type of claim occurs when the event that has led to the claim has caused a delay that prolongs
the overall contract period. The quantum of the claim will thus have two elements. First, the
costs of disruption (similar to 1 above) and second, the costs of the contractor staying on site for a
greater period of time (i.e. site set-up costs). Figure 13.9.1 represents the logic.
3 Acceleration
This type of claim occurs when the event that has lead to the claim has caused a delay, but the
programme is accelerated to ‘catch up’ to the original contract programme. Therefore, the quan-
tum of the claim will comprise additional resources and expenses such as weekend and overtime
working. However, it is unwise and commercially risky for a contractor to assume such costs will
be automatically payable. It is a principle long established in common law that a contractor must
‘take all reasonable steps to mitigate the loss consequent to the breach’. Therefore, a wise contrac-
tor will seek written instruction form their client to proceed with such acceleration as the client
might assume that the contractor (out of the goodness of their heart!) has caught up the lost time
at their own expense (Figure 13.9.2).

Critical activity

Activity delay
causes equivalent
project over-run
Activity

Non critical activity

Time
Figure 13.9.1 Prolongation.
Source: Glenn Steel (2013).
322 Glenn Steel

Delay to critical activity retrieved by acceleration

Critical activity
Extra resources allow timely
completion despite delay
Activity

Time

Figure 13.9.2 Acceleration.

Source: Glenn Steel (2013).

Further reading
Adriaanse, J. (2010) Construction Contract Law, 3rd edn, Palgrave McMillan, Basingstoke.
Murdoch, J. R. and Hughes, W. (2008) Construction Contracts: Law and management, 4th edn, Taylor & Francis, London.

13.10 Project management

Key terms: generic project management; project plan; critical path methodology
The quantity surveying profession provides a significant percentage of the membership of the Project
Management Faculty of the RICS. The skills learned in the profession (both during undergraduate
degree programmes and experience in practice) hold them in good stead to be effective project man-
agers. Transferable skills in subjects such as forecasting, planning, analysis, attention to detail through
document production, budgeting, control, cost management, risk management and value manage-
ment are subjects that support the extension of the role into project management.
Figure 13.10.1 indicates the terminology associated with ‘generic’ project management, i.e. not
associated directly with the construction industry. The terminology is not often observed in the con-
struction industry, but appears to be coming more and more into the delivery of construction projects.
New approaches by the quantity surveying profession (e.g. the links through the new suite of New
Rules of Measurement documentation) are implementing good practice principles from the field of
project management.
In particular, the contractor’s QS (quite often their job title is that of ‘Commercial Manager’) needs
to implement such plans as that shown above to successfully deliver a project, although, as stated
above, the terminology is quite different.
The question ‘why’ is perhaps not as relevant to a contractor as other considerations shown in the
above diagram. A contractor that has been successful in securing work needs to deliver a project to the
satisfaction of the client and achieve an acceptable return. In project management theory, a company
that cannot deliver the benefits of a proposed project should not be starting the project – this is quite
 Quantity surveying 323

Why? Clarify (benefits)

What? Work/Product
breakdown structures

Organisational
Who?
breakdown structure

Responsibility
Who does what?
assignment matrix

How? Network

When? Gantt chart

Cost breakdown
How much? structure

Project plan

Figure 13.10.1 Project plan.

Source: Glenn Steel (2013).

different in construction for a contractor. Nevertheless, consideration of what the objectives are for the
contractor in completing the project is good practice, even though the benefits are likely to be client
satisfaction and financially based.
The question of ‘what’ is a significant issue for the contractor. The subdivision of the work into pack-
ages for subletting to subcontractors is a very important stage in the project management process and this
is managed by the commercial QS. Quite often poor procurement strategy results in the contractor losing
money or being delayed by poorly selected subcontractors which has a detrimental impact on project
delivery. Choosing the correct subcontractor that is financially sound, technically capable with good
health and safety practice is crucial to the success of the project. Well-managed demarcation between
packages with no overlap results in better working arrangements and can also avoid ‘scope creep’ when
on site. Defining the scope of a project is one of the key phases of project planning.
The organisational breakdown structure shown in Figure 13.10.1 refers to the process of assign-
ing work to the teams or personnel responsible for undertaking the work. However, allocating the
contractor’s team to the project is not a complex process, but the allocation of the right people for the
right project is crucial to success. Similarly, the identification of ‘who does what’ is also a relatively
simple process and a not insignificant issue in construction.
The next two stages in Figure 13.10.1 are central to the commercial success of the project for the
contractor. Time planning, method statement and sequencing of work are crucial factors in control-
ling the work and ensuring timely completion, thus avoiding liquidated and ascertained damages at
the end of the project. Critical path methodology is a key contributor to managing time and recording
and reviewing progress is a critical tool in the project life cycle. On a more negative aspect, keeping
records is of fundamental importance in compiling contractual claims (see Concept 13.9) as any delays
will need to be proven to the client.
324 Glenn Steel
The final stage in the planning process is the cost breakdown structure. Once again, this is not
normal terminology but is analogous to the financial control systems a contractor would adopt.
In particular, costing systems will need to have sufficient detail to allow effective financial control
to take place. The cost value reconciliation process (CVR – see Concept 13.14) is the vehicle
by which the contractor will identify problems and take corrective action in order to meet their
project objectives.
Planning is crucial in projects to ensure objectives are achieved. Objectives in construction projects
can be structured around the ‘iron triangle’ – that is time/cost/quality. In recent years, a fourth dimen-
sion has been added, namely health and safety. One issue that has not been mentioned in the above
plan is the contractor’s need to be aware of the project stakeholders. Obviously, a key stakeholder is
the client, as well as all of the subcontractors and their own employees. Another issue that has become
more apparent over recent years is the need to have regard to the sustainability. This has become cru-
cial and contractors need to have appropriate policies in place and publicise them to the general public,
particularly in the locality where the site is situated. This attention to what may be termed ‘corporate
social responsibility’ needs to be visible to be implemented effectively. Certainly, under initiatives
such as the Considerate Constructors Scheme and the implementation of waste management plans,
construction sites have become a much improved environment and cause much less disturbance to the
local environment and infrastructure.
In summary, whereas the terminology associated with the construction industry is different and
methods vary, the overriding need for effective planning remains the key issue in projects. Compliance
with time, cost, quality and health and safety issues has a significant impact on project success and
company reputation.

Further reading
Harris, F., McCaffer, R. and Edum-Fotwe, F. (2013) Modern Construction Management, 7th edn, Wiley-Blackwell,
Chichester.
Maylor, H. (2003) Project Management, 3rd edn, Prentice Hall, Harlow.

13.11 Partnering
Key terms: competitive tendering; Latham Report; Construction Industry Board; Egan Report;
strategic partnering
The construction industry traditionally for many years adopted an ethos of doing business on a com-
petitive footing based on a procurement process that was based solely on completing a building design
(via a range of consultants) before submitting the design (recorded in detail in a BoQ) to a range of
contractors for tender. The competitive nature of the industry over many years has led to a range of
problems which have been impossible to resolve. The reliance on pure competitive tendering has
driven prices and therefore profit levels so low that return on investment is poor in construction com-
panies. Furthermore, the lack of retained profits from companies has meant that there has been a lack
of innovation in the industry resulting in a state of inertia.
The industry has a strong reputation for confrontational and adversarial relationships. The com-
petitive nature of the industry was seen as one of the major causes of this as the need to win work in
competition drove prices so low that the winning tender would attempt to exploit any ‘gaps’ in the
client’s design by making claims for extra money and time. The very nature of the competitive envi-
ronment created a ‘race to the bottom’ and resulted in poor quality projects as well as poor quality and
short-term relationships. High numbers of disputes led to the court system being over extended and
resulted in long and protracted legal proceedings. This further exacerbated poor relationships and costs
of legal proceedings were spiralling out of control.
 Quantity surveying 325
Starting in the 1960s, there have been several attempts by the government to influence change in the
industry which have generally failed. Competitive tendering was one of the key issues tackled by the
Latham report of 1994 (called Constructing the Team). Sir Michael Latham led a joint industry – government
review – and saw traditional competitive tendering as the main reason for adversarial relationships in the
industry. In an earlier report entitled ‘Trust and Money’ he criticised the ritual tendering process prevailing
in the industry and particularly the level of waste incurred by contractors (particularly subcontractors) in
abortive tendering costs due to unreasonably long tender lists. In addition, Latham referenced some unethi-
cal bidding and tendering procedures at subcontractor level which had become endemic in the industry.
Latham also discussed the pressure faced by public sector bodies that were forced to accept the
lowest bids and that clients should take a balanced view by considering ‘non price’ or quality criteria
in their bid evaluation. The government established the Construction Industry Board to implement
the findings of the Latham report which made 30 recommendations. This led to the implementation
of several codes of practice for tendering which implemented some of Latham’s recommendations.
However, the most visible and well documented impact of the Latham report was the legislation
introduced (Housing Grants, Construction and Re-generation Act, 1996) which implemented new
payment laws that intended to improve cash flow from contractor to subcontractor and the statutory
right to adjudication to introduce rapid resolution of disputes (within a 42-day period).
In 1998 a more strategic and radical approach to tendering was shown in another industry-wide
report, Rethinking Construction (the Egan report, named after the chair of the commission Sir John
Egan), which stated a deep concern that the industry was failing its clients. The report implemented
stiff and ambitious targets, one of which was to ensure that 20 per cent of construction projects (rising
to 50 per cent by the end of 2007) would be delivered using integrated teams and supply chains. This
was one of many ‘benchmarks’ established by Egan, and measurement of continuous improvement is
one of the positive and lasting developments resulting from the Egan report. The report led directly to
the development of partnering as a method of procurement, relying on the principle that cooperation
is a more efficient method of working than traditional competitive contracting. There are three main
components to a partnering arrangement:

● mutual objectives;
● an agreed method of problem resolution;
● an active search for continuous and measurable improvements.

Partnering can take many different forms. In its purest sense, a ‘partner’ has absolute trust in the other
and will work together without any need for a contract. This is unrealistic in a legal and risk based
sense, but spirit of working together and openness in business relationships (even going as far as shar-
ing detailed financial information in an ‘open book’ accounting arrangement) is seen as the ideal. The
birth of partnering saw the introduction of standard forms of contract for partnering arrangements
(e.g. PPC2000) and the introduction of appropriate clauses and working arrangements intended to
encourage partnership approaches. For example, clause 10.1 of NEC3 states that the contract should
be performed in a spirit of mutual trust and cooperation. It is doubtful whether such a clause will be
enforceable at law despite it being an express term of the contract.
There are two types of partnering arrangement – project specific partnering and strategic partnering.
Project specific partnering, as the name suggests, relates to specific ‘one-off’ projects. This may be appro-
priate to clients that build infrequently, but measuring ‘continuous improvement’ will not be possible
over time. Strategic partnering appears to be the basic intention of the Egan report as the potential for
long-term savings and procedural improvements is created. By establishing long-term relationships, the
client and contractor (and subcontractors?) can create common facilities and learning from projects can
be implemented in repeat projects. There is the capacity to make measurable improvement and to meet
the benchmarking targets established in the Egan report (see Concept 13.16).
326 Glenn Steel
The application of strategic partnering can lead to significant advantages. These may include a
reduction in disputes, reduction in costs (due to development of more efficient working systems),
improved quality and safety, more stable and regular workloads for contractors and subcontractors, and
improved working environments.
Large clients with significant capital programmes introduced framework agreements, where a small
number of large contractors ‘competed’ to be included on a framework, which was in effect a partnership
between the client and multiple contractors. The work would be shared between the partner organisations
based on ability, financial efficiency and availability. In this case, the client would receive the benefit of the
experiences of several contractors and thereby improve performance and increase organisational learning.
The weakness of partnering is that the means of agreeing prices is by negotiation. Whereas the
improvements in efficiency should outweigh any extra costs, the client ‘feels’ that they have lost the feel
for the market price. This is particularly true of public sector clients who will need to demonstrate they
have achieved ‘Best Value’ for the public purse. This will involve quite complex and therefore expensive
analyses of costs. It is easier, in some respects, to go back to the ‘old days’ of competitive tendering.
This is a key point – in times of recession, the client is tempted to revert back to ‘type’ and insist
on competitive bids to ensure the market price is achieved. After perhaps years of negotiation and due
to tight financial constraints the client may feel that the costs of negotiation outweigh the potential
savings of competition. This approach is evidenced by some framework agreements resorting to ‘mini
competitions’ rather than maintaining the true philosophy of a strategic partnering approach.

Further reading
Cartlidge, D. (2011) New Aspects of Quantity Surveying Practice, 3rd edn, Spon, London.
Egan, J. (1998) Rethinking Construction, HMSO, London.
Latham, M. (1994) Constructing the Team, HMSO, London.
Potts, K. (2008) Construction Cost Management: Learning from case studies, Spon, London.

13.12 Procurement methods

Key terms: procurement; risk; change; trust; design and build; contract strategy; partnering
‘Procure’ is defined in the Compact Oxford English Dictionary as ‘obtain’, but originates from the Latin
procurare which means to ‘take care of, manage’. A combination of these simple definitions comes rea-
sonably close to reflecting the essence of procurement in the construction industry.
A traditional perception of procurement used to see it just as the choice to be made between three
quite different contractual approaches through which the client organisation engaged with a con-
tracting organisation in order that the former could have something altered or built from new by the
latter. While this is satisfactory as a rough working definition, it suggests a simpler world than today.
Professional services have broadened out enormously over the years, such that the ‘procurement’ of a
particular scheme may embrace everything from arrangements to purchase of the land to the ongoing
management of the finished property some 30 years later.
Risk: Construction can be one of the most risky of businesses. Every new job is, in effect, a prototype,
likely to throw up its own unique risks and problem issues. So, one of the key concerns of both parties will
be, and should be, the identification and the effective allocation of risk. At worst, this becomes an exercise
in each party trying to shift all possible risk onto the other. At best, it will call for each party to accept (and
subsequently manage) those risks it is best equipped to accept, through experience, financial resources etc.
Change: One of the chief risks, it could be said, is the risk of change – changed circumstances, changed
design and so on. A procurement route can be chosen specifically to accommodate change in certain
ways, the consequences varying for the parties accordingly.
 Quantity surveying 327
Trust: It is to be hoped always that parties to a contract can trust one another in their business deal-
ings and that they will perform effectively and in a timely manner. However, only recently has a firm
expectation of this been incorporated formally within contractual agreements. Mutual trust forms the
‘backbone’ it could be said to the partnering relationship – one of the newer facets of procurement
practice.
The management of a construction project concerns, in its simplest form, managing three main fac-
tors: namely time, cost and quality. It is possible, therefore, to amplify this last statement to state that
the construction industry is in the business of managing the risks of changes to time, cost and quality.
A client can choose from three main procurement routes – within these it can be seen how risk
factors can be variously allocated.

The traditional route

The client engages their own architect, quantity surveyor and various other specialist consultants. The
client’s architect will be responsible for the whole design of the works on behalf of the client (with the
possible exception, nowadays, of any contractor designed portions) and will manage the cost, quality
and timescales involved. The contractor will generally be responsible for constructing the building
according to the drawings etc. within the originally stated contract period for a cost agreed by some
basis at tender stage. Usually the whole design should be finalised and measured (and set down in
BoQs) before the works are sent out to obtain tenders.

Risks to the client of the traditional route

Providing that the client’s consultants have produced a perfectly functional, comprehensive, top qual-
ity design before the project goes out to tender it should indeed be possible to ensure that the building
is subsequently constructed to this high standard. Also, since (in the case of a contract with BoQs)
every detail can be accounted for, the value of the final account should be as the tender sum.
It is thought that the factor that suffers in the case of the traditional approach is time. Procurement
via a traditional route is not a quick process.

Management of change in the traditional route

Change normally means an improvement or addition rather than an omission – with an addition to the
cost. Tender documents should be fully and finally prepared, in which case there should be no need
for change – no need for the final price to increase. However, more often than not, a change will be
required, and the client, whose design this is will have to pay accordingly.

The design and build route

The client presents the contractor with a performance specification. As the name suggests, this will
detail the required scheme in broad, generic terms setting certain parameters but stipulating very little
detail – (e.g. a 200 m2 office) whereupon the contractor carries out all design work and then constructs
the required building for a fixed price, all within a time limit set by the client.
This is the ‘pure’ form of design and build, as it was originally created – one in which all design
detail and construction responsibility is left to the main contractor. There has been a tendency for
clients to make their design briefs/requirements increasingly detailed and in some cases even passing
employment of the architect over to the main contractor (known as ‘novating’), in which case the
client maintains much of the say as to the designs as they proceed.
328 Glenn Steel
Risks to the client of the design and build route
The contractor is responsible for the design of the building and so the client can send his project out to
tender as soon as he has finalised the performance specification (usually produced with the advice and
help of an architect and/or other specialists). Once the contractor has stated a time and cost for com-
pleting the works these should not change, as the responsibility for these is entirely the contractor’s.
It is thought that the factor that could suffer in the case of a design and build approach is that of quality.
However, in a pure design and build scenario they have only given a performance specification – not
detailed in every way as in the traditional route, and so a lot is left to the contractor, who may be
tempted to ‘cut corners’ in order to offer a particularly keen price.
However, the opposite may be true and design could benefit. The contractor, through his own
design team, may in fact come up with an innovative, exciting design.

Management of change in the design and build route

Everything about the design and about the planning and execution of the works is the contractor’s
responsibility. If during construction the client wants to rethink and change any aspect of the works,
he could well face a severe penalty in terms of very high rates and long (costly) extensions to the con-
tract programme. By opting for design and build the client gave the contractor total control over the
quality, quantity and pace of the works.

Management based routes

The term covers a number of possible contractual/control situations, but in all cases the client appoints
an individual or organisation to manage construction operations, in return for a lump sum fee or a
percentage of the contract sum. In management contracting the lead contractor provides expertise in
management and in buildability. This contractor does not take on the work or employ any of the
labour or plant themselves. They will let the work as a series of packages, usually by competitive tender
(though sometimes on some other basis) One advantage of this is the capacity for the client to engage
the management contractor at an early point in the design stage, thus drawing on the latter’s expertise
in putting the whole thing together. In this case, contracts for the works packages will be between the
management contractor and the works package contractors. Construction management operates similarly,
but here, while the project manager (again, an individual, firm or contracting organisation) has the
same coordinating role as that above, the contracts for the work packages are directly between the cli-
ent and the works package contractors. This last may prove too onerous a responsibility for the client
body unless they have prior experience.

Risks to the client under management contracts

The client, through their project manager or through the management contractor, can determine the
quality of the works (through rigorous specifications, drawn details etc.) and can set an overall pro-
gramme for the works, which it should be possible to enforce.
It is thought that the factor that could suffer most in the case of the management approach is cost.
Since design may only be finalised in time for the letting of the package, there can be no actual cer-
tainty as to cost until the tender sum has been agreed for the last work package to be agreed and issued.

Management of change in the management routes

The processes and consequences for the client in this case will be much the same as for either of the
above traditional or design and build routes, depending upon how a particular package has been let.
 Quantity surveying 329
Making the decision – contract strategy
It will be seen that in following the ways of the above, there is nearly always a trade-off between time,
cost and quality – one or two points on the triangle which will be stronger at the expense of one or
two others.
In practice, clients will be aware, or can be advised, of this. Generally they will be led to make
a conscious choice between the three, based on the individual properties seen above. A further
deciding factor may be the client’s assessment of the degree of certainty about the works, and thus
likelihood of change.

Newer and longer-term solutions

The procurement routes considered so far have all assumed that the relationship between the client
and the contractor is, essentially, to occur on a one-off basis. So, in the above:

1 the client selects the best contractor for the job;

2 the contractor constructs the works; and
3 the contractor hands over the completed works to the client and the two parties part company.

This in turn has been made on the basis of two key presumptions:

1 that the client is financing the purchase of the building out of their own funds; and
2 there would be no cause for or benefit to be gained from a deeper or longer-term relationship
between the parties.

Over recent years, two key developments in procurement processes have tried to address changes in
the actual needs and circumstances of the parties, as follows:

● in terms of contractual relationships, that is partnering;

● in terms of project finance, that is PFI.

Partnering
Reference was made above to the level of trust expected/hoped for within the contractual rela-
tionship. Partly to combat the traditional adversarial nature of contractual relationships within the
construction industry, a structured relationship between the key players in the construction team or
‘partnering’ has been developed. This relies on a willingness of those taking part to be open, sharing
information as freely as they can and seeking to resolve any differences/disputes in an open con-
structive manner. In its earliest days, partnering was achieved through a Partnering Agreement – a
legal document setting out guidelines for relationships between the parties but being unenforceable
legally in its own right. In such case there would still be a standard form of contract in force. The
Partnering Agreement merely suggested how parties to the contract itself should ideally behave.
PPC2000 is a standard form of contract which gave legal force to the partnering relationship. In
PPC2000 any number of individuals/concerns could be party to the contract (the more the better,
for everybody’s sake) rather than this being restricted to the usual two parties in the contract, the
client and the main contractor.
A partnering relationship (whether via Agreement or via PPC2000) can be applied to a single
scheme (Project Partnering) or to a series of schemes, stretching out over a number of years (Serial
Partnering).
330 Glenn Steel
The private finance initiative
At the start of the 1990s the UK Government created a new process for financing construction works
– chiefly applicable to the public sector in respect of such buildings as schools , hospitals and the like.
The relationship is essentially that of mortgagor (the private sector) and mortgagee (the public sec-
tor). The private sector provider is responsible for raising the funding, finding the design team and
the contractor (each of which may be selected by one or other of the means above) and producing
the required building. The most striking feature of this approach to procurement is that the provider
retains and maintains the building for a period of between 25 and 40 years, engaging in what is a long-
term exercise of facilities management.
Although it seems not to be listed as a ‘procurement method’ in text books, it seems that it is
indeed appropriate to address the issue of the private finance initiative (PFI) within this concept.
Admittedly, it was primarily created by the government as a funding device, applicable whatever
the immediate procurement method (in terms of traditional, design and build etc.) But, due to the
25–40 year pay-off periods involved and the continuing link between the client (in this case the
government) and the provider, it presents a pattern of ownership and control that fits the broader
definition of procurement.
PFI has received a significant amount of criticism, mainly in the light of the high charges made to
the public sector for the long-term contracts mentioned above (see Concept 3.3). The government
has introduced PF2, a revised procurement process that seeks to speed up procurement and reduce
costs.

Further reading
Cartlidge, D. (2013) Quantity Surveyor’s Pocket Book, 2nd edn, Taylor & Francis, London.
Greenhalgh, B. and Squires, G. (2011) Introduction To Building Procurement, Spon, London.

13.13 Contract administration

Key terms: interim valuations; valuation of variations; final account; ethics
The QS plays an important role in the management and administration of the contract signed between
the contractor and the client. Many provisions of standard forms of contract relate to financial mat-
ters for which the client’s QS will be responsible during the duration of the contract. In addition, the
contractor’s QS will have a range of contract administration duties that are somewhat different, but
particularly important to the contractor in furthering their business. This is a crucial/key difference
between the QSs employed by both parties – a client’s QS is providing consultancy services whereas
the contractor’s QS is a central figure in making a business sustainable over time and profitable.
A detailed knowledge and understanding of the conditions of contract is needed by both in order
to be able to apply the provisions correctly and professionally. Because of this a QS often has more
knowledge about details of contract provisions than other parties and is in a position to offer advice on
their use. The QS is seen as the legal expert in the construction team in administering contracts.
Most contracts place the responsibility for most of the activities on the QS acting on behalf of the
employer. However, in practice a joint working arrangement is needed between the client’s QS and
the contractor’s QS to ensure that all of the necessary work is completed to both parties’ satisfaction.
However, for example in the JCT suite of contracts, specific reference is made to the client’s QS and
not to the contractor’s QS. This is because the contractor in general terms is referred to as a company
and the contractor’s QS acts on their employer’s behalf. In fact, the main role of the contractor in
terms of administration of contracts is to give notice to the client when items of contention arise and
to provide information to allow the client to make judgements with regard to time and cost.
 Quantity surveying 331
Some of the key functions of the client’s QS are as follows:

● preparation of interim valuations for interim certificates;

● measurement and valuation of variations;
● preparation of final account.

The other main responsibility for the QS prescribed by most building contracts is that of ascertaining
direct loss and/or expense incurred by the contractor (see Concept 13.9).

Ethics
The QS has a professional duty as a chartered surveyor to ensure that the financial administration of
the contract is fair to both parties (employer and contractor). However, ‘fairness’ can be subjective and
the QS must act within the stated conditions of the contract. The QS has no authority to vary those
conditions even if the result of applying them seems to be financially penalising one or other of the
parties. For example, verbal instructions must be confirmed in writing, otherwise payment should not
be made. Another example, if one party is experiencing temporary cash flow problems, then payments
should not be adjusted to allow for this. This ethical presumption is particularly difficult to apply for
the contractor’s QS who is charged with making due profit for a business – this is, in practice, a very
difficult balance to achieve. For example, the contractor’s QS may seek to ensure that the contrac-
tor derives any potential benefits from the provisions, for example errors/omissions in quantities.
However any application for further payment can only be based on the contract provisions.

Interim valuations and certificates

In order to reduce the contractor’s liabilities to finance construction work, it is normal to allow for
regular periodic payments to be made to the contractor for work completed to date. Standard forms
of contract set out when the payments will be made, how the amount payable will be assessed and the
procedure for making payment.
Normally the contractor will be paid monthly, commencing one month after the date on which
the contractor takes possession of the site, and usually continuing until at least the date of practical
completion. For cash flow purposes, regular dates are agreed (and entered into the contract particulars)
on which the work will be valued so that payments will follow on a regular basis.

Assessment of amounts of payment

Before each payment is made, it is usually necessary for the client’s QS to prepare an interim valuation.
He must visit the site and check on the progress of the work at the agreed valuation date. Although it
is the client’s QS’s responsibility to prepare the valuation, the contractor’s QS has an option to submit
an application first if he so wishes.
The work is valued on a cumulative basis. At each valuation the total work carried out to date
since the start of the contract and the unfixed materials and goods on site are valued as accurately as is
reasonably possible. From this, retention is deducted and the total value of previous payments to give
a balance payable for the last month.
The preparation of a valuation can be divided into sections as follows:

1 Preliminaries
2 Main contractors building work (as priced for the contract)
3 Variations
332 Glenn Steel
4 Provisional sums
● for defined work where certain information can be provided, including the nature and scope
of the work and how it is to be fixed in place
● for undefined work where this information cannot be provided
● contingency sums
5 Unfixed materials and goods
6 Claims for direct loss and/or expense
7 Statutory fees and charges.

Once the amount due to the contractor is calculated the client’s QS must deduct retention. Items 6
and 7 above are not subject to retention and must be paid in full. The client’s QS then informs the
client of the amount that must be paid to the contractor through the lead consultant who is often the
architect.

Financial reporting
An interim valuation is produced primarily for the purpose of calculating monthly payments to the
contractor. As such it is a historical document (albeit a very up-to-date one) and does not attempt to
predict what might happen in the future. A further role for the QS, beyond the contractual require-
ments of valuations and payments, is that of anticipating events for the remainder of the contract and
maintaining a report of the likely financial outcome of the contract. Quite often a monthly financial
statement is produced, alongside the interim valuation, which acts as a report to both the employer
and the contractor with regard to the financial progress of the contract.
Similarly, the contractor’s QS will produce a CVR report (see Concept 13.14) which makes a pru-
dent assessment of the contractor’s financial performance on the project.

Variations
Variations are defined as ‘the alteration or modification of the design, quality or quantity of the works’.
The definition is wide ranging, but does not include changes to the very nature of the work. Whether
or not the nature of the work is being changed as the result of a ‘variation’ may be difficult to ascertain
– it will depend on the circumstances, as shown by examples of case law.
Variations can also arise due to changes in access to the site, limitations of working space or working
hours and the order in which work is to be carried out.
The variations clauses allow for changes to be made under the contract (without changing the con-
tract itself). Variations to the contract are changes to the contract itself that can only be made by further
agreement between the parties. Hence, the definition and scope of variations allowed by the contract
are important to know and understand.
All variations (indeed all instructions even if they do not incorporate a variation) must be in writing.
If oral instructions are given, they must be confirmed in writing by the architect. The contractor has
a ‘right of reasonable objection’ to a variation instruction.

Valuation of variations
Variations must be valued in accordance with the provision of the particular contract. In general, a
reasonable process defined in JCT contracts that serves well as good practice is given in Table 13.13.1.
Dayworks, mentioned in the final row of the table, can be defined as a method of valuation based on
the prime (actual) cost of all labour, materials and plant used in carrying out the work, normally with
a percentage addition to the total cost of each for overheads and profit.
 Quantity surveying 333
Table 13.13.1 Valuation of variations

Conditions under which

Character of work work is carried out Quantity of work Method of valuation
Similar Similar Similar Bill rates
Similar Different Significantly different Bill rates with fair allowance
Different May also be different May also be different Fair rates
Work cannot be properly valued by measurement and pricing above Daywork rates

Final accounts
Practical completion is the point in time where the contractor has substantially completed construction
work and is able to hand over the building to the employer. It is a milestone that marks a number of
changes to payment procedures and timing of activities, as follows:

● Half of the amount held as retention is released in the next payment to the contractor.
● Regular (monthly) interim certificates cease.
● The rectification period commences.

The final account involves the ascertainment of all changes to the contract sum that have occurred
during the period of the contract. The process of receiving documents from the contractor’s QS and
ascertaining the final account and agreeing it with the contractor is likely to be iterative, i.e. a process
of negotiation until agreement is reached.

Contractor’s QS role
The above material relates to the main contract between the client and contractor. The contractor’s
QS additionally administers a significant number of subcontracts. As contractors subcontract 75–90 per
cent of the work this is a considerable task as all of the aforementioned administrative procedures are
replicated across up to 50 subcontracts which may exist on a large/complex project.

Further reading
Ashworth, A. and Hogg, K. (2007) Willis’s Practice and Procedure for the Quantity Surveyor, 12th edn, Blackwell, Oxford.
Ramus, J. W., Birchall, S. and Griffiths, P. (2006) Contract Practice for Surveyors, 4th edn, Butterworth Heinemann,
London.
Towey, D. (2012) Construction Quantity Surveying: A practical guide for the contractor’s QS, Wiley-Blackwell, Chichester.

13.14 Cost value reconciliation

Key terms: management accounting; gross amount certified; payment application; internal valuation;
anticipated final value
Cost value reconciliation (CVR) is the predominant method adopted by contractors to finan-
cially control individual projects. As the title suggests, the objective is to ‘reconcile’ the income
from projects (or value) against the cost incurred in achieving that value. Whereas the CVR is
usually completed by the contractor’s QS – the process requires a team effort from the contractor’s team.
Considerable discussion is required before the CVR is issued to the rest of the management team.
334 Glenn Steel
The latter point is vital, as the CVR provides information for action by the company’s management.
CVRs from all of the contractors’s projects form part of the contractor’s management accounting process. The
management accounts comprise management information that is used to review performance throughout
the financial year and should not be confused with financial accounts, which are a statutory requirement.
Therefore there are two basic reasons for conducting cost value comparisons in contracting organisations:

● good management practice;

● accountancy requirements.

In common with all management accounting systems, there are no legal requirements to enforce com-
panies to monitor their performance using a set methodology. Each contractor will design their own
process. However, it is beneficial to the company to follow issued guidelines which direct companies
to follow certain parameters. SSAP9 (Statement of Standard Accountancy Practice) comprises a series
of explanatory notes that are intended to remove inconsistencies from financial reporting procedures
relating to financial accounts. It is clearly beneficial and good practice for the commercial QS to fol-
low such guidelines in controlling their projects to increase the reliability of the company’s accounts.
It is essential that management are kept informed on a regular and frequent basis of how things
are going in terms of company performance – whether this is profitable or not. Within contracting
organisations this amounts to comparing the actual costs to be allocated to projects against accurate
assessments of the value of works carried out.
The SSAP9 guidelines advocate a conservative approach to completing annual accounts and cost–
value comparisons. They divide their considerations into two sections:

● long-term projects, i.e. contracts that span more than one accounting year;
● short-term projects, i.e. those that do not.

SSAP9 therefore guides the commercial QS in how to report work in progress where a project spans
an accounting period as well as emphasising the need to adopt two key accountancy principles in
their analysis. First, they must be ‘prudent’ in their actions. This means taking a conservative view of
financial transactions, for example not making an assumption that the contractor will be paid for extra/
varied work completed. SSAP9 provides that profit should only be declared where there is reasonable
certainty that the profit has been achieved.
Second, the principle of matching should be imposed. This means that the commercial QS must
match income and expenditure together in the same period. This principle has a significant impact on
the production of the CVR and the QS must adjust their figures to cater for differences in timings of
interim valuations (money received) and entry into their costing systems (money paid out).
To be of most benefit to the management team it is necessary for cost–value comparisons to be
produced as expeditiously as possible after interim valuations are completed and agreed on site. There
is little point in producing cost information several weeks after the event, a situation that could render
remedial measures ineffective.
CVRs are not just completed to monitor performance; they are an essential management tool used
in many departments, in particular estimating. Feedback from project performance is required con-
tinuously to ensure that accurate and competitive estimates can be produced.

Key components of a cost value reconciliation

A CVR report contains all key management information required for the contractor’s senior manage-
ment to take corrective action to address problems on the project. The following figures are crucial in
maintaining control over the project:
 Quantity surveying 335
● The gross amount certified – this is the amount actually paid by the client (as ascertained by the
client’s QS) to the contractor and is therefore crucial in measuring performance relating to cash
flow on the project.
● The payment application – this is the amount requested by the contractor. This amount should
not be over stated or exaggerated (prudent) and should be fully justified by the commercial QS.
This figure is the starting point for the CVR calculation.
● The internal valuation – the CVR calculation will adjust the payment application to reflect the
issues addressed by SSAP9 and should implement the accounting principles of prudence and
matching.
● The anticipated final value – this will require the commercial QS to anticipate future losses and
unforeseen expenditures on the project to ensure that the financial status of the project is not over-
stated (e.g. allowing for the costs of repairing defects, making allowances for failure to complete
on time).

The calculation of the internal valuation figure is where the bulk of work is required to complete the
CVR appraisal. Once the internal valuation has been calculated (having made adjustments for pru-
dence and matching) this is compared (reconciled) with the total costs for the project to give a realistic
picture of performance on the project. Accordingly, the contractor will report a complete picture on
project performance which will comprise an assessment of:

● cash flow
● current profit attained
● potential profit upon completion
● likely cost to complete the project.

Further reading
Potts, K. (2008) Construction Cost Management: Learning from case studies, Spon, London.
Towey, D. (2012) Construction Quantity Surveying: A practical guide for the contractor’s QS, Wiley-Blackwell, Chichester.

13.15 Cash flow

Key terms: Latham Report; Egan Report; payment systems; liquidity problems
Cash flow within contracting organisations has been a significant issue for the construction industry
for decades. Arguably, the most well-known judge during this time, Lord Denning, famously stated in
1971 that cash flow is the life blood of the building industry. This has been confirmed in the seminal
reports by Latham (1994) and Egan (1998), which further explored the issue of cash flow in construc-
tion projects. The Latham report led directly to the Housing Grants, Construction and Regeneration
Act (known as the Construction Act 1996), part of which was designed to improve the flow of cash
from main contractors to subcontractors. This was achieved by implementing strict payments systems
and outlawing clauses that had been written into subcontracts which imposed unreasonable and ‘cash
unfriendly’ contractual terms such as ‘paid when paid’ clauses.
Nevertheless, the 1996 Act failed to make sufficient progress in solving the problems associated
with cash flow and this resulted in further legislation in 2009 (The Local Democracy, Economic
Development and Construction Act). The Act further tightened payment systems introduced in the
1996 Act and closed loopholes by outlawing types of contract terms that contractors had developed to
avoid passing on due entitlements (e.g. ‘pay when certified’ clauses).
However, the term cash flow must be seen from two distinct perspectives and should not focus
narrowly on the problems that exist in the contractor/subcontractor relationship. First, there must
336 Glenn Steel
be a clear distinction made between cash flow related to projects and cash required for organisational
purposes, i.e. to run a business. Second, one must not ignore the requirements for clients to efficiently
fund their projects as the cash flow from client to main contractor is vital for a project. The consult-
ant quantity surveyor will produce cash flow forecasts for the client to inform them of their monetary
commitments under a contract. Cash will flow regularly from the client to the construction company
over a given period (usually monthly).
Of course, a contracting organisation is faced with cash flow issues on both fronts. Whereas there is
clear distinction between project and organisational finance there is a significant overlap – this is par-
ticularly true of contractors. If their business is performing well (i.e. they are securing work) there will
be a requirement to finance several projects at once. This may result in pressures on the company as
payment (cash) is received ‘in arrears’. The most common reason for company failure in construction
is insolvency – that is the company does not have enough assets to cover its debts or if it is unable to
pay its debts as they fall due.
A key financial principle that companies must understand is that cash flow and profitability are two
separate things. A company can be profitable, but not have positive cash flow. This principle has been
reflected in the type and nature of annual financial statements provided by companies – a key docu-
ment is the cash flow statement that shows the ways in which cash has been received and spent. Only
in the last 30 years has the reporting of cash movements been seen as a crucial measurement of financial
performance.
However, a company can have positive cash flow, but not be profitable. A business can fail if it
hasn’t enough cash (or working capital) in the short term to pay bills. However, a company can’t stay
in business indefinitely without making a profit.
It is therefore of crucial importance to manage cash flow effectively, whether it be for projects or
organisational requirements. This requires effective use of cash flow forecasts that predict cash require-
ments over a period of time (for example, the financial accounting period of a company).
Management of cash also requires sound financial planning strategies and companies need to be
aware of possible sources of finance available should the need for cash arise. There are many sources of
finance available to a company and the correct source will depend on a number of factors, for example:

● the time money is needed (is it short, medium or long term);

● source of money (is it to be sourced internally or externally).

Literature varies on the definition of time – however, as a general rule short term is 1 year, medium
term is up to 5 years and long term is over 5 years. In terms of source of money a key consideration is
that a company retains control of internal financing, whereas a third external party becomes involved
and some form of agreement is required with them to receive funding.
For example, a contractor will need to decide whether to borrow money (external) from a bank or
to finance from cash earned in running the business (retained profits) – or a mixture of both in the case
of multiple projects.
For contractors, the difference between cash and profit is a crucial factor. In 2012, the average profit
for the largest 100 construction companies in the UK was 2 per cent . This implies that retained profit is
not a regular/reliable source of internal finance for either organisational or project cash. Furthermore,
financial analysis literature suggests that a well managed credit control system that includes increasing
creditor payment periods and decreasing debtor collection periods, will create positive cash flows for
a company. This is possibly the reason for the reluctance for main contractors to pay subcontractors
(see discussion above). However, the major contractors in the UK are trying to overcome the cash
flow problem by guaranteeing subcontractor payments through banks through supply chain finance
initiatives. These initiatives have been supported by government and may prove to be a success and a
solution to this long-running problem.
 Quantity surveying 337
When any company decides that they need cash there are a number of considerations to take into
account. They should generally match borrowing to assets held, so long-term borrowing should be
used for permanent operating assets (e.g. office accommodation, plant) and short-term borrowing is
appropriate for assets affected by seasons and short-term needs (e.g. liquidity problems). In addition,
the company may wish to take flexibility into account. For example, short-term borrowing can post-
pone a commitment requiring a long-term loan. However, it is crucial to recognise that short-term
borrowing requires renewing more frequently and can cause problems when the company is con-
stantly in financial difficulty. Finally, it is commonly recognised that interest rates are usually higher
on short-term debt as lenders require a higher rate of return. If frequent short-term borrowings are
renewed, the financing of a company in this way can work out to be more expensive.

Further reading
Atrill, P. and McLaney, E. (2011) Accounting and Finance for Non-specialists, 7th edn, Prentice Hall, Harlow.
Egan, J. (1998) Rethinking Construction, HMSO, London.
Harris, F., McCaffer, R. and Edum-Fotwe, F. (2013) Modern Construction Management, 7th edn, Wiley-Blackwell,
Chichester.
Latham, M. (1994) Constructing the Team, HMSO, London.

13.16 Benchmarking
Key terms: Egan Report; Latham Report; drivers for change; targets for improvement
Benchmarking in the construction industry came to prominence with the issue of the Egan report in
1998. The Egan report, alongside the Latham report of 1994, had a significant and far-reaching impact
on the construction industry and emphasised the need for the industry to measure its performance and
strive to achieve ‘world class’ standards.
A benchmark has two components. The main focus of the ‘Egan’ benchmarks relate to the first
which is the establishment of a reference/measurement standard that is used for comparison with other
companies. The nature of this ‘comparison’ will depend upon the type of benchmarking being carried
out (see below). This results in a ‘quantitative’ measurement whereby a ‘gap’ between a company’s
performance and that of the ‘best in class’ can be identified. This is the essence of the technique.
However, another vital component in ‘pure’ benchmarking is the communication of the method
of operation which achieves a particular quantitative ‘score’. This allows comparison with a specific
‘process’ (method of working) to understand how improvements can be achieved – it is important to
understand how the particular measurement or ‘metric’ was achieved. This allows an organisation to
identify and introduce ways in which innovation can improve performance. It is clear that companies
will not openly and willingly offer information about their methods of achieving a particular score
– this is central to their company project strategy and part of their intellectual capital. Therefore, the
construction industry relies on striving to achieve a metric that places their projects in the upper quar-
tile (top 25 per cent ) which is generally regarded as being the desired performance.
The Egan report (called ‘Re-thinking Construction’) established the ‘5-6-10’ model, which encourages
the industry to measure (and thereby benchmark) in key areas of performance. The ‘5’ relates to industry-
wide drivers for change which will be achieved by meeting the other key benchmarks in the model. The
model further breaks down the drivers into ‘project targets’ which are seen to be the key areas of continu-
ous improvement required. The ‘targets for improvement’ are the measurements that are regarded as a
minimum requirement. Other metrics may be measured on a project-specific basis to demonstrate progress.
The achievement of the industry as a whole is published in a report entitled UK Industry Performance
Report on an annual basis, thus providing data for comparison across the industry. Where metrics fail to
reach desired level or fail to reach the previous year’s results, the whole industry has the opportunity
338 Glenn Steel
to respond. The core metrics have been extended over the years since the report was released in 2003.
For example, additional metrics related to staff loss, CSCS cards (related to Health and Safety), women
in construction, disabled people in construction and the age profile of the industry were introduced in
2012. It can be seen from Figure 13.16.1 that most of the metrics in the model relate to project data,
but some relate to organisations (i.e. profitability and productivity).

Types of benchmarking
There are many different types of benchmarking available – the ‘Egan’ benchmarks could be seen as
an example of external benchmarking. Other types are:

Internal
Internal benchmarking involves benchmarking operations from within the same organisation (e.g. separate
strategic business units). Access to data is easier, less time and resources are needed and change may be
easier to manage. However, real innovation may be limited due to the internal focus and world class
performance is more likely to be found through external benchmarking – hence the use of ‘Egan’ targets.

Non-competitive
Competitive or performance benchmarking measures performance relating to key products and/or services
of companies in the same sector. In order to protect confidentiality this type of analysis is often under-
taken through trade associations or third parties.

DRIVERS FOR IMPROVING THE TARGETS FOR

CHANGE PROJECT PROCESS IMPROVEMENT

Product Partnering the Construction cost

Committed leadership
development supply chain
Construction time

Focus on the customer Predictability – cost

Predictability – time
Project Production of
Product team integration implementation components Client satisfaction – product

Client satisfaction – service

Quality driven agenda Defects

Profitability
Respect for
Commitment to people Sustainability
people Productivity

Figure 13.16.1 The benchmarking process.

Source: Centre for Construction Innovation (2004: 8).
 Quantity surveying 339
Strategic benchmarking involves examining long-term strategies, and is used by successful high perform-
ers in order to improve a business’s overall performance.
Process benchmarking attempts to improve critical processes through comparison with best performing
companies performing similar work.
Functional benchmarking compares partners drawn from different sectors to find innovative ways of improv-
ing work processes. This has the potential to lead to dramatic improvements in performance in a short time.

Common pitfalls of benchmarking

It is very easy for companies to benchmarking too many things including things that are ‘nice to know’
rather than being fundamental to continuous improvement. Therefore, the selection of the items to
benchmark is crucial – hence the focus in the construction industry on ‘generic’ metrics supplemented
by those that are more project specific.
In general, benchmarks that are not specific and difficult to measure will not help and will fall into
disuse over time. Unless initial improvements are observed companies can give up too early – the
technique needs time to show signs of progression. Also, it should be noted that benchmarks should
not be fixed as company priorities change over time.
Companies make common mistakes – for example, they assume that benchmarking is a ‘one-off’ project.
To be effective, benchmarking must be seen as a continuous improvement process. However, benchmark-
ing does not provide obvious/simple solutions – it provides information upon which to act. Companies
should not assume it involves copying or imitating competitors (since the process is partly concerned with
understanding measurement and process). Benchmarking should be seen as a process of learning about the
organisation and is not a ‘quick fix’. The process is often time consuming and labour intensive.
Benchmarking can convey significant advantages to a company. It helps avoid complacency and
can improve efficiency and thus profits. Furthermore, the technique can improve client satisfaction
levels and at the same time improve employee satisfaction by creating a more efficient, profitable and
rewarding environment.

Further reading
Centre for Construction Innovation (2004) ‘An Introduction to Key Performance Indicators’, Constructing Excellence
in the North West, Liverpool.
DETR (2000) ‘KPI Report for The Minister for Construction’, Published by Department of the Environment,
Transport and the Regions.
Egan, J. (1998) Rethinking Construction, HMSO, London.
Fewings, P. (2012) Construction Project Management: An integrated approach, 2nd edn, Routledge, Oxford.
Latham, M. (1994) Constructing the Team, HMSO, London.

13.17 Value management

Key terms: value; value engineering; value planning; value review; brainstorming; functional analysis
Any phrase that includes the word ‘value’ needs careful interpretation as its definition is somewhat
vague and depends on the reader’s perception of value. Value is a very subjective judgement in one
respect, but can also be seen as a complex entity made up of several different/diverse factors. For
example, how scarce is the item under consideration, how useful it is, does it have value in exchange,
what is its ‘marginal utility’. Marginal utility is the additional satisfaction a consumer gains from con-
suming one more unit of a good or service. Positive marginal utility is when the consumption of an
additional item increases the total utility and negative marginal utility is the opposite of this.
340 Glenn Steel
In construction, maximum value has been defined as:

● a level of quality from least cost;

● the highest level of quality from a given cost; or
● an optimum compromise between the two.

From the construction clients point of view, maximum value is the relationship between value and
price. This is a key concept in considering value management (VM) as a technique.
There is often confusion in the definitions of related activities concerned with VM. In the UK, VM
is a wider term used to describe the overall structured, team based approach to a project throughout
the whole of the project lifecycle – i.e. from the concepts stage, through project definition and imple-
mentation to the operation of the building after completion on site. VM has component parts which
are:

● VE: value engineering is the process of analysing the functional benefits a client required for the
whole or part of the design. It is in effect a study of completed designs.
● VP: value planning is applied during the development of the brief to ensure that value is planned
into the project from the beginning.
● VR: value review – monitoring the value process and feedback into subsequent areas of work.

Two important techniques employed in VM are brainstorming and functional analysis. Brainstorming
is important because the ideas by which value may be increased depend on the creativity of the project
participants. The technique depends upon being ‘unrestrained’ in approach, so there is no limitation to
the strange and outlandish suggestions generated. In some ways, the more extreme the better as some
creative thinking techniques can be limiting and constrained. The process depends on the ability of
the facilitator of the group activity to be able to foster the correct atmosphere. It is also important to
recognise that this technique intends to generate ideas and not solutions.
Functional analysis is the second important technique and intends to evaluate objects in a build-
ing from the perspective of their function in a building, i.e. what they do, rather than their form, i.e.
what they are. Various alternatives that could equally provide that function are then considered. In
addition, a breakdown of the functional costs can be carried out and each part individually analysed.
An example of this could be a window – is the window required at all? If the window is required,
the window is broken down into its constituent parts and the costs analysed – i.e. the materials,
opening lights, furniture, glazing etc. are costed to determine where possible value can be adjusted.
The key concept at this point is recognising that the concept of value implies that cost can increase as
well as decrease – the technique is not about cost cutting. It is concerned with meeting the client’s
value requirements.
However, in the construction industry, the application of VM principles, particularly in the VE
phase (evaluation of completed design) has become more of a cost cutting exercise rather than true
VE. Also, in construction, due to the complex nature of buildings, the functional analysis of individual
building elements would not be cost effective – hence, the reliance on VE in the post design, but pre-
construction phase of a project.
VM should be a technique that is applied throughout the project life cycle. However, application of
the methodology can be seen by clients as expensive as it requires the involvement of a wide range of
project stakeholders over a protracted period of time – in effect the process can be limitless in terms of
time, but a well used format is the 40-hour workshop. Reducing this time is often where clients can
reduce costs. The success of the methodology is that a facilitator can maintain a careful structure. This
is known as the ‘job plan’ and follows a logical sequence as follows:
 Quantity surveying 341
1 The information phase – where project information is presented including design work completed
at that point in time. This phase could include a functional analysis if deemed cost effective.
2 The creative phase – this is where the core technique of brainstorming is applied to generate ideas
for the delivery of the project brief.
3 The evaluation phase – evaluating and testing the idea generated in stage 2. It is likely that most
ideas will be rejected, but those that emerge from this stage will have significant support from the
project team.
4 The development phase – developing ideas that are feasible and will result in enhanced value
However, some ideas may well have a ‘knock-on’ effect and cause problems to other elements in
the building resulting in the requirement for further development.
5 The ideas and presentation phase – presenting the ideas in a fully costed format with clear identi-
fication of the benefits that could be realised. The overriding objective of this phase is to gain the
client’s approval and support for change to the project delivery.

VM is unlikely to be cost effective for small projects, but the technique can be shortened and/or
abbreviated to allow potential benefits to be realised. The technique can generate savings on project
costs and the involvement of the design and construction teams at various stages can improve briefing
and the design process. The key point is that unnecessary project costs can be eliminated.

Further reading
Cartlidge, D. P. (2011) New Aspects of Quantity Surveying Practice, 3rd edn, Spon, London.
Walker, P. and Greenwood, D. (2002) Risk and Value Management, RIBA Enterprises, Newcastle upon Tyne.

13.18 Risk management

Key terms: enterprise risk management; hazard risks; financial risks; operational risks; strategic risks
Risk management is more readily associated with projects – other sections in this book discuss the
ways in which risk may be apportioned between the parties, for example in the choice of procure-
ment route. The choice of traditional or design and build procurement has a key impact on the risk
perceived by both parties.
However, before considering project risk, it is important to initially discuss enterprise risk – that is,
the systematic approach to managing total risks a company faces in carrying out its day-to-day busi-
ness. There are a growing number of companies offering associated IT solutions to assist companies in
measuring and understanding the corporate risks it takes.
Enterprise risk management (ERM) is a process implemented by a company’s board of directors at
the very top of the management structure. Risk management must be applied in setting the strategic
direction of the company across the whole enterprise in order that potential risky events are identified
that might impact on the company so that the company’s short- and long-term value to its stakeholders
is maintained and developed.

Risks covered by enterprise risk management

The types of risks covered by ERM are as follows:

● hazard risks that have traditionally been addressed by insurers, for example fire, theft, pollution,
health and pensions;
● financial risks which cover potential losses due to changes in financial markets, including interest
rates, foreign exchange rates, liquidity risks and credit risk;
342 Glenn Steel
● operational risks which can cover a wide variety of situations, such as poor customer satisfaction,
poor product development, product failure, trademark protection, corporate leadership, informa-
tion technology, management fraud and information risk;
● strategic risks including factors such as changing customer preferences, technological innovation
and regulatory or political change.

ERM relates to the corporate objectives of a company and emanates from the idea that ‘outcomes’ (i.e.
actual performance) differ from the planned objectives. Failure to achieve the corporate plan can result
from external factors, such as changes in the marketplace, new entrants into the market, changing
client requirements, changes in the economy and money markets, and changes in the political, legal,
technological, demographic and other environments that affect the company’s business.
In addition, the corporate plan may not be achieved due to internal factors such as human error,
fraud or systems failure.
Accordingly, it is logical that ERM is a ‘top-down’ process where companies will alter and adapt their
strategies to lower risk. The overriding duty of the company is to its shareholders and to maintaining share-
holder value. To achieve this the ‘agents’ (i.e. the management of the company) need to set objectives that
match those of shareholders and this needs to reflect sound management of risk. In publicly quoted compa-
nies risk is a perception by the stock market and quite often high risk can lead to high rewards.
As stated above, insurance used to be the predominant method. However, companies have moved
away from this due to advances in the ability to understand and prevent insurable risks (i.e. they could
be managed). Sophisticated prevention and control systems have reduced the impact of corporate
risks. Companies have retained risks and managed them (rather than insuring) and other mechanisms
of ERM are now used. These include legal mechanisms – e.g. limited liability status, outsourcing of
non-core activities such as information technology which reduces the risk of technical obsolescence.
In general, more knowledge/competence of the business implies risks are lowered – of course the
opposite also applies.

Link to project risks

For companies that operate in the construction industry there needs to be a clear link to projects as this
is the predominant method of earning income and making profits. In ERM the ‘top-down’ approach
required implies passing down some responsibility for management of risk to people closest to the
point where risk arises, i.e. projects. This leads to the consideration of risk management at the project
level which has separate methods of assessing risk, but the culmination and aggregation of total project
risk needs to be managed via ERM at a corporate level as shown in Figure 13.18.1.
There are clear links between the two and yet the processes involved are somewhat different. For
example, health and safety performance on site is a clear project risk, but should a serious accident

Enterprise risk
management

Figure 13.18.1 Enterprise risk management.

Source: Glenn Steel (2013).
 Quantity surveying 343
occur there will a significant ‘knock-on’ effect on the company’s ability to attract future work, par-
ticularly if the event causes a fatality.

Project risk management

There is a significant literature in this field with many separate definitions. The key issue in construc-
tion is whether or not a contractor can manage risk effectively without allowing too much within
competitive bids, thus rendering the company uncompetitive. It is good practice to measure and allow
for risks in a bid, but a contractor will understand that by adding money into a competitive estimate
they are relying on their competitors doing the same thing, thus ‘equalising’ the market. However,
an assessment of risk is a measure of uncertainty and is based on the probability that something will
occur. However, if it does occur, what impact would it have on the project objectives and would this
be a negative impact?
Certainly, the traditional view of risk has strong negative connotations. However, this perception is
now seen as too narrow and needs to be ‘balanced’ with a view that with risk comes potential ‘upside’
opportunities. An illustration of this is in PFI procurement. The contractor is given the opportunity
to reflect risk for many issues that the client is ‘averse’ to – i.e. the client wishes for the contractor to
accept the risks on their behalf and include allowance in the costs of the project for which the public
sector client pays a unitary charge or rent. It is an opportunity for the contractor to make a return by
accepting and managing the client’s risk effectively so risk becomes an investment opportunity.

Risk and opportunity management

The core processes involved in risk management are:

● risk identification which involves determining risks that are likely to affect the project and catego-
rising risk characteristics;
● risk estimation including evaluation of risks and assessing possible project outcomes;
● risk response, planning and execution involving defining, developing and executing steps to
enhance opportunities and responses to threats.

This leads to a risk management strategy which specifies the most important risks and how to manage
them. The options for dealing with each risk are evaluated in turn against the following options:

● shrink/reduce – can be shrunk or reduced by, for example, establishing more information about
a risk situation;
● accept/retain – can be accepted by a party as unavoidable and as being impossible to adopt an
alternative strategy;
● distribution/transfer – may be distributed to another party, e.g. subcontractor;
● elimination/avoidance – possibly avoid the project or a particular element of the project.

The quantification of risk is the joint function of two items, likelihood (or probability) and impact.
BS4778 confirms that, as it states that risk is a combination of the probability of the occurrence of a
defined hazard and the magnitude of the consequences of the occurrence. This leads to the concept of
a risk matrix that provides a tool for communicating the overall risk picture.
With reference to Figure 13.18.2, situation 1 is the least worrying and it may be appropriate to
ignore the risk. In situation 2, risks are often allowed for by contractors by including some contingency
allowance or ‘risk pot’ to have money available for handling the consequences of risk. Situation 3 is
typically dealt with by insurances as this relates to instances that are rare but can be damaging – similar
344 Glenn Steel

Project

Project

Project

Project

Project Project

Project

Figure 13.18.2 Quantification of risk.

Source: Adapted from Walker and Greenwood (2002: 80).

in nature to domestic house insurance. Situation 4 comprises risks of greatest concern and may be suf-
ficient to warrant a risk avoidance strategy by refusing the project.

Further reading
Kahkonen, K. (2006) in Lowe, D. and Leiringer, R. (eds) (2006) ‘Management of uncertainty’, Commercial Management
of Projects: defining the Discipline, Blackwell, Oxford, ch. 10.
Walker, P. and Greenwood, D. (2002) Risk and Value Management, RIBA Enterprises, Newcastle upon Tyne.

13.19 5D building information modelling

Key terms: 3-dimensional building models; BIM manager; BIM maturity; supply chain integration;
time as fourth dimension; cost as fifth dimension
Building information modelling (BIM) is a fast developing technique for introducing collaborative
strategies into the construction industry. BIM is central to the Government’s construction strategy
which includes a BIM task group. The government strategy provides for all public sector projects to be
using BIM by 2016 with the objective of improved public asset performance in cost, value and carbon
performance. A small sample of PFI projects has demonstrated how BIM can improve the manage-
ment of projects throughout their life cycle.
At a strategic level, BIM may be the catalyst that results in the industry working collaboratively
where other major initiatives have failed. The private sector is gradually realising the benefits of BIM
and major engineering contractors are rapidly developing expertise in the field.
 Quantity surveying 345
What is BIM?
BIM uses software to create a 3-dimensional model of a building that can be changed to test a pro-
posed building and the professional design team can visualise the way the real building would look
should certain designs and changes be implemented. At the design stage of the project, it is necessary
for the whole design team to ‘pool’ their designs into a single 3D model so that all relevant design
information is shared, thereby allowing an integrated and collaborative approach to be adopted. The
traditional mode of operation in the industry makes the sharing of a consultant’s ‘intellectual property’
a difficult hurdle to overcome, but compulsory for the technique to be successful. One of the main
questions posed as the methodology develops is who takes control of the model once complete? Some
organisations are publishing BIM ‘protocols’ to assist in such decisions (e.g. RICS). The role of a (so
called) BIM manager will be a crucial function in the development of BIM.
Designers can use BIM to explore alternative concepts, conduct value engineering and optimise
their designs. Contractors can use a BIM model to ‘rehearse’ construction, coordinate drawings and
prepare shop and fabrication drawings. Owners can use the model to optimise building maintenance,
renovations and energy efficiency, as well as to monitor life cycle costs. BIM enables collaboration
among designers, constructors and owners in ways the construction industry has never known before.

Levels of BIM maturity

BIM can be used at different levels of integration and sophistication. In the UK construction industry.
Level 2 is the current standard that major contracting organisations have reached. However, the UK is
behind the progress made in other countries. For example, Scandinavia and North America are ahead
of the UK. In 2007, Finland and Denmark mandated BIM use on all public sector projects.
The recognised levels of BIM maturity are as follows:

● Level 0 – unmanaged CAD, in 2D, with paper (or electronic paper) data exchange.
● Level 1 – managed CAD in 2D or 3D format with a collaborative software used to provide a com-
mon data environment.
● Level 2 – a managed 3D environment held in separate discipline ‘BIM’ tools with data attached.
This level of BIM can utilise 4D construction and/or 5D cost information. This level is recog-
nised as providing a significant challenge to industry incumbents. The Government Construction
Strategy report provides for industry to achieve Level 2 BIM by 2016.
● Level 3 – a fully integrated and collaborative process enabled by ‘web services’ and compliant with
emerging Industry Foundation Class (IFC) standards. This level of BIM will be able to utilise 4D
construction sequencing, 5D cost information and 6D project life cycle management information.

Benefits of BIM
There are many possible uses of BIM on construction projects. However, to exploit the full advantage
of BIM’s capabilities, a collaborative approach needs to be adopted with the full integration of the
supply chain and the information that they provide.
The advantages of the 3D model can be seen as the following:

● Model walkthroughs allow problems to be resolved.

● Traditionally designed drawings must be coordinated to assure that different building systems do
not clash and can actually be constructed in the allowed space. BIM allows clash detection to be
achieved before design completion.
● Project visualisation allows the client and planning authorities to observe the appearance of the
final building.
346 Glenn Steel
● The level of construction information in a BIM model means that prefabrication can be used with
greater assurance.

The fourth dimension of BIM relates to time and applying 4D would allow improvements in con-
struction planning and management e.g. the contractor can visualise crane locations and traffic access
routes and visualisation of design changes.
The fifth dimension of BIM relates to cost that allows automated quantity take-offs to generate
essential financial management information. In addition, cost data can be added to each BIM object to
enable the model to automatically calculate a rough estimate of material costs.
The sixth dimension features facilities management which allows life cycle cost management by
turning the model into an ‘as built’ model, which is provided for the owner.

Barriers to implementation
BIM has the potential to improve the process of designing, constructing and operating buildings.
However, despite the clear vast potential there are barriers to its implementation as follows:

● Different BIM models in the initial stages means there will not be a common technology in use.
● Current technologies and levels of BIM adoption do not yet allow seamless coordination between
different BIM models.
● Some firms may not be able to afford BIM and therefore traditional drawings will still have to be
produced to communicate down the supply chain. It is also likely that smaller subcontractors will
not have access to the digital BIM model on site.
● The ownership of the BIM model data is not clear at the moment and different legal problems
may be faced in relation to each type of information, e.g. exposure to design liability.
● Provisions on the input of data, limitation of liability and defining the role of any BIM ‘model
manager’ will be crucial in the adoption of BIM.
● The risk profile for construction projects and project participants will change with use of a BIM
model and a collaborative, integrated approach. This implies that contract conditions will need to
be changed to fall in line.
● BIM methodology will completely change the way that designers approach the design process. It
is likely that more hours will be spent on the design and less in production.
● BIM places increased reliance upon information technology. With this reliance comes the need
for specific support and security precautions.
● BIM models will require significant investment in hardware, software and staff training across the
industry.

Further reading
Isurv (2013) ‘What is BIM?’ available at: www.isurv.com/site/scripts/documents_info.aspx?documentID=7216&cate
goryID=1246 (accessed 13/12/2013).

13.20 Expert witnesses

Key terms: tribunal arbitration; official enquiry; Civil Procedure Rules; expert immunity
There are two kinds of witness. They are witnesses of fact and expert witnesses (EWs). An EW pro-
duces expert evidence. Once material facts in issue have been identified the parties aim to prove (or
disprove) those facts to the satisfaction of the court.
 Quantity surveying 347
An expert can be anyone with knowledge of, or experience in, a particular field or discipline
beyond that to be expected of a layman. An EW is an expert who makes this knowledge and experi-
ence available to a court (or other judicial bodies, e.g. tribunals, arbitrations, official enquiries, etc.) to
help it understand the issues in a case and thereby reach a sound and just decision
Moreover, an EW is paid for the time it takes to:

● form an opinion; and, where necessary,

● support that opinion during the course of litigation.

It’s very important to keep these definitions clear and in focus. If an individual strays from acting as
an EW into advising the client – and thus becomes an expert adviser – this significantly changes their
legal position.
English law has developed detailed rules to govern the use of expert evidence in civil proceedings.
The basic requirements that affect the use of expert evidence are set out in the Civil Procedure Rules
1998 Rule 35 – Experts and Assessors, implemented in April 1998.
The Royal Institution of Chartered Surveyors (RICS) has published a practice statement (Surveyors
Acting as Expert Witnesses, third edition, 2011) on surveyors acting as EWs.

The English legal system

Surveyors will often find that they are the first point of contact for a client with a problem and need
to understand the framework in which they are operating in order to give clients the best advice about
the options that are available to them for dealing with a potential dispute. Surveyors should never
forget that the best advice they can give a client contemplating resolution of a dispute is to take early
legal advice.
There are two types of cases within the English legal system – criminal cases and civil cases, which
involve an individual, business or organisation taking action against another, usually to obtain money
or other legal redress.
The system remains adversarial, although the Civil Procedure Rules have introduced reforms
emphasising that legal action is to be regarded as a last resort and introducing requirements to undergo
mediation processes before, if such processes should fail, full court appearances.

What is expert evidence?

The fundamental characteristic of expert evidence is that it is opinion evidence. Generally speaking,
lay witnesses may give only one form of evidence, namely evidence of fact. To be practically of assis-
tance to a court, however, expert evidence must also provide as much detail as is necessary to allow
the court to determine whether the expert’s opinions are well founded. It follows, then, that it will
often include:

● factual evidence supplied in the expert’s instructions that requires expertise in its interpretation
and presentation;
● other factual evidence that, while it may not require expertise for its comprehension, is linked
inextricably to evidence that does;
● explanations of technical terms or topics;
● hearsay evidence of a specialist nature, e.g. as to the consensus of medical opinion on the causation
of particular symptoms or conditions; as well as
● opinions based on facts presented in the case.
348 Glenn Steel
Expert evidence is needed when the evaluation of the issues requires technical or scientific knowledge
only an expert in the field is likely to possess.

Pre-1999 position
Prior to the publication of the Civil Procedure Rules 1998, there were considerable misgivings in the
courts as to the function of EWs in the courts. This came about because each party to a dispute appointed
its own expert and a tendency developed for EWs to present their client’s case in the best possible and
uncritical light. Hence, lawyers would refer to ‘hired guns’ and attack experts for their poorly concealed
bias and lack of impartiality. Mr Justice Laddie stated: ‘An expert should not consider that it is his job to
stand shoulder to shoulder through thick and thin with the side that is paying his bill.’

Immunity of the expert (negligence) – prior to 2011

The protection of witnesses from civil claims arising out of their evidence has (subject to certain
exceptions) been embedded in the English legal system since at least 1873. The immunity of advocates
(an advocate can be defined as ‘a person who puts a case on someone else’s behalf’) at trial was consid-
ered and removed by the House of Lords in Hall v Simons (2002) but this case reaffirmed the existence
of the immunity afforded to EWs. So prior to 2011 an expert who failed to make sure that their oral
evidence in court was properly prepared could not be sued for negligence.
Such immunity was founded on the principle that evidence that is put before a court, whether by
way of report or oral testimony, should be given freely and without fear of reprisal. The effect of this
is that, in contrast to other work they might carry out, EWs were not exposed to claims for breach
of contract and/or negligence in respect of the evidence that they give to the court. Immunity from
being sued was argued to be one of the reasons why experts were perhaps willing to give evidence in
difficult or controversial cases.
If such immunity was removed some experts may no longer choose to give evidence for fear of later
being sued because the result is not to their client’s satisfaction. However, in relation to civil proceed-
ings, indications started to come from the judiciary that, where professional EWs offer their services in
return for payment, it would be increasingly difficult to justify the continued retention of immunity
from claims for breach of contract and/or negligence.

Expert immunity – after 2011

The court in the case of Jones v Kaney reviewed the immunity of the EW. As mentioned above, there
had been much disquiet in courts about the role of the EW and the perceived support by the expert
of the ‘bill payer’ rather than providing expert opinion on complex issues in dispute.
In the case of Jones v Kaney, the Supreme Court resolved the matter and EWs can now be sued for
providing negligent expert evidence just as they can be sued for negligently providing any other ser-
vice. It is, therefore, vital that anyone acting as an EW obtains personal indemnity insurance to protect
themselves against the risk of claims from their clients.
An expert who is not seen to be independent and even-handed in his evidence will be of little value
to his client and may injure his client’s case. The real cost of a biased expert may be many times the
cost of their fee.

Further reading
Horne, R. and Mullen, J. (2013) The Expert Witness in Construction, John Wiley & Sons, Chichester.
RICS (2011) Surveyors Acting as Expert Witnesses, 3rd edn, RICS, Coventry.
14 Regeneration
Julie Clarke, Hannah Furness, Paul Greenhalgh, Rachel Kirk
and David McGuinness

14.1 Defining urban regeneration

Key terms: urban regeneration; neighbourhood renewal; area-based initiatives; multiple deprivation
Regeneration is a term that is widely misused and misunderstood. It means different things to different
people, and can range from large-scale activities that promote economic growth, to neighbourhood
interventions that improve people’s quality of life. Fundamentally, it is a holistic process of reversing
economic, social and physical decline in areas where market forces alone will not suffice. Holistic
regeneration may be conceptualised as a stool, the three legs of which represent physical, economic
and social aspects, without any one of which the stool will fall over.
Urban regeneration as an idea encapsulates both the perception of a town or city in decline and the
hope of renewal, reversing trends in order to find a new basis for economic growth and social well-being.
It may be defined as a comprehensive and integrated vision and action that leads to the resolution of
urban problems and that seeks to bring about a lasting improvement in the economic, physical, social and
environmental condition of an area that has been subject to change (Roberts and Sykes, 2000).
Physical regeneration is work on the physical fabric of an area where such work forms part of a strategy
to promote social, physical and economic improvements in a given locality, rather than just redevelopment
driven solely by market forces (Commission for Racial Equality, 2007). It is necessary to clearly distinguish
physical regeneration activity from redevelopment; the latter has arguably been occurring ever since urban
settlements existed. It is the process of recycling or reusing land that has already been developed, and may
involve demolition, land remediation and reclamation, rebuilding, rehabilitation, conversion and change
of use etc. To be considered to be physical regeneration, a project must have some public sector input or
intervention that results in it making a contribution beyond the delivery of profitable or worthwhile prop-
erty development.
Urban policy is the collection of policies and programmes introduced by, sometimes, successive
governments, to tackle social, economic, physical and environmental problems in urban areas. Urban
policies are often targeted at areas of greatest need, as identified by a weighted combination of socio-
economic indicators of poverty and deprivation. Area-based initiatives (ABIs) are spatially targeted
programmes of intervention intended to reverse the process of decline, alleviate poverty and promote
a process of transformation in the fortunes of an area. Such initiatives are long term, taking anywhere
from 10 to 20 years to deliver measurable improvements.

Further reading
Commission for Racial Equality (2007) Regeneration and the Race Equality Duty, CRE, London.
Communities and Local Government (2008) Transforming Places, Changing Lives: A framework for regeneration, DCLG,
London.
Roberts, P. and Sykes, H. (2000) Urban Regeneration: A handbook, Sage, London, ch. 2.
350 Clarke, Furness, Greenhalgh et al.
14.2 Development corporations and regeneration agencies
Key terms: Urban Development Corporations; Urban Regeneration Companies; development agencies
Development corporations have been used in a variety of countries to pursue urban renewal and
redevelopment. Examples include in the US where most major cities have a development corpora-
tion to administer funding programmes (see separate concept); in Germany there are Stadtebauliche
Redevelopment Agencies; in the Netherlands the Rotterdam Development Agency was responsi-
ble for facilitating the Kop van Zuid project; in France Agences d’Urbanisme et Aménagement du
Térritoire have been responsible for large infrastructure projects, for example in Lille (see Couch et al.,
2003). While there is considerable variation between the institutional arrangements and performance
of development corporations around the world, they do have some common characteristics:

● remit to pursue redevelopment of land and property;

● assembling of development sites (often using their own compulsory purchase powers);
● use of capital funding to ‘pump prime’ development sites;
● reclamation and remediation of derelict and contaminated ‘brownfield’ land;
● masterplanning of strategic developments;
● investment in infrastructure, services and utilities;
● de-risking of development to lever in private sector investment and development;
● operating at arm’s length from central or local government.

The UK has a long and rich history of the use of development corporations to pursue the above activities.
The Scottish and Welsh Development Agencies were created in the mid 1970s with remits to pursue
economic development with a particular focus on attracting inward investment. In England the New
Town Development Corporations had long been established to build out the new towns’ programme
of the 1960s and 70s. The step change occurred with the 1980 Local Government Planning and Land
Act by the Conservative Government, which gave the Secretary of State the power to create Urban
Development Corporations (UDCs) to secure the regeneration of their (urban development) areas by:

● bringing land and buildings back into effective use;

● encouraging the development of existing and new industry and commerce;
● creating an attractive environment;
● ensuring that housing and social facilities are available to encourage people to live and work in the
area.
(Section 136 Local Government Planning and Land Act 1980)

Fourteen UDCs were created in four phases between 1980 and 1990. Phase 1 created the pioneering
London Dockland and Merseyside Development Corporations, partly in response to the urban riots that
had swept like wildfire across the country the previous year. The second and largest phase, in 1987, cre-
ated Teesside, Tyne and Wear, Trafford Park, Black Country and Sheffield Corporations; phase 3, a year
later, comprised smaller corporations in Central Manchester, Leeds and Bristol; the final phase in 1990
created corporations in Birmingham and Plymouth. UDCs were also designated in Laganside (Belfast)
and Cardiff Bay; there were none in Scotland. It may be observed that the pattern of designation is
dominated by the large metropolitan cities that were almost exclusively controlled by Labour authorities.
UDCs were given wide ranging powers to acquire, hold, manage, reclaim and dispose of land and
property, carry out building, run a business and do anything necessary or expedient for the purposes
incidental to those purposes. They could take over land held by public bodies (vesting) or use their com-
pulsory purchase powers to acquire land from private individuals against their will. They not only had
statutory planning powers, but took responsibility for building control functions, provided mortgages,
 Regeneration 351
loans, grants and could even take over housing authority and public health functions. UDCs were
controversial for a variety of reasons, not least because they were generously funded at a time when
local authorities were being rate capped by the Conservative administration. They took over the local
planning authorities’ development control powers for their urban development area; they were not
accountable to the general public, only to the Secretary of State for the Environment, who appointed
the Chief Executive, Chair and board members; they pursued their remit in such a narrow and single-
minded way that the local population were often the last to benefit from their activities; and finally, they
gave lie to the notion that the basis for urban revitalisation lies in the market and entrepreneurship.
UDCs were successful at delivering end results in terms of the remediation of brownfield sites,
investment in highways and other infrastructure, construction of commercial and industrial floorspace
and residential units, often in mixed use projects. This was only achieved at considerable expense
(London Docklands Corporation alone was estimated to have cost the taxpayer in excess of £3 bil-
lion at 1996 prices) and was sometimes at the expense of the local residents who were often the last to
benefit from the ‘trickle-down’ effect.
Most UDCs were wound up in 1998, by which time they were regarded by many as rather anachronis-
tic. The UK has entered a new era of consensual and holistic regeneration pursued through a partnership
between public and private sectors and local communities. The replacement for the UDC was the Urban
Regeneration Company (URC), the model for which is compared with the UDC model in Table 14.2.1.

Table 14.2.1 Urban Development Corporations and Urban Regeneration Companies

Origin 1980 Local Government Planning and Urban Task Force 1999
Land Act, Part XVI Urban White Paper 2000
Guidance and Principles 2001
Statutory Yes No
Number 14 (none in Scotland) 24 (across the UK)
Life-span 5–17 years In theory 10–15 years
Aims 1 To bring land and buildings back into 1 Coordinate and deliver holistic and
effective use sustainable regeneration
2 Create environment conducive for 2 Engage the private sector in an agreed
private sector investment physical and economic regeneration
3 Encourage development of new strategy
commerce and industry 3 Work with key partners to deliver
4 Ensure housing and social facilities are employment opportunities
available 4 Work with key partners to link activity to
local communities
Staffing and use of Medium sized in-house establishments with Small in-house teams with great reliance on
consultants moderate use of consultants use of external consultants
Politics and governance Usurped local authorities Local authorities a key partner
Appointment of By Secretary of State By local authority and Regional
board/exec Development Agency; approved by SoS
Relationship with LA Completely autonomous A key partner but operating at arms length
Funding Generously funded No dedicated funding; rely on partners for
funding/resources
Planning powers Development and building control powers Rely on Local Planning Authority to use
in Urban Development Area powers to assist their work
CPO powers Full powers used extensively Key partners exercise on their behalf (RDA,
English Partnerships and local authority)
Vesting of publicly Common Control of land often retained by local
owned land authority or other public body
352 Clarke, Furness, Greenhalgh et al.
Perhaps because of their consensual modus operandi and lack of funding and powers, the URCs were
not as dynamic and successful as their forbears. Many have subsequently been wound up due to lack
of funding or have morphed into economic development companies.

Further reading
Couch, C., Fraser, C. and Percy, S. (2003) Urban Regeneration in Europe, Blackwell, Oxford.
Deas, I., Robson, B. and Braidford, M. (2000) ‘Re-thinking the Urban Development Corporation experiment: the
case of Central Manchester, Leeds and Bristol’, Progress in Planning 54(1): 1–72.
Foster, J. (1999) Docklands: Cultures in conflict, worlds in collision, Routledge, London.
Imrie, R. and Thomas, H. (2000) British Urban Policy: An evaluation of Urban Development Corporations, Sage, London.
National Audit Office (1993) The Achievements of the Second and Third generation Urban Development Corporations, HMSO,
London.
Parkinson, M. (2008) Make No Little Plans: The regeneration of Liverpool City Centre 1999–2008, Liverpool Vision,
Liverpool.

14.3 Neoliberal urban policy

Key terms: laissez-faire; Urban Development Corporations; Enterprise Zones; Michael Heseltine
The election of Margaret Thatcher as Prime Minister in 1979 ushered in a new era of urban policy,
apparently based on neoliberal ideologies of deregulation and competition that manifested themselves
in relaxation of planning controls and a more laissez-faire regulatory approach to encourage private
sector enterprise and entrepreneurialism. Somewhat ironically, the first two significant tools of regen-
eration introduced by the Thatcher Government were on the one hand positively Stalinist (Urban
Development Corporations), while also causing significant distortion in the operation of the free mar-
ket (Enterprise Zones – EZs).
The prevailing situation for the introduction of UDCs and EZs was a malaise in Britain’s inner
cities, culminating in 1981 in the worst rioting the UK had seen for decades, most notoriously in
Toxteth in Liverpool, Handsworth in Birmingham, St James’ in Bristol and Brixton in London.
The Government had to be seen to act decisively and Michael Heseltine, the Secretary of State for
the Environment, grasped the nettle, symbolically landing in a ‘war-torn’ Toxteth by helicopter and
promising to tackle Britain’s failing inner-cities.
The main pieces of legislation used to introduce these new ‘property-led’ tools of regeneration
were the Local Government Planning and Land Act and Finance Acts of 1980, Part XVIII, Schedule
32 and Part XVI, Schedules 26–9 of which contained provisions for EZs and UDC respectively.
Fourteen Development Corporations were created across the UK with the exception of Scotland, in
four phases between 1980 and 1990. These were complemented by the designation of 32 EZs across
the whole of the UK between 1980 and 2006. The Conservative Government originally regarded
EZs as the remedy to Britain’s urban problems but by the mid-1980s it became apparent that this fis-
cal tool lacked the political traction to really make much difference at the local level, provoking the
Government to change tack and embark on creating a second round of UDCs in most major cities
in England. It was no coincidence that all the cities in which these QUANGOs (quasi-autonomous
non-governmental organisations) were created were controlled by Labour local authorities.
The 1980s is now regarded as one of the most dynamic and controversial periods in British urban
policy, in part due to the plethora of policy initiatives that were introduced during a short space of
time (see Table 14.3.1).
 Regeneration 353
Table 14.3.1 1980s policy initiatives

1980 Local Government Planning and Land Act and Finance Act gives powers to the Secretary of State for the
Environment to create UDCs and designate EZs
1981 Inner city riots
13 EZs designated
London Docklands and Merseyside Development Corporations established
Urban Regeneration Grant introduced
Simplified Planning Zones established
1982 Derelict Land Act and Grant introduced
14 more EZs designated
Urban Development Grant introduced
1983 Conservative Government re-elected
1984 First Garden Festival in Liverpool
New Assisted Areas
1985 5 City Action Teams created
Inner City Enterprises set up
Estate Action established
1986 8 Inner City Task Forces established
Second Garden Festival in Stoke on Trent
1987 5 more UDCs created
8 more Task Forces established
1988 Action for Cities Launched
City Grant introduced to replace Urban Development and Regeneration Grants
4 more ‘mini’ UDCs created
Third Garden Festival in Glasgow
2 more City Action Teams
1989 Local Government Housing and Finance Act which legislated for the creation of City Challenge Partnerships
3 more Task Forces established

In practice this experimental policy cocktail brought about greater centralisation of political power and fund-
ing, encouraged the usurping of local authorities through the introduction of QUANGOs, and manifested
itself in limited-life, property-led, area-based initiatives that favoured capital-led projects and encouraged
greater private sector involvement. The consequences of this short-term approach was that the economic
base of inner city areas continued to erode as there was actually less money going into them due to rate cap-
ping. What financial incentives that did exist tended to benefit investors and developers, increasing private
sector investment through large-scale ‘flagship’ developments that caused significant levels of displacement
and relocation. The lack of an overarching strategy meant that policies were not ‘joined up’ and were thus
failing to relieve deep-seated poverty, unemployment and deprivation (see Atkinson and Moon, 1994).
Even before the decade was out, serious concerns were being expressed about the direction and
impact of urban policy in the UK, most notably by the Archbishop of Canterbury’s Commission on
Urban Priority Areas, which published Faith in the City: A call for action by church and nation in 1985,
which was critical of the way that the urban poor had been marginalised in society and questioned
whether the political will existed to set in motion a process to tackle this social exclusion. By the end of
the 1980s it was apparent to most commentators that Government urban policy was not working. The
Government’s own Audit Commission produced a report in 1989 famously describing urban policy
as a ‘patchwork quilt of complexity and idiosyncrasy’, its performance being undermined by a frag-
mented and incoherent array of policies. The notion of trickle down, on which many of the policies
were predicated, was increasingly regarded with scepticism and doubt. Most damningly, it appeared
that the people who were in most need of help were least likely to benefit from the policies.
354 Clarke, Furness, Greenhalgh et al.
There was an urgent need for change and it came in the shape of Michael Heseltine, who
returned to the DoE after some years in the political wilderness and immediately performed a
complete ‘volte-face’ by re-orientating urban policy to concentrate again on local solutions for local
people in partnership with locally accountable and democratically elected bodies – namely local
authorities.

Further reading
Archbishop of Canterbury’s Commission on Urban Priority Areas (1985) Faith in the City: A call for action by church and
nation, Church House, London.
Atkinson, R. and Moon, G. (1994) Urban Policy in Britain: The city, the state and the market, Macmillan, London.
Brownhill, S. (1990) Another Great Planning Disaster, Paul Chapman, London.
Healey, P., Davoudi, S., O’Toole, M., Tavsanoglu, S. and Usher, D. (eds) (1993) Rebuilding the City: Property-led
regeneration, Spon, London.
Imrie, R. and Thomas, H. (1993) ‘The limits of property-led regeneration’, Environment and Planning C 2(1): 87–107.
Lawless, P. (1989) Britain’s Inner Cities, Paul Chapman, London.
MacGreggor, S. and Pimlott, B. (1991) Tackling the Inner Cities, Clarendon, Oxford.
Robson, B. (1988) Those Inner Cities: Reconciling the social and economic aims of urban policy, Clarendon, Oxford.
Smyth, H. (1994). Marketing the City: The role of flagship developments in urban regeneration, Spon, London.
Turok, I. (1992) ‘Property-led urban regeneration: Panacea or placebo’, Environment and Planning A 24(3): 361–379.

14.4 Compact cities and urban sprawl

Key terms: compact city; urban sprawl; densification; urban development; suburbanism
The compact city movement originated in northern Europe during the inter-war period as a
response to urban sprawl and suburban development. Although the term ‘compact city’ creates
the impression of a single, coherent concept, this is somewhat misleading as there are a variety of
notions of a compact city and many of different models of varying significance and influence that
seek to promote more compact and sustainable urban development. However, there is one core
principle that is common to all models: increased intensification of urban land use predominantly by
way of residential densification. In order to successfully counter urban sprawl, densification strate-
gies need to go hand in hand with a policy of urban containment.
Urban sprawl is the excessive spatial growth of cities, characterised by a widely dispersed popula-
tion in low-density residential development, rigid separation of homes, shops, and workplaces, a lack
of distinct and thriving city/town/suburban centres and poor interconnectivity between localities.
According to Downs (1999) sprawl has ten traits:

1 Unlimited outward extension of new development.

2 Low-density residential and commercial settlements.
3 Leapfrog development beyond established settlements.
4 Fragmentation of powers over land use among many small localities.
5 Dominance of transportation by private automotive vehicles.
6 No centralised planning or control of land uses.
7 Widespread strip commercial development.
8 Great fiscal disparities among localities.
9 Segregation of specialised types of land uses in different zones.
10 Reliance mainly on trickle-down to provide housing to low-income households.

A significant characteristic of urban sprawl is the inefficient use of land and resources, the conse-
quences of which are environmental degradation and pollution, particularly from vehicle emissions
 Regeneration 355
due to increased dependence on automobiles, the loss of rural land and the impairing of urban vitality
and diversity. Thus, compact urban form should reduce congestion, pollution, carbon emissions and
development pressure on greenfield land.
Compact urban form highlights the value placed upon proximity and ease of contact between
people. It gives priority to the provision of public areas for people to meet and interact, to learn from
one another and to join in the diversity of urban life (DETR/UTF, 1999). Compact city models typi-
cally involve planning for new housing at higher densities than may have been previously considered
appropriate. It also involves raising the densities of existing areas of housing through infill development
or retrofitting of current structures and plots. Table 14.4.1 presents residential densities measured by
dwellings per hectare (ha) and persons per ha for a range of different UK housing types and locations.
Proponents of compact city models believe that by developing at higher densities, urban areas may
avoid the problems associated with low density housing and urban sprawl. A compact urban form
typically reduces the distance that infrastructure and utilities need to cover, which in turn reduces
the cost of providing such infrastructure (this may be compared with ‘ribbon development’ that is
symptomatic of suburban development). Other benefits of urban densification are improved security,
a reduction in derelict land. Thus, a compact city should encourage and promote urban regeneration,
the revitalisation of town centres, construction at higher densities, mixed use development, enhanced
public transport provision and the concentration of urban development at public transport nodes,
consequently reducing urban sprawl.

Table 14.4.1 UK residential density gradient

UK residential density gradient Units/ha Persons/ha

Low density detached – Hertfordshire 5 20
Milton Keynes average 1990 17 68
Average density of new development in UK 1981–91 22 88
Minimum density for a bus service 25 100
Private sector 1960s/70s – Hertfordshire 25 100
Inter-war estate – Hertfordshire 30 120
Private sector 1980s/90s – Hertfordshire 30 120
Hulme – Manchester 1970s 37 149
Average net density London 42 168
Ebenezer Howard – Garden city 1898 60 240
Minimum density for a tram service 60 240
New town higher density low rise – Hertfordshire 64 256
Sustainable urban 69 275
Victorian/Edwardian terraces – Hertfordshire 80 320
Central accessible urban 93 370
Holly Street – London 1990s 94 376
Holly Street – London 1970s 104 416
Hulme – Manchester 1930s 150 600
Islington – 1965 185 740

Source: Commission for Architecture and the Built Environment (2005).

NB: an average dwelling size of 4 bed-spaces has been assumed throughout this table although it
should be noted that this is higher than the average household size in the UK.
356 Clarke, Furness, Greenhalgh et al.
According to Gordon and Richardson (1997) there are three generic approaches to delivering more
compact urban forms:

1 the ‘macro’ approach whereby average densities are high across the extent of an urban area;
2 the ‘micro’ approach which focuses on achieving higher densities at the neighbourhood level;
3 the ‘spatial structure’ approach, which recognises the role of the city centre as the core around
which all other elements of the city revolve.

Compact cities are therefore places that reduce fuel consumption by reducing distances travelled by
residents, particularly by private motor vehicles, through the provision of good public transport and
encouraging walking and cycling. Such cities also provide residents with improved accessibility to a
wide range of employment and services through mixed use development. With an increased number
of residents per hectare, investment in frequent and reliable public transport becomes more financially
viable, and the excessive journey times associated with sprawling low density cities that people endure
commuting between their homes and places of work may be reduced or avoided.

Further reading
Bruegmann, R. (2006) Sprawl: A compact history, University of Chicago Press, Chicago, IL.
CABE (2005) Better Neighbourhoods: Making densities work, CABE, London.
DETR/UTF (1999) Towards an Urban Renaissance, Spon, London.
Downs, A. (1999) Some Realities about Sprawl and Urban Decline, Brookings Institution, Washington, DC, p.1.
Ewing, R., Schmid, T., Killingworth, R., Slot, A. and Raudenbush, S. (2008) ‘Relationship between urban sprawl and
physical activity, obesity and morbidity’, Urban Ecology, 567–582.
Gordon, P. and Richardson, H. W. (1997) ‘Are compact cities a desirable planning goal?’ Journal of the American Planning
Association, 63: 95–106.
Layard, A., Dvoudi, S. and Batty, S. (eds) (2001) Planning for a Sustainable Future, Spon, London.
Jenks, M. and Burgess, R. (eds) (2000) Compact Cities: Sustainable urban forms for developing countries, Spon, London.

14.5 Shrinking cities

Key terms: industrial decline; depopulation; managed decline; rustbelt cities
From the 1950s to the end of the twentieth century many of the UK’s industrial towns and cities
outside London suffered significant depopulation often due to deindustrialisation and the demise of
traditional heavy industries such as coal mining, steel production and shipbuilding. More recently,
a sharp decline in the population of some British towns and cities has been linked to loss of a core
employer due in part to increased global competition, the mobility of manufacturing firms, techno-
logical advances, cuts in defence spending or social changes such as where people choose spend their
holidays. Towns and cities that have lost population have not done so in a uniform way; inner city
areas have usually been most acutely affected, often as a consequence of suburbanisation and competi-
tions from new towns, market towns and commuter settlements. Such large-scale migration is often
along ethnic lines and has been termed ‘white flight’ by some commentators.
Shrinking cities may be defined as significant urban conurbations (min. population of 10,000
people) that have suffered continual population decline over a sustained period of time (more than
two years) and exhibit signs of structural economic crisis. Shrinking cities are a global phenomenon
and much academic research has been focused on the significant European and North America
industrial cities of the nineteenth and twentieth centuries that have suffered loss of their key indus-
trial employers and severe economic restructuring resulting in depopulation as mobile unemployed
labour migrates to alternative towns and cities in search of new employment opportunities. Such
 Regeneration 357
population loss can lead to serious economic, social and environmental consequences, including
failing housing markets, land abandonment, the failure of retail centres, vandalism and crime. For
local authorities/municipalities, population loss is a serious threat to their economic stability as
depopulation results in a decline in tax revenue (from both domestic and commercial rates), which
has a corrosive impact on urban infrastructure, housing, schools, social services, the environment,
amenities, etc. Towns and cities, once they are in a downward spiral of decline, find it very difficult
to reverse their fortunes.
Notable examples of shrinking cities are Detroit and Cleveland in the United States, both casualties
of the increased global competitiveness and success of developing countries (e.g. southeast Asian car
industry), and the former East German cities of Dessau and Liepzig, which have struggled in terms
of economic competitiveness since German reunification. The most notorious US example of the
decline of a ‘single sector’ city is Detroit, previously known at ‘Motor City’ and home to Motown
Records, which has been decimated by the decline in motor vehicle manufacturing resulting in the
city recently being pronounced bankrupt and placed into special measures by the US administration.
Prominent UK examples of shrinking towns/cities include Liverpool, Blackpool and Middlesbrough.
It should be noted that depopulation of Western conurbations, towns and cities in the mid to late
twentieth and early twenty-first centuries contrasts graphically with wider global trends of urbanisation
in developing countries, during an era in which urbanisation has continued inexorably such that now
well over half the world’s population live in cities.

Further reading
Bernt, M. (2009) ‘Partnership for demolition: The governance of urban renewal in East Germany’s shrinking cities’,
International Journal of Urban and Regional Research, 33(3): 754–769.
Couch, C. and Cocks, M. (2011) ‘Underrated localism in urban regeneration: The case of Liverpool, a shrinking city’,
Journal of Urban Regeneration and Renewal, 4(3): 279–292.
Hollander, J., Pallagst, K., Schwartz, T. and Popper, F. (2009) ‘Planning shrinking cities’, Progress in Planning, 72(4):
223–232.

14.6 The urban renaissance

Key terms: Urban Task Force; urban renaissance; gentrification; compact city
The Urban Task Force (UTF) was established in 1998 by the Deputy Prime Minister of the newly
elected Labour Government, John Prescott. The UTF, under the chairmanship of the architect
Richard Rogers, comprised a group of experts from the public and private sectors, complemented by
a number of working groups. Their mission was to:

identify causes of urban decline in England and recommend practical solutions to bring people
back into our cities, towns and urban neighbourhoods. It will establish a new vision for urban
regeneration founded on the principles of design excellence, social wellbeing and environmental
responsibility within a viable economic and legislative framework.
(DETR, 1999)

The Government’s motivation for pursuing the urban renaissance agenda was driven by increasing
concern about depopulation of major conurbations in the UK outside London (see Table 14.6.1)
and represented a concerted attempt by the British urban movement to pursue a set of long-term and
holistic principles that sought to place disadvantaged communities and neglected neighbourhoods back
at the centre of the policy arena.
358 Clarke, Furness, Greenhalgh et al.
Table 14.6.1 Population change in UK conurbations 1991–2001

Population 1991 (000s) Population 2001 (000s) Change 1991–2001 (%)

London 6829 7308 7.0
West Midlands 2619 2570 –1.9
Greater Manchester 2553 2512 –1.6
West Yorkshire 2062 2084 1.1
Clydeside 1728 1666 –3.6
Merseyside 1438 1366 –5.0
South Yorkshire 1288 1266 –1.7
Tyne and Wear 1124 1078 –4.1
Source: ONS (1991).

To pursue their mission, the UTF visited not only English cities but also cities in Europe, such as
Barcelona and Amsterdam, and in North America. They published their landmark report Towards an
Urban Renaissance, also referred to as the ‘Rogers Report’, in 1999, that set out their urban vision for
England in five sections (containing 105 separate recommendations):

1 The sustainable city.

2 Making towns and cities work.
3 Making the most of our urban assets.
4 Making the investment.
5 Sustaining the renaissance.

A central premise of the report is that increasing the intensity of activities and people within an area is
crucial to creating sustainable neighbourhoods. The report recommended revising planning guidance to
promote greater residential densification (see Concept 14.4) by discouraging local authorities from using
arguments of excessive density and over-development as reasons for refusing planning permission, cre-
ating a planning presumption against excessively low density urban development and providing advice
on use of density standards linked to design quality. Such recommendations sought to create a policy,
legislative and financial regime that would encourage both developers and local planning authorities to
pursue well-designed higher density brownfield development.
One of the more contentious components of the UTF report was its analysis and recommenda-
tions around delivery of new housing on brownfield land, the Government target for which at the
time was 60 per cent of all new housing to be built on previously developed land. The UTF, in
hindsight, wrongly concluded that the target would be difficult to achieve and sustain when in fact it
was exceeded within a year and would ultimately peak at 80 per cent. However, the debate around
the potential of brownfield land to accommodate new housing (the Government at the time antici-
pated that around 4 million units would be needed by 2016), continued beyond the publication of
the UTF report, becoming the focus for Kate Barker’s reports (Barker Review of Housing Supply
and Barker Review of Land Use Planning) and provoking Peter Hall’s striking statement/caveat in
Richard Rogers’s independent report ‘Towards a strong Renaissance in 2005’.
The UTF report was unashamedly pro-urban, with a bias towards the built environment and physi-
cal regeneration, but was of undoubted influence on the Government’s Urban White Paper (UWP)
published the following year. ‘Our towns and cities – the future: delivering an urban renaissance’
(DETR, 2000), was the first urban white paper for nearly a quarter of a century. Its scope was broader
and more comprehensive than the UTF report, drawing on the work of the Social Exclusion Unit and
 Regeneration 359
the State of English Cities reports. Fundamentally though, the UWP echoed the UTF’s call for a move
back to the city and presented a new vision of urban living in England. While the UWP adopts most
of the policy reforms recommended by the UTF, it does reject calls to significantly increase public
expenditure for urban regeneration or to interfere with the workings of the free market, instead mak-
ing some marginal adjustment to fiscal arrangements that ultimately failed to deliver any demonstrable
improvements to delivery. Ultimately, the Task Force Report is a more considered and detailed docu-
ment but the UWP managed to mediate some of the worst of its middle class excesses.

Further reading
DETR (2000) ‘Our Towns and Cities – the future: Delivering an urban renaissance’, DETR, London.
DETR/UTF (1999) Towards an Urban Renaissance. Spon, London.
Imrie, R. and Raco, M. (2003) Urban Renaissance? New Labour, community and urban policy, Policy Press, Bristol.
Rogers, R. (2005) ‘Towards a Strong Renaissance: An independent report of the Urban Task Force’, available at:
www.urbantaskforce.org/UTF_final_report.pdf (accessed 20/11/2013).

14.7 Enterprise Zones

Key terms: displacement; capital allowances; simplified planning; rates holiday
Enterprise Zone (EZ) regimes vary between countries, but essentially they are designated areas that
benefit from a combination of government subsidies, tax breaks, simplified planning and reduced
bureaucracy. When EZs were first introduced in the UK in 1980, they were seen as a property
driven initiative designed to encourage the physical and economic regeneration of relatively small
areas (Department of Environment, 1995); similar models having operated in France and the US for
many decades. The policy evolved from the concept of Freeports espoused by Peter Hall in the late
1970s. Geoffrey Howe, Margaret Thatcher’s first Chancellor of the Exchequer, seized on the idea and
adapted the model to deliver a package of fiscal and other benefits targeted at developers, landlords,
investors and occupiers. The power for the Secretary of State for the Environment to create EZs was
contained in the Local Government, Planning and Land Act 1980 and provision for the fiscal measures
was contained in the Finance Act (Section 74). In all, 32 EZs were designated across the UK, 22 in
England, five in Scotland, three in Wales and two in Northern Ireland. They were designated in four
tranches and each had a 10-year life span.
EZs in the UK comprised a package of eight measures, the three most significant of which were
100 per cent capital allowances in respect of investment in buildings and fixed plant and machinery,
a rate-free period for the life of the zone, and a simplified planning regime. The rate-free period was
intended to reduce operating costs for occupiers although half of this benefit was clawed back by land-
lords by way of increased rents. Capital allowances allow investors to deduct the price of purchasing an
EZ investment from their taxable income, effectively subsidising the purchase price of EZ property by
the rate at which investors would usually pay tax. This incentive, in combination with the higher rents
that landlords were able to charge as a consequence of the tenants paying no rates during the life of the
zone, resulted in higher investment yields. At their peak, EZs encouraged the creation of unit trusts
to allow wealthy individual investors to reduce their tax bills by investing in the EZ trusts. In some
locations the capital allowances were extended beyond the life of the zones using golden contracts that
allowed the build out of undeveloped sites long after the zones had officially expired.
The simplified planning regimes established in the zones, which provided fast track planning per-
mission for any development that conformed with the regimes established by the zone authority,
encouraged the development or regional shopping centres, such as Merry Hill in the West Midlands
and the Metrocentre in Gateshead. Such large-scale developments would normally have had to go
through a protracted planning process that usually resulted in an expensive and time-consuming public
360 Clarke, Furness, Greenhalgh et al.
planning inquiry. The necessity for this was negated by simplified planning. Ultimately, EZs were a
powerful supply-side stimulant that encouraged the construction of millions of square metres of com-
mercial and industrial floorspace in the zones in a relatively short space of time. Whether this was the
right space in the right place at the right time to encourage sustainable economic growth is debateable.
EZs were subject to more monitoring and evaluation than any other property-led regeneration
initiative, probably because they proved to be a very expensive policy tool that was paid for by the
Treasury. The early EZs covered large swathes of inner urban land (e.g. Tyneside and Isle of Dogs)
and were found not to be as effective as they might have been for four reasons: first, by the time
derelict land had been reclaimed and infrastructure put in, the zone could be halfway through its life;
second, some of the inner urban areas were not where modern business wanted to be located; third,
private landowners whose land was designated as EZ received windfall profits for doing nothing; and
fourth, the early zones included within their boundaries many firms that pre-dated the designation
of the zones; these firms received 10-year rates holidays just by being there. Later zones were often
designated in more accessible locations, on vacant greenfield sites in public ownership.
As a result of the powerful cocktail of financial incentives and simplified planning, EZs encouraged
a concentration of property development, investment and occupation activity in particular locations,
to the detriment of other areas. They created a two-tier property market, with an on-zone market
characterised by high rents, yields, supply and demand, and an off-zone market of stagnating or reduc-
ing values due to a lack of investment and diminished investor and occupier demand. EZs also caused
displacement by attracting local occupiers to relocate to the zones from nearby.
Problems also arose when zone incentives expired. Occupiers found themselves not only paying
inflated ‘on-zone’ rents on leases with upward-only rent reviews, but simultaneously having to cope
with the re-imposition of business rates calculated at inflated rateable values. Vacant premises, that had
not been occupied during the life of the zone, continued to overhang the market. Landlords that had
benefitted from the generous capital allowances were able to offer heavily subsidised rents and other
occupier incentives to attract tenants, undermining the viability of competing developments.
In November 2010, George Osborne announced the designation of a ‘new breed’ of Enterprise
Zones in England. The new EZs were to benefit from business rate discount worth up to £275,000
per business over a 5-year period, simplified planning by way of Local Development Order powers
or Simplified Planning Zone, retention of new and additional business rates within the zone by the
local authority and introduction of superfast broadband (DCLG, 2010). The announcement provoked
a flurry of publications comparing the proposed new EZs with the old style ones, with the new zones
being branded EZ ‘Lite’, compared to their EZ ‘Max’ predecessors. In total, 24 areas in England were
given EZ designation, with Wales announcing five EZs of its own. A notable difference between old
and new zones is the sectoral focus of many of new zones, for example renewable energy, automotive
manufacture, aerospace and advanced manufacturing.
Because of these side effects, EZs were generally regarded as an outmoded tool of regeneration. It
was therefore something of a surprise when in November 2010, five months after the forming of a
Coalition Government, the chancellor of the exchequer, George Osborne, announced the designation
of a ‘new breed’ of Enterprise Zones. The new EZs were to benefit from business rate discount worth
up to £275,000 per business over a 5-year period; simplified planning by way of Local Development
Order powers or Simplified Planning Zone; retention of new and additional business rates within the
zone by the local area to be invested locally; and introduction of superfast broadband (DCLG, 2010).
The announcement provoked a flurry of publications comparing the proposed new EZs with
the old style ones (see Sissons and Brown, 2011; Larkin and Wilcox, 2011, Higton, 2011). Eleven
areas were identified as recipients of the first wave of EZ designations with four named locations in
the vanguard. Notionally, all areas were to be covered by a local enterprise partnership (LEP). LEPs
missing out on the first wave of designations were invited to bid in a second round for a further
ten; ultimately another 13 locations were selected, resulting in a total 24 new EZs. Two further
 Regeneration 361
EZs announced for Lancashire and Hull and Humber LEPS in response to proposed closure of BAE
plants and the Scottish Government and Welsh Assembly have made similar announcements of the
intention to create EZs. Time will tell whether the new ‘Lite’ EZs will perform with anything like
the vigour of the old EZ ‘Max’.

Further reading
Department of the Environment (1995) Final Evaluation of Enterprise Zones, London, HMSO.
Higton, A. (2011) Enterprise Zones in the UK since 1980, South West Observatory, Bristol.
Jones, C., Dunse, N. and Martin, D. (2003) ‘The property market impact of British Enterprise Zones’, Journal of Property
Research, 20(4): 343–369.
Larkin, K. and Wilcox, Z. (2011) What Would Maggie Do? Why the Government’s policy on Enterprise Zones needs to be
radically different to the failed policy of the 1980s, Centre for Cities, London.
Office of the Deputy Prime Minister (2003) Transferable Lessons from Enterprise Zones, HMSO, London.
Segade, O. and Barrett, S. (2012) Enterprise Zones: Only one piece of the economic regeneration puzzle, London Chamber of
Commerce, London.
Sissons, A. and Brown, C. (2011) Do Enterprise Zones Work? An Ideopolis policy paper, The Work Foundation, London.

14.8 Partnership working

Key terms: networked governance; collaborative working; effective partnership working; barriers to
partnership working
As a concept, partnership involves ‘an agreement between two or more independent bodies to work
collectively to achieve an objective’ (Audit Commission, 2005: 7). Partnerships and partnership
working are key to delivering regeneration. Such partnerships involve diverse agencies in diverse
arrangements, incorporating different extents of collaboration; they can range from a contractual obli-
gation, to an arrangement for funding, to adopting a whole new way of working that has implications
for all the partners involved. While the theory of effective partnership working is clearly established in
the literature, extensive evidence exists to demonstrate the challenges of effective partnership working
in practice.
The wide range of stakeholders engaged in regeneration activity – from central and local govern-
ment to private, statutory and third sector organisations, to local residents and communities – reflects
the context of complex networked governance (see for example Stoker, 1998), which requires col-
laboration and partnership working. A growing recognition of the complexity of the problem to be
addressed in declining areas, and an understanding of the failures of regeneration in the past, as well
as the need to consider alternative sources of funding for regeneration, have all supported the rise to
prominence of partnership working (see for example Shaw and Robinson, 2010). A coordinated,
joined up, multi-agency approach, working with communities as partners is seen as key to delivering
sustainable outcomes.
Effective partnership working can bring many advantages for the stakeholders, reflecting the notion
of collaborative gain, defined by the Improvement Service (2008, p. 3) as:

a situation where partnership working brings about ‘added value’ benefits, which would not have
been achieved by the individual partner organisations operating on their own (‘More than the sum
of the parts’). These benefits might include, for example, enhanced outcomes for service users/
communities or efficiency gains for the partners themselves.

Ensuring a ‘fruitful partnership’ is achieved (Audit Commission, 1998) requires various criteria to be
met. Hudson and Hardy (2002) outline the following six principles for successful partnership working:
362 Clarke, Furness, Greenhalgh et al.
● Acknowledgement of the need for partnership
● Clarity and realism of purpose
● Commitment and ownership
● Development and maintenance of trust
● Establishment of clear and robust partnership arrangements
● Monitoring, review and organisational learning.

Such principles highlight the challenges facing partnership working in practice. As well as potential
benefits there are multiple potential barriers facing partnerships operating in the context of complex
networked governance, reflecting the diverse vested interests, different organisational cultures, and
uneven power relations among the various stakeholders (see for example the evaluation of New
Deal for Communities (DCLG, 2010) or Coulson (2005). In practice, partnership working can be
characterised by conflict and tensions; trust, open and effective communication, and a willingness to
compromise, for example, can be difficult to achieve and can take considerable time. Partnership work-
ing can be expensive, unrewarding and time consuming if not done effectively (Audit Commission,
1998), however where successful partnership working is evident the benefits can be considerable for all
involved. Recognising the importance of partnerships (and also the challenges of the process of part-
nership working in practice), a number of toolkits/frameworks to evaluate and improve partnership
working are available for partner agencies to use (see for example Audit Commission, 2009).

Further reading
Audit Commission (various) e.g. ‘A fruitful partnership’ (1998); ‘Governing partnerships’ (2005); ‘Building better lives’
(2009); all available at: http://archive.audit-commission.gov.uk/auditcommission/nationalstudies/pages/default.
aspx.html (accessed 20/11/2013).
Coulson, A. (2005) ‘A plague on all your partnerships: Theory and practice in regeneration’, International Journal of Public
Sector Management 18(2): 151–163.
DCLG (2010) What Works in Neighbourhood-level Regeneration? The views of key stakeholders in the New Deal for Communities
Programme, HMSO, London.
Hudson, B. and Hardy, B. (2002) ‘What is a successful partnership and how can it be measured’, in: C. Glendinning
et al. (eds) Partnerships, New Labour and the Governance of Welfare, Policy Press, Bristol, ch. 4.
Improvement Service (2008) available at: www.improvementservice.org.uk/collaborative-gain/ (accessed 20/11/2013).
Shaw, K. and Robinson, F. (2010) ‘UK urban regeneration policies in the early 21st century: Continuity or change?’,
Town Planning Review, 81(2): 123–150.
Stoker, G. (1998) ‘Governance as theory: Five propositions’, International Social Science Journal, 50(155): 17–28.

14.9 Funding and finance for regeneration

Key terms: regional development agencies; public–private partnerships; local enterprise partnerships;
Regional Growth Fund
The majority of funding for regeneration comes from public sector bodies such as central, regional
and local government, other regional, local and national bodies such as regional development agencies,
and via the European Commission. In addition, funding is also available from other bodies such as
the Heritage Lottery Fund. In 2007, approximately 80 per cent of grant aid available for regeneration
projects came from the public sector.
Sources of private sector finance for regeneration and economic development include banks, insur-
ance companies, and other lending institutions such as finance houses.
A number of different ‘pots’ of public sector funding are available, depending on the nature and scope
of the project. Funding can be the full funding of the project or funding of a large proportion of the costs,
e.g. site remediation works, which would otherwise make the project unviable for the developer.
 Regeneration 363
Single pot funding was distributed and administered by the nine regional development agen-
cies (RDAs) (now defunct) across England, whose remit was to provide funding to encourage
economic development and regeneration in the areas of business efficiency, investment, competi-
tiveness, employment, skills and sustainable development. The funding came from contributing
central government departments, which at the time were Department of Trade and Industry (DTI),
Department for Communities and Local Government (DCLG), Department for Education and
Skills (DES), Department for Environment, Food and Rural Affairs (Defra), and Department for
Culture, Media and Sport (DCMS). Each RDA was allocated a set annual budget, determined by
economic need and performance, which varied region by region. These budgets were significant: in
2007/8 the RDAs’ total budget under the Single Programme was £2.2 billion which was available
to the RDAs to spend to meet regional priorities identified in their regional economic strategies and
corporate plans, such as promoting business growth, development and innovation, brownfield land
reclamation, learning and skills, infrastructure, communities, sustainability, culture, and regional
promotion and tourism.
Public sector grants are usually awarded as one-off single payments towards a project that has a robust
business case that meets defined criteria and provides evidence that the project will deliver required out-
puts, outcomes and impacts, such as creating jobs and businesses. In addition, a condition of many public
sector grants is that the project must secure ‘match’ funding from another funding body, or from the pri-
vate sector. This ‘leverage’ of additional finance demonstrates ‘added value’. Another typical condition of
a public sector grant is that the award must be spent within a specified timescale, usually within a financial
year, so that the proposed outcomes and impacts are delivered and realised. Depending on the nature
of the proposed project, other conditions might include a demonstration of ‘deliverability’; strategic fit
with existing policy and priorities; and quality and sustainability considerations such as environmental
sustainability, quality of place and social impacts. Overall, proposed projects must demonstrate that they
are fulfilling a specific economic need and delivering economic impact.
Common public sector funding mechanisms are private finance initiative (PFI) and public–private
partnerships (PPP). Both are used by the public sector to develop buildings that will deliver services.
PFI was introduced in the UK in 1992 as a mechanism for procuring public buildings without the
need for public borrowing to support the capital cost. The private sector therefore develops the build-
ing on behalf of the public sector, which then pays back the costs as a revenue stream over the term
of the agreement. Many services such as hospitals, schools and prisons have been delivered in this way,
with the public and private sectors entering into a PPP, whereby the private sector contributes its
expertise and funding in return for guaranteed repayments from the procuring public body. The public
sector is therefore effectively paying a rate of interest relative to the capital cost of the building.
Since the onset of the credit crunch in 2007 and subsequent recession, public sector funding for
regeneration has been significantly reduced following central government efficiency savings and austerity
measures that were put in place to stabilise the economy. The removal of the regional tier of govern-
ment and the demise of the regional development agencies and other public sector funding bodies and
the move towards ‘local’ policy has meant that traditional public sector funding for regeneration projects
has all but disappeared. This, in addition to the lack of finance available from banks and other lending
institutions for development and regeneration has meant that new mechanisms of funding and finance
have to be considered. The government has responded to this by giving local authorities more power
to support growth through development by shifting the focus of regeneration away from a subsidised
regional strategy to a more local and independently financed model. Public sector funding is now being
channelled through a series of programmes that are designed to lever in private sector investment, which
is seeing a move to more innovative and collaborative methods of funding and finance. New mechanisms
include Local Enterprise Partnerships (LEPs), Growing Places Fund, Regional Growth Fund, European
funding, tax incremental financing (TIF) and the Homes and Communities Agency (HCA). From the
private sector, finance is becoming available through, for example, traditional equity funds setting up debt
364 Clarke, Furness, Greenhalgh et al.
funds or moving into bridging finance or senior debt; however, it is still extremely restricted due to the
perceived high risk of property-led regeneration by private sector lending institutions.
Some of the current available funding mechanisms for regeneration are summarised below.

LEPs and the Regional Growth Fund

LEPs were created under the Localism Act 2011 to encourage the public and private sectors to
come together to influence and shape local policies for economic development based on local need.
Established LEPs are able to bid for funding from the Regional Growth Fund allocated by central gov-
ernment to stimulate the economy within LEP areas. £1.4 billion was allocated in the first round with
a further £1 billion allocated in the second. In addition, the Growing Places Fund (GPF) has allocated
£730 million to be used for transport and infrastructure improvements.

European funding
Funding for projects has been allocated by the Joint European Support for Sustainable Investment in
City Areas (JESSICA) and the European Regional Growth Fund. In addition, the European Investment
Bank offers investment via JESSICA Urban Development Funds that have been established in the UK.

Tax incremental financing

TIF enables local authorities to keep up to 50 per cent of increases in business rates that result from a
development to invest in the local area, or to borrow against, rather than those rates being transferred
back to central government to be redistributed. TIF ‘zones’ therefore act as a mechanism for local
authorities to lever in additional funding.

Homes and Communities Agency

The HCA has now taken control of the land and property portfolios of the disbanded RDAs, amount-
ing to approximately 10,000 hectares of brownfield land. It has a £550 million fund under the Get
Britain Building programme to kick-start stalled residential development sites across the UK. In addi-
tion, there is a £225 million ‘large sites’ fund to stimulate development of unviable sites, and a £190
million public land infrastructure fund.

Private sector investment

Under the RGF programme, the private sector is expected to ‘match’ public sector funding and pro-
vide up to 70 per cent of the total investment required to deliver the economic, social and structural
improvements identified. Pension funds are now starting to invest in lower risk infrastructure and
regeneration projects, mainly via debt, mezzanine and bridging finance, and by working collabora-
tively with local authorities and LEPs; the private sector is assisting in refinancing regeneration and
development projects that were previously seen as unviable and undeliverable.

Further reading
BPF (2007) ‘Funding regeneration – a guide to public sector grants’, available at: www.bpf.org.uk/en/files/bpf_
documents/regeneration/Funding_regeneration_final_printed_version.pdf (accessed 02/12/2013).
GVA (2013) Alternative Funding Development Spring 2013, available at: www.gva.co.uk/WorkArea/DownloadAsset.
aspx?id=15032394537 (accessed 02/12/2013).
Isaac, D. O’Leary, J. and Daley, M. (2010) Property Development Appraisal and Finance, 2nd edn, Palgrave Macmillan,
Basingstoke, ch. 6.
 Regeneration 365
14.10 Brownfield land
Key terms: brownfield land; previously developed land; National Land Use Database
Transforming the vast areas of brownfield land that lie across the country is one of the biggest chal-
lenges collectively facing government, communities and businesses. Failure to recycle brownfield land
may potentially lead to further erosion of the countryside and natural resources; perhaps more impor-
tantly it will represent a missed opportunity to revitalise urban and rural areas blighted by centuries of
industrial activity (LGA, 2002).
Brownfield land comprises land or premises that have been previously used or developed and
are not currently fully in use, although they may be partially occupied or utilised. It may be vacant,
derelict or contaminated. Fundamentally, therefore, a site is not available for immediate and full use
without some intervention (Alker et al., 2000). For some, the term brownfield land is viewed as a
synonym for contaminated land, which ignores the potential for land to be derelict without being
contaminated; whereas other people use the term in a more generic way to mean non-greenfield.
More recently, the term ‘previously developed land’ (PDL) has gained some traction, defined as
land that was occupied by a permanent structure including the curtilage of the developed land and any
associated fixed surface infrastructure. The specific focus of this concept is vacant, derelict and under-
used PDL, which is regarded as land so damaged by previous industrial or other development that it is
incapable of beneficial use without treatment (ODPM, 2004).
There have been many initiatives aimed at reclaiming brownfield land, one of the earliest of which
was garden festivals, introduced in West Germany to help with post-war reconstruction. The first
Garden Festival was held in Hanover in 1951, and the concept has since been adopted in the UK,
Japan, Singapore and Canada. Another common approach is a grant regime that subsidises the cost of
reclaiming derelict and contaminated land, for example the Derelict Land Grant, which operated in
England in the late twentieth century. A third approach is to create quasi-public agencies that pursue
brownfield reclamation and development, for example development corporations and regeneration
agencies that were tasked with bringing brownfield land back into productive use.
Historically, derelict land surveys were conducted to record the quantity, location and condition
of brownfield land in England and Wales by the Department of the Environment. In 1998, English
Partnerships established a National Land Use Database (NLUD) to provide data on vacant and der-
elict sites and other previously developed land and buildings that may be available for development in
England and provide statistics on the number, type and planning status of previously developed land.
NLUD recorded that, in 2009, there were 61,920 ha of PDL in England, down 3 per cent from
2008, an estimated 33,390 ha (54 per cent) of which were vacant or derelict; the remaining 28,530
ha were in use but with potential for redevelopment (HCA, 2011). Disappointingly, NLUD surveys
ceased after 2009, when English Partnerships merged with the Housing Corporation to form the
Homes and Communities Agency; the Scottish Derelict and Vacant Land Survey continues.

Further reading
Alker, S., Joy, V., Roberts, P. and Smith, N. (2000) ‘The definition of brownfield’, Journal of Environmental and Planning
and Management, 43(1): 46–49.
HCA (2011) Previously Developed Land that may be Available for Development, HCA, Warrington.
LGA (2002) Something Old, Something New: A report of the LGA Inquiry into the Development of Brownfield Land, LGA,
London.
ODPM (2004) Previously Developed Land that may be Available for Development, ODPM, London.
366 Clarke, Furness, Greenhalgh et al.
14.11 Contaminated land
Key terms: Environmental Protection Act Part IIA; polluter pays; suitable for use; pollutant linkage;
remediation
All industrial societies have, in the past, allowed land to become derelict and contaminated. Various
industrial practices, such as industry, mining and waste disposal, have led to toxic or noxious substances
being in, on or under land. Land in this condition can pose a serious threat to health and the environ-
ment, including pollution of water (DETR, 2000).
Land is considered to be contaminated if it contains substances in sufficient quantities or concentra-
tions that are likely to cause harm directly or indirectly to humans and the environment. Contaminated
land may give rise to statutory nuisance, contain unlawfully deposited regulated waste, cause pollution
of controlled waters, contravene environmental regulations or give rise to private nuisance in common
law. It may typically require measures to be undertaken in order to make it suitable for reuse.
The UK Government introduced a legislative framework to address the country’s legacy of derelict
and contaminated land. The primary piece of legislation is the Environmental Protection Act 1990
which established the principle of ‘polluter pays’ and the ‘pollutant linkage’ test. In addition, a ‘suit-
able for use’ approach has also been introduced that seeks to balance the policy goal of remediating
contaminated land with concerns about the prohibitive cost of doing so.
The planning regime in the UK establishes procedures for dealing with contaminated land in rela-
tion to the future use of land but is a voluntary process with a vague definition of unacceptable harm.
In contrast, the Part IIA regime deals with contamination in relation to current uses of land, adopting a
clear statutory definition of contamination and significant harm and imposing a compulsory regulatory
process. Part IIA of the EPA 1990 follows the ‘polluter pays principle’ such that the cost of reme-
diation will normally lie with the person(s) who caused or knowingly permitted the contamination.
Therefore, any person, organisation or business might be liable to remediate contaminated land if they
caused or knowingly permitted the contamination. However, if this person(s) cannot be identified
then the owner or occupiers of the land will be responsible. Lenders, investors, insurers and profes-
sional advisers are normally excluded from liability for remediation (DETR, 2000).
Part IIA of the Environmental Protection Act 1990 charges local authorities with identifying land
in their area that is contaminated, determining what needs to be done by way of remediation and
serving remediation notices on individuals or companies that the law deems to be responsible for that
contamination. It recognises that harm to health and the environment arises not from the mere pres-
ence or contaminating substances in land, but from their movement along a ‘pathway’ to where they
can cause damage to a ‘receptor’. S78A defines harm as being to the health of living organisms or other
interference with ecological systems of which they form part and, in the case of humans, includes harm
to their property.
The principle underlying Part IIA is that land should be decontaminated to a level that is suitable
for the use for which the land is intended. Contaminating substances should therefore not be ignored
when there is a change in the use of land because the ‘acceptable’ level of contamination is different
depending on the end use. This common sense approach was adopted following experience in the
US and the Netherlands, where the ‘clean as green’ approach of restoring land to its pre-development
condition was found to be prohibitively expensive in the long term.
Remediation is a process that should address the issues identified by desk top study and site inves-
tigation. It addresses risks arising from a pollutant linkage, makes the site suitable for its actual or
intended use and assists with the preparation of the site for general development. It is the process by
which the risk of harm or pollution arising from substances in land is eliminated or reduced to an
acceptable level. This may take place by reference to a particular use of land, or alternatively, to all
possible uses of that land (RICS, 2010).
 Regeneration 367
Remediation may comprise:

● removing the substance or substances from the source, thus rendering it harmless;
● severing the ‘pathway’; or occasionally by
● removing the receptor or reducing its vulnerability.

The choice of remediation technique will depend on the following factors: time, cost, ground con-
ditions, contamination risk, the nature of the development and actual or intended use, the need for
long-term environmental monitoring and residual risks.

Further reading
DETR (2000) ‘Contaminated Land’. Circular 02/2000, DETR, London.
HM Government (2012) ‘Environmental Protection Act 1990: Part 2 A – Contaminated Land Statutory Guidance’,
Defra, London.
RICS (2010) Contamination, the Environment and Sustainability: Implications for chartered surveyors and their clients, 3rd edn.
GN13/2010. RICS, London.

14.12 Gap funding

Key terms: grant funding; negative residual; state aid
Gap funding is a government or public sector grant to fund what is called the negative residual, which
is the difference between the cost and value of a property development project that is non-viable, e.g.
the costs outweigh the value, thus it would not go ahead without gap funding. For example, if the total
development costs (including land) of a development is £800,000 and its gross development value
is £1 million, the negative residual is £200,000 and the scheme will not progress as the developer is
making a loss. If a grant of £200,000 is made available to bridge the negative residual, together with a
reasonable allowance for the developer to make a profit, then the project may go ahead. Grants were
targeted at Assisted Areas where development viability was a problem, for example office and industrial
development in northern towns and cities. In locations with higher end values, where residual values
were positive then no grant would be needed even if it was available. In some instances a grant was
made available based on pessimistic end values but with a clawback arrangement so that if higher end
values were achieved on completion then some or all of the grant may be repaid. It is possible to cal-
culate a gearing or leverage ratio of public to private investment, which for the example above would
be 1 : 4 (£200,000 : £800,000).
Gap funding operated across the UK for over two decades, the first example of which was the
Urban Development and Urban Renewal Grants introduced in 1982, which were merged in 1988
to create City Grant, later transferred to English Partnerships in 1993 and renamed the Partnership
Investment Programme (PIP) which operated between 1994 and 1999.
The continued use of gap funding in the UK was thrown into turmoil in 1999 when the European
Commission classified PIP as state aid under Article 92 (1) of the Treaty of Rome. Their decision was
provoked by concerns that the grant regime was anti-competitive and had been used to bail out the
ailing Rover car plant at Longbridge. Despite the EC’s decision being regarded by many as perverse,
the Government decided to pull the PIP programme with immediate effect.
As a consequence of the decision there was a hiatus in physical urban regeneration activity in
England, with the loss of a significant level of public sector investment in property-led regenera-
tion with which to lever in greater levels of private investment, hampering the operation of the
newly established regional development agencies that had just inherited the grant programme from
English Partnerships. In response to the adverse decision, a number of alternatives to gap funding
368 Clarke, Furness, Greenhalgh et al.
were considered, which were to allow a modest level of funding in assisted areas up to the European
state-aid limits, pursue direct development funded by the public sector, revolving investment fund
or competitive procurement. Eight new EC approved schemes were launched in England, none of
which adequately replaced PIP, supporting as they did only 10 per cent to 20 per cent of schemes
previously qualifying for gap funding.
In 2007 a new regime was introduced to support investment to bring back into productive use land
or buildings that are derelict, contaminated, under-used or vacant and are suitable for use or conver-
sion for business purposes. In order to be eligible, the investment had to be on land situated within an
assisted area and owned by the prospective developer or by a relevant public body. The beneficiary of
the aid was the developer who owned the land on which the investment was to be made and the grant
was calculated with reference to the gap between the projected eligible costs of the initial investment
and the projected market value of the material assets.
Categories of eligible costs included:

● market value of the land;

● cost of preparing the land for development;
● cost of providing services and infrastructure;
● costs of constructing and refurbishing buildings;
● a development fee (developer’s profit);
● professional fees;
● reasonable costs of marketing and letting and disposing of units.

While the new scheme was similar in many ways to the original gap fund, the momentum of
the programme had stalled during the intervening seven years and the private sector had little
appetite to get involved in a time-consuming bureacratic process that offered relatively modest
levels of funding (due to State Aid limits). As a consequence, grant funding in the UK has all but
disappeared. The concept of gap funding is now regarded by many as an outmoded method of
regeneration funding, an addictive ‘fix’ that was administered to regions with weak and failing
economies. The new methods of regeneration funding, such as TIF business rates retention and
revolving infrastructure funds are now predicated on borrowing against the future uplift in values
facilitated by investment in infrastructure rather than the a public sector grant used to lever in
private sector investment.

Further reading
Department for Communities and Local Government (2007) ‘Regional Investment Aid Scheme for Speculative and
Bespoke Development’, Commission Regulation (EC) No. 1628/2006 on the application of Articles 87 and 88 of
the Treaty to national regional investment aid, DCLG, London.
European Commission (2006) State Aid Control and Regeneration of Deprived Urban Areas, DG Competition, Brussels.
House of Commons (2000), Environment Transport and Regional Affairs Committee – ‘The Implications of the
European Commission Ruling on Gap Funding Schemes for Urban Regeneration in England’, House of Commons,
London.
Needham, B., Adair, A., Van Geffen, P. and Sotthewes, M. (2003) ‘Measuring the effects of public policy on the
finances of commercial development in redevelopment areas: Gap funding, extra costs and hidden subsidies’, Journal
of Property Research, 20(4): 319–342.
Royal Institution of Chartered Surveyors (2000) Alternatives to the Partnership Investment Programme, RICS, London.
 Regeneration 369
14.13 Community engagement
Key terms: community; engagement terminology; the participation continuum; barriers to engagement
It is generally held within the context of public policy, irrespective of ideological belief, that engagement
with communities is a ‘good thing’. These communities can be ones of faith, interest, employment, educa-
tion, health etc. However within the policy of regeneration these communities are communities of place.
Engagement with communities in regeneration developed as a reaction to the top-down regenera-
tion initiatives of the 1970s and 1980s, typified by the UDCs. Centralised state-determined policy
decided how, where and in what form regeneration was to be delivered. These projects, certainly
in their early stages, offered very little to disadvantaged communities. Economically driven with an
agenda to transform areas physically, the needs of poorer communities were peripheral at best (Tallon,
2010). Post-1990, approaches to the role of community in regeneration began to undergo a change.
Policies such as City Challenge and the Single Regeneration Budget saw a shift away from a profes-
sionally dominated approach to delivering regeneration to one where the views of the community
were actively sought (Robinson et al., 2005).
The concepts involved in community engagement are, however, difficult to reach a consensus on
and a failure to do so can lead to policy failure.
Community as a concept is nebulous. Within the context of regeneration it is spatial, expressed at
the neighbourhood or estate level. However, policy makers would be wrong to assume that a com-
munity is homogenous, expressing one single viewpoint. Communities are made up of many differing
groups differentiated by age, household type and stage in the life cycle, tenure, economic status, faith,
ethnicity etc. This in itself can make reaching a consensus about issues and responses problematic.
The same can be said of the notion of engagement. There are a multitude of phrases that are used by
policymakers to describe interaction with communities. These phrases are often used in such a manner
that they often substitute for each other without recourse to their full meaning. There are numerous
issues that need to be considered to ensure the most appropriate form of engagement is used. Not least
of which is the question – what is the purpose of that engagement? Traditionally, consideration of
participation processes was around how to do it well. However, as community engagement began to
form a much more important element of regeneration policies, the debate was opened up to determine
what was the motivation behind the decision to engage? Summarised briefly, the three rationales are:

● maintaining a consensus approach to ensure decisions are within the status quo (organisation led);
● bargaining to ensure decisions are agreed collectively but are contained within what is considered
to be acceptable change (balance in decision making); and
● increasing the consciousness of different groups to agree collective priorities and achieve radical
change (community led) (Hague, 1990).

Determining what the rationale is behind engagement with the community will determine where on
the participation continuum any engagement will sit (Figure 14.13.1).

Consultation Involvement Empowerment Control

Organisation led Decision-making balance Community led

Figure 14.13.1 The participation continuum.

370 Clarke, Furness, Greenhalgh et al.
Emphasis post-1997 in terms of community engagement and regeneration saw a much greater
emphasis on community governance which saw a move towards the participation of residents in deci-
sion making about their community. Communities that could articulate their concerns, determine
the most appropriate outcomes, ensure effective implementation and see successful change were seen
as being highly empowered (Robinson et al., 2005). This was demonstrated in the New Deal for
Communities programme and more recently in current ideas around community self-determination,
i.e. the localism agenda. However, community engagement at this level of sophistication, in the form
of formal partnerships and active citizenship, has many difficulties to overcome.
Individuals from communities who find themselves in formal partnerships are expected by the
other partners to represent the community. However, as the very nature of community is varied they
find themselves with an impossible task that is limited by their own experiences and aspirations. The
community themselves expect their varying views to be articulated but time and support to allow for
meaningful interaction between representatives and the community is often lacking (JRF, 2000). The
scale of interaction in formal partnerships can be daunting with time-consuming demands being placed
on a few individuals, leading to the breaking of ‘community stars’ or their absorption into the part-
nership’s agenda (JRF, 2000). There is a steep learning curve for what amount to unpaid volunteers
and the pressure for results, particularly among local politicians, can negate the process of meaningful
engagement. Lack of representativeness is often cited as a failing in regeneration schemes that causes
delays but adds little value to the process or its outcomes (Ball, 2004).
Support can be put in place for those actively involved, such as training, skills development, men-
toring etc. Engagement with the community over regeneration initiatives needs to be multifaceted to
ensure all views are heard. Expectations of and on community representatives on partnerships needs to
be determined, collectively at the outset of any regeneration project.

Further reading
Ball, M. (2004) ‘Cooperation with the community in property led urban regeneration’, Journal of Property Research,
21(2): 119–142.
Hague, C. (1990) ‘The development and politics of Tenant Participation in British Council Housing’, Housing Studies, 5: 4.
JRF (2000) Community Participant’s Perspectives on Involvement in Area Regeneration Programmes, Joseph Rowntree
Foundation, York.
Robinson, F., Shaw, K. and Davidson, G. (2005) ‘“On the side of Angels”: Community involvement in the governance
of neighbourhood renewal’, Local Economy, 20(1): 13–26.
Tallon, A. (2010) Regeneration in the UK, Routledge, Abingdon.

14.14 Gentrification and abandonment

Key terms: gentrification; abandonment; displacement; polarisation; urban renaissance

Gentrification is the transforming of a working class or vacant area of the central city into a middle class resi-
dential or commercial use.
(Lees et al., 2010)

It occurs when low income residents of inner-city areas are replaced by new higher income residents,
from other areas of the city, in a spatially concentrated manner. The definition hinges on economic,
social and population changes that cause physical changes to neighbourhoods. It should be noted that
while physical change may be the most apparent manifestation of gentrification, it is not essentially
part of the process, but more of an end result. Gentrification involves the exploitation of the economic
value of real estate and the treatment of local residents as objects rather than subjects of upgrading.
 Regeneration 371
Even though population movement is a common feature of cities, gentrification is specifically the
replacement of a less affluent group by a wealthier social group (Berg et al., 2009).
Established models of urban land use, such as Burgess’s Concentric Zone and Hoyt’s Sector
Theory, recognise that residential land use is segregated in terms of income and social class that
change over time through a process of invasion and succession due to economic and population
growth. Both theories describe how inner city areas are abandoned by high income households
and infilled, usually at high density, by lower income housing. Conversely, gentrification may be
regarded as the reverse of this process, whereby high income residents re-invade previously aban-
doned inner city areas.
Abandonment occurs when owners and occupiers of property have no incentive for continued
ownership or occupation and are willing to surrender their title, without compensation, due to the
absence of any effective demand for (re)use (paraphrasing Marcuse, 1985). As a result, property rental
and capital values collapse due to there being little or no demand for property. This is often accom-
panied by stigmatisation of an area resulting in blight (link to economic theory?). Gentrification,
conversely, results in rapid increase in land and property values which is to the detriment of residents
on low incomes who are unable to afford inflated rents and values and become displaced.
The benefits of gentrification are that it usually improves the quality of housing in an area,
revitalising areas of the city and increasing the tax base though domestic rates and local taxation
on economic activity. It is regarded by some as a means of solving social malaise, not by provid-
ing solutions to unemployment and poverty (see Concept 14.1) but by transferring or displacing
problems elsewhere in a city and is sometimes mistakenly regarded by policymakers as a solution to
abandonment.
The reciprocal relationship between gentrification and abandonment may be explained by adopting
a dual market theory of housing, in which gentrification happens in one market and abandonment in
another. Essentially they are two sides of the same coin, sometimes existing side by side, and are mutu-
ally reinforcing, each contributing to and accentuating the other, as populations move in opposite
directions. Thus, gentrification results in displacement and social polarisation on both sides, and in a
vicious circle in which low income groups are continuously under pressure of displacement and high
income groups seek to wall themselves within gentrified neighbourhoods. Far from being a cure for
abandonment, gentrification worsens the process (Marcuse, 1985).
The role of real estate speculation in the gentrification is significant and needs to be acknowledged.
Property investment speculation is a strong accompaniment and necessary ingredient to the process of
gentrification, and the behaviour of speculators and investors in the property market generally is the
single most sensitive indicator of the type of change that is likely to occur in a neighbourhood.
Notably, despite reading like a gentrifiers’ charter, the term ‘gentrification’ is never used in either
the 1999 Urban Task Force Report or the 2000 Urban White Paper (see Concept 14.6), which is
remarkable, given the fact that the many of the principles and characteristics of urban renaissance
are consistent with those typically associated with that of gentrification. The UTF report not only
heralded the urban renaissance in England but, arguably, launched a new phase of state-led gentrifi-
cation in English towns and cities, resulting in a doubling of apartment building in England between
2001 and 2005. According to the DCLG, the number of apartments constructed in England rose
from a quarter of all new dwellings in 2001–2, to half of all new dwellings in 2005–6, since when
apartment construction has returned to around a quarter of new dwellings by 2012–13, mainly as
a consequence of the credit crunch and collapse in housing development in the UK during the
subsequent recession. Despite increased supply of residential units in British towns and city centres,
problems of housing affordability and access, which continue to characterise housing markets in
many parts of the UK, have been exacerbated by the capping in housing benefit payments, effec-
tively pricing out low income groups from more expensive residential areas in towns and cities,
resulting in increased social polarisation.
372 Clarke, Furness, Greenhalgh et al.
Further reading
Berg, J., Smith, N., Breznik, M. and Uitermark, J. (2009) Houses of Transformation: Intervening in European gentrification,
NAi Publishers, Rotterdam.
Communities and Local Government (2013) ‘House Building: March Quarter 2013, England’, Housing Statistics
Release, DCLG, London.
DETR (2000) Our Towns and Cities – the Future: Delivering an urban renaissance, DETR, London.
Lees, L., Slater, T. and Wyly, E. (2010) The Gentrification Reader, Routledge, Abingdon.
Marcuse, P. (1985) ‘Gentrification, abandonment and displacement: Connections, causes and policy response in New
York City’, Urban Law Annual. Journal of Urban and Contemporary Law, 28: 195–240.
Urban Task Force (1999) Towards an Urban Renaissance: Final report of the Urban Task Force, Spon, London.

14.15 Social enterprise

Key terms: social mission; corporate social responsibility; business model; regeneration
Social enterprises are businesses. They trade, are revenue generating, make a profit and pay rea-
sonable salaries to staff. They do not function purely through volunteering, the receipt of grants
or donations. However, social enterprises are businesses with a particular social mission. That
mission is to ensure, as a consequence of their activities and income generation, that their clearly
stated social and environmental objectives are met. Social enterprises are not to be confused with
the corporate social responsibility strategies adopted by many private sector businesses. In this case
businesses engage with social and environmental actions to minimise any negative impacts and to
generate positive images of themselves as a company. Their responsibilities are primarily to their
investors.
Social enterprise businesses are set up to make a difference and they do this through reinvestment
of surpluses in accordance with their social mission. They achieve this in lots of different ways: creat-
ing jobs for those who cannot get into mainstream employment; reinvesting in community projects;
protecting the environment; providing vital services.
Social enterprise businesses are varied in terms of both their activities and the organisational model
they adopt. Social enterprises can be:

● community interest companies (CICs) – a legal form especially created for the use of social enter-
prises to ensure that social enterprise businesses cannot deviate from their social mission or be sold
for profit;
● registered with the Industrial and Provident Society (IPS) – this is the model usually adopted by
cooperatives and mutual societies. This business model ensures that the social enterprise is demo-
cratically controlled and all members are actively involved in decisions;
● a company limited by guarantee (CLG) – this is the most common legal model used by busi-
nesses. Social enterprise businesses often choose to use this because it allows for flexibility in terms
of how the organisation is governed and also it can make accessing finance simpler. However, a
social enterprise business would have to include details of its social mission and policy regarding
reinvestment of profits in its memorandum and articles of association;
● charities – some social enterprise businesses will, as part of their organisation’s structure, have
a charitable arm. Registration with the Charities Commission places certain restraints on an
organisation’s activities; however, it does provide an opportunity for social enterprise and other
businesses to take advantage of different forms of tax relief. Where retention of surpluses is essen-
tial to the success of a social enterprise, a charitable arm could assist.
 Regeneration 373
There are many different types of businesses operating as social enterprise companies. They also oper-
ate at local, regional, national and international levels. They can produce goods or deliver services. As
a consequence there are many different types, from those that are instantly recognisable such as:

● Divine Chocolate – 45 per cent of the business is owned by cocoa growers.

● The Big Issue – works to support vendors who are homeless, vulnerable because of their housing
or in danger of becoming homeless.
● The Eden Project – works on projects worldwide that bring about social, economic and environ-
mental regeneration.
● Jamie Oliver’s Fifteen – offering training and employment to unemployed young people.

To those that are less well known outside their local communities:

● The Salmon Youth Centre, Bermondsey – delivering an extensive range of activities aimed at
challenging young people to widen their aspirations.
● Growing Well, Kendal – provides local people with mental health problems support in a
farming environment.
● Greenworks, London – recycles surplus office furniture and sells it at reduced costs to local
small businesses.

Social enterprise businesses have contributed to regeneration projects in a number of ways; 39 per cent
of social enterprises are concentrated in the most deprived communities (13 per cent standard small
and medium enterprises – SMEs) (Social Enterprise UK, 2011). Social enterprise businesses can sup-
port regeneration objectives through the creation of employment, the generation of local economic
activity and the provision of services and facilities. Home Baked in Anfield, Liverpool is both a com-
munity land trust (CLT) that aims to provide affordable homes for local people through its CLT, and
a cooperatively run bakery offering training and job opportunities, again for local people. This contri-
bution to the local economy of disadvantaged communities is significant. Social enterprise businesses
when asked in 2011 about their economic development in a time of poor or non-existent growth in
the general economy reported the following:

● 58 per cent of social enterprises reported growth last year (28 per cent SMEs);
● 57 per cent of social enterprises predicted growth next year (41 per cent SMEs) (Social Enterprise
UK, 2011).

In addition, social enterprise businesses can also be a conduit through which regeneration occurs. An
example is SKINN based in what was the industrial heartland of Sheffield. SKINN is a not for profit
organisation that is working with local residents and businesses to improve the area of Shalesmoor,
Kelham Island and Neepsend. Faced with multiple issues around the environment, public space and
negative developments in the area, SKINN came together to provide a coordinated approach to the
strategic planning of regeneration in the area.

Further reading
Social Enterprise UK (2011), available at: www.socialenterprise.org.uk (accessed 20/11/2013).
374 Clarke, Furness, Greenhalgh et al.
14.16 Area-based initiatives
Key terms: regeneration; trickle down; neighbourhood renewal; Urban Development Corporations;
New Deal for Communities; multiple deprivation
Area-based initiatives (ABIs) are an approach where regeneration policies are brought to bear on a
defined and specific area of a conurbation, city or town. The area in question will typically exhibit
high levels of multiple deprivation, usually the result of underlying adverse economic, social and envi-
ronmental conditions. ABIs first came to the fore through the Urban Programme that was launched
in 1968 but only became mainstream government policy in the 1980s under Margaret Thatcher’s
Conservative administration, driven by a dominant neoliberal ideology. They believed that finite
resources would be better spent on spatially, financially and time constrained initiatives, concen-
trated on specific areas of need rather than being thinly spread across a region or urban area. Such an
approach was also politically motivated as it allowed the usurping of usually Labour controlled (inner)
city authorities by QUANGOs that were imposed by and accountable to Central Government rather
than the local electorate. The approach was closely linked to the ‘trickle-down’ paradigm which sug-
gested that the positive benefits generated by ABIs would not only ‘trickle down’ to the most needy
and deprived members of society but would also spill over into neighbouring areas, creating a virtuous
trickle down of wealth and opportunities.
Area-based initiatives have been developed under a series of guises over the past four decades;
examples include the Urban Programme, Urban Development Corporations, City Challenge, Single
Regeneration Budget Challenge Fund and New Deal for Communities. Often the financial approach
to regeneration pursed by ABIs is that of ‘pump priming’, using public sector resources up front, to
lever in private sector investment often through infrastructure and building projects. Most ABIs are
time limited but the scale of projects involved in ABIs can range from the refurbishment of a single
building to the redevelopment a whole neighbourhood. ABIs have also been employed to deliver
flagship regeneration projects such as iconic cultural attractions, business and industrial parks, retail
and leisure centres, and heritage and conservation areas, all of which seek to enhance the economic
competitiveness and attractiveness of an urban area.
Tony Blair’s New Labour government, elected in 1997, launched a plethora of ABIs in the form
of ‘action zones’ and neighbourhood initiatives, across a range of sectors including health, education,
crime, employment, in an attempt to eradicate social exclusion, the most prominent of which was
New Deal for Communities. NDC was a well-resourced ABI that aimed to tackle inequalities faced
by 39 of the poorest urban areas in England over a 10-year time frame. It should be noted that previ-
ous ABIs were often awarded through a competitive bidding process, e.g. City Challenge and Single
Regeneration Budget (SRB); however, New Labour chose to use ‘need’, as represented by the Index
of Multiple Deprivation, as the key determinant of which areas would receive resources.
One criticism of ABIs is that they often simplify the complex process of regeneration by focusing
on hard (physical) outputs and ignoring the softer, more complex aspects of holistic regeneration;
for example, many of the property-led regeneration initiatives of the 1980s which resulted in iconic
flagship projects that did little to relieve deep seated deprivation and poverty – trickle down does not
work! Some early ABIs were criticised for lack of engagement with the wider community and, under
New Labour, the complexity and lack of coordination between individual ABIs was highlighted as a
failing. By 2010, when the Coalition Government came to power, most ABIs were reaching expiry,
but the Coalition chose to speed up the process under the auspices of debt reduction and austerity.
Subsequently, a report by the Work Foundation (2012) reported that for the first time in 40 years
there would be no ABIs in England tasked with reversing decline in some of England’s most deprived
neighbourhoods.
 Regeneration 375
Further reading
CLES (2010) ‘Area based initiatives – do they deliver?’, available at: www.cles.org.uk/wp-content/uploads/2011/01/
Area-Based-Initiatives-do-they-deliver.pdf (accessed 20/11/2013).
Lawless, P. (2004) ‘Locating and explaining area-based urban initiatives: New deal for communities in England’,
Environment and Planning C: Government and Policy, 22: 383–399.
Matthews, P. (2012) ‘From area-based initiatives to strategic partnerships: Have we lost the meaning of regeneration?’,
Environment and Planning C: Government and Policy, 30(1): 147–161.
Shaw, K. and Robinson, F. (1998) ‘Learning from experience? Reflections on two decades of British urban policy’,
Town Planning Review, 69: 49–63.
Work Foundation (2012) People or Place? Urban policy in the age of austerity, Work Foundation, Lancaster.

14.17 Tax incremental financing

Key terms: finance; investment; regeneration; property development; infrastructure; business rates
Tax incremental financing (TIF) is a financing tool that allows local authorities to borrow against
the predicted future growth in local business rates arising from a new development. This money is
used to fund the infrastructure improvements and enable the development scheme to proceed. TIF
is therefore a way for the public sector to fund infrastructure investment, to drive regeneration and
unlock economic growth, by borrowing against the future additional tax revenues that the infrastruc-
ture investment unlocks. TIF is thus a form of PPP, based on the premise that in areas affected by
blight, property taxes tend to be relatively low. When an area is redeveloped, property values rise and
commercial activity increases, which causes an incremental increase in the tax revenues generated. In
particular, TIF focuses on improving infrastructure in blighted areas to facilitate new development and
increase property values. In essence, it is a mechanism of paying for growth with growth.
TIF originated in the USA in the 1950s and its use grew rapidly in the 1980s at a time when federal
government funding for redevelopment was being cut and responsibility for urban policy was being
transferred to lower-level government. In the UK, enthusiasm for TIF has grown in the prevailing
post-credit crunch economic conditions.
Two preconditions are typically required to ration its use:

1 Blight test: demonstration that urban regeneration is required in order to prevent or remove
‘blight’. US cities have their own statutory criteria of what constitutes a ‘blighted’ area, such as the
presence of unsafe buildings, prevalence of depreciated property values, environmental contami-
nation and inadequate infrastructure.
2 ‘But for’ test: demonstration that private funds are insufficient and the development would not
reasonably be anticipated or realised without the adoption of the TIF.

TIF schemes should therefore only be approved in situations where private sector developers have
deemed a project viable were it not for the cost of infrastructure provisions. By implication, proposals
deemed unviable for a range of issues as well as infrastructure problems, would not acquire TIF status.
Other preconditions could include an assessment of value for money, that the scale and quantum of
investment should be material to the local authority and that private sector investment would be lever-
aged through the deployment of TIF.
There are three financing models employed by TIF schemes:

1 Local authority prudential borrowing powers – in the UK this would be from the Public Works
Loan Board.
2 Municipal bonds – this involves local authorities issuing bonds that are sold to the capital markets
to raise money to pay for infrastructure.
376 Clarke, Furness, Greenhalgh et al.
3 ‘Pay as you go’ developer financing – this involves no upfront borrowing by the local authority;
instead, the private development company pays for all the infrastructure costs up front and then is
repaid by the local authority using the uplift in taxation.

With core funding for regeneration in England only a third of what it was a few years ago, and the
Coalition Government pursuing a localism agenda that sees responsibility for urban regeneration resid-
ing with local authorities and LEPs, TIF may be the most effective way of using public finances to
encourage urban regeneration schemes at a time when developers and developments are suffering from
a chronic lack of finance.

Further reading
Core Cities Group and British Property Federation (2010) A Rough Guide to Tax Increment Financing, CCG and BPF,
London.
Greenhalgh, P., Furness, H. and Hall, A. (2012) ‘Time for TIF? The prospects for the introduction of tax increment
financing in the UK from a local authority perspective’, Journal of Urban Regeneration and Renewal, 5(4): 367–380.
Hutchinson, N., Liu, N., Adair, A., Berry, J., Harran, M. and McGreal, S. (2012) Tax Increment Financing – An
opportunity for the UK?, RICS Research, London.
Squires, G. (2012) ‘Dear Prudence: An overview of tax increment financing’, Journal of Urban Regeneration and Renewal,
5(4): 356–379.
15 Residential property
Julie Clarke, Rachel Kirk and Cara Hatcher

15.1 The private rented sector

Key terms: tenancies; rents; Local Housing Allowance; condition in the private rented sector; trends in
the private rented sector; yields
The private rented sector is defined as consisting of properties, owned by individuals or companies,
that are rented out for the purpose of making a profit from a wide range of different households from
across the socio-economic spectrum. The proportion of households whose head is classified as in a
professional or managerial role renting in the private sector has increased from 11 per cent in 1980 to
33 per cent in 2009. Conversely the proportion of skilled manual households fell from 19 per cent to
11 per cent over the same time period (Pawson and Wilcox, 2012).
There are different types of tenancies that exist in the private rented sector. The main tenancy types
are as follows:

● Regulated – a regulated tenancy gives a tenant greater protection from eviction than other private
sector tenancies. It applies to tenancies prior to January 1989.
● Assured – this is a legal tenancy that gives you the right to live in your accommodation for a
defined period of time. This may be a fixed term such as 6 months or a periodic tenancy that rolls
on and can be weekly or monthly. It came into effect in January 1989 and was the default tenancy
until February 1997.
● Assured shorthold – the majority of tenancies in the private sector are assured shorthold with a fixed
term of 6 to 12 months. This tenancy came into effect in February 1997.

Rents charged within the private sector are determined by the market – what a landlord believes a
tenant will pay. For those needing assistance with their rent payment a Local Housing Allowance is in
place to determine the amount of assistance available. Local Housing Allowance is set at the level of
the cheapest 30 per cent of private rents where the dwelling is located.
The condition of stock in the private rented sector is very variable. In 2010 over a third of pri-
vate rented dwellings, under the Housing and Health Safety Rating System were not deemed decent
(Pawson and Wilcox, 2012). This percentage had almost halved in the period from 1996 when it stood
at 62.4 per cent. However this lack of fitness is concentrated among long-term and more vulnerable
tenants; 54 per cent of long-term tenants live in dwellings with substantial long-term repairs needed
(CLG, 2011).
The number of private rented sector dwellings within the UK housing stock has undergone con-
siderable change over time. At the end of the First World War the private rented sector made up over
90 per cent of the housing stock of the United Kingdom. From that point on there had been, until the
turn of the century, a steady decline in the proportion of private rented dwellings (see Figure 15.1.1).
378 Julie Clarke, Rachel Kirk and Cara Hatcher
Since the start of the 2000s this downward trend has reversed so that by 2009 the percentage of dwellings
in England rented from the private sector reached 17.4 per cent (Pawson and Wilcox, 2012). The more
than doubling of the private rented sector between 1991 and 2011 can be explained by a number of factors:

1 Significant investment in the 1990s and early 2000s by institutional investors in the buy-to-let
market for rent to professional households. Willingness to invest is dependent on yields. The
scale of the yield available determines the willingness of institutional investors to invest in the
sector. Historically, yields have been seen as high because of the sustained rise in house prices.
However, the housing market downturn from 2007 saw the rates of yield diminish and, as a
consequence, the number of buy-to-let investors fell. Recent years however have seen, for
the reasons outlined in 3 and 4 below, increased demand for private rented properties and as a
consequence average gross income yields were averaging 5.8 per cent in 2012 (Daly, 2012).
2 The buy-to-let trend had stabilised by 2012 but there was still continued growth in the size of the
private rented sector. This can be attributed to the depressed housing market. Many home owners
are reluctant or unable to sell and so they have turned to renting their property as an alternative.
3 A further contributory factor is the reduced availability of mortgage products and a loan-to-value
ratio that has resulted in the need for larger deposits. This has, until April 2013, seen the number
of mortgage approvals and the number of first time buyers decline. A consequence of this has been
the rise of what the media has termed ‘generation rent’.
4 A final compounding factor in the growth of the private rented sector has been the stimulus for
demand created by a reduction in the number of new social housing homes for rent under the
Government’s National Affordable Homes Programme.

Further reading

100

90

80

70

60
Owner occupied
50
Private rented
40 Social housing
30

20

10

0
1919 1939 1953 1961 1971 1981 1991 2001 2011

Figure 15.1.1 Changes in the tenure of dwellings 1919–2009.

Source: Adapted from Holmans (2005: 143); ONS (2009).
 Residential property 379
CLG (2011) English Housing Survey 2009/10, Bulletin 4.
Daly, J. (2012) ‘Higher Yields Attract Investors’, Residential Property Focus Q2, available at www.savills.co.uk/
research_articles/141564/141008-0 (accessed 20/11/2013).
Holmans, A. (2005) Historical Statistics of Housing in Britain, Cambridge Centre for Housing and Planning Research, Cambridge.
ONS (2009) Social Trends: Housing, ONS, London.
Pawson, H. and Wilcox, S. (eds) (2012) UK Housing Review 2011/12, Chartered Institute of Housing, Coventry.
Rugg, J. and Rhodes, D. (2008) The Private Rented Sector: Its contribution and potential, University of York, York.

15.2 The social housing sector

Key terms: trends in the social housing sector; stock condition; Decent Homes Programme; house-
hold diversity
The social housing sector is defined as housing provided at below market rent on a secure basis to
households unable to meet their housing needs in the private sector. The ability to provide hous-
ing at sub-market rents is due to two factors: the provision of social housing is subsidised; and the
organisations providing and managing social housing are non-profit making. Landlords providing and
managing social housing include housing associations (also called Registered Providers), local authori-
ties and, on behalf of local authorities, arm’s-length management organisations (ALMOs).
Over the course of the last century the proportion of social housing stock has fluctuated greatly
from 11 per cent in 1939, peaking at 30 per cent in 1971 before declining to current levels of 18 per
cent (see Figure 15.2.1). The role of social housing has also changed. The reasons for this are varied.
The advent of the Right to Buy policy in 1980 and a move away from funding the development of new
council housing saw the beginning of a rapid decline in the number of council properties. By 2012, 1.77 mil-
lion council homes had been sold under the Right to Buy (Pawson and Wilcox, 2013). By 1991 the number
of council dwellings had reduced by a third to 19.8 per cent of total housing. This reduction was further
compounded when an increasing number of local authorities opted to transfer their housing stock to become
either new housing associations or to join an existing housing association. This was known as large scale stock
transfer and was motivated primarily by a desire to invest in existing stock and develop new homes.
By 2011 local authorities owned only 7.6 per cent of the properties in the United Kingdom. This
contrasts with the growth of housing associations from a starting point of owning 1 per cent of proper-
ties in 1939 to owning 10 per cent of the housing stock in 2011. This increase, gradual at first, gained
in momentum from 1974 when housing associations begin to receive substantial government funding
in the form of Housing Association Grants to build new homes. Despite reduction in grant levels over
subsequent years, the vast majority of new social housing starts are housing association. In 2004/5
housing associations accounted for all but one hundred of the 19,070 social housing new build starts.
By 2011/12 although the number of local authority new starts had reached 2,470, housing association
new build was 33,410. The formation of a coalition government in 2010 saw the capital programme
for the National Affordable Homes Programme reduced by 63 per cent. Government funded contri-
butions to the provision of social housing reduced to approximately 20 per cent of build costs with the
remainder being funded through reserves or private sector borrowing (Pawson and Wilcox, 2013).
The condition of social housing stock has improved significantly since the introduction of the
Decent Homes Standard in 2000. In 1996 non-decent homes in the social sector accounted for 52.6
per cent of the stock. This figure had fallen to 20 per cent by 2010 (Pawson and Wilcox, 2012). The
programme of Decent Homes investment aimed to ensure that by 2010 all properties in the social
housing sector met the following:

● the statutory minimum standard for housing;

● a reasonable state of repair;
● reasonably modern facilities and services; and
● a reasonable degree of thermal comfort.
380 Julie Clarke, Rachel Kirk and Cara Hatcher
30

25

20

15 Housing association
Local authority
10

0
1919 1939 1953 1961 1971 1981 1991 2001 2011

Figure 15.2.1 Changes in the tenure of dwellings 1919–2011.

Source: Adapted from Holmans (2005: 143); Pawson and Wilcox (2013: Table 17b).

The last three decades have seen a significant change in the characteristics of tenants of social housing.
The diversity of households within the social housing sector has decreased since the 1970s. A long-
term characteristic of those households leaving the sector has been for them to be in employment
and in the 25–45 age group (Perrie and Capie, 2008). The proportion of households who are classed
as economically inactive renting from the social housing sector has increased, from 47 per cent in
1980 to 62.5 per cent in 2009. Conversely the number of households whose head is classified as in a
professional or managerial role has fallen from 5 per cent in 1980 to 1 per cent in 2009 and for those
classified as skilled manual from 23 per cent in 1980 to 5 per cent in 2009 (Pawson and Wilcox, 2013).
Social housing has become a tenure characterised by a concentration of younger and older households,
economic inactivity and low incomes. This residualisation of the tenure has, as a consequence, con-
centrated households with multiple issues into concentrated geographic locations.

Further reading
Holmans, A. (2005) Historical Statistics of Housing in Britain, Cambridge Centre for Housing and Planning Research,
Cambridge.
ONS (2009) Social Trends: Housing, ONS, London.
Pawson, H. and Wilcox, S. (eds) (2012) UK Housing Review 2011/12, Chartered Institute of Housing, Coventry.
Pawson, H. and Wilcox, S. (eds) (2013) UK Housing Review 2013, Chartered Institute of Housing, Coventry.
Perrie, J. and Capie, R. (2008) Who Lives in Social Housing?, CIH/Housing Corporation, Coventry.

15.3 Owner occupation

Key terms: freehold; leasehold; flying freehold; owner occupation; first time buyers
Owner occupation can be simply defined as a property in which the owners reside. The average num-
ber of current owner occupiers in the UK is 64 per cent (ONS, 2013). London, however, has a current
owner occupier rate of only 49.6 per cent (ONS, 2013).
There are a variety of properties available for owner occupation within the residential sector includ-
ing houses, flats and bungalows. These can be owned freehold or leasehold. A fee simple absolute in
 Residential property 381
possession, commonly known as a freehold, refers generally to a house or bungalow that can be owned
for an indefinite period of time and can grant the ownership to their next of kin into perpetuity. The
owner occupier also has the definitive right to alter their property without having to negotiate with
a landlord. A flying freehold is a less common type of ownership but readily occurs in Right to Buy
properties whereby an owner occupier may share the common rights to a shared access, for example.
This will be explored later in other forms of occupation.
A leasehold property refers to a property that is bound or held by the terms of a legal document,
referred to as a lease. This document is drafted to include the relevant restrictions and covenants on
a property. Generally, flats and apartments are held under such leases comprising of 99 years or 125
years. In terms of owner occupation of a leasehold property there is less freedom to alter and reside
in the property without due consideration of others and importantly the terms of the lease. In some
cases, a house can be held under a leasehold restriction. In many cases, an owner occupier will attempt
to purchase the freehold, at a premium, from the landlord. If the landlord wishes to dispose of the
freehold they must provide the leaseholder(s) with the first right of refusal whereby they have the right
to purchase the freehold.
In terms of owner occupation rates in England and Wales, there has been a significant decline
in owner occupation via a mortgage since 2001. There are a variety of reasons why this may have
occurred including inflated house prices, restrictions on mortgage/bank lending and a stark reduction
in wages. This has subsequently led to a surge in demand for rental properties rather than owner occu-
pation. The changing situation is illustrated in Figure 15.3.1.
As illustrated in Figure 15.3.2, there is a striking reduction in first time buyers in occupation in the
UK. This will ultimately have an effect on the residential property market as a whole and this is driven
by the current economic climate whereby restrictions on bank lending, reduced consumer confidence
and lower wages has seen a steady decline in owner occupation.
At present, owner occupation has suffered from bank lending restrictions making affordability and
availability of mortgages difficult, resulting in a spike of demand in the rented sector.

100

90

80

70

60
Owner occupied
50
Private rented
40 Social housing
30

20

10

0
1919 1939 1953 1961 1971 1981 1991 2001 2011

Figure 15.3.1 The rise and fall of owner occupation.

382 Julie Clarke, Rachel Kirk and Cara Hatcher

450,000

400,000

350,000

300,000

250,000
First time buyers
200,000
Renters
150,000

100,000

50,000

0
2007 2008 2009 2010 2011

Figure 15.3.2 First time buyer activity versus growth in private renting.
Source: Adapted from Savills (2013).

Further reading
Mackmin, D. (2008) Valuation and Sale of Residential Property, 3rd edn, Estates Gazette Books, London.
ONS (2013) ‘A Century of Home Ownership and Renting in England and Wales’. Available at: www.ons.gov.
uk/ons/rel/census/2011-census-analysis/a-century-of-home-ownership-and-renting-in-england-and-wales/short-
story-on-housing.html (accessed 20/11/2013).
Savills (2013) ‘Residential Property Focus Q2 2013’. Available at: http://pdf.euro.savills.co.uk/residential---other/
rpf-q213.pdf (accessed 20/11/2013).

15.4 Housing tenure – other forms of ownership

Key terms: shared ownership; shared equity; rent to buy
There are various other forms of owner occupation whereby the resident does not have sole owner-
ship of the property. There are various private companies that act as part purchasers for clients wishing
to own their own property.
Due to the recession, the first time buyer particularly has found difficulty in obtaining finance in
order to purchase their own property so many companies and house builders have started to offer
shared equity or help to purchase property.

Shared ownership
Many shared ownership schemes are governed by the government and under social housing. However,
there are a variety of private shared ownership schemes in the market place.
Gov.uk (2013) states ‘Shared ownership schemes are provided through housing associations. You buy
a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining
share.’ The benefit of this is that a person can own a percentage and pay a small rent until they are able
to own the whole amount. This is popular in new build properties at present and the government has
launched a help to buy scheme. The help to buy scheme is available where:
 Residential property 383
● the household earns £60,000 a year or less;
● you’re a first time buyer;
● you rent a council or housing association property.
(Gov.uk, 2013)

The FirstBuy scheme works in conjunction with the Homebuy Agency and house builders ‘will enable
an eligible buyer to purchase a brand new property, funded by an affordable mortgage (Firstbuy, 2013).

Shared equity
The purpose of shared equity schemes works like a mortgage but instead of obtaining a loan from a
bank or building society, a company will keep a share of the equity in the property, usually 30 per
cent. This 30 per cent is on the value only and legally, the property is 100 per cent owned by the per-
son living in the property. The issue with shared ownership is that a rent needs to be paid on the 30
per cent which can be more expensive in the long term. The situation is illustrated in Figure 15.4.1.

Owner
occupier
Developer
70%
or house
builder 30%

100% legal
ownership
by owner
occupier

25 years to repay loan = 100%

owner occupied.

Figure 15.4.1 Shared equity scheme.

Rent to buy
Rent to buy offers first time buyers and tenant buyers an opportunity to buy their own property
without the need for a deposit. This type of purchasing was introduced following the Government
Homebuy Scheme. The purchaser acts as a tenant in the first instance but can own up to 100 per cent
of the property. This is still in its infancy and is not a traditional form of property ownership; however,
it may become popular if the market remains difficult for mortgage lending.

Further reading
Gov.uk (2013) ‘Affordable home ownership schemes’, available at: www.gov.uk/affordable-home-ownership-
schemes/shared-ownership-schemes (accessed 20/11/2013).
Firstbuy (2013) ‘Firstbuy scheme’, available at: www.firstbuyscheme.org.uk/firstbuy.php (accessed 20/11/2013).
Mackmin, D. (2008) Valuation and Sale of Residential Property, 3rd edn, London, Estates Gazette Books.
384 Julie Clarke, Rachel Kirk and Cara Hatcher
15.5 Affordability in housing
Key terms: affordability; affordable housing; house prices to income ratio; mortgage costs to income
ratio; rent to income ratio; residual income approach
Essentially, housing affordability is about the relationship between a household’s income and the cost
of housing – whether it be house prices, mortgage costs or rents. The related notion of affordable (or
unaffordable) housing is a relative, shifting concept and is therefore difficult to define; it is open to
varying interpretation and can be political in its application.
As housing has become increasingly expensive (reflecting rising demand from households out-
stripping the supply of housing), and earnings have increased significantly more slowly, issues of
affordability in housing markets have become more prevalent –whether in terms of access to home
ownership for first time buyers or addressing the housing needs of lower income households. Such
debates about affordability require measures of the extent and nature of the problem, something which
is not straightforward.
The most common measures of affordability consider the ratio of house prices to income (see for
example DCLG, 2013). The focus on house prices can be seen as quite a crude measure of afford-
ability as, for many people, housing costs are determined by mortgage payments which are influenced
by availability of credit and interest rates among other things. The UK Housing Review Affordability
Index (Pawson and Wilcox, 2013) provides an illustration of changes over time using mortgage cost
to income ratios. See also the Council of Mortgage Lenders (www.cml.org.uk) for wide-ranging data
and debate on affordability issues in the home ownership market. Affordability issues are also signifi-
cant in the rental sector, as demonstrated by the UK Housing Review’s (Pawson and Wilcox, 2013)
comparison of rents (in both the private and social rented sectors) with earnings. Comparisons of such
data can be made over time and geographically, providing an overview of the extent and distribution
of the problem.
Other analyses of affordability are more tenure neutral, but potentially more complex and difficult
to apply. The residual income approach to measuring affordability – i.e. considering the income a
household has remaining once their housing costs are paid –provides an alternative to the various
housing costs to income ratio measures. This approach recognises the particular issues facing lower
income households and the greater proportionate impact of their housing costs given the smaller over-
all income in the first place. However, this approach also raises the difficult question of defining what
is the minimum level of resources that a household requires to meet their non-shelter needs (see for
example, Whitehead et al., 2009).
Affordability, in its many facets, is a central aspect of the housing policy agenda. The Barker Review
of Housing Supply (2004) in the UK argued that the development of additional housing stock was key
to improving affordability. A major policy implication of the affordability debate in the UK is the need
to provide more affordable housing, i.e. below market price housing. Policy interventions intended to
boost affordable provision have included the use of the planning system as a mechanism to secure addi-
tional affordable housing, support for low cost and shared home ownership initiatives and government
subsidised development of affordable housing. The latest Affordable Homes Programme 2011–2015
(Homes and Communities Agency, 2011) provides some grant funding for a range of housing associa-
tions, ALMOs, councils and private landlords to develop affordable housing, but at a much reduced
rate which requires the developers to raise a significant proportion of the cost themselves through
rental income. To facilitate this, the Government in 2011 introduced ‘a new, more flexible form of
social housing, Affordable Rent’ – a key aspect of this model is that the affordable rent homes are
available to tenants at ‘up to a maximum of 80 per cent of market rent’ (www.homesandcommunities.
co.uk/ourwork/affordable-rent). The implications of this policy shift for increasing rents raises a ques-
tion that underpins this discussion of affordability – how affordable is affordable?
 Residential property 385
Further reading
Barker Review (2004) ‘Review of housing supply. Delivering stability: securing our future housing needs’. Final
Report – Recommendations, HM Treasury, London.
DCLG (2013) Department of Communities and Local Government Statistical data set – Housing Market Series,
DCLG, London, available at: www.cml.org.uk (accessed 20/11/2013).
Homes and Communities Agency (2011) Affordable Homes Programme 2011–2015, available at: http://www.
homesandcommunities.co.uk/affordable-homes
Pawson, H. and Wilcox, S. (eds) (2013) UK Housing Review 2013, CIH, Coventry.
Whitehead, C., Monk, S., Clarke, A., Holmans, A. and Markkanen, S. (2009) Measuring Housing Affordability: A review
of data sources, Cambridge Centre for Housing and Planning Research, University of Cambridge.

15.6 Homelessness
Key terms: statutory homelessness; main homelessness duty; priority need criteria; temporary accom-
modation; rough sleeping; hidden homelessness
The meaning of ‘home’ with all its psychological as well as physical connotations highlights the mul-
tifaceted and complex nature of what being without a home – homelessness – can mean (see for
example, Somerville, 1992). Homelessness in its broadest sense is a wide-ranging and potentially con-
tested concept and can include circumstances such as people forced to leave home due to domestic
abuse, households living in overcrowded conditions, as well as those sleeping rough. Homelessness is
intrinsically difficult to define and to measure.
Official homelessness statistics provide a measure of statutory homelessness. In England statutory
homelessness is defined as ‘those households which meet specific criteria on priority need set out in
legislation, and to whom a homelessness duty has been accepted by a local authority’ (DCLG, 2013a).
Such legal definitions can vary – for example in 2003 Scotland moved away from priority need
categories and towards a national strategy for preventing homelessness. In England and Wales the
Homelessness Act 2002 required local authorities to develop a Homelessness Strategy, incorporating
the provision of advice and assistance to help households meet their housing needs and avoid home-
lessness (i.e. not just those identified as priority homeless). This preventative approach has become an
increasingly significant aspect of homelessness policy (Pawson and Wilcox, 2013).
In England statutory homeless legislation was first introduced in the 1977 Housing (Homeless
Persons) Act. This has since been updated in the Housing Act 1996 and Homelessness Act 2002. Such
legislation placed a legal obligation on local authorities in England to ensure suitable accommodation
is available for the household where a main homelessness duty is owed; this requires several criteria to
have been met.
Applicants will be accepted where they are eligible for assistance (households recently arriving in,
or returning to, the country may not qualify for statutory assistance), are not intentionally homeless
and whose circumstances mean that they meet priority need criteria. Priority groups as outlined in
the legislation include pregnant women, households with dependent children, those who have lost
their home through natural disaster such as flood, or are vulnerable because of old age, mental ill-
ness or physical disability. The Homelessness Act 2002 extended the priority need criteria to include
16–17-year-olds and those aged 18–20 who had previously been in care, as well as introducing addi-
tional ‘vulnerable’ considerations such as people fleeing their home due to violence or the threat of
violence, and people leaving care, custody or the armed forces. Local authorities can also consider
whether the applicant has a local connection to their area and may refer to an alternative local author-
ity where this is not the case.
Where a main housing duty is accepted the local authority has an obligation to provide suitable and
settled accommodation – this may be in their stock or through referral to a social housing organisation
or in the private rented sector. Where appropriate accommodation is not available local authorities
386 Julie Clarke, Rachel Kirk and Cara Hatcher
may provide temporary accommodation – for example in bed and breakfast hotels – to meet their duty
to the homeless household in the meantime.
Since 2009 there has been an increase in the number of homeless households accepted by local authori-
ties in England (i.e. households owed the main homelessness duty); Government statistics show that in
2012/13 there were 53,540 acceptances, a 6 per cent increase compared to the previous year (DCLG,
2013b). However, pressure groups, such as Shelter (www.shelter.org.uk), argue that statutory measures
provide an underestimation of the scale and nature of homelessness. While attempts, however methodolog-
ically difficult, are made to assess the number of people who are sleeping rough (see DCLG, 2013a, rough
sleeper counts), the notion of hidden homeless – ‘non-statutory homeless people living outside mainstream
housing provision’ (Reeves and Batty, 2011) – highlights the invisible nature of aspects of homelessness.
The hidden homeless can include, for example, single people who are sleeping on friends’ sofas (‘sofa surf-
ing’) or people living in illegal accommodation such as ‘beds in sheds’ (Pawson and Wilcox, 2013).

Further reading
DCLG (2013a) ‘Homelessness data: notes and definitions’, available at: https://www.gov.uk/homelessness-data-notes-
and-definitions (accessed 27/03/2014).
DCLG (2013b) ‘Series Homelessness Statistics’, available at: https://www.gov.uk/government/collections/
homelessness-statistics (accessed 27/03/2014).
Pawson, H. and Wilcox, S. (eds) (2013) ‘Commentary: Housing needs, homelessness, lettings and housing management’,
in UK Housing Review 2013, CIH, Coventry.
Reeves, K. and Batty, E. (2011) The Hidden Truth about Homelessness: Experiences of single homelessness in England, Crisis,
London.
Somerville, P. (1992) ‘Homelessness and the meaning of home: Rooflessness or rootlessness?’, International Journal of
Urban and Regional Research, 16(14): 529–539.

15.7 Housing management – allocating property (social housing)

Key terms: waiting lists; allocations policy; choice-based lettings
Allocation is the task of matching a household with a property. The allocation of rented housing
to prospective tenants is a fundamental role of the landlord or their agent irrespective of tenure.
Allocations need to be made quickly and effectively to minimise rent loss, maximise rental income and
prevent properties falling into disrepair or becoming vandalised.
The allocation of social housing is determined by need and all organisations allocating social housing
must have regard to the law which states those households deemed as having a ‘reasonable preference’
must be given priority. Examples include those at risk of becoming homeless or are homeless, those
facing violence or those with a medical condition that makes their existing housing unsuitable.
Local authorities are obliged to have in place a register of housing applicants called a housing
waiting list. In some areas this is a combined list from which Housing Associations will also select
applicants. This approach has been followed for a number of reasons:

● It avoids the need for applicants to complete multiple forms to join the waiting list of different
landlords with housing in the same area.
● The avoidance of duplication ensures that estimates of housing need in an area are more accurate.
● Common waiting lists and common application forms are usually the result of cooperation
between landlords in an area where landlords have agreed a shared set of priorities for allocating
housing. By agreeing a shared set of priorities it ensures that whenever a vacancy arises, irrespec-
tive of landlord, the household in greatest need is allocated the property.
 Residential property 387
However some housing associations continue to have their own application form, waiting list and
allocations policy. This is common for the large national associations and smaller specialist providers.
It is for this reason that it is difficult to estimate with accuracy the number of people who are seeking
accommodation. Statistics from government identify that waiting lists held by local authorities have
increased by over a third (Table 15.7.1) in the ten years since 2002.
Social landlords must have a procedural system to determine who is allocated property and this
procedure must be published. This is called an allocations policy.
Historically allocations policies have included the following:

● Date order – housing occurs in strict date order but as landlords have to have regard to the law
date order tends to be used within other systems.
● Points schemes – an applicant is considered against a scheme where differential points are awarded
for different factors such as overcrowding, households living separately, medical conditions.
● Group schemes – depending upon their primary housing need an applicant is allocated to a group,
examples of which are medical cases, management moves, homeless households. The landlord will
usually then apply a quota of their allocations to each group.
● Combined schemes such as points and date order were also commonly used.

Recently concerns were raised by applicants about the complexity and lack of transparency of many allo-
cations policies. While landlords themselves found the traditional approaches time consuming, resource
intensive and inefficient. Information collected about the applicant, often many years before an alloca-
tion is made, can quickly become out of date leading to wasted time verifying data in order to allocate
a property. Refusal rates under these systems were high leading to properties standing empty for longer.
The government in 2000 introduced its Housing Green Paper, ‘Quality and Choice – a Decent House
for All’. This paper challenged organisations to rethink how they allocated housing to address these con-
cerns. The result was the introduction of choice-based lettings (CBL) for the majority of social landlords.
CBL schemes are different from traditional needs-based waiting lists. They allow applicants who are
registered to express an interest in any vacant property for which they are matched in terms of type and
size. Properties are advertised widely via shops, newspapers, websites etc. Need still plays an important
role in the allocation of vacant social properties and those registered are allocated into a priority band.
Evaluation of CBL found that applicants welcomed the choice, control and transparency offered by
the new system. For social housing landlords they found that properties were refused less often and
tenants stayed longer in the property than under the previous systems.
In England in the year 2011–12 the social housing sector made almost 300,000 allocations of prop-
erty (Table 15.7.2). The management of this process forms a fundamental part of a landlord’s housing
management function.

Table 15.7.1 Local authority waiting lists in England

Waiting lists 2002 2012

Unitary Authorities 165,975 420,406
London Boroughs 266,789 380,301
Metropolitan Districts 291,74 483,499
Shire Districts 408,836 564,330
Total 1,133,342 1,848,536
Source: Department for Communities and Local Government.
388 Julie Clarke, Rachel Kirk and Cara Hatcher
Table 15.7.2 Allocations of social housing 2011–12

New tenants Existing tenants Total allocations

Local authority (including 89,100 51,800 140,900
ALMOs)
Housing associations 23,000 135,000 158,000

Source: Department for Communities and Local Government.

Further reading
Thornhill, J. (2010) Allocating Social Housing: Opportunities and challenges, Chartered Institute of Housing, Coventry.

15.8 Housing management – rent collection and recovery (social housing)

Key terms: rent setting; housing benefit; rent collection; recovering rent arrears
Rent is the payment made to a landlord for the occupation of a property. Rent setting, collection and
the recovery of unpaid rent are important elements of the management of any tenancy irrespective of
tenure.
Rents within the social housing sector as well as paying for the management and maintenance of
a tenants home also covers the provision of a range of services such as welfare benefit advice, into
work advice, community involvement and tackling anti-social behaviour. In addition rents contribute
towards the payment of capital borrowing costs allowing new homes to be built.
Rents within the social housing sector are not set by the market but do have a relationship to it.
Since 2002 rent setting has been the subject of a rent formula aimed at establishing a convergence of
rents between all social housing providers within a local area by 2012. The formula was based on the
Retail Price Index (RPI) figure from the September preceding the increase and a maximum increase
of +0.5 per cent and £2.

RPI + 0.5% + £2

The ‘formula rent’ at the point of convergence is determined by three factors: value, size and local
average earnings. An issue for social housing landlords with the rent convergence formula has been the
wide variation in RPI over the last decade with the highest figure being 5.6 per cent in September 2011
which, including the additional £2, resulted in an average rent increase for tenants of 8 per cent in April
2012. Concerns have also been expressed when RPI falls to very low levels which results in small rent
increases impacting upon organisations’ abilities to service debt and raise finance. This formula has been
continued following the change of government in 2010 and the deadline for convergence has been
extended to 2016.
Households on a low income or in receipt of welfare benefits may be entitled to claim housing
benefit to cover some or all of the rent costs and some service charges such as the upkeep of communal
areas and the services of a caretaker. It does not cover energy, food or care costs. Approximately two-
thirds of tenants in social housing claim housing benefit.
2013 saw significant changes to housing benefit policy for social housing tenants. Tenants of work-
ing age in receipt of housing benefit but who are deemed to be under occupying their property have
had their housing benefit reduced. Under occupation by one bedroom results in a 14 per cent reduc-
tion in benefit while under occupation by two rooms will see housing benefit reduce by 25 per cent.
Universal Credit is another significant change coming into effect during 2013–14. Under this move
 Residential property 389
working age recipients of welfare benefits will receive one single payment that brings together all of
the benefits they are in receipt of. As part of this measure tenants can no longer opt to have their
housing benefit paid direct to their landlord but must actively make that payment once their Universal
Credit is paid once every four weeks. Social housing landlords have raised concerns about the conse-
quent increase in rent arrears as the direct result of these two changes to housing benefit payments. In
addition rent payment transactions and recovery action will increase in numbers with the consequent
increase in associated costs.
Table 15.8.1 gives details of the number of housing benefit payments and average payment by ten-
ure in England.
A variety of methods are used by social landlords to collect rent:

● Door to door collection, where a rent collector called on a regular basis, was the traditional
method of collecting rent. This has declined due to the cost of collection and the vulnerability of
rent collectors to robbery.
● Most landlords have some form of office-based collection where tenants can come to the office
to pay their rent. This has the benefits of being less costly, safer and rent accounts are updated
immediately a payment is made.
● Tenants of some landlords can pay their rent via post offices, Allpay and other similar services.
This method tends to be associated with higher arrears and delayed updating of rent accounts but
is useful for more rural communities where access to a rent collection point is difficult.
● Landlords prefer either bank payments such as direct debits or online payment facilities whereby
tenants can pay direct from their bank accounts via the landlord’s website. This is less costly and
easier to administer. However a major issue is the number of tenants without bank accounts.

Social housing rent arrears are difficult to accurately state due to the demise of the Tenant Services
Authority and the Audit Commission. However, estimates are that 5 per cent of all rent due is owed to
social landlords. CIPFA reported in 2012 that local authority rent arrears in England totalled £202,731,000.
Rent arrears recovery is an important function of housing management. Tenants get into arrears for
a range of reasons and the reason for non-payment can influence how the debt is recovered. Reasons
given for non-payment include problems with housing benefit, other debts, illness, low income,
domestic problems, etc.
Prevention of rent arrears – organisations ensure tenants at tenancy sign up are aware of the conse-
quences on non-payment. It is also important to ensure tenants income is maximised through the
completion of a welfare benefits check and that appropriate housing benefit forms are completed.
Early action – organisations have in place policies that ensure when a payment is missed tenants are
contacted immediately. The format of the contact can vary but is usually one of the following; letter,
visit, text message or email. However, the intent is to establish the reason for the missed payment to
minimise it happening again.

Table 15.8.1 Housing benefit recipients and average weekly payment in England

Local authority tenants Housing association tenants Private tenants

Number of Average weekly Number of Average weekly Number of Average weekly
recipients (000s) housing benefit recipients (000s) housing benefit recipients (000s) housing benefit
paid (£) paid (£) paid (£)

1,196 74.17 1,626 83.69 1,455 109.90

Source: Pawson and Wilcox (2013).

390 Julie Clarke, Rachel Kirk and Cara Hatcher
Legal action – as arrears increase organisations will then choose to follow a legal process that could ulti-
mately lead to recovery of the property. However, before this, social landlords will have to serve a Notice
of Intention to Seek Possession. At this stage further discussions can take place to put in place a payment
plan acceptable to the organisation and within the means of the tenant. Failure to keep to an agreement
can result in the landlord seeking a possession order from the court. This is costly and time consuming.
In almost all cases a suspended possession order will be granted that formalises the payment plan.
All rent arrears recovery action is dependent upon the quality, accuracy and timeliness of the land-
lord’s management information systems and the use of new and developing technologies to advise
tenants that payments are due or have been missed.

Further reading
DCLG (2006) Guide for Effective Rent Arrears Management, DCLG, London.
Pawson, H. (2010) Rent Arrears Management Practices in the Housing Association Sector, Tenant Services Authority, London.
Pawson, H. and Wilcox, S. (eds) (2013) UK Housing Review 2013, Chartered Institute of Housing, Coventry.

15.9 Housing management – repairing property (social housing)

Key terms: repair categories; responsive repairs; cyclical repairs; planned repairs; stock condition survey;
major works; Decent Homes Standard
Repairs to a landlord’s stock are a fundamental aspect of housing management. It is essential that stock
remains in good condition not only to protect its value as an asset but also because house conditions
can impact upon the quality of life of tenants. To this end landlords will have in place a process to
ensure that repairs are carried out effectively (in a timely manner) and efficiently, providing good value
for money.
Within the context of social housing, repairs to housing stock represents a significant proportion of
the revenue expenditure of landlords. In addition for most tenants this is their primary form of contact
with their landlord once their tenancy has commenced and one upon which they will make a judge-
ment on their landlord’s ability.
Repairs to the stock of social landlords can be categorised in the following way:

● responsive repairs;
● cyclical works;
● planned works;
● major repairs.

These categories can be further subdivided.

Responsive or day-to-day repairs are unplanned and reported by tenants. Most landlords will sub-
divide that into emergency repairs that require an immediate response such as a broken window that
requires boarding up or an older person’s faulty heating system in winter. Other repairs are classed as
routine in that they are not urgent but require action. These can include leaking radiators, heating
faults or a fence blown down in the wind. Within this routine repair category landlords may determine
a further set of response times depending on urgency. So in the case of the examples above, a heating
fault would be deemed to be more urgent, generally, than a fallen down fence. Most landlords have
moved towards appointment systems for responsive repairs in response to tenant feedback.
Cyclical works are carried out in a repeating, predetermined cycle. The duration may differ depend-
ing on organisational priorities and legal requirements. Gas servicing needs to be carried out annually.
However, painting repairs and painting of woodwork may be carried out every five years. This ability
to plan should increase efficiencies and reduce costs.
 Residential property 391
Planned maintenance work usually arises out of a comprehensive assessment of the stock con-
dition. This will determine at which point components need to be replaced such as windows,
roofs, heating systems, kitchens etc. Each of these planned works will have a different cycle so
for example a whole heating system might be replaced every 15 years and a roof every 50 years.
However depending on the design, original methods of construction, building materials used,
and maintenance over time these timescales will vary enormously. This is where a stock condi-
tion survey can help a landlord understand the peculiarities of their stock especially where there
are non-traditional design and build schemes. This type of work is usually organised in large
contracts covering a specific geographical area. All components in the designated contract area
will be replaced irrespective of condition. While this may appear self-defeating in terms of value
for money it is more expensive to replace individual components on a responsive basis once the
contract has ended.
Major works occur when a landlord undertakes extensive improvements to a property in one go.
Properties can have many if not all of the following components replaced in one contract over a few
weeks – electrics, heating systems, windows, kitchens, bathrooms. As you would expect, there is a
great deal of upheaval and ideally the work should be carried out without the tenant in the property.
However, moving a tenant out (decanting) for the duration of the work into another property is
costly. Costs incurred are loss of rent from the decant property, moving costs, delays to the contract
if decants are delayed. Most organisations will attempt to carry major works around the tenant with
support in place through contract liaison officers. Decanting will occur where tenants are vulnerable.
The introduction of the Decent Homes Standard introduced in 2000 set a minimum standard for
the condition of social housing stock. The standard stated that all housing must:

● be above the statutory minimum standard;

● be in a reasonable state of repair;
● provide reasonably modern facilities and services;
● provide a degree of thermal comfort.

This resulted in a significant amount of investment in social housing stock, dramatically improving
its condition.
Irrespective of the method of repair, social landlords regularly collect performance data around
customer satisfaction in order to improve services.

Further reading
Joseph Rowntree Foundation (2002) ‘Britain’s housing 2022’, available at www.jrf.org.uk/publications/britains-
housing-2022-more-shortages-and-homelessness (accessed 20/11/2013).

15.10 Housing management – managing tenancies (social housing)

Key terms: anti-social behaviour; prevention; tenancy agreement; diversionary activities; support;
ASBOs; family intervention projects; enforcement
Tenancy management has, in recent years, become an increasingly important aspect of housing man-
agement in social housing. Tenant expectations about the quality of where they live coupled with
increased emphasis from the sector regulator, the Homes and Community Agency, on tenancy stand-
ards has resulted in a greater emphasis on tenancy management. In parallel with this has been a growth
in incidents of anti-social behaviour (ASB). ASB can range from occasional but annoying neighbour
nuisance such as noise late at night to, sustained harassment and criminal activity. Most minor cases
of ASB can be resolved through dialogue and mediation. Criminal activity is referred to the police.
392 Julie Clarke, Rachel Kirk and Cara Hatcher
For the more problematic cases of ASB housing managers have had to develop a range of responses
and work with a diverse range of partners in order to achieve successful resolution. The Joseph
Rowntree Foundation (JRF) in 2005 used the British Crime Survey as a source of data to identify
some of the characteristics associated with ASB. They found:

● ASB was an acute problem but for a minority of people;

● acts of ASB were concentrated in deprived urban areas (34 per cent in inner city areas saw ASB as
a problem);
● 27 per cent saw rowdy teenagers as the worst form of ASB they experienced;
● empirical research in the case study areas saw drug and alcohol misuse, neighbour disputes and
‘problem families’ as contributing to ASB.

Responses by social landlords can be categorised as:

● preventive;
● supportive;
● enforcement.

Preventive measures adopted by social landlords begin with the tenancy agreement. This contractual
agreement between tenant and landlord varies depending upon the type of tenancy on offer. However,
most tenancy agreements will place a responsibility on the tenant, their household and visitors not to
cause a nuisance or annoyance either within the property or in the broader estate and neighbourhood.
This broadening out of the responsibilities beyond the tenant and their property was in response to
much of the ASB being caused by household members and their friends.
Many landlords offer new tenants introductory or probationary tenancies. These tenancies do not
offer security of tenure for the first 12 months and enable landlords to recover possession of the prop-
erty more easily should breaches of tenancy occur. As part of receiving a new tenancy most social
landlords spend time with tenants at sign-up explaining their responsibilities and the consequences of
breaching their tenancy, including what constitutes ASB.
Other preventive actions landlords can take is rapid responses to minor issues, such as graffiti, petty
vandalism and neighbour disputes to prevent escalation. In areas where ASB is a noticeable problem
many social landlords have introduced neighbourhood wardens whose role is to work with the com-
munity to assist in the prevention and reporting of ASB. Neighbourhood wardens along with housing
officers and others such as youth workers also deliver diversionary activities, especially during the
school holidays and summer nights, that offer young people on an estate positive activities. This helps
avoid unintended youth ASB.
A second strand of the responses to ASB is supporting households to change their behaviour. Depending
upon the severity of the ASB, different approaches to support will be adopted. Support measures often
involve housing officers working with other agencies to deliver a more holistic solution. Where young
people are involved in ASB the landlord along with the police and school may ask the family to sign up
to an Acceptable Behaviour Contract (ABC). This sets out the acceptable and unacceptable behaviours
and the responsibilities of the young person and their parents/carers and is signed by all parties. A breach
of an ABC can be used as evidence when going to court for possession of the property.
Landlords can also seek injunctions or specifically Anti-Social Behaviour Orders (ASBOs). ABSOs seek
to ensure individuals modify their behaviour or keep away from areas where they have caused problems in
the past. ASBOs can be sought for both tenants and individuals who are not tenants but whose behaviour is
deemed as being unacceptable. Breaches of an ASBO can lead to the individual being jailed. ASBOs have
been criticised for being over-used and used in inappropriate situations, such as expecting someone with
severe mental health problems to change their behaviour, and so their value has diminished over time.
 Residential property 393
Where problems are more deeply entrenched and have occurred over a long period family inter-
vention projects can provide support to households either in their home or removed from the area
in a residential placement with family support officers. This is usually only used where the behaviour
has deteriorated so much normal relations between the family and their neighbours has irretrievably
broken down and there is no possibility of them returning. Families are appointed an individual sup-
port worker who coordinates the involvement of other agencies such as educational welfare, health
services, the police and probation services, youth offending teams and schools.
The final set of actions available to social landlords involves enforcing the tenancy agreement. This
requires the landlord to provide evidence of serious and persistent breaches of the tenancy. Often those
affected feel very vulnerable and are unwilling to give evidence against their neighbours. When this is
the case landlords have a number of options available to them such as professional witnesses and the use
of mobile closed circuit surveillance. The landlord can then either seek a possession order suspended
on the guarantee of adherence to the tenancy agreement or absolute possession. The number of pos-
session cases granted has increased in recent years as the result of more robust evidence collection.

Further reading
Shelter (2007) ‘Tackling ASB’, available at: http://england.shelter.org.uk/professional_resources/policy_and_research/
policy_library/policy_library_folder/back_on_track_a_good_practice_guide_to_addressing_anti-social_behaviour
(accessed 20/11/2013).

15.11 Housing management – allocating property (private rented sector)

Key terms: availability; affordability; housing stock
The private rented sector consists of a wide variety of housing stock, ranging from studio apartments to
detached country estates. The allocation of this housing stock is very different to social housing, with
less of an onus on fundamental need and more on demand for a particular type of property.
The private rented sector is currently a growing market place and there is a demand for rental prop-
erty in this sector from students, young professionals, families and individuals and also the Department
of Social Security (DSS).
Some of the housing stock in the private rented sector is allocated to social housing needs and the
DSS will provide rental payments on behalf of these tenants.

Allocation of property
The allocation of property in the private rented sector is fundamentally through the market system and
based on affordability. If a tenant can prove they can afford the rent through their salary and references,
they will be provided an assured shorthold tenancy on the property for usually 6 months.
The rent is payable every month and includes a tenant’s deposit at the start of the tenancy and any
associated management costs.
In terms of the DSS, they will pay the rent and associated costs on behalf of the tenants and
therefore will have their own allocation policy to adhere to regarding number of beds, location and
affordability.

Schemes to assist private rented tenants

There are a number of schemes to assist people in establishing funds for a property in the private rented
sector. Many local councils offer assistance to tenants by providing a paper guarantee, which can be
used to guarantee a month’s rent if they have problems with payments.
394 Julie Clarke, Rachel Kirk and Cara Hatcher
This type of scheme is beneficial to a variety of tenants including:

● homeless priority groups, whereby offering a property in the private rented sector would prevent
homelessness;
● homeless households with priority needs;
● single people or couples who are homeless.

The Localism Act 2011 has allowed ‘local authorities to discharge their homelessness duty with an
offer of accommodation in the private rented sector without the applicant’s consent’ (Gov.uk, 2013).
However, there are a number of issues with this use of legislation, including a lack of suitable property
and the possible increase in homelessness that this could lead to.
There are two distinct users of the private rented sector – the privately guaranteed and referenced
individual users and those that have the support of the local councils and DSS who assist or make
rental payments.

Further reading
Gov.uk (2013) ‘The Private Rented Sector’. Available at: www.publications.parliament.uk/pa/cm201314/cmselect/
cmcomloc/50/50.pdf (accessed 14/11/2013).
Mackmin, D. (2008) Valuation and Sale of Residential Property, 3rd edn, Estates Gazette Books, London.

15.12 Housing management – rent collection and recovery (private rented sector)
Key terms: rent collection; non-payment; recovery
Many landlords in the private rented sector collect rent themselves, or through a managing agent.
Rent is generally paid on a monthly basis either directly to a landlord or if through a managing agent
into a client account for that property.
The RICS UK Residential Property Standards, fifth edition (October 2011), known as the Blue Book,
reiterates the importance of the lease in providing information on the service charge. It does, however,
emphasise the importance of the management surveyor especially when dealing with recovery costs.
The Blue Book states ‘There are no statutory rights for landlords to recover any costs or to collect ser-
vice charges in advance; the rights are purely contractual, thus the lease is paramount.’ (RICS, 2011).

The Tenancy Deposit Scheme

At the start of a new assured shorthold tenancy, a deposit is paid which usually amounts to one calen-
dar month rental payments. The Tenancy Deposit Scheme (TDS) is run by the Dispute Service Ltd.
It is insured by the government. It has two main roles, which are protecting deposits and resolving
deposit disputes. Tenancy deposit protection applies to all deposits for assured shorthold tenancies that
started in England or Wales on or after 6 April 2007.
The deposit for the tenancy is placed in a fund that is protected and is independent from the land-
lord and therefore as long as the tenant does not damage the property, they will receive their whole
deposit back. The legal requirements are contained in sections 212–215 of, and Schedule 10 to, the
Housing Act 2004.
In terms of protection for the tenant, the Housing (Tenancy Deposits (Prescribed Information)
Order 2007 is a protection for the tenant and includes information on the landlords contact details, the
deposit amount and how the deposit can be used. A certificate is provided to the tenant so they are
aware of their deposit contribution.
 Residential property 395
Recovery of rent
The recovery of the non-payment of rent is a complex issue and can be a lengthy process in terms of
recovery, not only of rent but possession of the property.
There are two main routes accessible to private landlords if they wish to regain possession of their
property under the Housing Act 1988, allowing for 2 months written notice, which are:

● Section 21 – gives a landlord an automatic right of possession without having to give any grounds
(reasons) once the fixed term has expired;
● Section 8 – allows a landlord to seek possession under certain grounds, one of which includes rent arrears.

These involve attending court proceedings which, depending on the specific case can take from 14
days to 42 days, if there are exceptional hardship circumstances. However, the landlord must have
already given 2 months written notice before either notice will be accepted.

Further reading
Gov.uk (2013) ‘Improving the rented housing sector’, available at: www.gov.uk/government/policies/improving-the-
rented-housing-sector--2/supporting-pages/private-rented-sector (accessed 14/11/2013).
Gov.uk (2013) ‘Gaining possession of a privately rented property let on an assured shorthold tenancy’, available at:
www.gov.uk/gaining-possession-of-a-privately-rented-property-let-on-an-assured-shorthold-tenancy (accessed
14/11/2013).
Parliament.uk (2013) ‘Private Rented Sector’, available at: www.parliament.uk/business/committees/committees-a-z/
commons-select/communities-and-local-government-committee/inquiries/parliament-2010/private-rented-sector/
(accessed 14/11/2013).
RICS (2011) UK Residential Property Standards, 5th edn, RICS, London.

15.13 Housing management – repairing property (private rented sector)

Keys terms: repair; obligation; responsibility; landlord and tenant
The repairs to a residential property are linked to the health and safety issues that surround the man-
agement of residential property. The role of the landlord or the managing agent is to protect not only
the tenant but also the property.

The tenant’s responsibility

The tenant has the responsibility to maintain the property to a fair standard and in the condition at the
start of their tenancy. In order to ensure that the tenant maintains the property in a condition that is
acceptable to the landlord, the landlord or landlord representative is usually allowed to enter the property,
with prior written permission, in order to inspect the condition of the property periodically. At the start
of the tenancy, the landlord will undertake a condition report on the property which details any issues
with the property, any furnishings or fixtures that are part of the property and therefore should remain at
the end of the tenancy, and the extent of the property including any grounds and outbuildings.
The tenant’s obligations can be found in the tenancy agreement they have signed and the tenant
must ensure that they adhere to these. The managing agent should always refer to the tenancy agree-
ment if a dispute about repairs arises.
The tenant in many cases must ensure they maintain the garden area, any furniture (which must be fire
resistant) and any equipment supplied by the landlord such as white goods. The tenant must ensure the
property is kept clean, free from damage, generally maintained; for example with the changing on light
bulbs, fuses, unblocking of sinks and protection of the heating system through sensible and proper use.
396 Julie Clarke, Rachel Kirk and Cara Hatcher
If an instance where the tenant has left the property in a condition below that required by the ten-
ancy agreement, the tenant’s deposit money can be used to rectify the damage or maintenance issue
caused.

The landlords obligations

As with the tenant, the landlord is required to keep the property in a well maintained order which must
be equal to the condition at the start of the tenancy. However, if the property was not in good order at
the beginning of the tenancy there may be an obligation for the landlord to upgrade the property to a
habitable standard.
The tenancy agreement, however, will not determine that a landlord must significantly improve
the property simply to suit the requirements of the property. The landlord is not required to carry out
repairs to the property until they are made aware of the defect by the tenant (Landlord and Tenant Act
1985). This notice can be verbally or in writing; however, in writing is preferable as proof of the defect
may be necessary if a dispute arises. The landlord is usually not responsible for carrying out repairs to
the plasterwork or skirting boards unless the damage has occurred directly due to an exterior defect
that the landlord was responsible for, such as a dampness problem.

The Landlord and Tenant Act 1985, section 11 – repairing obligations in short leases for the
landlord
Section 11 states that in a short lease such as an assured shorthold tenancy, the landlord has the
responsibility:

‘(a) to keep in repair the structure and exterior of the dwelling-house

(b) to keep in repair and proper working order the installations in the dwelling-house for the
supply of water, gas and electricity and for sanitation
(c) to keep in repair and proper working order the installations in the dwelling-house for space
heating and heating water’ (Landlord and Tenant Act 1985).

It is important that both the tenant and the landlord adhere to their repairing obligations which change
from tenancy to tenancy. Therefore, it is important that the managing agent or surveyor is aware of
the responsibilities of each party in the agreement to ensure that the obligations are undertaken when
required.

Further reading
Gov.uk (2013) ‘Private renting’, available at: www.gov.uk/private-renting/repairs (accessed 20/11/2013).
Landlord and Tenant Act 1985.

15.14 Housing management – managing tenancies (private rented sector)

Key terms: management; private rented sector; tenancies
The management of residential property can be diverse and complex and there is a fundamental need
to understand the legal obligations of tenancies that a property management might encounter in the
profession. These tenancies all have unique requirements as a managing agent; you will need to abide
by these rules and regulations as a managing agent and ensure your landlord does also. There are three
types of tenancy that a residential property management surveyor may come across in the management
of tenancies and residential properties. These are:
 Residential property 397
● the regulated tenancy;
● the assured tenancy;
● the assured shorthold tenancy.

The regulated tenancy

A regulated tenant or tenancy consists of:

● a tenant of residential accommodation only;

● the tenant has exclusive use of living accommodation;
● the tenancy is not the market rent each month;
● the tenancy began prior to 15 January 1989.

The regulated tenant has the right to reside in the property until they choose to leave or they die. The
tenant pays well below market rent for the property and this has a fundamental negative impact on the
value of the property because the tenancy runs with the sale of the property.

The assured tenancy

For an assured tenant or tenancy:

● the rent is payable to a private landlord or their representative such as a managing agent;
● they have the right to reside in the property free from disturbance from the landlord or any other
person associated with the landlord;
● the tenancy began between 15 January 1989 and 27 February 1997 and was not defined as an
assured shorthold tenancy when signed.

The assured tenant has a right to automatically renew their tenancy. The can pay market rent unlike
the regulated tenancy.

The assured shorthold tenancy

This is the most common form of residential tenancy and is utilised in most residential tenancies. They
usually consist of 6 months tenancy agreements and include:

● a tenancy that commenced either on or after 28 February 1997;

● the rent is market rent and is directly payable to the landlord or their representative (the property
manager);
● the landlord has to provide 24 hours’ notice before they or their representative can access the property.

The assured shorthold tenancy was introduced to provide a fairer tenancy agreement for the landlord
as well as the tenant. The landlord can regain possession of the property after the 6 month agreement
but must give the tenant 2 months’ written notice to allow the tenant the opportunity to find and
move into another property; however the tenant only has to give one months’ notice.
When valuing or managing residential properties, there is a need to understand the type of tenancy
you are dealing with. The tenancy in place can determine the impact on value whether that be a nega-
tive impact or little impact at all; in managing a property, you need to be aware of your ability to enter
a property or your legal obligations to the tenant to maintain their quiet enjoyment of the property
they rent.
398 Julie Clarke, Rachel Kirk and Cara Hatcher
Further reading
Gov.uk (2009) ‘Regulated tenancies’, available at: www.gov.uk/government/publications/regulated-tenancies
(accessed 20/11/2013).
Gov.uk (2009) ‘Assured tenancies and assured shorthold tenancies’, available at: www.gov.uk/government/publications/
assured-and-assured-shorthold-tenancies-a-guide-for-landlords (accessed 20/11/2013).

15.15 Housing support – independent living

Key terms: self-determination; deinstitutionalisation; aids and adaptations, lifetime homes
Conceptually, independent living is a set of beliefs or philosophy: ‘it is about disabled people hav-
ing the same level of choice, control and freedom in their lives as any other person’ (Office for
Disability Issues, 2008). Independent living challenges what is perceived as a socially constructed view
that has traditionally medicalised disability, portraying it as a medical problem that requires specialist
help and intervention, i.e. encouraging dependency rather than self-determination and independence.
Empowerment of the individual underpins the concept of independent living. Whereas historically
people with mental and physical disabilities may have been placed in institutions or some form of resi-
dential care, there has been a long-standing policy support for deinstitutionalisation and the provision
of care within communities and independent living.
Access to housing, the design of housing, and the types of support available to people in their own
home, are key factors in facilitating independent living, enabling people to choose to live in commu-
nities rather than in residential care if they wish to. Practical support for people to live in their own
homes can incorporate many different aspects. It can include, for example, the provision of floating
support through support workers going into people’s homes to enable people with disabilities to live
independently. Physically, the current housing stock is poorly equipped to deal with the needs of
disabled people and the increasing number of people in later life. Support for independent living can
include the provision of aids and adaptations within houses. These range from grab rails being installed,
to specialist equipment such as bath seats being provided, to the replacement of a bath with a level
access shower, for example.
A more radical way of sustaining independent living, and achieving a housing stock that is more
flexible and adaptable to diverse needs, is to consider the design of new housing development – some-
thing that is encapsulated by the notion of Lifetime Homes (see for example www.jrf.org.uk ). Lifetime
Homes are designed so that they can respond to the changing needs of individuals and families as their
circumstances change over their lifetime and remain accessible. The Lifetime Homes standard is made
up of 16 criteria – including for example width of available parking and doorways being sufficient to
facilitate use of buggies and wheelchairs; height of window sills and window handles meaning they are
accessible; a wheelchair accessible WC on the entrance level with potential for accessible shower (see
www.lifetimehomes.org.uk. for more details). This standard has been incorporated into the Code for
Sustainable Homes (see Concept 16.5). Meeting all the criteria is mandatory for Code level 6.
In spite of a clear policy commitment to the principle of independent living, its implementation
in practice presents considerable challenges as it requires significant investment as well as cultural
change.

We know that people’s housing plays a critical role in helping them to live as independently as
possible, and in helping carers to support others more effectively. However, people told us during
the Caring for our future engagement that there were not enough specialised housing options for
older and disabled people.
(DoH, 2012)
 Residential property 399
Further reading
DoH (2012) White Paper, ‘Caring for our future: reforming care and support’, HMSO, London.
Homes and Communities Agency at www.homesandcommunities.co.uk/ourwork/care-support-specialised-housing-
fund (accessed 20/11/2013).
Office for Disability Issues (2008) available at: http://odi.dwp.gov.uk/odi-projects/independent-living-strategy.php
(accessed 05/06/2014).

15.16 Housing support – specialist supported housing

Key terms: vulnerable adults; supported housing schemes; foyers
For some people, their particular needs and circumstances may mean that they require a form of sup-
ported housing that specialises in providing integrated support services and accommodation. Such
circumstances might include health-related needs such as people with physical or learning disabilities
or mental health problems or drug/alcohol dependency issues. Specialist supported housing can also
be provided for people whose experiences or changing circumstances make them vulnerable or cre-
ate additional needs, for example women and children fleeing domestic violence, refugees and asylum
seekers, people leaving prison and teenage parents. The Homes and Communities Agency identifies
15 categories of vulnerable groups in relation to supported housing (see www.homesandcommunities.
org.uk for further information).
For a variety of reasons, such individuals and households may face a number of challenges and dif-
ficulties in obtaining and sustaining their own tenancy or home. Moreover, the often multifaceted and
complex nature of the types of problems such people are facing means they require support as well
as accommodation. Supported housing schemes are necessarily diverse in nature, offering a variety
of accommodation and types of support. For example, they can be purpose built residential schemes
incorporating accommodation units and communal facilities, or they may be clusters of housing where
additional support is provided for the residents, or they can include hostel settings. Support services
can include practical assistance and social support to enable vulnerable people to live as independently
as possible; they can include personal development or training in terms of life skills (for example budg-
eting or cooking) or provision of education, training and employment opportunities; or the support
might include counselling and advice, as well as many other types of support.
An example of a specialist supported housing initiative is the foyer movement. In the 1990s foy-
ers were introduced in the UK as a response to the combination of youth unemployment and youth
homelessness, drawing on the foyer approach developed in France. The intention was to address the
‘no home–no job–no home’ cycle by providing young homeless people aged 16–25 with accommo-
dation in a secure environment and also support in terms of learning and skills, personal development,
and training and employment opportunities. Now there are over 120 foyers across the country each
providing both housing and direct services for young people (see www.foyer.net).
Supported housing schemes are provided by a range of organisations, including local authori-
ties, social landlords, charity and voluntary organisations or social enterprises. Supported housing
may be an organisation’s specialist function or it may be an aspect of an organisation’s wider remit.
Organisations may also focus on a particular issue, e.g. mental health problems, or they may pro-
vide housing support for a range of client need groups. The combination of housing and specialist
support for vulnerable adults provides a vital service in communities. It has been argued that the
preventative approach of such schemes is beneficial and cost effective. However, while there are
significant needs, there are significant challenges in terms of funding and developing such services.
Financially, there is a complex economy for housing, support and care. As public funding becomes
more limited, charitable, voluntary and private resources and alternative models of development and
provision are increasingly being explored.
400 Julie Clarke, Rachel Kirk and Cara Hatcher
Additional reading
Homes and Communities Agency at www.homesandcommunities.org.uk (accessed 20/11/2013).
National Housing Federation at www.housing.org.uk (accessed 20/11/2013).

15.17 Housing an older population

Key terms: demographic changes; three phases of old age; specialist housing; staying independent
The population of the United Kingdom is ageing. This raises many issues, one of which is how are
we going to meet the housing needs of an older population. Old age is complex and the aspirations of
older people, in terms of their housing, differ enormously.
An ageing population is seen as a national challenge for housing, health and social care. Statistics
from government indicate the following trends:

● 60 per cent of projected household growth up to 2033 will consist of households where the main
householder is over 65.
● By 2016 this will mean an extra 2.4 million older households.
● Older people occupy a third of all homes.
● 3.7 million older people live alone.
● The 75+ age group is growing faster than any other.
● In 2000 90 per cent of older people lived in mainstream not specialist housing.

These statistics, however, mask a range of other trends that need to be addressed in terms of investment
in provision and support services:

● It is predicted that over one million people will suffer from dementia by 2025 rising to 1.7 million
by 2051.
● The number of older people with a learning disability is not accurately known but is expected to
increase between 37 per cent and 59 per cent.
● The number of disabled older people will double to 4.6 million by 2041.
● Over the next 30 years the population is predicted to increase in the following age bands:
– 65+ by 76 per cent an increase of 7.3 million
– 75+ by 95 per cent an increase of 4.4 million
– 85+ by 184 per cent an increase of 2.3 million.
● These figures also hide variations geographically as the population in rural areas is growing and
ageing faster than that in urban areas.
(DCLG/DoH/DWP, 2007)

It is also essential that we do not see old age as homogenous but recognise that there are significant
variations between what is commonly defined as the three stages of old age. Many of the most impor-
tant distinctions between groups of older people are about phases of life rather than chronological age
groups and importantly each stage has differing needs.
The three phases of older life are identified as:

● older workers – people who either still have jobs or are still actively seeking work;
● third agers – people who have retired from work and can reorganise their lives around leisure,
family responsibilities, non-vocational education or voluntary work;
● older people in need of care – people whose lives are substantially affected by long-term illness or
disability.
 Residential property 401
These three groups are not wholly distinct, and people can move between them in all directions, and
the types of housing and levels of services that these groups will require will be different, making deci-
sions about investment in provision and support more complex.
Priorities for housing older people are seen as supporting independence for as long as possible and
the offering of high quality housing choices.
In terms of specialist housing for older people it has traditionally been a combination of older per-
sons’ bungalows usually in the social or owner occupier sector; sheltered accommodation developed
post war; or residential care. Bungalows are in short supply, sheltered accommodation is dated in terms
of size, style and communal facilities and residential care is perceived very negatively as an option of
last resort.
Recently there has been a growth in the development of retirement communities for sale by lease-
hold. Developers in this niche market include Retirement Villages and McCarthy & Stone. This is
an expensive option for a significant number of older people particularly in relation to on-going costs
such as service and management charges.
In 2012 the Joseph Rowntree Foundation (JRF) published a report that stated that the specialist
housing on offer did not reflect the choices most older people make. They also stated that while three
quarters of older people are owner occupiers only a quarter of specialist housing is for sale. Those
properties traditionally built by the social housing sector because of pressures on funding and scheme
viability tend to have only one bedroom. Older people aspire to a minimum of two bedrooms for
many reasons. They concluded that there has been slow progress in developing different housing
options for older people. Specialist retirement developers are seen as having a limited model that for
many is not affordable. General house builders, who have the opportunity to develop mixed age hous-
ing, were seen as not designing with older people in mind as a target market. In 2013 JRF concluded
that there was insufficient investment in specialised housing options and that this lack of investment
was compounded by the economic downturn in the housing market.
The government has in the light of this committed, via the Department of Health, £160 million of
capital funding for specialist housing providers to bring forward proposals for development of special-
ist housing to meet the needs of older people (and adults with disabilities) outside of London in the 5
years from 2013–14. This fund is to be managed by the Homes and Community Agency.
Other trends within housing and older people are focused around keeping people independent in
their own home through direct support such as care workers; assisted technologies such as community
alarm systems and remote health monitoring; handy person services carrying out small-scale repairs
and other tasks such as hanging curtains; advice services such as First Stop providing free independ-
ent advice on housing, care and finance; and adaptations. The latter process for those in the private
and owner occupied sectors is managed by a network of Home Improvement Agencies. The agencies
advise on the type of improvements and adaptations needed, assist with applications for grants and
loans; help to find reputable tradespeople; and oversee the work. Home Improvement Agencies are
not-for-profit organisations supported by the government and local authorities.

Further reading
DCLG (2013) ‘Providing Housing and Support for Older and Vulnerable People’, available at: www.gov.uk/
government/policies/providing-housing-support-for-older-and-vulnerable-people (accessed 20/11/2013).
DCLG/DoH/DWP (2007) Lifetime Homes, Lifetime Neighbourhoods: A national strategy for housing in an ageing society,
DCLG, London.
Joseph Rowntree Foundation, available at: www.jrf.org.uk/work/workarea/housing-with-care-older-people (accessed
20/11/2013).
Joseph Rowntree Foundation (2012) Older People’s Housing: Choice, quality of life and under occupation, JRF, York.
16 Sustainability
Graham Capper, John Holmes, Ernie Jowsey, Sara Lilley, David McGuinness
and Simon Robson

16.1 Sustainable development

Key terms: inter-generational equity; intra-generational equity; environmental limits; mega-cities;
ecological footprint
A definition of sustainable development that is often used is: ‘development that meets the needs of the
present without compromising the ability of future generations to meet their own needs’. This comes
from the United Nations World Commission on Environment and Development report of 1987
(often known as the Brundtland Report after its chairperson). It incorporates the concept of inter-
generational equity or fairness to people in the future.
The concept of sustainable development also requires intra-generational equity or fairness to the
current generation in the form of relief of poverty and decent living standards in both the developed
and the developing world. The built environment and especially world cities play a key role in achiev-
ing sustainable development and inter- and intra-generational equity.
Sustainable development has a number of practical features that can be implemented directly in
policies for the built environment. They include:

● Environmental limits should not be exceeded e.g. absorption of waste, protection against radiation,
overuse of resources, air quality etc. The precautionary principle should be adopted where there
is any doubt.
● Demand management should follow an acceptance of environmental capacity limits, e.g. instead
of building roads or airports in anticipation of more demand (which is then self-fulfilling) the
increase in demand should be managed. This is done for energy through conservation and effi-
ciency measures rather than building new power stations.
● Environmental efficiency – this can be increased by:
– increasing durability
– increasing technical efficiency
– avoiding overuse of renewable natural resources (faster than replenishment)
– closing resource loops by reuse, recycling and salvage
– reducing primary non-renewable resource use.
● Welfare efficiency means gaining the greatest human benefit from each unit of economic activity.
Environmental issues cannot be separated from social issues and the built environment should
protect and enhance health.
● Equity for people in the current generation (intra-generational equity) because poverty leads to
environmental damage.
 Sustainability 403
According to the United Nations, 70 per cent of the world population will be urban dwellers by 2050.
Mega-regions have developed where urbanisation has spread to join cities together to form continuous
urban sprawl, often with unbalanced development, income inequalities and slum shanty towns. The
largest of the mega-regions is Hong Kong–Shenhzen–Guangzhou in China, which is home to about
120 million people. Other mega-regions have developed in Japan and Brazil, and are developing in
India, west Africa and elsewhere in the developing world.
The UN-Habitat report in March 2010 described the process of urbanisation and ‘endless cities’
as unstoppable but generally positive because these regions are driving wealth. The top 25 cities in
the world account for more than half the world’s wealth and the five largest cities in India and China
account for 50 per cent of the wealth in those countries. Migration to cities for economic reasons
continues at a fast pace and much of the wealth in rural areas comes from people in urban areas send-
ing money back. The process of urban sprawl, however, is wasteful, adds to transport costs, increases
energy consumption, requires more resources and causes the loss of prime farmland.
The biggest threat to sustainable cities comes from inequalities of income. The more unequal cities
become, the higher the risk that economic disparities will result in social and political tension. Cities
that are prospering the most are generally those that are reducing inequalities (UN Habitat 2012/13).
The ecological footprint of cities is the land required to feed them, to supply their water, to supply
their timber and other products and to reabsorb their carbon dioxide emissions by areas covered with
growing vegetation. For London this is at least 50 million acres (which equals the Great Britain land
area) or 125 times its surface area of 400,000 acres. If the population of the world lived at the standards
of USA citizens, then three planets would be needed. A typical North American city with a popula-
tion of 650,000 would require 30,000 square kilometres of land – in comparison, a similar size city in
India would require 2,800 square kilometres (Wackernagel and Rees, 1996). The high levels of con-
sumption are associated with large amounts of waste and pollution which are causing health problems
and climate change. Changing this is a central objective of sustainable development policies. The built
environment can be made more sustainable by achieving targets to reduce its ecological footprint.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 14.
UN (2009) ‘World Economic Situation and Prospects 2009’, Doc. No. E.09.II.C.2, available at: www.un.org/esa/
policy/wess/wesp.html (accessed 03/12/2013).
UN-Habitat (2010) State of the World’s Cities 2010/2011, Bridging the Urban Divide, available at: http://
sustainabledevelopment.un.org/content/documents/11143016_alt.pdf (accessed 05/06/2014).
UN-Habitat (2012/13) State of the World’s Cities 2012/2013, available at: http://www.unhabitat.org/pmss/
listItemDetails.aspx?publicationID=3387 (accessed 24/03/14).
Wackernagel, M. and Rees, B. (1996) Our Ecological Footprint, New Society Publications, Canada.
World Commission on Environment and Development (1987) Our Common Future, ‘The Brundtland Report’, Oxford
University Press, Oxford.

16.2 Biomass
Key terms: renewable energy; energy policy; renewable heat incentive
Biomass is the catch-all term used to describe energy primarily generated from plant based sources
rather than fossil fuels and can include:
● wood and wood residues (chunks, sawdust, pellets, chips)
● agricultural residues (straw, chaff, husks, animal litter and manure)
● energy crops (hybrid poplars, switchgrass, willows)
● municipal solid waste (MSW).
404 Capper, Holmes, Jowsey et al.
Biomass is considered to be a renewable energy source, as opposed to the burning of fossil fuels. If the bio-
mass material comes from sustainable sources, such as miscanthus grass or short coppice willow (which has
a three-year rotation), it may be deemed to be carbon neutral because the carbon released from the plant
material has already been fixed from the atmosphere through the process of photosynthesis. However,
environmentalists have raised concerns that as demand increases for biomass it is likely that sufficient sup-
ply can only be achieved through harvesting of mature trees, which will cause a considerable carbon debt.
Biomass can be converted into direct heat energy through burning or this heat energy can be used
for electricity generation through a steam turbine. Biomass has a significant role in achieving the UK’s
target of 15 per cent renewable energy by 2020. There are plans to convert coal-powered power stations
to biomass but this is a finely judged investment decision primarily based in the UK on carbon taxes and
government renewable energy subsidies. For example, in 2011 work began on the conversion of the 900
MW Tilbury power station to biomass but in 2013 the plan was shelved due to uncertainty about the
renewables subsidies. Meanwhile, Drax, the UK’s largest power station, which supplies 7 per cent of the
country’s electricity and burned 25,000 tons of coal per day in 2012 has committed to being predomi-
nantly biomass by 2017. This is likely to involve importing 7.5 million tons of biomass from the USA
and Canada which will need 4,600 sq miles of forest to maintain continuous supply. Despite the carbon
emissions involved in harvesting, processing and transporting the biomass material Drax claim that their
biomass generation has half the CO2 emissions of a modern gas-fired power station.
Prior to the discovery of North Sea gas in the 1970s the default heat source was coal; practically
this meant the delivery and storage of bulky, dirty fuel, manual or automatic feeding of boilers and the
disposal of ash. The discovery of natural gas and the installation of gas boilers and fires made the whole
process of keeping warm cheaper and cleaner. There has been significant research and development of
gas-fired technology to produce highly efficient (95 per cent) gas boilers which are readily understood
by the design and facilities management professions. The advent of biomass effectively returns heating
to a Victorian (but low carbon) age with the consequent need to relearn storage and delivery strate-
gies. Biomass heating installations in residential or commercial applications will have the same basic
requirements: a boiler, an automatic feed system for the biomass fuel, biomass storage area and easy
access for bulk delivery and disposal of ash. Compared to gas boiler installations, there are considerably
more moving parts and maintenance implications.
In urban residential applications biomass will not be competitive with gas-fired heating and is
only likely to be installed in small-scale district heating schemes in social housing – for example the
replacement of a boiler installation in a block of flats. In rural areas, where occupiers are dependent
on expensive oil or electricity as the primary heating source, biomass may be an attractive alternative
provided the residential property has sufficient space for the relatively large boiler, biomass feed hopper
and space to store the timber pellets which will normally be delivered in 15–20 kg bags. It should be
noted that timber pellets require considerable processing of the source timber which has to be finely
chopped and re-formed into pellets to a specific moisture content to allow for automatic boiler feeding
and minimising of ash production.
In commercial applications there has been a significant growth in installations over the past decade,
particularly to satisfy town and country planning conditions which have required 10 per cent of energy
to be supplied from renewable sources. In these instances compliance has been readily achieved by
installing a small biomass boiler as an adjunct to the main gas boiler installation. Anecdotal evidence
suggests that in many instances these biomass boilers are not normally switched on. However, as the
economics of gas/biomass fuels changes in future, biomass may become the primary fuel source.
Apart from these token installations there is a substantial body of experience in the UK on the successful
commercial application of biomass technology. One of the better examples is Queen Margaret University
Edinburgh. The university was built in 2008 as a low-carbon campus for 5,000 students. It illustrates the
best aspects of the biomass technology. The boiler installation and long-term fuel supply is a package deal
between the university and the Baccleuch Estate (largest landowner in the UK). The main heat source is an
 Sustainability 405
Austrian Kohlack boiler of 1,500 kW with two small gas boilers for summer use. The biomass installation
provides 90 per cent of the heat and hot water demand for the university and produces 75 per cent less car-
bon than the equivalent gas installation. The fuel is chipped timber from the Baccleuch Estates in Scotland
and can be supplied at up to 60 per cent moisture content as the boiler preheats the fuel. The short supply
line and minimal processing needed reduces the embedded carbon in the fuel supply.
A driver of demand for biomass heating has been the UK Government’s Renewable Heat Incentive
(RHI). This will provide a subsidy to a variety of renewable heat technologies, biomass, heat pumps
and solar collectors. The payment applies to installations completed after 2009 and will continue to be
paid for 20 years. It is likely that this subsidy will encourage the installation of more biomass heating
schemes. However, in 2013 the Government announced that it was planning to restrict RHI to power
stations, hence the uncertainty described earlier.
The wholesale adoption of biomass could have unintended consequences, for example, delivery of
biomass by truck (rather than gas by underground pipe) will have an impact on traffic density. Security
of supply and cost must also be considered; the cost of biomass has been predicted by the American
Energy Information Administration to be double the cost of natural gas by 2017 because of the reduc-
tion of gas cost due to fracking in the USA.
In the UK, biomass has been adopted as a renewable heat source; however, the technology is
more risky in terms of design, security of supply and ongoing maintenance compared to the default
gas installation. Future energy costs are difficult to predict – carbon taxes and subsidy regimes make
accurate calculation impossible. Moreover, the conventional wisdom that biomass is carbon neutral
is clearly flawed when supply chains are taken into consideration; however, coal is imported from
Austria and LPG from Qatar, so the question is: which is the least worst choice.

Further reading
Committee on Climate Change (2011) ‘Bioenergy Review’, available at: www.theccc.org.uk/publication/bioenergy-
review/ (accessed 24/10/2013).
MacKay, D. J. C. (2009) Sustainable Energy without the Hot Air, UIT Cambridge, Cambridge.

16.3 Building Research Establishment Environmental Assessment Method

Key terms: sustainable buildings; environmental assessment; environmental impact
The Building Research Establishment Environmental Assessment Method (BREEAM) is, as the name
suggests, an environmental assessment method devised and administered by BRE Global, a brand
owned by the BRE Trust, a charitable not for profit organisation. The BRE grew out of the Building
Research Station which was established by the government in the 1920s to carry out research into
building materials and set standards.
BREEAM is one of a number of environmental standards in existence around the world, in the
US LEED (Leadership in Energy and Environmental Design), in Australia, Greenstar and CASBEE
(Comprehensive Assessment System for Building Environmental Efficiency) in Japan. Almost every
developed country has devised an environmental assessment method, often with a methodology linked
to the specific climate conditions or environmental issues in the region. The International Institute for
Sustainable Development listed just under 900 methodologies in 2012.
The aims of BREEAM are listed by BRE as:

● to provide market recognition to low environmental impact buildings;

● to ensure best environmental practice is incorporated in buildings;
● to set criteria and standards surpassing those required by regulations and challenge the market to
provide innovative solutions that minimise the environmental impact of buildings;
406 Capper, Holmes, Jowsey et al.
● to raise the awareness of owners, occupants, designers and operators of the benefits of buildings
with a reduced impact on the environment;
● to allow organisations to demonstrate progress towards corporate environmental objectives.

When it was devised in the 1990s there was a need for an independent environmental assessment
system as property developers could claim to be producing ‘green’ buildings on the most spurious of
grounds. BREEAM takes a comprehensive approach to environmental sustainability allowing a pro-
ject to gain ‘credits’ under a wide range of criteria. The credit criteria and the weighting of the credits
are established by a panel of stakeholders, the criteria are modified regularly (every two or three years)
to keep them ahead of legislation and current practice. The main headings considered are:

● management (of the construction process);

● health and well-being (of the building occupants);
● energy (relating to energy consumption as measured by the energy performance certification
(EPC) metering and low- or zero-carbon technologies);
● transport (relating to the location of the building and carbon generated by commuting or visitors);
● water (consumption and metering);
● materials (to encourage the selection of low environmental impact construction materials linked
to the Green Guide to Specification);
● waste (to discourage wastage of materials in the construction process);
● land use and ecology (to encourage the use of brownfield sites, the preservation of ecological fea-
tures and enhancement of biodiversity);
● pollution (to reduce pollution effects across a wide range of issues including light, noise and
watercourses).

As demand for environmental accreditation has increased so BRE Global have devised BREEAM
methodologies for a broad range of building types, beginning with offices, then going on to cover
industrial buildings, education, prisons, courts and retail. Nonstandard buildings can be covered by an
‘other buildings’ BREEAM which BRE will devise on a bespoke basis. Buildings can be designated as
Pass, Good, Very Good, Excellent or Outstanding; the Outstanding designation has been added since 2008
to recognise the most sustainable buildings which will comprise only the top 3 per cent of developments.
BRE Global train and licence BREEAM assessors through what is effectively a franchise system.
BRE Global are ISO 9001 accredited and have rigorous QA procedures to monitor the quality of
assessor reports and adherence to technical standards.
Despite being devised in 1990 BREEAM accreditation was relatively rare until 2000 when the
Government made a policy decision that they would not occupy offices unless they had a Very Good
BREEAM rating. This policy was generally ignored until about 2005 when the requirement was
adopted by regional development agencies when approving grants, and planning authorities began
to impose BREEAM ratings as a condition of granting planning permission. These developments
forced design teams to engage with the BREEAM process and as a result there has been a consid-
erable improvement in certain aspects of the construction process – for example, the Considerate
Constructors scheme and the availability of timber from sustainable sources. Initially BREEAM
accreditation was based on the building design at the procurement phase but now accreditation can be
achieved at the design stage and the post construction stage to ensure that the aspirations of the design
team are achieved in practice.
As BREEAM has matured so the detail of the BREEAM manuals have grown and the time needed
to collect the evidence needed. Design teams and clients can be very selective as to which credits they
will attempt to gain – some credits are relatively easy to gain while others, such as the responsible
sourcing of materials, require extensive time-consuming evidence collection. In some instances the
 Sustainability 407
provision of sub meters to measure substantial energy uses and sub tenancies are installed to gain the
credit, but not used by office managers when the building is occupied.
BREEAM has become institutionalised in the UK but as recently as 2011 research by Fuerst and
McAllister found no statistical evidence of enhanced appraised property value. BREEAM’s effect is to
provide the developer and occupier the assurance that buildings are built to an accepted environmental
standard; however, research shows that this is no guarantee that the building will be economical to run
or pleasant to work in.

Further reading
Fuerst, F. and McAllister, P. (2011) ‘The impact of Energy Performance Certificates on the rental and capital values of
commercial property assets’, Energy Policy, 39: 6608–6614.
www.bsria.co.uk/news/breeam-or-leed/ (accessed 20/11/2013).
www.bre.co.uk/greenguide/podpage.jsp?id=2126 (accessed 20/11/2013).

16.4 Code for Sustainable Homes

Key terms: environmental benchmarking; market differentiation; building regulations; zero carbon homes
The Code for Sustainable Homes has its origin in Ecohomes, the residential environmental bench-
marking scheme devised by the Building Research Establishment (BRE) in 2000. Ecohomes was
effectively ‘nationalised’ when Defra commissioned the BRE to revise the scheme to become a com-
pulsory rating and certification system rather than a voluntary label. The Code is now the national
standard for the sustainable design and construction of new homes. The Code aims to reduce carbon
emissions and create homes that are more sustainable. It set design principles for energy, materials and
water usage and to improve health, reduce pollution and minimise waste. The Code measures the
sustainability of a new home against nine categories of sustainable design, rating the ‘whole home’ as
a complete package.
The Code’s nine elements of design and construction are:

● Energy and CO2 emissions

● Water use
● Materials
● Surface water runoff
● Waste
● Pollution
● Health and well-being
● Management
● Ecology.

Similar to BREEAM, homes can be classified in two stages: at the design stage and after a post con-
struction review. The buildings can be classified from level 1 to 6 stars where level 6 represents a
zero carbon home. Code level 3 has become the minimum standard for social housing funded by the
Homes and Communities Agency (HCA) and their counterparts in Wales and Northern Ireland.
The code provisions deal with fundamental design and specification issues – for example, fittings to
reduce energy and water consumption and the selection of materials of low environmental impact. In
addition, credits are awarded for features that help the occupant to lead a more sustainable lifestyle – for
example, an outdoor clothes drying line, cycle storage shed and rainwater storage butts. The Code sets
minimum standards for energy and water use at each level. It is intended to provide valuable information
to home buyers, and offers builders a tool with which to differentiate themselves in sustainability terms.
408 Capper, Holmes, Jowsey et al.
The Code may be described as a ‘top-down’ scheme, enforced as a condition of funding by HCA
and occasionally by local authorities as a condition when selling land to house builders. It is notice-
able, however, that the Code does not appear to be affecting the marketability of properties. A review
of new homes for sale by house builders and existing homes being sold by estate agents shows that
the Code is not being used as a sales feature. Legislation insists that the energy performance certificate
(EPC) should be featured in the sales particulars in an attempt to introduce energy performance as an
issue in the sales negotiation. In fact, homes are bought with reference to location, neighbourhood,
size, age, garden, public transport and school facilities. For the vast majority of home buyers the energy
performance of their home or indeed the provision of a rainwater butt is not a deal breaker.
In July 2007 the Government’s Building a Greener Future policy statement announced that all new
homes would be zero carbon from 2016. There were to be clear carbon reduction milestones along
the way, specifically in 2010 and 2013. The 2010 Building Regulations required a 25 per cent reduc-
tion in emissions; however, the 2013 revision has watered down the proposed reduction from the
intended 25 per cent to just 6 per cent. This has been in response to an election commitment not to
put additional burdens on house builders during the current parliament. In addition, the requirement
for zero carbon energy for the home has been amended to exclude electrical appliances. Consultation
on ‘allowable solutions’, i.e. what technology is deemed to be zero carbon and to what extent carbon
emissions may be mitigated off site has yet to be agreed. This reduction in ambition and lack of clar-
ity has left the house building industry in some disarray; some developers are working on designs to
achieve the zero carbon target but the lack of certainty has undermined the drive to innovate for many.
It may be that the 2016 target is postponed to try to ensure that the additional cost of zero carbon is
only imposed when the market has fully recovered from the 2008 recession.

Further reading
DCLG Code for Sustainable Homes, available at: www.gov.uk/government/policies/improving-the-energy-efficiency-
of-buildings-and-using-planning-to-protect-the-environment/supporting-pages/code-for-sustainable-homes
(accessed 20/11/2013).
DCLG Code for Sustainable Homes Case Studies, Vols 1, 2 and 3, DCLG, London.

16.5 Combined heat and power

Key terms: cogeneration; sustainable buildings; local energy generation
The conventional means of generating electricity in most developed countries is to have a centralised
power station using gas, coal or oil to produce steam that passes through as turbine to produce elec-
tricity that is then distributed around the region using a high voltage network. There are losses at each
stage, in converting the fuel into steam, in the generation system and in the distribution network. The
Department for Energy and Climate Change quote end user efficiency figures of 35 per cent for coal
and 48 per cent for gas generation. How much better would it be if the electricity could be generated
locally so that the waste heat that would otherwise disappear up a cooling tower could be used to heat
a building, and the electricity used on site to avoid losses in the distribution system?
The solution is called combined heat and power (CHP), sometimes referred to as cogeneration.
It has been used extensively in continental Europe, particularly when hooked up to district housing
schemes. Although the theory looks indisputable, the practicalities at the local and individual level can
be problematic and need careful scrutiny and design.
CHP systems can be classified as large-scale custom built CHP for industrial applications, often
using steam or gas turbines for outputs of 1–100 MWe. Small-scale packaged CHP systems of 60 kW
to 1.5 MWe will use a reciprocating engine while a micro-CHP, designed for individual homes, uses
a sterling engine as its primary source.
 Sustainability 409
In more detail, a modern packaged CHP system will comprise a reciprocating engine, similar in
scale to a truck or a ship (depending on the scale of the building), fed by gas or oil, this works at its
optimum power to produce electricity which is fed directly into the host building. The waste heat,
which in a truck or ship would be removed to a radiator and out through the exhaust system, is care-
fully harvested through heat exchangers to heat water for building heating and domestic hot water.
To work effectively, the host building needs a fairly constant demand for heat and electricity; for this
reason they are most effective in hospitals and swimming pools, both of which have a constant and
substantial demand for hot water.
In substantial applications such as hospitals CHP has provided a dual benefit of reducing energy
costs and CO2 emissions. Some hospital trusts have also entered into private finance initiative (PFI)
schemes with energy supply companies (ESCOs); the ESCO supplies and maintains the CHP system
in return for an inflation-linked energy cost over 25 years. The risk of installing and maintaining the
capital equipment is transferred to the ESCO but the risk to the Hospital Trust is to ensure that they
have judged their demand for heat and energy correctly and they are not left with an energy contract
for a hospital they may wish to run down or close during the period for the PFI contract.
At the domestic scale, micro CHP, which comprises a wall-mounted, gas-fired Sterling engine,
will generate electricity when heating. It is similar in size to a large wall-mounted gas boiler and
thus is an easy replacement for an existing gas boiler. It would be best installed in a utility room
or garage as the engine gives off a mechanical hum. Typically, micro CHP systems will generate
1Kw of electricity, the homeowner will gain the main benefit if they can use the electricity when
the heating is being used, and this may mean doing the ironing or laundry in the evening rather
than during the day. Currently in the UK micro CHP is eligible for the Feed-in Tariff of 10p for
each kWh of energy generated and a further 3p for each kWh exported to the grid, provided the
CHP system and installer are certified under the Micro Generation Certification Scheme. While the
sterling engine technology is proven over decades, micro CHP has not been installed widely. The
public may be wary of an unfamiliar technology and the difficulty of securing maintenance services
from local plumbers.
CHP has been successfully embraced by large-scale industrial, leisure and health undertakings.
Domestic installations have had limited application – perhaps because of the high efficiency of con-
ventional gas boilers and competition and promotion of PV panels for those who want to make an
investment in renewable technology.

Further reading
Department of Energy and Climate Change ‘CHP Focus’, available at: http://chp.decc.gov.uk/cms/ (accessed
20/11/2013).
Energy Saving Trust, ‘Choosing a renewable technology’ available at: www.energysavingtrust.org.uk/Generating-
energy/Choosing-a-renewable-technology (accessed 20/11/2013).

16.6 Electric vehicles and electric vehicle infrastructure

Key terms: battery electric vehicles; hybrid electric vehicles; electric vehicle charging infrastructure;
electric vehicle charge points
The Climate Change Act (2008) established a long-term framework and targets to reduce the UK’s
greenhouse gas emissions by at least 80 per cent, compared to 1990 levels, by 2050. Transport accounts
for approximately a quarter of domestic carbon dioxide (CO2) and other greenhouse gas emissions in
the UK and is contributing to declining air quality. Reducing greenhouse gases from transport will help
the long-term goal of reducing the UK’s greenhouse gas emissions by at least 80 per cent compared to
1990 levels by 2050. Ultra-low-emission vehicles – any vehicle that emits extremely low levels of carbon
410 Capper, Holmes, Jowsey et al.
emissions compared with current conventional vehicles, such as electric, plug-in hybrid and hydrogen
powered cars and vans – help cut down greenhouse gas emissions and air pollution on our roads.
A battery electric vehicle is a vehicle that is run on an electric motor, powered by a rechargeable
battery, charged via the mains electricity. They are entirely run on electricity, and with no petrol or
diesel used, the vehicles do not produce any tailpipe emissions. Most EVs (electric vehicles) offer a full
battery range of about 100 miles, for example the Nissan Leaf travels 124 miles per full charge. The
distance/range of the EV when fully charged largely depends on how the car is driven, dependent on
driving style, road condition, weather, heating/air conditioning used on the journey etc. Driving the
car in the most efficient way maximises the car’s range and ensures driver satisfaction.
A hybrid electric vehicle is a vehicle powered by a combustion engine with varying levels of electri-
cal energy storage captured when braking and stored in a battery or supercapacitor.
A hydrogen fuel cell electric vehicle is a vehicle driven by an electric motor powered by a hydrogen
fuel cell that creates electricity on board.
Plug-in hybrid electric vehicles (PHEVs) combine petrol or diesel engines with a battery and electric
motor; they can be plugged into the mains electricity to charge the battery, and provide a much longer
driving range on electric-only power. The batteries have a greater storage capacity than an existing hybrid,
making it possible to drive considerably further using the electric motor only. A PHEV is a plug-in version of
a full hybrid, usually with a larger battery and a greater electric driving range. In addition to capturing energy
when braking, the on-board battery can be charged from an external source when the vehicle is not in use.
Hybrid cars use both electric motors and a conventional petrol or diesel engine to drive the vehicle.
A series hybrid is a plug-in hybrid where the wheels are driven exclusively by an electric motor with
an additional internal combustion engine connected in series. The engine runs at optimum efficiency
to power an on-board generator to charge the battery. ‘Range extenders’, which use a small combus-
tion engine to charge the battery to enable longer-distance journeys, are a type of series hybrid.
In the UK, the Office of Low Emission Vehicles (OLEV) is the unit that brings together the work
of three government departments; the Department for Transport (DfT), the Department for Business,
Innovation and Skills (BIS), and the Department of Energy and Climate Change (DECC). OLEV
supports the early market for ultra-low emission vehicles (ULEV) and is responsible for:

● grants to reduce the upfront cost of new ULEVs;

● a programme of research through the Technology Strategy Board and supporting wider green
growth opportunities;
● encouraging UK businesses to seize commercial opportunities in the ULEV sector;
● raising awareness, developing and strengthening the capability of ULEV manufacturing, demon-
stration and the associated UK supply chain;
● a nationwide recharging infrastructure strategy, including funding to eight pilot areas under the
Plugged-in Places programme;
● contributing to the development of new carbon dioxide emissions standards (OLEV, 2013).

Government support in the form of the Plug-in Vehicle Grant is available to reduce the higher initial
cost of purchasing an electric vehicle. This provides a subsidy of:

● 25 per cent, up to £5,000, towards the cost of an electric car;

● 20 per cent, up to £8,000, towards the cost of an electric van.

At the end of September 2013, 5,702 claims had been made through the Plug-in Car Grant scheme
(OLEV, no date).
Cenex – the UK’s first Centre of Excellence for low carbon and fuel cell technologies – is a deliv-
ery agency, established with support from the Governments Department for Business, Innovation and
 Sustainability 411
Skills, to promote UK market development in low carbon and fuel cell technologies for transport
applications. Cenex is known for its research into the market dynamics for low carbon vehicles of all
types as well as its analysis work on real-world operation and user behaviour for electric vehicles and
vehicles running on natural gas, bio-methane and hydrogen (CENEX, no date).

EV charging infrastructure
There are electric vehicle charge points available to use at accessible public locations. Examples of
the charge point locations include on-street parking, businesses and organisation’s car parks, hotel car
parks, airports, shopping centres, supermarkets, restaurants, cafés, as well as at existing petrol stations.
There are three main types of EV charging infrastructure in the UK:

1 Standard (3 kW) points can be used to top up an EV battery in a couple of hours and charge a
battery from flat to full in 6 to 8 hours.
2 Fast (7–46 kW) points are able to top up batteries in 30 minutes, and charge from flat to full in less
than 4 hours.
3 Rapid/Quick (50–250 kW) chargers will act as an emergency to be utilised when drivers have a
near-empty battery. This is due to the high level of infrastructure required for the technology to
operate safely, as result these will be located in strategic off-road locations.

OLEV provides funding to the Plugged-in Places programme (2011–13) which offers match-funding
to consortia of businesses and public sector partners to install electric vehicle charging points. There
are eight Plugged-in Places: East of England; Greater Manchester; London; Midlands; Milton Keynes;
north-east England; Northern Ireland and Scotland (OLEV, no date). By the end of March 2013, over
4,000 charge points had been provided through the eight Plugged-in Places projects. About 65 per
cent of these Plugged-in Places charge points are publicly accessible. Using data provided by charge
point manufacturers, it is estimated that non Plugged-in Places organisations may have also installed
about 5,000 charge points nationwide (OLEV, no date).
Buyers of electric vehicles need to know that that there is sufficient electric vehicle charge point
infrastructure available to make them feel confident that they are able to easily charge the electric vehicle.
This will help to alleviate range anxiety, one of the main barriers to uptake of EVs. Range anxiety is the
driver’s fear that the electric vehicle battery will run out of power before they reach their destination
or a charge point. There are a number of different resources for EV drivers to locate EV charge points,
including websites, mobile phone applications and in-car technology such as satellite navigation systems.

Further reading
CENEX, available at: www.cenex.co.uk/ (accessed 21/11/2013).
Department of Energy and Climate Change (2008) ‘The Climate Change Act’, available at: www.decc.gov.uk/en/
content/cms/legislation/cc_act_08/cc_act_08.aspx (accessed 21/11/2013).
Department of Energy and Climate Change (2011) ‘The Low Carbon Plan: Delivering our Low Carbon Future’,
Crown Copyright.
Department of Energy and Climate Change, available at: www.gov.uk/government/organisations/department-of-
energy-climate-change (accessed 21/11/2013).
Department for Transport, available at: www.gov.uk/government/organisations/department-for-transport (accessed
21/11/2013).
OLEV, available at: www.gov.uk/government/organisations/office-for-low-emission-vehicles (accessed 21/11/2013).
Plugged in Places programme, available at: www.gov.uk/government/publications/plugged-in-places (accessed 21/11/2013).
Reducing greenhouse gases and other emissions from transport, available at: www.gov.uk/government/policies/
reducing-greenhouse-gases-and-other-emissions-from-transport#actions (accessed 21/11/2013).
412 Capper, Holmes, Jowsey et al.
16.7 Energy policy and the built environment
Key terms: energy efficiency; energy policy; housing; built environment; renewable; energy use
The UK Government Energy White Paper (DTI, 2007) introduced a commitment to reduce carbon
dioxide emissions by 60 per cent by 2050 in the UK. The UK’s legally binding target under the Kyoto
protocol is to cut greenhouse gas emissions by 12.5 per cent below 1990 levels by 2008–12. The 2008
Climate Change Act established a target of a 34 per cent reduction in carbon emissions by 2020 and at
least 80 per cent by 2050. Five-year carbon budgets set the trajectory to 2050 and in the first carbon
budget period (2008–12) the limit of greenhouse gas emissions is 3,018 MtCO2e. The provisional
figures for 2011 suggest that both the international (Kyoto) and domestic targets for reducing green-
house gases are being met. The 2011 UK emissions are provisionally estimated to be approximately
570 MtCO2e (26 per cent below the baseline).
In 2009 buildings accounted for about 45 per cent of the UK’s total carbon emissions: 27 per cent
from domestic buildings and 18 per cent from non-domestic buildings. Much of these emissions
come from space heating and hot water provision as a result of burning fossil fuels to heat buildings,
and generating the electricity that powers lighting and appliances. In order to achieve such ambitious
targets to reduce carbon dioxide emissions, the UK government has recognised the need to target the
domestic housing sector. The energy consumed in homes accounts for more than a quarter of energy
use and carbon dioxide emissions in Great Britain. More energy is used in housing than either road
transport or industry and housing represents a major opportunity to cut energy use and CO2 emissions
(DECC, 2011) and therefore mitigate the impacts of climate change. The energy we use for heating
and powering our non-domestic buildings is responsible for around 12 per cent of the UK’s emissions,
three-quarters of which comes from private businesses, with the remainder from public buildings.
In addition, energy use for cooling is more significant in the commercial sector than for residential
buildings.
Since 1990, government policies, including Warm Front, the Energy Efficiency Commitment and
the Carbon Emissions Reduction Target have dramatically accelerated the deployment of cavity wall
and loft insulation: a simple method for improving the energy efficiency of buildings and contributing
to decreased carbon dioxide emissions and fuel bills for householders. In 2010, over 400,000 existing
homes received cavity wall insulation (DECC, 2011), and this increased by 31 per cent between April
2008 and April 2012, meaning 11.4 million of 19 million homes with cavities were insulated (DECC,
2012). Over a million lofts were insulated in 2010 (DECC, 2011) and the number of homes with loft
insulation (at least 125 mm) increased by 47 per cent between April 2008 and April 2012, meaning
14.5 million of the 23.4 million homes with lofts are insulated to this level (DECC, 2012a). New
buildings standards mean that a house built today demands less energy for space heating required by a
house built before 1990, as well as new condensing boiler standards (DECC, 2011). Since legislation
was introduced in 2005 mandating the installation of condensing boilers in all but special applications,
installation rates have increased to over 1.5 million a year which in turn has saved 4.1 MtCO2e alone.
This has led to savings for many householders (approximately £95 off their energy bills this year) and
at least £800 million for the UK as a whole.
Further UK government energy policies relevant to the built environment include:

Green Deal
The Green Deal, launched early 2013 and first outlined in the Energy Act 2011, is the Government’s
energy efficiency policy to overcome barriers to improving the UK’s building stock and provide a
means to aid households and businesses to improve energy efficiency with no upfront additional cost.
Individuals are able to pay back the costs of installing the measures through the energy savings that they
have made on their energy bills (DECC, 2011). This will promote a ‘whole house’ approach – offering
 Sustainability 413
a package of measures and ensuring the needs of the property are assessed as a whole. Micro generation
technologies may be eligible for the Green Deal.
Private rented buildings are one of the most difficult sectors to improve. While tenants benefit
from more energy efficient buildings, the landlords decide whether to pay to make the changes. The
Green Deal will help tackle this split incentive. From 2016, domestic private landlords will not be able
unreasonably to refuse their tenants’ requests for consent to energy efficiency improvements. In addi-
tion, the Energy Act 2011 contains provisions for a minimum standard for private rented housing and
commercial rented property from 2018, and the Government intends for this to be set at EPC band
E. Use of these regulation-making powers is conditional on there being no net or upfront costs to
landlords, and the regulations themselves would be subject to caveats setting out exemptions. If these
powers are used, the Government envisages that landlords would be required to reach the minimum
standard or carry out the maximum package of measures fundable under the Green Deal and Energy
Company Obligation (even if this does not take them to band E).

Energy Company Obligation

The Energy Company Obligation (ECO) was introduced in January 2013 to reduce the UK’s energy
consumption and support people living in fuel poverty, for those most in need and for properties that
are harder to treat. The ECO funds energy efficiency improvements worth around £1.3 billion every
year. This will play an important role in supporting the installation of solid wall insulation, and also in
providing upfront support for basic heating and insulation measures for low-income and vulnerable
households. The costs of ECO are assumed to be spread across all household energy bills in Britain. It
will place a duty on energy companies both to reduce emissions through undertaking solid wall insula-
tion and to tackle fuel poverty by installing central heating systems, replacing boilers, and subsidising
cavity wall and loft insulation.

Feed-in Tariff
The Feed-in Tariff (FiTs) scheme was introduced April 2010, under the Energy Act 2008. People
are able to invest in small-scale low-carbon electricity, in return for a guaranteed payment from an
electricity supplier of their choice, for the electricity they generate and use, as well as a guaranteed pay-
ment for unused surplus electricity they export back to the grid (DECC, 2012b). At the end of quarter
1, 2012, 247,953 FiTs installations were confirmed, 69 per cent of the total installed capacity were
in the domestic sector. The majority of installations were solar PV, with other technologies installed
being micro-CHP, anaerobic digestion, hydro and wind (DECC, 2012b).

Renewables Obligation and Renewable Heat Incentive

The Renewables Obligation (RO) aims to support the use of large-scale renewable electricity gen-
eration and the Renewable Heat Incentive (RHI), introduced in March 2011, supports generation
of heat from renewable sources at all scales and provides long-term financial support to renewable
heat installations, to encourage the uptake of renewable heat (DECC, 2012b). The RHI Premium
Payment scheme managed by the Energy Saving Trust, provided £15 million funding to households
to help them to buy renewable heating technologies (DECC, 2013).

Smart meters
Government aims for all homes and small businesses to have smart meters by 2020 and energy
suppliers will be required to install smart meters. The Government is mandating the provision
414 Capper, Holmes, Jowsey et al.
of in-home displays for domestic customers ensuring that consumers have the information and
advice to make changes that will cut carbon and energy bills (through its consumer engagement
strategy) The in-home display (IHD) shows how much energy consumers are using and what it
will cost, encouraging controlled energy use and energy savings and money savings. More spe-
cifically, smart meters will give consumers: near real-time information on energy use, expressed
in pounds and pence; the ability to manage their energy use, save money and reduce emissions;
an end to estimated billing – people will only be billed for the energy they actually use, helping
them to budget better; and easier switching – it will be smoother and faster to switch suppliers to
get the best deals.

CRC Energy Efficiency Scheme

The CRC Energy Efficiency Scheme (or CRC Scheme) is designed to improve energy efficiency and
cut emissions in large public and private sector organisations. It requires participants to buy allow-
ances for every tonne of carbon they emit. It is expected to reduce non-traded carbon emissions by 16
million tonnes by 2027, supporting our objective to achieve an 80 per cent reduction in UK carbon
emissions by 2050. The CRC scheme applies to emissions not already covered by Climate Change
Agreements (CCAs) and the EU Emissions Trading System (EUETS). Organisations that use more
than 6,000 megawatt-hours (MWh) of electricity settled on the half-hourly market in a qualification
year are required to participate, and must buy allowances for every tonne of carbon they emit (DECC,
2013).

National Planning Policy Framework

The National Planning Policy Framework outlines how developments should be planned to reduce
carbon emissions from buildings. Local planning authorities are required to make sure that new
developments are energy efficient, while new homes are required to be zero carbon from 2016,
which may be extended to other buildings from 2019. EPCs have been improved so that they are
more informative and user friendly. Green Deal is mentioned, to enable people to pay for home
improvements over time using savings on their regular energy bills. The Code for Sustainable
Homes is introduced which provides a single national standard for the design and construction of
sustainable new homes (DECC, 2011).

Building Regulations
The Government is committed to improvements in new-build standards through changes to
Part L of the Building Regulations in England and their equivalents within the devolved admin-
istrations. Increased standards of insulation were introduced by the changes to the Building
Regulations in 2006 and 2010. In October 2010, the new regulations in England and Wales
introduced a 25 per cent improvement on 2006 carbon emissions standards for new buildings,
while regulation in Scotland delivered a 30 per cent reduction on their 2007 standards. It is
intended that changes in 2013 will be an ‘interim step on the trajectory towards achieving zero
carbon standards’ for new homes by 2016. The changes will come into effect on 6 April 2014.
Domestic new buildings will have to be 6 per cent more efficient than current requirements
and for non-domestic new buildings the requirement will be 9 per cent. Despite these require-
ments and the perception that they have and do demand onerous standards of both designers and
constructors (the 2013 standards require a 44 per cent efficiency improvement over the 2006
baseline), the low number of new house completions means that the impact of such changes is
likely to be limited (DECC, 2011).
 Sustainability 415
Further reading
DECC (2011) ‘The Carbon Plan: Delivering Our Low Carbon Future’. Crown Copyright.
DECC (2012a) Statistical Release: Experimental Statistics. Revised estimates of Home Insulation Levels in Great
Britain: April 2012. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment data/
file/49407/5457-stats-release-estimates-home-ins-apr2012.pdf
DECC (2012b) ‘UK Energy in Brief’, available at: https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/65898/942-uk-energy-in-brief-2012.pdf (accessed 19/11/2013).
DECC (2013) ‘Domestic Renewable Heat Incentive: The first step to transforming the way we heat our homes’,
available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/212089/Domestic_
RHI_policy_statment.pdf (accessed 20/11/2014).
Department of Energy and Climate Change, Committee on Climate Change, Department for Environment, Food and
Rural Affairs and Department for Transport (2013) ‘Reducing the UK’s greenhouse gas emissions by 80% by 2050’,
available at: www.gov.uk/government/policies/reducing-the-uk-s-greenhouse-gas-emissions-by-80-by-2050
(accessed 21/11/2013).
Department for Communities and Local Government (2013) ‘Improving the energy efficiency of buildings and using
planning to protect the environment’, available at: www.gov.uk/government/policies/improving-the-energy-
efficiency-of-buildings-and-using-planning-to-protect-the-environment (accessed 21/11/2013).
DTI (2007) ‘Meeting the Energy Challenge: A White Paper on energy’, available at: http://www.berr.gov.uk/files/
file39387.pdf (accessed 19/11/2013).

16.8 Environmental impact assessment

Key terms screening; scoping; baseline; impact prediction and assessment; mitigation; alternatives;
decision making
A process for identifying the likely consequences for the biophysical environment and for man’s health and
welfare of implementing particular activities and for conveying this information, at a stage when it can materi-
ally affect their decision to those responsible for sanctioning the proposals.
(Wathern, 1990)

This definition of environmental impact assessment (EIA), although dated, encapsulates the essence of
the process. The key issue is that decision-makers, often planning officers, committees and inspectors
are fully apprised of the likely environmental impacts of a development proposal prior to permission
being granted or refused.
A key milestone in the evolution of EIA was the National Environmental Policy Act (NEPA)
which was enacted in the US in 1969. NEPA established the purpose of EIA and established the basic
procedures. Since 1969 the majority of developed countries, and many developing countries, have
introduced some form of EIA for major projects.
The main stages in the EIA process are as follows. Although illustrated as a linear process in Figure
16.8.1, iteration of some of the stages may be required.
The first stage of the process is to determine whether an EIA is required, this is known as screening.
The decision will be made following a review of the type and scale of the development with reference
to various criteria.
Scoping is the process of deciding what should be included in the EIA. This is an important part
of the process to ensure that resources are focused on the most significant issues and that the report
produced will be useful and relevant to the ultimate decision-makers.
A baseline study is a description of conditions existing at a point in time against which subsequent
changes can be detected through monitoring.
416 Capper, Holmes, Jowsey et al.

Screening

Scoping

Baseline study

Impact prediction

Mitigation

Environmental
impact statement

EIS review and

desision making

Monitoring

Figure 16.8.1 The environmental impact assessment process.

An attempt must be made to predict the impact the proposed development will have on all the scoped
issues. This must be done in a quantifiable way and should also include a prediction of the time frame
in which the impacts are likely to occur.
Following the prediction of which impacts will occur it is necessary to assess their importance and
significance. It is critical that this assessment is carried out in an overtly unbiased way as the assessment
will be scrutinised by experts, the public, pressure groups and ultimately the decision-makers.
Mitigation measures are taken to either remove or reduce impacts. Mitigation may also include
enhancing the development in some way to offset rather than reduce the impact.
An Environmental Statement must then be written including a description of the development, a sec-
tion on mitigation measures explaining how any significant adverse effects will be avoided, reduced
or remedied, an assessment of the main effects the development is likely to have on the environment,
a summary of the main alternatives considered (designs and sites) and a justification as to why the
selected scheme was chosen, and a non-technical summary.
In the UK the EIA should be submitted with the planning application to the competent local
planning authority. They will then consult on the application and make a decision based on all the
material considerations. Material considerations include a wide variety of matters that relate to the use
and development of land. Material considerations will include all relevant planning policies and the
environmental statement if an environmental impact assessment has been required.
 Sustainability 417
If planning permission is granted, it will generally be subject to conditions or a planning agreement.
The conditions or agreement may contain measures to mitigate impacts identified in the EIA.

Further reading
‘Town and Country Planning (Environmental Impact Assessment) Regulations 2011’, available at: www.legislation.
gov.uk/uksi/2011/1824/introduction/made (accessed 20/11/2013).
Wathern, P. (1990) Environmental Impact Assessment: Theory and practice, Routledge, Abingdon.

16.9 Ground/air source heat pumps

Key terms: renewable energy; sustainable buildings; local energy generation; ground source heat pump
(GSHP); air source heat pump (ASHP)
Heat pumps can best be described as a refrigerator mechanism applied to a building. A refrigerator
takes heat out of the ice box or cold space and transfers the heat to the (warm) coil on the back of the
fridge. It achieves this by using a refrigerant which typically (R134A) boils at –24 degrees centigrade.
The refrigerant liquid is allowed to evaporate in the ice box, this evaporative process draws heat out
of the local space (you can test this by wetting your finger and blowing on it, the evaporation of the
moisture on your finger will make it feel cold – this is latent heat of evaporation, which you may recall
from school physics lessons). The refrigerant gas is then taken through a compressor that increases its
pressure and temperature, the gas is allowed to condense which liberates the heat and warms up the
refrigerator coil, the liquid then goes through an expansion valve which lowers its pressure and allows
it to evaporate, thus starting the cycle again.
The theoretical attraction of a heat pump is that it transfers free heat from one place to another
using only electricity to drive the compressor (and fans or pumps). The process has a multiplier effect
whereby the process of the refrigeration cycle may produce three or four times the heat energy which
would be produced by running the electricity though a radiant electric fire. The heat source may
be the outside air in which a fan passes volumes of air over the evaporator. Alternatively if there is
enough space, heat may be drawn from the ground by means of bore holes or pipes (termed a slinky)
laid in trenches in the ground. Ground temperature remains relatively stable more than 1m below
ground level (10–15 degrees in the UK) so it provides a stable source of heat to be exchanged. The
slinkies draw in heat from the ground which has been warmed by the sun; deep bore holes draw heat
from the ground by migration of heat from the surrounding geology. It should be noted that neither
system is truly ‘geothermal’, which refers to heat sources deep underground, up to a mile in the UK
(or at surface level in Iceland). In the UK a slinky will produce 1kW for a 10m length trench, thus
a medium-size detached house will need enough garden or local land to accommodate 80 metres of
trench which if doubled back must be at least 5 metres apart, an area of land not normally available in
a UK domestic garden.
GSHPs are more are more efficient than ASHPs because they draw on a more stable and reli-
able heat source, but they are much more expensive to install due to the drilling or trench digging.
Air source heat pumps are drawing heat from the air which may range from –5 to + 30 in the UK.
Paradoxically, they are much less efficient at low temperatures so they are best in summer when there
isn’t any need for space heating, and least effective in winter when there is most demand for heating.
Heat pumps produce low grade heat, up to 55 degrees centigrade. This is relatively cool for space
heating; in homes, radiators will need to be larger than conventional gas-fired heating, taking up more
wall space. The ideal heat transfer system for heat pumps is an under-floor heating system but this is
tends to restrict installations to new build properties. The low temperature also means that the water
heating system must use an immersion heater to periodically heat the water up to 70 degrees as a pre-
caution against legionella.
418 Capper, Holmes, Jowsey et al.
A field trial by the Energy Savings Trust produced some very interesting results, the efficiency or
multiplier effect of the heat pump installations is measured as the coefficient of performance (CoP).
Installations surveyed produced CoPs of 1.2 to 2.2 for ASHP (mode 1.6) and 1.6 to 3.4 (mode 2.2) for
GSHP; this is much lower than the nominal CoP advertised by manufacturers. The overall conclusions
were that heat pumps may be an effective alternative to heating by oil, coal or LPG but could not
compete with a modern gas boiler fuelled by mains gas. In this study of early installations there were
many instances of poor design and installation, the report also reported problems of occupiers failing
to understand the operation of the system.

Further reading
Energy Saving Trust (2010) ‘Getting warmer, a field trial of heat pumps’, available at: www.energysavingtrust.org.
uk/Organisations/Technology/Field-trials-and-monitoring/Field-trial-reports/Heat-pump-field-trials (accessed
20/11/2013).
Energy Saving Trust (2012) ‘Detailed analysis from the first phase of the Energy Saving Trust’s heat pump field trial’,
available at: www.gov.uk/government/publications/analysis-from-the-first-phase-of-the-energy-saving-trust-s-
heat-pump-field-trial (accessed 20/11/2013).

16.10 Life cycle assessment of buildings

Key terms: environmental impact; scoping; inventory; impact assessment; interpretation
Life cycle assessment (LCA) is a tool that can be used to assess the environmental impacts of a product,
process or service from design to disposal, that is, across its entire life cycle, from raw material extrac-
tion through materials processing, manufacture, distribution, use, repair and maintenance, and disposal
or recycling. The procedure involves:

● compiling an inventory of relevant energy and material inputs and environmental releases;
● evaluating the potential impacts associated with identified inputs and releases;
● interpreting the results to help make a more informed decision in order to reduce environmental
impact.

The term life cycle is used because measuring environmental impact requires the assessment of
raw-material production, manufacture, distribution, use and disposal, including all intervening trans-
portation steps necessary or caused by the building’s existence. The procedures of LCA are part of ISO
14000 environmental management standards. There are four phases of LCA: a scoping exercise; then
a life cycle inventory; then impact analysis and finally interpretation of results.
Scoping starts with an explicit statement of the goal and scope of the study that sets out the context
of the study, and explains how and to whom the results are to be communicated. This is a key step and
the ISO standards require that the goal and scope of an LCA be clearly defined and consistent with the
intended application.
Life cycle inventory (LCI) analysis involves creating an inventory of flows from and to the environ-
ment for a product system. Inventory flows include inputs of water, energy and raw materials, and
releases to air, land and water. To develop the inventory, a flow model of the technical system is con-
structed using data on inputs and outputs. The input and output data needed for the construction of
the model are collected for all activities within the system boundary, including from the supply chain.
Once the inventory is complete the next phase is impact assessment. This evaluates the significance
of potential environmental impacts based on the LCI results. This involves selecting and classifying
impact categories, measuring impacts in common units that can then be aggregated to give an overall
environmental impact.
 Sustainability 419
Life cycle interpretation is a systematic technique that identifies, quantifies, checks and evalu-
ates information from the results of the LCI and the LCA. This provides a set of conclusions and
recommendations for the study, including identification of significant issues; evaluation of the study
considering completeness, sensitivity and consistency; conclusions, limitations and recommendations.
A key purpose of performing LCI is to determine the level of confidence in the final results and com-
municate them in a fair, complete, and accurate manner.
For a building LCA, the process would typically involve assessing:

● production of building materials;

● transport of materials to construction site;
● actual construction of building including additional materials, building processes and transport of
workers and equipment to site;
● operation of building over its lifetime;
● disposal of building materials at end of building life.

Research by Bribián et al. in 2009 in a study based on Spanish property revealed that embodied
energy can represent more than 30 per cent of the primary energy requirement during the life
span of a single house of 222 m2 with a garage for one car. The contribution of the building
materials decreases if the house does not include a parking area, since this increases the heated
surface percentage. Usually the top cause of energy consumption in a residential building is heat-
ing, but the second is the building materials, which can represent more than 60 per cent of the
heating consumption.

Further reading
Bribián I. Z., Scarpellini S. and Usón A. A. (2009) ‘Life cycle assessment in buildings: State-of-the-art and simplified
LCA methodology as a complement for building certification’, Building and Environment, 44(12), December: 2510–
2520, available at: www.bre.co.uk (accessed 20/11/2013).

16.11 Retrofit
Key terms: sustainable buildings; low carbon technology; carbon reduction commitment; Green Deal
Retrofit has become a catch-all term to describe the process of upgrading of homes and commercial
buildings to reduce their environmental impact.
The UK government has ambitious plans to reduce carbon emission by 80 per cent by 2050. As
buildings account for approximately 50 per cent of carbon emissions, Building Regulations have been
successively amended to lower energy demand in new buildings with the target of achieving zero
carbon homes by 2016 and zero carbon commercial buildings by 2019. However, in England, for
example, 52 per cent of homes were built before 1960, Victorian, Edwardian and interwar homes had
no provision for thermal insulation and thus without extensive modifications will continue to con-
sume energy for space and water heating, jeopardising carbon reduction targets.
The consideration of home retrofit may be considered under two headings: the technical evaluation
of which interventions are effective; and the policy options available to ensure that energy efficient
retrofit takes place. As regards physical improvements, the payback period, how long it takes for the
energy savings to repay the capital cost, may be estimated reasonably accurately. However, this is not
the only consideration, occupiers will also consider whether the improvement will improve their
comfort balanced against the disruption and inconvenience caused by having the work done. For
example, under-floor insulation is cost effective but the disruption caused by retrofitting in an existing
home makes it an unlikely first choice for homeowners.
420 Capper, Holmes, Jowsey et al.
When triangulating capital cost, energy savings and ease of installation, most homeowners will
choose the following:

● upgrading lights to compact fluorescent or LED lighting – DIY job, cost effective;
● loft insulation – most existing homes have 100 mm but 300 mm will be cost effective;
● draught proofing – cheap, easy to install and improves comfort;
● heating controls – hot water cylinder thermostats, room thermostats, thermostatic radiator valves
– half a day for a competent plumber.

After these simple steps things begin to get more complicated: for the 21 million homes heated by gas
in the UK (83 per cent) the next step will be to install a modern gas boiler. Gas boiler technology has
improved considerably in the past two decades; old conventional gas boilers will typically be 80 per
cent efficient, modern condensing boilers can achieve 95 per cent efficiency. Replacing a boiler and
hot water storage cylinder with a combi-boiler which only heats water as it is needed will also improve
carbon outputs and energy costs.
For those off the mains gas network, most will use electricity for space heating, often ‘night stor-
age’ radiators using off-peak electricity. It is tempting to replace these with air source heat pumps but
although this offers a notional multiplier effect the space heating will be working during the day when
electricity is at its most expensive. If space is available in the home, biomass may be a better solution
and has the advantage of being notionally carbon neutral.
After these measures, retrofit becomes more intrusive and expensive; if the home has cavity walls
then insulating them with blown fibre is cost effective, especially at the subsidised rate available due to
the energy companies’ carbon reduction commitment. In a solid wall home upgrading the insulation
value is comparatively expensive; if applied to the outside of the home it will change the appearance,
usually not for the better, and if applied inside it will reduce the size of rooms and be very disruptive
during the retrofit process.
Although wall insulation is more cost effective many homeowners will choose to replace sin-
gle glazed windows with double glazed; this creates a more comfortable environment and reduces
the incidence of condensation. Replacing timber frames with uPVC will avoid the need for regular
repainting although they are often less aesthetically appealing. As regards policy drivers to facilitate
retrofit, the Government has imposed energy saving commitments on the energy supply industries
which has translated into subsidised loft and cavity wall insulation; this has been very effective to the
extent that in many cities all lofts and cavities have been filled in eligible households.
The main driver towards retrofitting is the Government’s Green Deal, launched in January 2013 – it is
intended that it will facilitate retrofitting for energy efficiency at no upfront cost to the homeowner. The
scheme requires homeowners to establish which energy efficiency measures are cost effective through a
paid-for survey by an approved surveyor. The work is then carried out by approved contractors and paid
for by a loan, the repayments of which are financed by the energy cost savings. This appears, on the face
of it, to be a fool proof means of retrofitting the homes of householders who don’t have much capital or
easy access to finance. The scheme got off to a shaky start; nine months after the launch, although there
have been over 7,000 surveys carried out, fewer than 400 households had signed agreements under the
scheme measured against a DECC target of 10,000. The scheme administration appears complex, has
a relatively high interest rate and, because the loan and repayment obligation is applied to the property
rather than the individual, could be a disincentive when it comes to selling the property.
The main success in retrofit has come from the social housing sector, taking advantage of a succes-
sion of Homes and Community Agency grants for registered social landlords (RSLs), which have had
the technical resources and expertise to bid for funding and execute retrofit on a large scale to such an
extent that now virtually all social housing achieves the Government’s ‘decent homes’ standards and
many homes have been installed with renewable technologies.
 Sustainability 421
Although RSLs have been very proactive in retrofitting their properties, it has been difficult for the
Government to incentivise homeowners to make radical interventions to effectively reduce domestic
energy consumption. Despite significant increases in energy cost and little prospects of reduction in the
future, the inertia of homeowners has been difficult to overcome when it comes to retrofitting energy
efficiency measures unless the grant regime is excessively generous, as found in the first iteration of the
FiT for PV installations.

Further reading
Low Energy Building database, available at: www.retrofitforthefuture.org (accessed 22/10/2013).
National Audit Office (2010) ‘The Decent Homes Programme’, available at: www.nao.org.uk/report/the-decent-
homes-programme/ (accessed 22/10/2013).

16.12 Sustainability appraisal

Key terms: strategic environmental assessment; cost–benefit analysis; environmental audit.
Sustainability appraisal (SA) is an umbrella term that covers a range of assessment methods. It involves
being clear about objectives and the alternative methods of achieving them by estimating the costs
and benefits of each option. A SA is mandatory in the UK under Section 39(2) of the Planning and
Compulsory Purchase Act 2004. The purpose of a SA is to promote sustainable development through
the integration of social, environmental and economic considerations in project planning. A key ele-
ment of this is the testing of projects or developments against the SA objectives in order to identify
likely positive impacts and also determine whether any negative impacts could arise. A range of assess-
ment techniques for policies and plans are available but the most useful are shown in Table 16.12.1.
Local authorities are also required to conduct an environmental assessment in accordance with the
requirements of European Directive 2001/42/EC (the Strategic Environmental Assessment Directive).
Although the requirements for carrying out SA and strategic environmental assessment (SEA) differ,
both are satisfied through the SA process.
SEA is a process of environmental assessment that leads to an environmental report that should help
inform policy choices. SEA enables city level policies to be evaluated in terms of their environmental
implications. Relationships between the city and surrounding areas can also be considered. Individual
housing, industry or transport projects are often considered in terms of their environmental impact, but
their effects on other sectors may be ignored if some form of assessment is not undertaken at a strategic
level (Jowsey and Kellett, 1996). SEA is a form of assessment of the environmental effects that arise from
policies, plans and programmes before individual projects are authorised. An SEA identifies the significant
environmental effects that are likely to result from the implementation of a project or plan. These effects
can then be considered together with financial, technical, political and other relevant factors.

Table 16.12.1 Environmental assessment techniques

Strategic environmental assessment

Environmental impacts of policy/plan
City–region relationship
Integration of policy
Environmental impact assessment Cost–benefit analysis Environmental audit
Potential impacts of new Monetary appraisal of private and Existing land uses and processes
developments social costs of development proposals identified and environmental
Utilises environmental standards and of alternative proposals targets set
and thresholds
Source: Adapted from Jowsey and Kellett (1996).
422 Capper, Holmes, Jowsey et al.
The process of producing a report has a number of stages (Therivel, 2004):

Stage 1 Identify the SEA objectives, indicators and targets that the plan or proposal can be tested
against.
Stage 2 Describe the environmental baseline (using data on the current environment) – and what
environmental and sustainability issues to consider.
Stage 3 Identify links to other relevant strategic actions.
Stage 4 Identify sustainable alternatives to the plan proposed (if there are any).
Stage 5 Prepare a ‘scoping report’ based on stages 1–4 and showing how to proceed.
Stage 6 Predict and evaluate the impact of alternative proposals.
Stage 7 Write the SEA report, establishing guidelines for implementation.
Stage 8 Consult with all those affected by the proposals and address any concerns.
Stage 9 Monitor the environmental/sustainability impacts of the strategic action.

Following this procedure should facilitate public participation and make the strategic action more
transparent. The SEA should improve the project or plan and promote urban sustainability. The
downside is, of course, its cost in terms of time and resources, and this can be considerable.

Further reading
Jowsey, E. and Kellett, J. (1996) ‘Sustainability and methodologies of environmental assessment for cities’, in C. Pugh
(ed.) Sustainability, the Environment and Urbanisation, Earthscan, London, pp. 197–227.
Therivel, R. (2004) Strategic Environmental Assessment in Action, Earthscan, London.

16.13 Sustainable urban drainage systems

Key terms: urban drainage; flood alleviation; natural drainage
The UK has recently experienced a number of extreme weather events; Meteorological Office statis-
tics indicate that heavy rainfall has become more common since 1960. Extreme rainfall is defined as a
the volume of rain that may be expected every 100 days – in recent years these volumes of rain have
been occurring every 70 days, leading to a greater instance of flooding. Climate change scientists note
that as the atmosphere warms it can contain more moisture, a 0.7 degree Celsius increase in tempera-
ture means that the atmosphere can contain 4 per cent more moisture; this can precipitate out as rain
– often in more intense bursts than has been experienced in the past. To check the risk of flooding
in any locality in the UK the Environment Agency has a flood map available at www.environment-
agency.gov.uk/homeandleisure/floods/31650.aspx.
Intense downpours can overwhelm old drainage systems and flood through sewerage treatment
plans causing pollution of rivers and coastline. More visible is the localised fluvial flooding when the
drainage capacity is overwhelmed and rainwater accumulates in watercourses, roads, parks and fields,
spilling over to flood homes and businesses. In some instances local flood effects can be traced back to
poor maintenance of rainwater gullies in roads or poorly maintained rivers, which allows debris, such
as fallen trees disturbing the flow of the river when in spate.
The effect of extreme rain events can be exaggerated by the intensity of development in cities,
whereby hard surfaces, roofs, roads and paths rapidly discharge rainwater into the surface water drainage
system or local watercourse. Some local authorities, especially on London, are discouraging the paving
over of front gardens for parking as it reduces the area of permeable land available to absorb rainfall.
To mitigate the effects of these extreme rainfall events the UK has been in the forefront of develop-
ing sustainable urban drainage systems (SUDS) to reduce the incidence of flooding and also help the
rainwater replenish the aquifer rather than running into rivers and the sea.
 Sustainability 423
The first priority is to try to retain rainwater on the site onto which it falls. This can be achieved by
a variety of design features. One highly visible and effective means of attenuating rainwater is to cover
buildings with a sedum or ‘green’ roof rather than a hard surface. Sedum are low maintenance flower-
ing plants, commonly known as ‘stonecrops’. In a green roof application they can be planted on a thin
layer of soil over a root barrier and waterproofing membrane. As well as improving the biodiversity of
the roof as a host to insects, green roofs will increase the durability of the roof by increasing insulation
and reducing thermal movement of the waterproof membrane. The major advantage is the ability of
the green roof to retain rainwater; it has been found that a well-designed green roof can retain 75 per
cent of rainwater, subsequently releasing it back into the atmosphere by evaporation or transpiration.
The extra weight of the soil and plant covering has to be accommodated in structural design of the
building. The capital cost of a sedum roof is likely to be double the cost of a conventional roof; it is
also likely that an irrigation system and access for maintenance will be needed. Figure 16.13.1 shows
a sedum roof covering a nursery building. The shallow pitch will help slow rainwater discharge. The
photograph was taken after the summer flush of colourful flowers had died back.
Another simple means of retaining rainwater on the site is the provision of permeable hard surfaces;
open jointed concrete block will allow rainwater to percolate through the paving rather than rapid
run-off to surface water drainage or adjacent stream. Figure 16.13.2 shows open jointed concrete pav-
ing in a car park that will allow rainwater to percolate through to the aquifer.
Some commercial and residential developments can retain rainwater on site by constructing a buffer
pond; although this will inevitably take up land, it can be positioned in such a way that it occupies
space that otherwise is undevelopable. A well-designed water feature can considerably enhance the
value of a development as well as improve biodiversity on site.
Rainwater harvesting has some applications; in the residential setting rainwater butts can retain
water for subsequent garden watering. In commercial applications, rainwater harvesting has limited
application and value – in most office development the demand for water is limited and the capi-
tal investment and subsequent maintenance obligation rarely make such an investment worthwhile.
There are also real risks involved; in one unfortunate instance the rainwater harvesting tank shared a
basement location with the IT server. When a pump failed the flooding of the basement caused tens
of thousands of pounds worth of damage to the IT installation.

Figure 16.13.1 A sedum roof. Figure 16.13.2 Open jointed concrete paving.
424 Capper, Holmes, Jowsey et al.
Having reduced the volume of water leaving the site to a minimum, the next stage is to convey
the water off site. The traditional means of water conveyance has been sealed pipes – fired clay in
the past, UPVC currently. The aim in a SUDS is to disperse the rainwater into the soil. A novel
innovation has been a ‘swale’ – a landscaped trench that will contain the water, in large volumes,
and allow it to disperse into the ground as it travels (assuming a permeable soil structure). Water
can also be conveyed in an infiltration trench (or French drain) – a trench filled with rubble that
provides a ‘route of least resistance’ that will convey the rainwater without containing it and again
allowing infiltration into the subsoil.
SUDS will also include detention basins and flood plains as a final line of defence; these are
areas of land that can be flooded without causing damage to infrastructure and buildings. Detention
basins and flood plains will allow excess rainwater to disperse over the landscape to avoid it flood-
ing rivers which will be walled in between quaysides and buildings as they run through towns and
cities.
The Environment Agency is spending in the region of £600 million per year on flood defences.
They have to make difficult decisions on competing flood defence schemes, assessing costs and benefits
to achieve the optimum value for money, while negotiating with the insurance industry. The more
attenuation work that can be carried out through site-based SUDs, the less major investment will be
needed downstream where the risks and costs are infinitely greater.

Further reading
Defra (2011) ‘National Standards for Sustainable Urban Drainage’, available at: www.gov.uk/government/
consultations/implementation-of-the-sustainable-drainage-provisions-in-schedule-3-to-the-flood-and-water-
management-act-2010 (accessed 20/11/2013).

16.14 Solar power photovoltaics

Key terms: low carbon technology; renewable energy; Feed-in Tariff; retrofit.
Photovoltaic (PV) technology has a long history; the photovoltaic effect was first observed by Edmond
Becquerel in 1839 but it was not until the need for electrical power in spacecraft that the technology
was refined. The first solar powered satellite was launched in 1958 and the first earth-based commercial
application was a solar powered lighthouse in Japan in 1966.
It isn’t essential to know how a PV panel works (who knows how a TV works?) but the tech-
nology is interesting and gives an insight into the operational parameters. Very simply, PV cells
comprise a wafer thin silicon crystal of which half has been treated to make it electron deficient
and the other half treated to make it electron rich. When photons of light strike the cell they
liberate electrons from the electron rich side of the crystal which flow to the electron deficient
side of the crystal; they leave holes which, when the cell is connected in a circuit, allows the
freed electrons to fill the holes on the enriched half of the crystal, thus providing a current and
usable electricity. In addition to these ‘conventional’ PV panels, thin film solar cells have been
developed that can be applied to glass or cladding panels, thus creating an integrated design for
commercial applications.
To gain the optimum power from PV panels they must be fixed to gain the maximum light from
the sun; this means predominantly south facing and fixed at an angle of 30–35° from the horizontal.
This can be achieved when fixed on frames on a flat roof such as an office block, but when retrofitted
to pitched roof they will be fitted at the same pitch as the existing roof which may be other than the
optimum. Slate and tiled roofs are normally designed at a minimum of 35°, while in the 1970s and
1980s speculative builders would construct roofs at 22.5° with interlocking concrete roof tiles because
they were relatively cheap.
 Sustainability 425
Care must be taken to avoid shading of the panels as it has a disproportionate effect on power
output. Trees, chimneys and dormer windows can all shade a PV array; even if a small section of the
panel is in shade, the performance of the whole panel will be significantly reduced. This is because PV
panels consist of a number of cells wired together into a series circuit. When the power output of a
single cell is reduced by shading, the power output for the whole series is reduced to the level of the
current passing through the shaded cell. Therefore, a small amount of shading can significantly reduce
the performance of the entire system.
PV panels generate direct current; electrical appliances use alternating current, so to make the elec-
trical energy useable on site or to export it to the grid it must be put through an inverter to convert
from DC to AC. PV panels are normally guaranteed for 20 to 25 years with an assumption that the
power output will decline to about 80 per cent of new condition over that time. The inverter will last
for 10 to 15 years before it must be replaced.
At UK latitudes PV generated electricity is not viable without a substantial subsidy. In early
commercial applications the Department for Trade and Industry provided capital grants to encour-
age PV installations which would develop the design and installation expertise. A prominent early
example was the recladding of the Cooperative Insurance Services (CIS) offices in Manchester.
The cost of the PV cladding was £5.5 million, which was subsidised by a grant of approxi-
mately £1 million by the North West Development Agency and the UK Major Photovoltaic
Demonstration Programme. The project was not financially viable in terms of the electricity gen-
erated but the project went ahead to gain experience in installing the system and measuring the
actual output against design outputs. The CIS have a long tradition of high-quality architecture
and environmental awareness, and the PV installation was a demonstration of their commitment
to a low carbon future.
The current means of subsidising PV installations on both residential and commercial property
is by means of a Feed-in Tariff (FiT). The Government imposes a levy on all electricity bills to
provide a subsidy to PV installations (and other low carbon technologies). A current estimate for
a residential installation on the Energy Saving Trust calculator, indicates that a 3.4Kw PV instal-
lation on a south-facing roof in the north of England would cost £6,700 to install and receive
a total income of £11,000 over 25 years. To be eligible for the FiT, installation must be carried
out by a contractor certified under the Micro Generation Certification Scheme and the home
must have an EPC rating of band D or better. If the property has an EPC rating of E, F or G the
homeowner has the option of improving its energy performance or accepting a lower rate of FIT
over the lifetime of the contract.
The cost of PV panels and installations has reduced considerably over the past 5 years as
Chinese manufacturers have moved into the market. The Chinese success is such that German
manufacturers are approaching the European Union to invoke anti-dumping legislation to protect
their PV manufacturing industry. As costs diminish, PV electricity is achieving parity with fossil
fuel-generated electricity in locations with ample sunlight. In addition to the cost advantage, PV
provides almost zero carbon electricity with a low maintenance package. There are, however,
aesthetic issues to be considered as residential retrofit installations on historic buildings can look
inappropriate and may be detrimental to subsequent saleability.
Figure 16.14.1 shows retrofit PV panels and solar water panels on a refurbishment of a Victorian
terraced house. Figure 16.14.2 shows building integrated thin film PV allied to the south-facing
external wall of an office building. Figure 16.14.3 shows the interior view of the same building.
426 Capper, Holmes, Jowsey et al.

Figure 16.14.1 Retrofit photovoltaic panels and solar Figure 16.14.2 Thin film PV.
water panels.

Figure 16.14.3 Interior view thin film PV.

Further reading
Carbon Trust (2011) ‘A place in the sun, lessons learned from low carbon buildings with photovoltaic electricity
generation’, available at: www.carbontrust.com/media/81357/ctg038-a-place-in-the-sun-photovoltaic-electricity-
generation.pdf (accessed 21/10/2013).

16.15 Solar water heating

Key terms: renewable energy; solar collector; heat exchanger; solar water heating
Solar water heating is a relatively simple renewable technology that has been exploited for decades,
particularly in southern Europe where solar water heating is routine – for example, in Greek holiday
villas. Solar water heating can be used in residential buildings and non-domestic buildings where there
is a high demand for hot water – for example, leisure centres.
The components of solar water heating comprise a solar collector, preferably on a south-facing pitched
roof, a hot water storage cylinder, a pump, connecting piping and control gear to manage the system.
 Sustainability 427
The solar collector absorbs radiation from the sun and converts it into heat energy to be trans-
ferred to a heat exchanger in the hot water cylinder by a fluid, usually water or anti-freeze. There are
two types of solar collector, flat plate collectors and evacuated tubes. Flat plate collectors are slightly
cheaper and simpler to build; they comprise a dark coloured panel, not unlike a radiator, mounted in
a structural box and covered by a glass sheet to provide a measure of thermal insulation. Evacuated
tube collectors are much more sophisticated devices: glass tubes are mounted in parallel rows with dark
coloured absorber tubes in the centre; these tubes can collect solar radiation more effectively, because,
as the name suggests, the glass tube is evacuated to form a vacuum that reduces the conduction of heat
away from the tubes, thus achieving higher temperatures.
Flat plates are more readily incorporated into a pitched roof; in new build they can be installed
in the plane of the roof pitch, in a retro fit they will normally be installed on pegs, above the pitch
of the roof. Evacuated tube collectors have a more ‘industrial’ or ‘hi-tech’ appearance that some
homeowners may find alien. In summer conditions both systems produce a similar output but in
the winter when the air temperature is colder and sunlight is weaker evacuated tubes should in
theory be more efficient.
Solar radiation heats the transfer fluid in the collectors and this is pumped to a heat exchanger in a
hot water cylinder. To be most effective the hot water storage cylinder should be larger than normal;
a typical domestic cylinder will be 450 mm diameter × 1000 mm high with a 100 litre capacity; for a
solar water system the cylinder will preferably be 300 litres capacity with twin coils, one for the solar
system and another for the backup system, be it a water boiler or an electric immersion heater. It is
important to have a control system that gives precedence to the ‘free’ solar water rather than the back-
up system, otherwise the occupier will be paying to heat water and there will not be any space in the
cylinder for the ‘free’ solar water when the sun is shining.
The Energy Saving Trust (EST) conducted an evaluation of residential solar water installations
and published a report: ‘Here Comes the Sun: a field trial of solar water heating systems’ in 2011.
The survey of 88 installations between April 2010 and April 2011 produced some very interesting
results. It found that the theoretical advantage of evacuated tubes was not observed in practice,
possibly because the flat plate collectors have a larger working area than evacuated tubes. They
found that a well-installed system could provide 60 per cent of a household’s hot water demand,
but the average was 40 per cent. The worst installation only produced 9 per cent and the best 98
per cent. An important issue is the demand for hot water in the home – if there are appliances
that heat cold water as part of their function, e.g. electric showers and cold feed clothes and dish
washers, these will comprise a significant element of the demand for hot water but will not be
displaced by a solar water system.
The most disappointing element of the EST report was the economic considerations. It found that
solar systems typically produced a saving of £55 per year when replacing gas and £80 per year when
replacing electric immersion heating (2011 prices). With installations currently costing from £3,000
to £6,000 this gives an optimistic payback period of over 35 years! Clearly, energy costs are increasing
much faster than inflation and payback will improve as energy costs increase. The economics will also
improve if the Government brings in the much delayed Renewable Heat Incentive payments (which
are currently only paid to commercial installations). As regards carbon saving, the EST report noted
that the carbon saving was similar to that achieved by installing draft proofing around all the doors,
windows and skirting boards.
Solar water heating is a reliable technology that is difficult at present to justify on economic or
carbon saving terms; however, it is highly visible and can be a demonstration of green credentials by
social housing providers and commercial developers. Figure 16.15.1 shows a large-scale evacuated
tube installation on the roof of a city centre library. Most libraries would not have enough demand for
hot water to justify such an installation but in this instance the library public toilets are heavily used
and hot water usage is significant.
428 Capper, Holmes, Jowsey et al.

Figure 16.15.1 Large-scale evacuated tube installation.

Further reading
The Energy Saving Trust (2011) ‘Here Comes the Sun: A field trial of solar water heating systems’, available at: www.
energysavingtrust.org.uk/Publications2/Generatingenergy/Field-trialreports/Here-comes-the-sun-a-field-trial-of-
solar-water-heating-systems (accessed 15/10/2013).

16.16 Wind turbines

Key terms: load factor; planning issues; Renewable Obligation Certificates
The UK has probably the best wind resources in Europe and wind turbines do now contribute a sig-
nificant proportion of the UK’s commitment to the production of renewable energy.
Most wind turbines seen in the UK have a horizontal axis and are technically known as ‘HAWTs’
(horizontal-axis wind turbines). They have the main rotor shaft and an electrical generator at the top
of a tower and are pointed into the prevailing wind to generate power. Less common and typically a
lot smaller are ‘VAWTs’, where the axis is vertical.
Modern commercial turbines can range in potential peak output from 2 MW to 7 MW with larger
turbines suited to offshore applications. The power generated by a turbine is determined by a com-
bination of the area that an individual turbine blade sweeps and the prevailing wind speed. All wind
turbines work best with a high, constant wind speed and a wind that flows smoothly, i.e. one that
is not interrupted by hills, trees or buildings. A power law demonstrates that maximum wind speeds
occur at higher turbine heights. These factors have resulted in larger wind turbine blades on increas-
ingly high towers.
 Sustainability 429
As a resource, wind is intermittent and therefore turbines do not run at maximum (or peak) capac-
ity at all times. The load factor (the ratio of average power to peak power) is typically 30 per cent for
modern turbines on a suitably windy onshore site.
In many rural areas of the UK, applications for planning permission for wind turbines are a major
issue for local authority planning officers. For a developer, gaining permission for wind farms can be a
long process, likely to go to an appeal and guaranteed to raise considerable local issues. The success rate
of wind farm applications compares unfavourably with most other major applications for development.
There are permitted development rights for some small domestic-scale wind turbines. For large-
scale wind ‘farms’ the planning process will depend on the exact size of the proposed development. In
England, planning applications for renewable energy projects, such as onshore wind turbines, above
50 megawatts (MW) are treated as nationally significant infrastructure projects (NSIPs) and under the
rules provided in the Planning Act 2008 require ‘development consent’. With modern individual
wind turbines having an output of between 2 and 3 MW this equates to wind farms of 15–20 turbines.
Projects below 50 MW are dealt with at local authority level in accordance with policies set out in the
National Planning Policy Framework (NPPF).
Irrespective of size, most development will normally start with a desktop scoping study to establish
the suitability of the terrain and the likely wind speed across a potential site. This is often followed by
an application for planning permission for an anemometer mast – a lightweight steel pylon-like struc-
ture with anemometers for measuring wind speeds at differing heights. Remote monitoring of the data
from the mast enables a more accurate assessment of likely wind speeds and therefore potential return
to developers.
A developer will have to decide how intensively a potential wind farm site could be developed,
but for technical and practical purposes individual wind turbines are typically spaced 400–600 m apart.
Other considerations include proximity to residential dwellings and potential noise issues, access, eco-
logical issues, historic environment impacts, landscape and visual amenity, traffic and transport, and
the not inconsiderable cost of the connection to the electricity grid. Given these considerations, larger
wind farms can deliver financial economies of scale but they don’t significantly increase the total power
output because larger turbines have to be spaced further apart.
The return on investment to a developer comes from a combination of the electricity sold to
the national grid along with various subsidy arrangements for renewable energy provided by the
government. In 2002 the government introduced the Renewable Obligation (RO), which requires
electricity suppliers to source a proportion of the electricity that they provide to customers from renew-
able sources. Renewable generators, such as wind farm developers, receive Renewable Obligation
Certificates (ROCs) for each MWh of electricity generated and these certificates are traded on the
open market.

Further reading
MacKay, David J. C. (2009) Sustainable Energy – without the hot air, UIT Cambridge, Cambridge, chs. 4 and 10.
17 Taxation
Ernie Jowsey and Rachel Williams

17.1 Direct taxes

Key terms: income tax; corporation tax; capital gains tax; inheritance tax; progressive taxation; tax relief
Direct taxes are so called because the taxpayer makes payment direct to the revenue authorities – Her
Majesty’s Revenue & Customs (HMRC) or the local authority. Usually each individual’s tax liability
is assessed separately. A direct tax, such as income tax, is assessed on and collected from the individual
intended to bear it. An indirect tax is not levied directly upon the person on whom it ultimately falls
e.g. VAT.
The most important direct taxes are:

● income tax – on incomes with higher percentage rates on higher incomes above a threshold
(which means that income tax is a progressive tax);
● corporation tax – on company profits;
● capital gains tax – levied at income tax rates on any capital gain above a threshold amount;
● inheritance tax – on legacies (and lifetime gifts) above a threshold amount;
● other taxes including national insurance contributions, stamp duties, motor vehicle duties, petro-
leum revenue tax, council tax and uniform business rate.

Direct taxes have several advantages including: low costs of collection and convenient methods of
payment such as PAYE; certainty of liability to the tax; they can be levied at progressive rates; and
they can be used to redistribute income. Their disadvantages include: a disincentive effect on effort
and enterprise (because the rewards are reduced); and if rates are high, a tendency for people to do all
they can to avoid the tax.
While direct taxes may affect incentives to effort and risk-bearing investment, they are basically neu-
tral in their effects on items of expenditure. There are some effects, however, on real estate, as follows:

● Interest relief on income tax for home-owners is a subsidy to home ownership.

● UK real estate investment trust dividend income is received net of basic rate income tax (20 per
cent in 2013).
● There is ‘rent a room’ relief on the income of an individual from letting furnished accommodation
which is part of his/her only or main residence. The exemption from income tax applies up to
£4,250 (in 2013).
● In the computation of corporation tax (income tax in the case of an unincorporated business),
agricultural and industrial buildings enjoy capital depreciation allowances. Commercial and resi-
dential buildings, however, can only offset actual repair and maintenance costs against tax. As
a result, agricultural and industrial buildings tend to have a shorter life irrespective of technical
 Taxation 431
considerations, while landlords of residential properties are deterred from making improvements
to buildings with a limited life.
● To avoid the break-up of agricultural estates that occurred in the past in order to pay inheritance
tax upon the death of a major owner, there is now no tax payable on agricultural land. The tax
advantage of leaving farm land rather than other assets influences demand, making farms more
attractive to the wealthy.
● Since owner-occupied houses are exempt from capital gains tax (CGT), the owner receives a
further ‘subsidy’ compared with other asset holders, thereby increasing demand for houses as
compared with other assets such as equities, unit trusts and expensive antiques, which are subject
to CGT.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 36.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.

17.2 Income tax

Key terms: progressive tax; tax relief; MIRAS; home ownership subsidy
Income tax in the UK is a progressive tax because it has higher rates above certain thresholds. Taxes
can be classified according to the proportion of a person’s income that is deducted. A regressive tax
takes a higher proportion of a poorer person’s income than of a richer person’s. Indirect taxes, which
are a fixed sum irrespective of income (e.g. television licences), are regressive. A proportional tax takes
a given proportion or percentage of one’s income. A progressive tax takes a higher proportion of
income as income increases (see Figure 17.2.1).
Justification for taxing the rich at a higher rate than the poor rests on the assumption that the law
of diminishing utility applies to additional income, so that an extra £50 affords less pleasure to the
rich person than to the poor person. So, taking from the rich involves less hardship than taking from
the poor. Generally, this can be accepted as true, but we can never be sure, simply because there is no
absolute measure of personal satisfaction.

Per cent of
income taken
in tax

Progressive

Proportional

Regressive

0 Income

Figure 17.2.1 Regressive, proportional and progressive taxes.

432 Ernie Jowsey and Rachel Williams
Income tax interacts with real estate in some areas:

● Interest relief on income tax for homeowners is a subsidy to house buyers that started in 1803.
Until 1950, when only 10 per cent of households were homeowners, the cost to the Exchequer
was small. But the subsequent increase in ownership led to the qualifying loan being limited to
£25,000 in 1974. This was raised to £30,000 in 1983 with the introduction of ‘mortgage interest
relief at source’ (MIRAS), under which the borrower paid the lender interest less the tax relief.
This homeownership subsidy peaked at £8 billion in 1991, but concern over government bor-
rowing meant that the rate was subsequently reduced in steps to 10 per cent. On 6 April 2000,
when MIRAS was abolished, the Exchequer saved only £1.4 billion a year. Over the previous
years, however, this subsidy, by favouring owner occupiers, effectively moved housing tenure
from the rented to the owner-occupied sector.
● UK real estate investment trust dividend income is received net of basic rate income tax (20 per
cent in 2010).
● There is ‘rent a room’ relief on the income of an individual from letting furnished accommoda-
tion which is part of his/her only or main residence. The exemption from income tax applies
up to £4,250.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 36.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.

17.3 Corporation tax

Key terms: company taxation; profits; depreciation allowances; dividends
Corporation tax is a tax on the taxable profits of limited companies and other organisations including
clubs, societies, associations and other unincorporated bodies. There are currently two rates of UK
corporation tax, depending on the company or organisation’s taxable profits:

● the lower rate – known as the ‘small profits’ rate;

● the upper rate – known as the ‘full’ rate or ‘main’ rate.

In the computation of corporation tax agricultural and industrial buildings enjoy capital deprecia-
tion allowances. Commercial and residential buildings, however, can only offset actual repair and
maintenance costs against tax. As a result, agricultural and industrial buildings tend to have a shorter
life irrespective of technical considerations, while landlords of residential properties are deterred from
making improvements to buildings with a limited life.
Private landlords can make savings on tax by forming a company and paying corporation tax rather
than income tax. Corporate tax is currently charged at 23 per cent, falling to 20 per cent in 2015. The
individual rate of income tax can be up to 45 per cent and the capital gains tax rate is 28 per cent.
There are some drawbacks with this, however, for example to take money out of a company structure
might require a dividend payment, and that is liable to income tax; and annual accounts must be com-
pleted for companies. If profits were extracted, the additional income tax payable on receipt would
eliminate much of the benefit, but if the profits were retained in the company there would be no
additional taxes. Forming a company to hold properties has the added advantage of conferring limited
liability should any claim be made against a property.
 Taxation 433
Further reading
www.gov.uk/renting-out-a-property/paying-tax (accessed 25/11/2013).

17.4 Inheritance tax

Key terms: death duty; tax threshold; agricultural relief; US estate tax
The origin of inheritance tax was Death Duty (or Estate Duty) which was introduced in 1894. This tax
was payable when an estate was transferred on the death of the owner. Inheritance tax was introduced
in 1986 and comes out of the deceased’s estate before the inheritance is passed on. It applies to transfers
on death, gifts made within 7 years of death and lifetime gifts. Some gifts are exempt, such as small gifts
of less than £250 per year and marriage gifts.
Inheritance tax is due when a person’s estate (their property and possessions) is worth more than
£325,000 when they die. This amount is known as the inheritance tax threshold. The rate of inherit-
ance tax is 40 per cent on anything above the threshold. The rate may be reduced to 36 per cent if
more than 10 per cent of the estate is left to charity. Inheriting a property from a spouse or civil partner
means the receiver is an ‘exempt beneficiary’ and normally won’t have to pay inheritance tax as long
as they are domiciled in the UK.
Inheritance tax could result in the break-up of agricultural estates in order to pay inheritance tax
upon the death of a major owner. In order to avoid this, there is now no tax payable on agricultural
land. This relief applies to the agricultural value of the asset only and for the purposes of agricultural
relief, a farmhouse, cottage or building must be proportionate in size and nature to the requirements
of the farming activities conducted on the agricultural land or pasture in question. For a woodland
estate, the value of the timber (but not the land) is excluded from the estate, but if the timber is sold,
inheritance tax is then due. The woodland might also qualify for agricultural relief or business relief if
it’s part of a working farm or business.
Of course the tax advantage of leaving farm land rather than other assets influences demand. A per-
son who wishes to pass on his wealth to an heir may purchase and enjoy the amenity of owning a rural
estate for at least two years and can, if he so wishes, carry on the actual farming through a contractor
or similar device. Moreover, since exemption from inheritance tax is given for gifts and bequests to
certain national institutions such as the National Gallery and the National Trust, it tends to decrease
the land available for holding in private hands.
In the United States an inheritance tax differs from an estate tax, which is a tax levied on an entire
estate before it is distributed to individuals. The Federal government currently has an estate tax for
estates in excess of $2 million. Estate taxes are imposed on the total value of the property at death.
Some states have an estate tax, some have an inheritance tax, and some have both. Inheritance tax is
imposed on the transfer of assets, including real estate, at death and the rate is dependent on the rela-
tionship between the deceased and the inheritor.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.
434 Ernie Jowsey and Rachel Williams
17.5 Indirect taxes
Key terms: specific tax; ad valorem; VAT; inelastic demand; hidden tax; tax evasion; tax avoidance;
inflation
Indirect taxes are levied on spending on goods and services. They are ‘indirect’ because the revenue
authority (HMRC in the UK) collects them from the seller, who tries to pass the burden on to the
consumer by including the tax in the final selling price of the good. Indirect taxes can be specific,
meaning they are a fixed sum regardless of the price of the good, or ad valorem, where they are a given
percentage of the price of the good or service.
There are three categories of indirect tax:

1 Customs duties levied at EU rates on goods imported from non-EU countries.

2 Excise duties on certain domestic goods and services, e.g. beer, whisky, petrol, cigarettes and gambling.
3 Value Added Tax (VAT, see Concept 17.6).

Because governments tend to have very great revenue needs they have to use indirect taxes so that
direct taxes are not extremely high. And where goods have inelastic demand (meaning they continue
to be bought even after a rise in price) the revenue yield is fairly certain and easy to calculate. Indirect
taxes are known as ‘hidden’ taxes because they are part of the purchase price that is not usually identi-
fied. They are also cheap to collect and difficult to evade. Of course they can be avoided by not buying
the good or service in question.
The disadvantages of indirect taxes include:

● They are regressive – the poor will pay a larger proportion of their income in taxes on spending
than the rich (who spend a smaller part of their total income).
● They can add to inflationary pressure if rates of duty are increased – this is particularly true
of VAT, which is applied to most goods and services in the UK except food, housing and
children’s clothing.
● They result in greater loss of satisfaction to consumers than direct taxes because their expend-
iture is rearranged to reflect altered prices. Then of course resources are not allocated as
efficiently as possible.

Further reading
Harvey, J. and Jowsey, E. (2007) Modern Economics, Palgrave Macmillan, Basingstoke, ch. 36.
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.

17.6 Value Added Tax

Key terms: VAT; option to tax; waive VAT exemption; transfer as a going concern (TAGC).
VAT is a form of indirect taxation which applies to the supply of goods and services within the UK. The
rates of VAT are; zero rate, reduced rate 5 per cent and standard rate 20 per cent. In a real estate context
it is of particular importance to the supply of land (sales and lettings) and to construction work. The VAT
treatment of some real estate related transactions and activities are considered in Table 17.6.1.
As noted in Table 17.6.1, except for new commercial buildings the supply of land does not give
rise to liability to pay VAT. Commercial property owners can however, elect to pay VAT which is
sometimes referred to as the option to tax or waiver of the exemption. When one first encounters the
notion of someone choosing to pay tax it can be quite difficult to comprehend. The way a VAT regis-
tered business operates is that they must account to HMRC for the difference between the amount of
 Taxation 435
VAT they charge on their sales (output tax) and the amount they are charged on their purchases (input
tax). If you sell goods or services that are exempt from VAT then you cannot reclaim the VAT on your
purchases as illustrated below in a case where a property owner has refurbished an office building.
If property owner does not elect
They pay building contractors £100,000 + VAT
Cost of works to owner = £120,000
If property owner elects
They pay building contractors £100,000 + VAT
They sell the property for £600,000 charging VAT on the purchase price.
Input tax = £20,000; Output tax = £120,000.
Property owner accounts to Customs & Excise for £100,000
Cost of works to owner = £100,000
Another way of thinking about it is that the tax is being passed along the supply chain (see Table 17.6.2).
This could be an issue for the tenant if they are making exempt or zero rated supplies such as insurance
companies and banks.
Even if the election to pay VAT has been exercised the tax will not be charged if the property is
being disposed of as part of a sale of a business (a transfer as a going concern – TAGC).

Table 17.6.1 Value Added Tax rates

Activity VAT status Rate of VAT

(if applicable) (%)
Construction of a new house Taxable supply 0
Sale of existing commercial building or lease of Exempt – but can opt to waive If exemption waived 20
commercial building the exemption
Sale of new commercial buildings Taxable supply 20
Construction of new commercial building or Taxable supply 20
alterations to existing building
Sale of land of buildings/assignment of lease as part Not a taxable supply
of the sale of a business as a going concern

Source of rates: HM Revenue & Customs, 2012.

Table 17.6.2 Input and output tax

Input tax Output tax

Office block owner refurbishes the property If the owner disposes of property without opting to tax then there
and is charged VAT on building materials would be no output tax to offset the input tax
and services by building contractor If the owner elects to pay VAT then when the property is sold it
will be subject to VAT
Property investors buy the refurbished Property investors let the property and receive VAT on the rent
property paying VAT on the purchase price from their tenant (a firm of surveyors)
The tenant pays VAT on its rent The tenant charges VAT on its services

The tenant’s clients pay VAT on services If the client is a registered VAT business they may be able to offset
but if not then it will be a cost to the business or consumer
436 Ernie Jowsey and Rachel Williams
Further reading
HMRC (2012) ‘VAT’, available at: www.hmrc.gov.uk/vat/ (accessed 25/11/2013).

17.7 Stamp Duty

Key terms: Stamp Duty Land Tax; stamp duty; Stamp Duty Reserve Tax
Stamp Duty is a tax paid by a buyer on the purchase of land and shares. There are three types of stamp duty:

● Stamp Duty on transfers of shares for more than £1,000;

● Stamp Duty Reserve Tax (SDRT) on electronic share transactions; and
● Stamp Duty Land Tax (SDLT) for transfers of real estate in the UK.

The amount of duty payable on share transactions is 0.5 per cent of the purchase price.
In order to identify the amount of SDLT payable it must first be identified whether the property
is freehold or leasehold and whether it is residential or not. The current rates of SDLT for the sales of
freehold property are set out in Table 17.7.1.
It can be argued that SDLT:

● discriminates against investment in property as opposed to shares which pay only 0.5 per cent;
● depresses overall property values;
● by increasing purchase costs, reduces market liquidity;
● where more accommodation is required, makes it cheaper to build on to one’s current house
rather than move to a higher-priced house;
● has a disproportionate effect on south of England properties, where property prices are highest.

NB: Lease duty is also payable at 1 per cent on the capital value of leases (found by capitalising the rent
payable over the term of the lease at the discount rate of 3.5 per cent) less the threshold of £150,000.

Table 17.7.1 Stamp Duty Land Tax rates

Rate (%) Residential Non-residential

0 £0–125,000 £0–150,000

1 £125,000–£250,000 £150,000–£250,000

3 £250,000–£500,000 £250,000–£500,000

4 £500,000–£1,000,000 £500,000

5 £1,000,000–£2,000,000

7 Over £2,000,000

15 Over £2,000,000 for acquisitions by

certain persons including corporate bodies
Source: Rates sourced from HMRC (no date).
 Taxation 437
If the property purchase price is above a payment threshold then SDLT is charged at that rate on the
whole amount. So, for example, if a house was sold for £250,500 then SDLT at a rate of 3 per cent
would be charged on the entire purchase price. It is therefore not very common to find properties
being sold for just over a SDLT threshold as, in the example above, the difference between buying
the property for £250,000 (SDLT = £2,500) and £250,500 (SDLT = £7,515) would be £5,015 in
additional tax. This is also an important factor when determining what price to market a property at.
SDLT is only payable on land transactions, so any element of the purchase price that is attributable
to chattels, e.g. carpets and furniture (see Concept 10.3 regarding fixtures and chattels) will not be
chargeable to tax. There are sometimes attempts to reduce the tax payable by artificially apportion-
ing the amount of the overall purchase price that is payable for the chattels but this is tax evasion and
therefore not legal.
There are calculators available on HM Revenue & Customs’ website to determine the amount
payable on other more complicated transactions including the grant of a new lease. A SDLT return
will have to be made within 30 days of ‘the effective date of the transaction’ (normally the date
of completion of the lease or the purchase). In some instances businesses opt to acquire real estate
through a property owning company rather than selling the land itself and there is a special type of
relief for transfers of land between group companies (stamp duty group relief). As has been noted
earlier, the rate of stamp duty on shares is half a per cent and therefore less than the rate of SDLT
on properties over £125,000/£150,000. There are, however, a number of anti-avoidance measures
that are designed to prevent this relief being used as part of arrangements whose main purpose is to
avoid tax.
In the past there have been special provisions put in place to try and promote market activity and
regeneration. For example, until April 2013 Disadvantaged Area Relief applied to certain parts of the
country in which a higher threshold was applied for the payment of SDLT (HMRC, no date) and
from March 2010 to March 2012 first time buyers were exempt from paying SDLT on homes costing
less than £250,000.

Further reading
HMRC (no date) ‘Stamp Duty Land Tax (SDLT): The Basics’, available at: www.hmrc.gov.uk/sdlt/index.htm
(accessed 25/11/2013).

17.8 Mansion tax and annual tax on enveloped dwellings

Key terms: wealth tax; double taxation; administration problems
A mansion tax does not exist in the United Kingdom although versions of it are in place in other
parts of the world, for example, in Ireland. As the name implies it is a tax that applies only to the most
valuable homes.
It is the policy of the Liberal Democrat party to introduce a mansion tax (Liberal Democrats, 2013).
Their proposal is that the tax would be charged at 1 per cent of the amount by which the value of
a residential property exceeds £2 million. For example the owner of a property worth four million
pounds would pay £20,000 (1 per cent of £2 million) per annum. They are also debating whether or
not an individual taxpayer’s property holdings should be added together so that mansion tax is payable
on the cumulative value of the portfolio.
Proponents of mansion tax argue that assets perpetuate privilege – most professionals inherit money
– taxing wealth is better than taxing incomes as it doesn’t distort incentives for employment or profit-
making – while under-taxed property encourages speculation and under-occupation. It is true that the
richest 10 per cent of population in the UK own 44 per cent of all wealth and the current tax system
does not seem to be redressing that. Inheritance tax is frequently avoided (see Concept 17.4).
438 Ernie Jowsey and Rachel Williams
The proposal has provoked criticism in some quarters and has been described as stemming from the
‘politics of envy’. In particular, concerns have been raised about the difficulties of administering such a
tax and double taxation (as the householder will also be paying council tax). David Cameron has ruled
out introducing a mansion tax if re-elected on the grounds that it is not sensible for a country which
wants to attract wealth creation. The Labour Party made mansion tax the subject of a vote in March
2013, which they lost, but they have not to date committed to adopting mansion tax as one of their
manifesto policies.

Annual tax on enveloped dwellings/annual residential property tax

The new annual residential property tax (ARPT) came into effect on 1 April 2013. This is an
annual charge that will be levied upon high-value UK residential properties owned by companies
(enveloped by companies). The charge will be calculated by reference to the value of the property,
as follows:

Property value Annual charge 2012/2013

£2m – £5m £15,000
£5m – £10m £35,000
£10m – £20m £70,000
Over £20m £140,000

Further reading
Knight, Frank (2013) ‘Taxing High Value Homes – Mansion Tax’, available at: http://my.knightfrank.co.uk/research-
reports/taxation-of-prime-property.aspx (accessed 25/11/2013).
Liberal Democrats (2013) ‘Liberal Democrats Policy Consultation: Taxation’, available at: www.libdems.org.uk/
siteFiles/resources/docs/conference/2013-Spring/114%20-%20Taxation.pdf (accessed 25/11/2013).
www.hmrc.gov.uk/ated/basics.htm#1 (accessed 25/11/2013).

17.9 Council tax

Key terms: local government; rates; council tax bands; regressive taxes
Local authorities need to raise finance in order to provide local services. It is thought to be better if some
of their revenue is raised through local taxation, rather than being financed by central government – this
is so that voters can see the results of local democracy via their influence on spending. Sources of rev-
enue for local authorities are: uniform business rates (see Concept 17.10), central government grants,
user charges and fees and the council tax. The amount by which the area authorities’ spending exceeds
revenue from the other sources has to be covered by levying a council tax on households.
Council tax is very similar to the old rating system, but instead of a notional annual letting value,
for which market evidence was deficient, it is based on the 1 April 1991 capital value of the property
– what it would have sold for on that date. The council tax band of a property is not related to its
current market value. This is because, by law, council tax valuations are based on the price a property
would have fetched if it had been sold on 1 April 1991. For Wales the Valuation date is 1 April 2003.
The Valuation Office Agency (VOA) determines the council tax bands of the 23.4 million domestic
properties in England and Wales. To allow for the difficulties involved in making a precise valuation of
each individual dwelling, values are divided into eight bands, A to H, with all households in the same
band paying the same amount of tax, but increasing upwards to H, whose payment band is treble that
of band A and double that of D. There is a 50 per cent discount for unoccupied dwellings and second
 Taxation 439
homes. There is no provision for a general revaluation, but a future sale or a change in the locality,
such as a new nearby motorway, may afford grounds for a revaluation (Jowsey, 2011).
Council tax is regressive because it is not proportional to either property values or incomes and the
rate charged is higher on lower value properties than it is on higher value properties (note that this
does not mean that the actual amount payable is higher on lower value properties).
For single residents there is a 25 per cent discount, but people exempt from the council tax are
ignored for the purpose of determining the single-person discount. Exempt people include: students,
student nurses, apprentices, youth trainees, those on income support, the severely mentally handi-
capped and elderly dependent relatives.
In Scotland a similar system operates to that in England and Wales, but the Scottish Government
believes that the council tax is fundamentally unfair and should be abolished and replaced with a fairer
local income tax based on ability to pay (Scotland.gov.uk).

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.

17.10 Rating and uniform business rates

Key terms: rate poundage; multiplier; rateable value; effect on rents; effect on investment
Uniform business rates (UBR) are the taxes paid by those who occupy, or have the right to occupy,
commercial property in the UK. HM Revenue & Customs sets these rates through the VOA, and
they are determined by rental levels – what the premises could be let for less rates and taxes, insurance
and maintenance expenses.
Surveyors working in rating help clients to minimise their business rates while complying with
legislation, or work for the VOA to set the rates businesses must pay. Rating involves property inspec-
tions, client meetings, database management, report writing and negotiating skills.
Business rates are easy and cheap to collect and they ensure that firms contribute to local expenditure
on collective services, such as police, roads, street lighting and open spaces. They are tax deductible
from profits. Taxes on commercial property, however, such as the UBR can also reduce investment
in property relative to plant and machinery which is not subject to such a tax.
In 1990 the response of the government to the weaknesses of the business rate was to take away
the power of the local authority to levy it. A new rating list was compiled by the valuation officer
appointed for each charging authority (the district borough or city council), using an unchanged for-
mula of a notional rental value – what the premises could be let for less rates and taxes, insurance and
maintenance expenses.
A rate (now known as ‘the multiplier’) is set for England and Wales by the Department of
Communities and Local Government. If the rateable value of a business property, in England, was
£20,000, and the local authority was calculating the 2013/14 business rates bill, it would multiply it
by 47.1p to get a total for the year of £9,420. If the business is entitled to any form of rate relief, this
sum is then adjusted to reflect that, making a final total for the rates bill. The multiplier usually changes
each year in line with inflation.
In England, since 1 April 2005, a small business rate relief scheme has been in operation. Eligible
businesses who apply to their local authority to be part of the scheme can have their liability calculated
using the small business multiplier (46.2p in 2013/14). Dependent on their rateable value, they may
also be eligible for a further discount on their bill. The City of London is able to set a different multi-
plier from the rest of England (slightly higher in 2013/14).
Revaluations of the rating list take place every five years, the next being in 2015. At each revaluation
the UBR is reset to ensure that in real terms the revenue from business rates is unchanged following
440 Ernie Jowsey and Rachel Williams
the revaluation. The revenue from the new rate is paid into a national pool and then distributed to local
authorities in proportion to their adult populations. There are separate pools for England and Wales.
It is doubtful whether businesses, while still relying on local authorities for services, will find their
needs treated with more respect now that they are paying a national rather than a local tax. Indeed,
when businesses paid the local tax, their Chambers of Commerce were listened to and could exert
influence. Thus accountability could be less under the UBR.
Increased UBR can affect rents. Since the firm has to sell in competition with other firms, it is likely
that it will have to bear most of the increase. In the short period, only if the demand for a firm’s product is
completely inelastic can the whole of a rate increase be passed on to the consumer through higher prices.
In the long term when a rent review is due, a firm may be able to pass some of the higher cost on to the
landlord by a rent reduction, depending on the relative elasticities of demand and supply.
In his Autumn Statement of 2013, the Chancellor of the Exchequer cut the scheduled increase in busi-
ness rates in April 2014 from 3.2 per cent to 2 per cent and also said pubs, restaurants and small shops
would receive a £1,000 discount on their rates for the next 2 years. Businesses that move into vacant
shops on Britain’s struggling high streets will, in addition, enjoy a 50 per cent discount on their rates
for 18 months, while rates relief for small businesses will be extended for another year.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.

17.11 Land value tax

Key terms: site value; potential value; betterment; external costs and benefits
Land value taxation (LVT – sometimes called site value rating, or site value taxation when used in the con-
text of local taxes) is a method of raising public revenue by means of an annual ad valorem tax on the rental
value of land. The site value is the value of the unimproved land used in its most productive use, regardless
of its current use. It equates to the sale value of the vacant freehold plot. Advocates say LVT would replace,
not add to, existing taxes and, if properly applied, could support a range of social and economic initiatives,
including housing, transport and other infrastructural investments. There is currently no LVT in the UK.
The value of every parcel of land in a country would be assessed regularly and the land value tax levied
as a percentage of those assessed values. ‘Land’ means the site alone, not counting any improvements. The
value of buildings, crops, drainage or any other works that people have erected or carried out on each plot
of land would be ignored, but it would be assumed that all neighbouring properties were developed as at
the time of the valuation; other things being equal, a vacant site in a row of houses would be assessed at the
same value as the adjacent sites occupied by houses. The valuation would be based on market evidence,
in accordance with the optimum use of the land within the planning regulations. If the current planning
restrictions on the use were altered, the site would be reassessed. Information on recent transactions makes
valuations easier, but if such information is scarce, valuers’ estimates can be subjective and open to challenge.
LVT can be justified for economic reasons because if it is implemented properly, it will not deter
production, distort market mechanisms or otherwise create welfare losses the way other taxes do.
Income taxation discourages work and sales, and value-added taxes discourage consumption, capital
gains taxes discourage investment, and real property taxes discourage building and improving property.
LVT does not have distortionary effects on output, because it is payable regardless of whether or
how well the land is actually used. Land is effectively in fixed supply, so an increase in the tax rate on
land value will raise revenue without damaging incentives for owners to invest in and use their land.
Because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay,
rather than on the expenses of landlords, and so LVT cannot be passed on to tenants. The only direct
effect of LVT on prices is to lower the market price of land.
 Taxation 441
The situation is shown in Figure 17.11.1, where the tax comes from the producer surplus or economic
rent, with no effect on the amount of land supplied.
The idea behind LVT as the basis of assessment is that the tax falls only on the land element of real
property, that is, the open market value of the site, on the assumption that it is currently available for its
most profitable use. Thus, compared with a net annual value (NAV) or capital value base, the buildings
are not taxed, but potential value is taxed (Figure 17.11.2).
As the basis of a property tax, LVT has many advantages. First, it has strong moral backing in that
it is closely associated with taxing ‘betterment’. The argument is founded on Ricardo’s theory of
economic rent: since land is fixed in supply, its value is determined solely by demand; LVT is a tax
on this demand-determined value and is thus a means by which ‘betterment’ can be returned to the
community. Moreover, because sites are, for spatial reasons, fixed in supply, the tax falls entirely on
economic rent with no effect on supply.
Second, LVT should improve the efficiency of land use. Because site-value is the sole tax base, it
is in effect a lump-sum tax which is levied irrespective of how the site is used, the value of the build-
ing on it, or whether the buildings are improved. That is, LVT is neutral as regards the type of use,
intensity of use and improvements. There is thus an incentive to develop sites to their most profit-
able use, since the burden of the given tax would then be spread over higher gross receipts. Even if
speculators continued to hoard land – vacant central sites and agricultural fringe land – LVT would
ensure that they had to pay towards the cost of public services provided. Furthermore, the improve-
ment of existing buildings would be encouraged. Thus LVT should speed up the renewal of inner-city
areas. Council tax, and the national non-domestic rates levied on businesses penalise landowners who
contribute to their communities by developing their land, while the owners of derelict, community-
damaging sites pay little, if any, tax. With LVT landowners have to pay whether or not they are using
the land productively. This provides a powerful incentive for bringing the land into productive use.
Third, LVT could have benefits for housing. In the short period, the rate burden would tend to
shift to central sites and away from suburban houses. Figure 17.11.3 shows that under LVT (a) rates
are payable on one-half of the original base, whereas (b) rates are payable on only one-quarter. In the
long period, the more intensive use of central sites should, given no change in the demand for land
resources, reduce the demand for and thus the price of peripheral land, the main source for new hous-
ing (Figure 17.11.3).

Price (£) S

Consumer surplus

P
Tax revenue Tax rate

Producer D
surplus

0 Quantity demanded and supplied

Figure 17.11.1 The effect of a land value tax.

 Building

NAV or
Capital
Value

Site as
occupied

LVT

Additional potential

Figure 17.11.2 Comparison of the incidence of NAV, capital value and LVT on buildings and land.

a City-centre land resource b Suburban land resource

Building
£500 000

Total value £1m

Building £300 000
Total value
Site
£400 000
£500 000
Site £100 000

Figure 17.11.3 The incidence of land value tax or site-value rating.

 Taxation 443
Fourth, LVT should produce external benefits. Given no change in the demand for land resources, its
impetus towards the redevelopment of central sites would reduce city sprawl. On the other hand, this
could be accompanied by external costs – increased city-centre traffic congestion and the loss of open
space, such as large private gardens and centrally situated recreational facilities, which could be taxed
out of existence. Planning regulation, however, could partly deal with such costs.
Fifth, LVT would reduce ‘fiscal zoning’ since, in the long run, the movement of business and peo-
ple to ‘low-rate’ areas would be self-defeating in that it would simply raise site values there.
Sixth, LVT should promote objectivity in making planning decisions. Because the NAV system
rates both buildings and land, the local authority has a built-in reason for approving a proposed devel-
opment through the higher rateable value that would result. With the building element removed by
LVT, planning decisions can follow a consistent policy based solely on environmental considerations.
Supply-side policy attempts to increase production and the supply of goods by decreasing costs,
such as by lowering taxes and eliminating excessive regulations and barriers to trade. A tax shift, away
from taxing production to taxing land values, is supply-side policy, since it removes the excess eco-
nomic burden of taxation.
Nevertheless, though LVT has advantages, it faces objections on principle and difficulties in imple-
mentation. The uncertainties in assessing site-values would give rise to considerable challenge by
owners and a transition period of several years might have to elapse before it could become fully opera-
tive. In the meantime it might not provide a predictable basis for financing local services.
LVT has been introduced in a variety of forms in several countries around the world. Denmark,
Hong Kong and Taiwan have used land values to raise revenues. On a more local scale, cities in parts
of Australia, South Africa, New Zealand and North America have adopted forms of LVT.
In the United States many local authorities operate a so-called split-tax system, in which buildings
and land are taxed separately. Some weight the tax towards buildings and others towards land. It seems
that the more it is biased towards land, the more this benefits the local economy.

Further reading
Jowsey, E. (2011) Real Estate Economics, Palgrave Macmillan, Basingstoke, ch. 22.
18 Valuation
Lynn Johnson and Becky Thomson

18.1 Income cash flows

Key terms: implicit; rack rented; under-rented; over-rented
Traditional investment valuation centres on the implicit reflection of income growth and risk through
the use of an all-risks yield (ARY). The alternative approach is the use of a discounted cash flow. With
regard to traditional investment valuation, the method applied depends on the type of cash flow.

Rack rented property

When an investment property is rack rented, the current rental income equates to market rent and the
valuation technique employed is relatively straightforward. The rental income is simply capitalised
using years purchase (YP) in perpetuity at an appropriate ARY.

Case study 1
The self-contained office building in Figure 18.1.1 extends to approximately 185.80 sq m (2,000 sq ft) and
was let in August 2013 on a new 10-year FRI lease at a market rent of £29,000 per annum (£156.08
per sq m; £14.50 per sq ft).
Similar investments on Metro Riverside with similar unexpired lease terms are achieving ARYs of
10 per cent. The lease has been agreed at market rent and therefore the cash flow over the life of the
lease will be as shown in Figure 18.1.2.

Figure 18.1.1 Unit 3, Metro Riverside, Gateshead.

 Valuation 445
£35,000

£30,000

£25,000

£20,000

£15,000

£10,000

£5,000

0
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027
Figure 18.1.2 Lease cash flow.

We can therefore assume that the market rent is received into perpetuity:

Market rent £29,000 per annum

YP in perp @ 10% 10.0000
Market value £290,000

The rack rented approach only applies when properties are let at full market rent and this occurs when:

a) the property has recently been let;

b) there has recently been a rent review to market rent;
c) market rents have not changed since the rent was last agreed.

However, some rents are not equal to market rent and are likely to either increase or decrease at some
point in the future, i.e. at a rent review or lease expiry.

Under-rented property
Under-renting occurs when the current passing rent received is below market rent. This is usually due
to the fact that the passing rent has been agreed some time ago (either at the start of the lease or at a
previous rent review) and over that time there has been rental growth.

Case study 2: Unit 1 Metro Riverside, Gateshead

Using the same property from Case Study 1, we can study a straightforward under-rented cash flow. In
this scenario, a 10-year FRI lease was agreed in August 2011 at a rent of £26,000 per annum (£139.94
per sq m; £13.00 per sq ft) subject to 5-yearly rent reviews.
Unit 3 is in the same development and is the same size and specification as the subject property.
Market rent was recently agreed at £29,000 per annum (£156.08 per sq m; £14.50 per sq ft) so an
increase is justified for the subject property at the next rent review in 2016, and therefore the invest-
ment is currently under-rented (see Figure 18.1.3).
Note that we are only interested in valuing the cash flows from the present into the future. We are
not interested in the cash flows that have gone before, as those sums have been paid and are not due
to be received. An investor wants to know the value of the income that is still to be received.
446 Lynn Johnson and Becky Thomson
£29,500
£29,000
£28,500
£28,000
£27,500
£27,000
£26,500
£26,000
£25,500
£25,000
£24,500
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029
Figure 18.1.3 Under-rented property.

Over-rented property
Over-renting occurs when the passing rent is above market rent. This is commonplace in the current
market, where rents which were agreed five or more years ago are now inflated over market rent due
to a decrease in rental values.

Case study 3: Unit 1, Metro Riverside, Gateshead

Using the same property again, we can assume a new 10-year FRI lease was agreed in August 2010 at
a rent of £33,000 per annum (£177.61 per sq m; £16.50 per sq ft) subject to 5-yearly rent reviews.
The market rent for Unit 3, Keel Row House is £29,000 per annum (£156.08 per sq m; £14.50
per sq ft) and therefore no increase is justified at the rent review in 2015 as the investment is over-
rented (see Figure 18.1.4).

£33,000

£32,000

£31,000

£30,000

£29,000

£28,000

£27,000
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Figure 18.1.4 Over-rented property.

 Valuation 447
Further reading
Sayce, S. et al. (2006) Real Estate Appraisal, Wiley-Blackwell, Oxford.

18.2 Term and reversion

Key terms: term and reversion; passing rent; market rent; ARY; perpetuity; market value
The term and reversion method was derived in the 1950s when inflation was negligible and fixed
incomes below market rent were more secure. The method considers two blocks of income received
over time – the term when the passing rent is received until the first reversion (i.e. a rent review or
lease expiry) and the reversion which is a future block of income received after the term at a higher
market rent.

Case study 1: Bowburn Industrial Estate, Durham

A 1,579 sq m (17,000 sq ft) detached industrial unit on a popular estate in Durham is owned freehold
and let on a 10-year FRI lease from 2010. The current passing rent is £71,000 per annum and there
is a rent review in Year 5 (2015). After careful analysis of the market and comparables we know that
the market rent is £76,000 per annum.
ARY for similar types of property (i.e. good location with good unexpired term and potential for
rental growth) are in the order of 9 per cent.

Cash flow graph

The term comprises two years of income at £71,000 per annum. Due to the rent review mechanism
in the lease, the freeholder has the opportunity to increase the income to market rent, so the rever-
sion starts from the rent review in 2014 when the income increases to £76,000 per annum. We then
assume that the £76,000 per annum will be received in perpetuity (see Figure 18.2.1).

£77,000

£76,000

£75,000

£74,000

£73,000

£72,000

£71,000

£70,000

£69,000

£68,000
2013 2014 2015 2016 2017 2018 2019 2020 2021

In perpetuity

Figure 18.2.1 Term and reversion.

448 Lynn Johnson and Becky Thomson
Valuation

Term
Passing rent £71,000 per annum
YP @ 9% 1.7591
for 2 years
Market value of the term £124,897
Reversion
Market rent £76,000 per annum
YP in perp @ 9% 11.1111
PV of £1 @ 9% 0.8417
for 2 years*
Market value of the reversion £710,752

Market value £835,649

*The term is 2 years, so we have to defer the reversionary income for 2 years. It is also possible to do this using YP in perp deferred.

Reversion
Market rent £76,000 per annum

YP in perp @ 9% deferred 2 years 9.3520

Market value of the reversion £710,752

Further reading
Isaac, D. and O’Leary, J. (2013) Property Valuation Techniques, 3rd edn, Palgrave Macmillan, Basingstoke.

18.3 Hardcore/layer method

Key terms: hardcore or layer method; core; top slice/layer; all-risks yield; passing rent; market rent
The hardcore or layer method is the more modern of the traditional basis of valuation. There are two
layers of income – the bottom layer is the most secure and this is received into perpetuity. The top slice
or top layer of income is the riskier element of the valuation, as it comprises the difference between
passing rent and the market rent. This is also valued into perpetuity, but at a higher yield due to the
greater risk attached.

Yield application
In practice it is perceived that the core income is the more secure, and a lower yield is applied. The
top slice is the future income over and above the rent currently received, so the reversionary yield is
therefore slightly higher. The level of risk applied to the top layer depends on the uncertainties and
risks associated with the investment.
 Valuation 449
Case study 1: Unit 9a, Chollerton Drive, North Tyneside
The subject property comprises a 1970s semi-detached industrial unit with a steel portal frame, insu-
lated metal cladding and a pitched metal clad roof incorporating translucent sections. The gross internal
area is 893.0 sq m (9,620 sq ft).
The property was let to a local textiles company in 2010 on a new 15-year FRI lease at a rent of
£24,000 per annum. The rent is subject to 5-yearly rent reviews. Comparable evidence suggests that
market rent is £27,500 per annum and an appropriate ARY is 10 per cent.

Valuation
The ARY has been applied to the core income while 0.5 per cent has been added to the yield for the
layer/top slice, due to the shorter unexpired term.
Core
Passing rent £24,000 per annum
YP in perp @ 10% 10.0000
Market value of the core £240,000

Layer
Market rent £27,500 per annum
Less passing rent £24,000 per annum
Incremental rent £3,500 per annum
YP in perp @ 10.5% 9.5238
PV of £1 @ 10.5% for 2 years* 0.8190

Market value of the layer £27,299

Market value £267,299
*There are two years remaining until the next rent review.

£28,000

£27,000

£26,000

£25,000

£24,000

£23,000 Core

£22,000
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Figure 18.3.1 Cash flow 1.

450 Lynn Johnson and Becky Thomson
Valuation with more than two layers
When considering properties with stepped rental increases, we have to consider each tranche of
income similar to the term and reversion method.

Case study 2: Dean Street, Newcastle upon Tyne

The subject property comprises a mid-terraced Grade II listed property (Figure 18.3.2). It is a three-
storey brick building with a slate-covered mansard roof. The ground floor retains the original ornate
sandstone façade, while the upper floors have been rendered and painted.
In 2013, a new 10-year FRI lease was agreed with a local clothes store on a stepped rental basis.
The initial rent was agreed at £22,000 per annum, rising to £23,500 in years 2 and 3, and then to the
market rent of £25,000 per annum in year 4. An appropriate ARY of 8 per cent has been determined
by comparable evidence. The valuation will include three tranches of income, and we need to think
about when the landlord will receive the increases.

Figure 18.3.2 Dean Street, Newcastle upon Tyne.

£25,500

£25,000

£24,500

£24,000

£23,500

£23,000

£22,500

£22,000

£21,500

£21,000

£20,500
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Figure 18.3.3 Cash flow 2.

 Valuation 451
Valuation
The ARY has been applied to the core income which is below market rent and therefore considered
secure. The yield has been increased by 0.25 per cent as the stepped rent is introduced, to account for
the associated uncertainties and risks.

Core
Passing rent £22,000 per annum

YP in perp @ 8% 12.5000

Market value of the core £275,000

Middle layer
£23,500 per annum – £22,000 per annum £1,500 per annum

YP in perp @ 8.25% 12.1212

PV of £1 @ 8.25% for 1 year* 0.9238

Market value of the middle layer £16,796

Top layer

£25,000 per annum – £23,500 per annum £1,500 per annum

YP in perp @ 8.5% 11.7647

PV of £1 @ 8.5% for 3 years** 0.7829

Market value of the layer £13,816

Market value £305,612

*The landlord has to wait one year before receiving the middle layer
**The landlord has three years before receiving market rent

The hardcore method is favoured in practice, and computer software programs such as Argus Investor
tend to default to the hardcore method.

Further reading
Isaac, D. and O’Leary, J. (2013) Property Valuation Techniques, 3rd edn, Palgrave Macmillan, Basingstoke.
452 Lynn Johnson and Becky Thomson
18.4 The all-risks yield
Key terms: yield; investment valuation; rent; comparable evidence; tenant covenant
A yield is the rate of return that a purchaser is seeking from a potential property investment (Shapiro
et al., 2012). The ARY is the yield most commonly used when valuing a property for investment
purposes, and it implicitly reflects all of the risks and prospects attached to a particular property invest-
ment. This means that any anticipated future movement in value is reflected in the proposed purchase
price by the adjustment of the yield by the valuer.
In order to establish the ARY, we need to use transactional evidence from the relevant property sector.
The ARY is expressed as a percentage and is calculated as follows:
Market Rent
ARY = × 100
MarketValue
Example 1
A fully let office block in central Newcastle with a recently reviewed rent of £160,000 per annum has
just been sold to a pension fund for £2m. Calculate the ARY:
£160,000
ARY = × 100
£2,000,000
Therefore, ARY = 8%

Example 2
It is important to note that the better the investment, the more investors will be prepared to pay for
the same rental income. If an investor were to offer £2.5m rather than £2m for the same investment
as that in Example 1, the yield changes:
£160,000
ARY = × 100 = 6.4%
£2,500,000
Therefore, a better property investment commands a lower ARY.
The quality of a property investment depends on the security of both the initial capital invested and
the rental income received; the liquidity of the property as an asset (i.e. buoyancy of the market) and
the costs of transfer (Shapiro et al., 2012). Therefore, external factors play a key part in assessing the
security of a property investment when analysing comparable evidence for an ARY:

● The economy
The economic climate is vital to the property investment market and how it performs. For exam-
ple, if an economy is emerging from a recession then there is uncertainty in the market as a whole.
Fewer investments come onto the market, as investors are waiting for the return of better market
conditions and a chance to secure a better return on their investments.
● Growth
An investor wants to make sure that the investment will grow in terms of market rent and market
value. An investment with little prospect of rental growth (i.e. a property that is currently over-
rented) is not attractive in the market and hence will affect the ARY achieved.
● Legislation
Changes in taxation, planning policy and law can all have an effect upon a property investment.
Does the property comply with current legislation? How much will an investor have to spend to
achieve compliance and let the property?
 Valuation 453
● The tenant
The quality of property investments can be affected significantly by tenant covenant, i.e. the
financial worth of a tenant. If you are valuing a property with a strong tenant covenant, you need
to be looking for similar tenant covenant strength in your comparables. Additionally, the status of
occupation (i.e. single occupier or multi-tenanted) must also be taken into consideration as these
factors impact upon ARY.
● The lease
As mentioned earlier, lease terms can have a great impact on the viability of a property investment
and the yield it will achieve. If a landlord has just agreed a new 10 or 15 year lease with a tenant,
then this will appeal to a potential purchaser as the rental income is guaranteed for the next 10 or
15 years. Therefore, he will pay more for the investment and the ARY will drop. Conversely, an
investor would be very wary if a lease is coming to an end and this would be reflected in what he
would be prepared to pay, so the ARY would be higher.
● Rent review
Rent reviews are common in commercial leases and they are normally ‘upwards only’ to encour-
age rental growth. If market rent has dropped below passing rent at the rent review, then the rent
will simply remain the same rather than go down. Upwards/downwards reviews do exist but are
less common. When searching for comparables, the rent review pattern should be the same.
● Breaks
Breaks can have an impact on the yield as they affect the security of income received by the
investor. A tenant may not even exercise their break, but its presence is unnerving to investors as
this could potentially convert into a vacant period or void. An ARY would ordinarily be increased
to account for this.

When analysing comparable evidence for a yield, the valuer needs to take all of the above factors
into consideration and make the necessary adjustments to the ARY in order to reflect any differences
between the comparable and the subject property.

Further reading
Blackledge, M. (2009) Introducing Property Valuation, Routledge, London, pp. 34–53.
Shapiro, E., Mackmin, D. and Sams, G. (2012) Modern Methods of Valuation, 11th edn, Estates Gazette Books, London,
pp. 67–78.

18.5 Over-rented property

Key terms: rent reviews; over-supply; tenant strength; unexpired term; degree of over-renting; hard-
core/layer method; short cut discounted cash flow
Over-renting occurs when a property is let at a rent higher than its market rent. This happens when either
market rent has fallen since the property was let and upwards-only rent reviews have maintained the high
historic figure; or the property was let at a headline rent with incentives and upwards-only rent reviews:

Example 1
An office building in Edinburgh’s New Town was let on a 20-year lease at a rent of £50,000 per
annum. By the first rent review, the market rent of the building had fallen to £40,000 per annum and
the building had become over-rented.
454 Lynn Johnson and Becky Thomson
● The £40,000 per annum market rent is sometimes referred to as the core income.
● The £10,000 per annum difference between the core income and the rent payable is called the overage.

Any valuer acting on behalf of a property investor has to deal with the risk of both the core income
and the overage for an over-rented property investment. There are three areas that must be examined
to assess the risks:

1 Tenant strength:
● receipt of the overage depends on the lessee continuing to fulfil the lease covenants;
● if the lessee leaves the property and the freeholder is forced to try and re-let, he will only be
able to achieve market rent (or core income);
● a proven multinational tenant will mean very little risk of default and security of income.
2 The unexpired term of the lease:
● most investors want at least an average of 8–10 years unexpired on the leases of the occupying
tenants within their property investment.
● if only a short average unexpired term remains, the investor may suffer a reduction in income
at expiry as he will only be able to re-let the property at the market rent;
● if the market rent has not grown sufficiently to overtake the passing rent by the lease end, the
tenant is likely to leave for cheaper alternative premises.
3 The degree of over-renting:
● both of the above issues become less of a problem if the over-renting is slight;
● if there is a large degree of over-renting, then default creates a large reduction in income.

With regard to the methods used for valuing over-rented property, the hardcore (or layer) method
was the first method adopted for valuing over-rented freehold interests, when the problem first arose
in the early 1990s.
When applied to over-rented property, the hardcore approach values market rent into perpetuity as
the core income (at an appropriate ARY), and the overage as the top slice (at a higher yield to reflect
additional risk) (see Figure 18.5.1). Note that the overage yield is based on an equated yield approach, i.e.
gilts yield, plus a property risk premium, plus in excess of 2–3 per cent, to reflect overage risk.

Passing rent
Overage/topslice
(Overage yield)
Market rent
Core income
(ARY)

Years

Figure 18.5.1 Overage/topslice.

 Valuation 455
Example 2
You have been asked to value an office building that was let 6 years ago on a 20-year FRI lease with
5-yearly upward-only rent reviews. The rent passing is £575,000 per annum and market rent is
£500,000 per annum.
The ARY for similar property is around 6.5 per cent and the appropriate overage yield is 9.75 per
cent (the gilt yield (4.75%) + property risk premium (3%) + over-renting risk (2%)).

Core income

Market rent £500,000 per annum

YP into perpetuity 15.3846
@ 6.5%
7,692,308

Topslice

Overage £75,000 per annum

YP single rate @ 7.4682
9.75% for 14 years
560,112

Market value £8,252,420

Say £8.253m

The hardcore method assumes the overage will last until the lease end, but in reality the market rent
is likely to increase during the remainder of the lease term (Figure 18.5.2).
The point at which market rent rises above passing rent is known as the breakthrough (Figure 18.5.3).

Passing rent MR increase

Overage

Market rent
Core income

Years

Figure 18.5.2 Market rent increases.

456 Lynn Johnson and Becky Thomson

Breakthrough

Passing rent MR increase

Overage

Market rent
Core income

Years

Figure 18.5.3 The breakthrough.

An alternative approach is to use a short-cut discounted cash flow which provides us with an opportu-
nity to estimate when ‘breakthrough’ occurs. A discounted cash flow is different from other investment
valuation methods as it explicitly adds rental growth to annual rent (using Amount of £1). In order
to discover the point at which market rent breaks through, we add rental growth at each reversion
opportunity.

Example 3
You have been asked to value an office building which was let 6 years ago on a 20-year FRI lease
with 5-yearly upward only rent reviews. The passing rent is £575,000 per annum and market rent is
£500,000 per annum.
The ARY for similar property is around 6.5 per cent, an appropriate equated yield is 7.75 per cent
and rental growth is predicted at 1.75 per cent per annum.

Estimate market rent at the second rent review (4 years’ time)

Market rent £500,000 per annum
Amount of £1 @ 1.75% for 4 years (1.0175)4 1.0719

£535,930

Estimate market rent at the third rent review (9 years’ time)

Market rent £500,000

Amount of £1 @ 1.75% for 9 years (1.0175)9 1.1690
£584,500
 Valuation 457
At the third rent review breakthrough occurs – the market rent is expected to exceed the passing rent
of £575,000 per annum.

Term
Passing rent £575,000 per annum
YP single rate @ 7.75%* 6.3124
for 9 years
£3,629,630

Reversion

Breakthrough market rent £584,500 per annum

YP in perp @ 6.5% 15.3846

PV of £1 @ 7.75% 0.5108
for 9 years
£4,593,266

Market value £8,222,896

Say
£8.223m

* As we are explicitly adding rental growth, we cannot then use an ARY (which implicitly reflects growth) to value income.
Therefore, in a discounted cash flow we use an equated yield.

Further reading
Baum, A. E. and Crosby, N. (2007) Property Investment Appraisal, 3rd edn, Wiley Blackwell, London; the hardcore/layer
approach (pp.103–107); the discounted cash flow approach (pp. 145–149); a case study (pp. 283–291).
Blackledge, M. (2009) Introducing Property Valuation, Routledge, London, pp. 362–369.

18.6 Analysing tenant incentives

Key terms: net effective rent; straight line; discounted; discounted cash flow; landlords perspective;
tenants perspective
Lease incentives can take many forms, but among the most common are rent free periods in excess
of 3 months, break clauses, staggered rents, caps on future rent reviews or cash payments reverse pre-
miums. Landlords prefer to grant concessions (such as prolonged rent free periods) rather than simply
accepting a reduced rent.
In a market such as that of today, most new lettings are at headline rents subject to some sort of
incentive. Valuers involved in rent reviews or valuations in these markets need to analyse headline
rents and incentive packages in order to find comparable evidence for market rents.
The question is, what rent would have been agreed by the parties to the lease if the letting had not
been subjected to incentives? This rent is known as the net effective rent.
458 Lynn Johnson and Becky Thomson
Net effective rent
There are several different methods of analysing transactions to ascertain a net effective rent, and four
approaches are identified by the RICS under UK Guidance Note 6 (2014) Analysis of Commercial
Lease Transactions.

1 rent and value apportionment not assuming the time value of cash flows (straight line or simple
method of analysis);
2 rent and value apportionment assuming the time value of cash flows (discounted analysis);
3 comparison by reference to effect on investment value (the assumption that market evidence for
similar properties will also be over-rented in a weak market, and therefore evidence will already
reflect the market’s perception of risk);
4 a DCF approach (assumptions are explicitly stated and different prospective cash flows mapped out).

Some of these methods can be approached from two sides, particularly when the objective is to analyse
a comparable letting to inform a rent review negotiation:

● landlord’s perspective – where the valuer will seek a method of analysis that gives a high net effective
rent, near to the headline rent;
● tenant’s perspective – where the valuer will seek a method of analysis that gives the lowest net effec-
tive rent possible.

On the other hand, when the objective of rental analysis is to estimate market rent for the purposes of
valuing a similar property, the valuer needs an unbiased method.

Simple analysis of net effective rent (straight line approach)

Example 1
The third floor of a prime office building in Newcastle achieved a peak rent of £125,000 per annum
in 2008.
By 2012, after a period of weakened economic activity, there were several vacancies in the office
building and a letting was agreed for the identically sized fourth floor at £130,000 per annum on a
15-year lease with 5-yearly upwards-only rent reviews. The lease is subject to 2 years rent free.
What is the net effective rent (i.e. market rent) of the fourth floor? Start by analysing the compa-
rable fourth floor letting from the landlord’s perspective. The landlord wants to produce a high net
effective rent to support his stance in negotiating a rent review on another office building in this loca-
tion. He can argue that the inducement is to persuade the tenant to pay the headline rent for the whole
of the 15 year lease, through the mechanism of the upwards only rent review. Therefore the effect of
the inducement should be spread over the entire 15 year lease:

Landlord’s perspective
Total rent (allowing for inducements) payable over the lease term:

13 years @ £130,000 per annum £1,690,000

Spread over 15 years £1,690,000 ÷ 15

Net effective rent £112,667 per annum

 Valuation 459
The tenant, however, will suggest the value of the rent free should be analysed only over the period
to the first rent review, i.e. 5 years:

Tenant’s perspective
Total rent (allowing for inducements) payable
over the first 5 years:
3 years @ £130,000 per annum £390,000
Spread over the period to the first rent review £390,000 ÷ 5

Net effective rent £78,000 per annum

These two opposed ways of analysing the net effective rent give two very different outcomes. They
serve the needs of the landlord’s and the tenant’s surveyors in arguing a rent review on a similar build-
ing, but are not helpful to a valuer wishing to find evidence of market rent. In this situation, the valuer
will have to arrive at a view of the appropriate figure somewhere within this range, based on evalua-
tion of the circumstances.

Discounted analysis of net effective rent

Lettings with inducements can also be analysed using the same principle as the simple approach, but
this time including discounting to allow for the timing of rents:

Example 2
The third floor of a prime office building in Newcastle achieved a peak rent of £125,000 per annum
in 2008.
By 2012 after a period of weakened economic activity, there were several vacancies in the building
and a letting was agreed for the identically sized fourth floor at £130,000 per annum on a 15-year lease
with 5-yearly upwards-only rent reviews. The lease is subject to 2 years rent free and the current ARY
for similar property is around 8%.
What is the net effective rent (i.e. market rent) of the fourth floor?
Instead of simply multiplying the rent by the number of years it is paid, we can replace this with YP
single rate to account for the timing of the rents:

Landlord’s perspective
Total rent (allowing for inducements) payable over the lease term:
Passing rent £130,000 per annum
YP single rate @ 8% for 13 years 7.9038
PV of £1 @ 8% for 2 years 0.8573
£880,870
Spread over 15 years:
YP single rate @ 8% for 15 years 8.5595

Net effective rent £102,911 per annum (£880,870 ÷ 8.5595)

460 Lynn Johnson and Becky Thomson
As before, the tenant will suggest the value of the rent free should be analysed only over the period to
the first rent review, i.e. 5 years:

Tenant’s perspective
Total rent (allowing for inducements) payable over the lease term:
Passing rent £130,000 per annum
YP single rate @ 8% for 3 years 2.5771
PV of £1 @ 8% for 2 years 0.8573
£287,215
Spread over the period to the first rent review:
YP single rate @ 8% for 5 years 3.9927
Net effective rent £71,935 per annum (£287,215 ÷ 3.9927)

Using DCF to analyse net effective rent

In some cases, a valuer will analyse a headline rent to find net effective rent so that it can be used to
estimate market rent for another property being valued to market value. In such cases an unbiased
estimate of market rent is required, and the valuer may resort to using the extreme landlord and tenant
perspectives to arrive at a compromise figure.
This is effectively recognition that both extreme views (i.e. writing off the inducement over the
whole lease or writing it off over the period to the first review) are incorrect. It recognises that the
headline rent should be written off for some period in between the two, where the headline rent is
likely to be overtaken by the growing market rent. In that case, the compromise is justified in theory,
but is inexactly calculated.
Advocates of the DCF growth explicit approach to analysing net effective rent seek to investigate
exactly when market rent will break through headline rent, and the effect of choosing it as the basis for
writing off the inducements.
We will apply the DCF approach to the Newcastle prime office letting:

Example 3
The third floor of a prime office building in Newcastle achieved a peak rent of £125,000 per annum
in 2008.
By 2012, after a period of weakened economic activity, there were several vacancies in the building
and a letting was agreed for the identically sized fourth floor at £130,000 per annum on a 15-year lease
with 5-yearly upwards-only rent reviews. The lease is subject to 2 years rent free. The current ARY
for similar property is around 8 per cent, a suitable equated yield is 10 per cent and a reasonable rate
of rental growth is 2.5 per cent per annum.
What is the net effective rent (i.e. market rent) of the fourth floor?
Initially, we need to estimate a point at which the market rent will pass through the headline rent. In
this example, we could trial the breakthrough point at the second rent review.
We assume that the landlord is indifferent whether he receives:

Scenario A: market rent on standard lease terms from Day 1

or
Scenario B: headline rent of £130,000 per annum with 2 years rent free.
 Valuation 461
Therefore, the value of the two scenarios should be the same and we can calculate the value of each
scenario and put the two values together in order to find the market rent:
Scenario A

Market rent £X per annum

YP in perp @ ARY of 8% 12.5
Market value 12.5X

Scenario B
Table 18.6.1 Scenario B summary – Assuming breakthrough at year 10

Years Income Amount of £1 YP single rate PV of £1 @ 10% Net present

(per annum) @ 2.5% @ 10% value
1–2 – – – – –
3–10 £130,000 – 5.3349 0.8264 £573,139
(8 years) (2 years)
Exit value Re-let @ MR 1.2801 12.5 0.3855 6.1685MR
(Breakthrough) (10 years) (YP in perp) (10 years)
Market value £573,139 +
6.1685 MR

On the basis that both scenarios are worth the same to the landlord:

£573,139 + 6.1685MR (Scenario B) is equal to £12.5MR (Scenario A)

£573,139 = 12.5MR – 6.1685MR
£573,139 = 6.3315MR
MR = £573,139 ÷ 6.3315MR
Market rent £90,522 per annum

However, the assumption that the market rent, growing at 2.5 per cent per annum, breaks through the
headline rent by the second rent review must be double checked. Does it cross, if it starts at £90,522
and grows at 2.5 per cent per annum?

(1.025)10 × £90,522 per annum = £115,876 per annum

The market rent would only grow to £115,876 per annum by the second rent review so it would
not exceed the headline rent of £130,000 per annum, and it’s clear the trial assumption regarding
breakthrough was wrong.
We must try again with the crossover rather later, say, when the lease ends in Year 15. This involves
modifying the valuation of Scenario B (Scenario A’s value remains unchanged):
462 Lynn Johnson and Becky Thomson
Scenario B
Table 18.6.2 Scenario B modified summary – Assuming breakthrough at year 15

Years Income Amount of £1 YP single rate @ PV of £1 @ 10% Net present value

(per annum) @ 2.5% 10%
1–2 – – – – –

3–15 £130,000 – 7.1034 0.8264 £763,132

(13 years) (2 years)

Exit value Re-let @ MR 1.4483 12.5 0.2394 4.3340MR

(Breakthrough) (15 years) (YP in Perp) (15 years)

Market value £763,132 +

4.3340MR

On the basis that both scenarios are worth the same to the landlord:

£763,132 + 4.3340MR (Scenario B) is equal to £12.5MR (Scenario A)

£763,132 = 12.5MR – 4.3340MR
£763,132 = 8.1660MR
MR = £763,132 ÷ 8.1660
Market rent £93,452 per annum

Checking that the new breakthrough assumption is correct:

(1.025)15 × £93,452 per annum = £135,346

This accords with the assumption that breakthrough occurs at the end of the lease. The result does, as
expected, fall between the extreme landlord and tenant views.
DCF methods can be used in this way to arrive at an unbiased analysis of net effective rent, theo-
retically suitable as the basis for deriving Market Rent.

Further reading
RICS Valuation – Professional Standards (2014) ‘UKGN 6 analysis of Commercial Lease Transactions’, RICS, London.

18.7 The discounted cash flow approach to valuing property investments

Key terms: rent reviews; equated yield; explicit rental growth; all-risks yield; net present value
When valuing property for investment purposes, a valuer can either use a traditional approach or a
discounted cash flow. In traditional investment valuation, the rent reverts to market rent at the first
opportunity and is then capitalised into perpetuity, despite the fact that the rent will probably increase
at a later point. The reversion is also at today’s market rent – we make no explicit assumptions regard-
ing rental growth as this is reflected in the ARY.
 Valuation 463
The alternative to traditional investment valuation is to use a discounted cash flow (DCF) that
recognises the importance of all income streams produced by an investment, and subsequently values
each cash flow separately. At each reversion, the rent steps up as the DCF approach explicitly allows for
rental growth on top of market rent by applying a rental growth rate known as the Amount of £1:

Example 1
Shop A was let 2 years ago on a 20-year FRI lease with 5-yearly rent reviews. The passing rent is
£50,000 per annum and the market rent is currently £55,000 per annum. Using a rental growth rate
of 1.5 per cent, calculate the rental cash flow over the life of the lease (Figure 18.7.1).

Cash flow 1 (Present day to Review 1)

Passing rent £50,000 per annum

Cash Flow 2 (Review 1 to Review 2)

Market rent £55,000 per annum
Amount of £1 @ 1.5% for 3 years 1.0457
Inflated market rent £57,512

Cash flow 3 (Review 2 to Review 3)

Market rent £55,000 per annum
Amount of £1 @ 1.5% for 8 years 1.1265
Inflated market rent £61,957

Cash flow 4 (Review 3 to Lease expiry)

Market rent £55,000 per annum
Amount of £1 @ 1.5% for 13 years 1.2136
Inflated market rent £66,745

£66,745 pa

£61,957 pa

£57,512 pa Cash Flow 4

Cash Flow 3
£50,000 pa Cash Flow 2
Cash Flow 1

0 3 8 13
Y

Figure 18.7.1 Cash flow analysis.

464 Lynn Johnson and Becky Thomson
Due to the fact that we apply a rental growth rate to the market rent, we cannot use the ARY as a cap-
italisation rate, as it already implicitly accounts for rental growth and we would be double counting.
Therefore, we use the equated yield within a DCF. When calculating the equated yield, we use a
‘safe’ investment as a benchmark. This is the rate of return from UK government bonds (known as
‘gilts’) which provide fixed interest and eventual capital repayment at the end of a set period. The gilt
rate is then adjusted to allow for the risk of property investment by the addition of a risk premium which
has fluctuated between 4 and 6 per cent over recent years.
A discounted cash flow clearly lays out all the different income streams of an investment in a table.
The income streams are separated into periods of time and the net cash flow for each period is grown,
capitalised and then discounted back.

Example 2
Shop A was let 2 years ago on a 15-year FRI lease with 5-yearly rent reviews. The passing rent is
£50,000 per annum and the market rent is currently £55,000 per annum. Assuming a rental growth
rate of 1.5 per cent, an equated yield of 8.7 per cent and an ARY of 7.5 per cent, calculate the value
of the freehold using a DCF (Table 18.7.1).

Table 18.7.1: Discounted cash flow analysis

A B C D E F G
Periods Income Amount of £1 Cash flow YP @ PV of £1 Net present
@
(years) (£) 1.5% (£) 8.7% @ 8.7% value (£)

3–5 50,000 – 50,000 2.5449 – 127,245

(3 years)

6–10 55,000 1.0457 57,512 3.9201 0.7786 175,538

(3 years) (5 years) (3 years)

11–15 57,512 1.0773 61,957 3.9201 0.5131 124,610

(5 years) (5 years) (8 years)

Exit value 61,957 1.0773 66,745 13.3333 0.3381 300,868

(5 years) (YP perp 7.5%) (13 years)
728,261

Notes:
Column A: each cash flow is split into reversionary time periods, i.e. the intervals between rent reviews. As we are already 2 years into
the lease the first cash flow starts in Year 3.
Column B: rental income before rental growth is added.
Column C: we use the Amount of £1 to explicitly reflect rental growth for the length of the time period (except the first cash flow,
as we start receiving this income immediately).
Column D: rental income once growth has been added.
Column E: we capitalise each cash flow using YP single rate at the equated yield for the length of the time period, i.e. in the first cash
flow, the £50,000 pa is received for 3 years, so we use YP @ 8.7% for 3 years etc.
Column F: although we have accounted for rental growth, we still need to discount each cash flow back to its present day value, so we
use present value of £1 over the number of years in the cash flow. The first income starts immediately, so we don’t need to discount
it back to the present day.
Column G: after multiplying across Columns D–F, each cash flow produces a net present value.
 Valuation 465
Exit value
A DCF should only go on for as long as is necessary. However, the period beyond the DCF cannot
be ignored as the investment will still exist and perform, so to account for this we capitalise the final
rental cash flow into perpetuity. We use YP in perp at an appropriate ARY to calculate the capital value
of the asset at this final point.
In Example 2, we capitalise the income with YP in perp at the ARY in Column E, but are still not
due to receive this sum for 13 years, so we need to discount using PV of £1 @ 8.7% (equated yield)
for 13 years.

Net present value

We total up each of the separate cash flows, including the exit value, which gives us our final net
present value.

Further reading
Blackledge, M. (2009) Introducing Property Valuation, Routledge, London, pp. 240–259.

18.8 Valuing vacant property

Key terms: void; vacant rates; rent free; market rent; all-risks yield; vacant costs
Historically, valuers have built risk of vacant property through the yield applied to the income. This
has, however, become increasingly difficult to evaluate in current market conditions as the risk of a
property becoming vacant has increased.
According to Jones Lang LaSalle (2013) at the end of 2012 total supply of immediately available
industrial floor space across Great Britain stood at 327.4 million sq ft, while at the beginning of 2013
vacant offices stood at 24.8 million sq ft.
When a property is generating no income or is owner occupied how can we apply the investment
method of valuation to find the market value?
We need to establish the market rent for the property and then consider how long it may remain
vacant. We also need to make an assumption on how much rent free to offer in order to achieve mar-
ket rent. Using comparable analysis of the market, the valuer needs to establish market rent and also
typical void/marketing periods and associated rent free periods.

Case study 1

Figure 18.8.1 Unit 1 Morton Palms, Darlington.

466 Lynn Johnson and Becky Thomson
Morton Palms is located approximately 1.6 km (1 mile) east of Darlington town centre on the A66,
which links the town with both the A1(M) to the west and the A19 to the east.
Constructed in 2006, the estate comprises 12 detached two-storey office buildings providing mod-
ern open plan accommodation. Unit 1 extends to a net internal area of 418.45 sq m (4,508 sq ft) and
has been vacant for approximately 6 months. It is being actively marketed by a local agent.
The market rent is £71,000 per annum and the agent marketing the premises has advised that the
property will let within 24 months, although a 12-month rent free period will need to be offered to
achieve the market rent.
ARYs for similar vacant investments are in the order of 10.5 per cent.

Valuation
The market rent will be achieved in perpetuity, but the landlord will not receive this for 3 years. Therefore,
the income has been deferred over the two year marketing void and the 12-month rent free period. A yield
of 10.5 per cent has been used, as the risk has been built into the cash flow by deferring the income.

Market rent £71,000 per annum

YP in perp @ 10.5% 9.5238
PV of £1 @ 10.5% for 3 years 0.7412
Market value £501,167

Costs associated with vacant property

Once a property becomes vacant and in the case of tenanted property the liability for costs falls with
the landlord. These costs may include:

Maintenance/repairs
This will depend on the lease terms that have been agreed with the vacating tenant. In most cases the
lease will be subject to dilapidations, and the tenant must hand back the property in a tenantable state
of repair. Therefore, the property may not need repairs in order to re-let. If, however, the tenant has

£80,000
£70,000
£60,000
£50,000
£40,000
£30,000
£20,000
£10,000
£0
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Figure 18.8.2 Cash flow graph.

 Valuation 467
vacated due to administration/liquidation then the landlord may need to carry out necessary repairs in
order to bring the property into a tenantable state of repair.

Service charge
Within multi-let buildings such as office blocks or shopping centres, the landlord will cover the cost of
the service charge for any void units. Service charge costs predominantly cover the upkeep, insurance
and repair of all common areas.

Security
This depends on the property, but the landlord will want to maintain the value and marketability of
the property and may therefore require security.

Services
Any essential services will be transferred over to the landlord/investor. The amount payable may be
minimal but it is still a liability.

Refurbishment costs
Although the tenant may have carried out some dilapidation works, the property may need refurbish-
ment if the landlord is hoping to re-let quickly and at a good rent.

Letting costs
The property will need to be marketed in order to re-let, and therefore expert advice is required from
a surveyor at a cost. Agency fees are around 10 per cent of market rent, although some properties are
subject to joint agency agreements and in this instance the fees are around 15 per cent of market rent.

Case study 1: Unit 1 Morton Palms, Darlington

There are a number of costs associated with the case study:

Vacant rates
The landlord will be liable to pay 2 years empty business rates.
Rateable Value – £52,000
UBR – 47.1 pence (standard business premises)
Rates payable = £52,000 × 0.471 = £24,492 per annum (£2,041 per month)
21 months (void period, allowing for 3 months rates free) × £2,041 = £42,861
The landlord will pay £42,861 in vacant rates over the void period.

Security/service charge
The site is subject to a service charge for the cleaning of common areas, landscaping and security on site.
In practice, a valuer may be given the cost information by the client to incorporate into their valuation.
For the purposes of this valuation, we have assumed 7.5 per cent of the market value will account for
service charge expenditure.
468 Lynn Johnson and Becky Thomson
£71,000 × 7.5% = £5,325 per annum
£5,325 × 2 years (void period) = £10,650
The landlord will pay £10,650 in vacant service charge over the void period.

Utilities
The unit will be subject to water, gas and electricity rates, and the costs of these services will be trans-
ferred to the landlord. In practice, a valuer may be provided with this information, but in this example
we have assumed 1 per cent of market rent.

£71,000 × 1% = £710 per annum

£710 × 2 years = £1,420
The landlord will pay £1,420 in vacant services over the void period.

Agency fees
The property is already being marketed by a local agent and the landlord will have agreed to pay a fee
once the property is let. The fee for a single agent is 10 per cent of the market rent agreed.

£71,000 × 10% = £7,100

The landlord will therefore accrue the following vacant costs over the 2 years:

Vacant rates £42,861

Service charge £10,650
Utilities £1,420
Agents fees £7,100
Total £62,031

This is a cost to any potential landlord/investor, and should therefore be deducted from the market
value of the property:

Value of Unit 1 £501,167

Less vacant costs £62,031
Market value £439,136
Say £439,000

Vacant costs will vary depending on the property to be valued. Any additional works (i.e. refurbish-
ment) which may be required should be deducted from the market value.

Further reading
Jones Lang LaSalle (2013) UK Industrial Property Trends Today, Issue 4.
 Valuation 469
18.9 Valuation and sustainability
Key terms: energy efficiency; corporate social responsibility; green buildings
A sustainable building should be one which meets peoples’ needs – as a home, or as a workplace – in ways
which enhance its positive impacts and minimise its negative impacts, environmentally and socially, both
locally and globally over time.
(UK Green Building Council, 2009)

Due to the increased development of sustainable ‘green buildings’ in the commercial property market
over the last decade, there is now increasing pressure on the valuation profession to incorporate the
additional value of sustainability into valuation appraisals.
Over the past few years, there has been a rapid shift in market sentiment with regard to sustainable
methods of constructing buildings and energy efficiency. Legislation such as The Energy Performance
of Buildings (Certificates and Inspections) Regulation 2007 and the revised Building Regulations (Part
L, Conservation of Fuel and Power) mean that developers are being forced to build or redevelop green
buildings. Company directors also have new duties under Section 172 of the Companies Act 2006 to
have regard ‘to the impact of the company’s operations on the community and the environment’.
Occupiers have their own corporate social responsibility (CSR) policies and will wish to demon-
strate that such policies are being applied in relation to the management of their property. There is
also the added financial incentive of cost savings in relation to energy efficient buildings which benefits
both landlord and tenants
A great deal of research has already gone into the creation of green leases which should complement
the day-to-day operation of sustainable buildings. A green lease is a lease that has additional provisions
for both the landlord and tenant to undertake specific responsibilities with regard to the sustainable
operation of a property. Such leases are already used in Australia where the Australian Government has
published a series of Green Lease Schedules that put the onus on tenants to operate efficiently within
their premises and maximise the environmental benefits of their building.
Some would argue that it may be possible to encourage the sustainable operation of buildings by
voluntary agreements between landlord and tenant, but many believe that the best way to get both
parties to act responsibly with regard to energy efficiency and sustainability of buildings is to confer
obligations on them via their lease. Otherwise, both parties are not necessarily incentivised to take
positive action.
On 2 March 2007, practitioners from the international valuation industry met to discuss the crosso-
ver between valuation and sustainability at the Vancouver Valuation Summit. Acknowledgement of
the fact that sustainability is now globally impacting on the process of valuation involved the signing
of the Vancouver Accord – a commitment by global professional bodies to begin the process to embed
sustainability into valuation and appraisals.
Following on from the Vancouver Accord, the Green Building Council of Australia commissioned
a report entitled Valuing Green in 2008 which examined the valuation of green leases in Australia.
This is one of the first documents to conduct detailed research into how the green agenda affects the
value of buildings, and the report identified the following factors that can potentially impact on value:

1 Obsolescence
Sustainable green buildings potentially have a lower risk of obsolescence and depreciation due to
the fact that they are essentially ‘future-proofed’ against growing legislation and regulation with
regard to sustainability. By reacting to future demand and the changing green agenda of many
potential tenants, green buildings are more likely to retain their value.
470 Lynn Johnson and Becky Thomson
2 Penalties
There is the potential future threat of increased insurance costs for non-green buildings, in addi-
tion to possible legal implications for poor energy performing buildings.
3 Incentives
To encourage the efficient management and occupation of sustainable buildings, it is likely that
tax and financial incentives will be introduced for sustainable buildings.
4 Net rent
An increase in net rent is likely due to savings in outgoings.
5 Lease terms
There is the potential to secure longer lease terms and retain tenants in a sustainable building,
along with the ability to attract good tenant covenants from large companies with a similar green
agenda.
6 Rental growth
Research suggests that green buildings have a higher growth potential which could lead to lower
ARYs and risk premiums.

Although the direct comparison method is the most widely used, the Green Building Council Australia
highlighted the difficulty in finding comparably ‘green’ buildings to make this method viable.
The Council’s recommended method for valuing green buildings was using DCF. Although the
method is still problematic with regard to comparable evidence, it is not so heavily reliant on com-
parables, and the timing of cash flows can be accurately modelled. This allows the valuer to factor in
future shifts in the market for green buildings and incorporate the additional incentives/penalties that
may be applicable.
This is an emerging market and a relatively new area for valuers, so a lack of knowledge and experi-
ence is likely to affect valuation standards. Knowledge comes with experience, and valuers therefore
need to be exposed to market transactions which are very limited at present, particularly in the UK.
Valuers will also need a degree of additional training subject to guidance from their relevant professional
body, but in the meantime we must ensure that we keep up to date with developments in the market.
The RICS have published a guidance note on sustainability and commercial property valuation
which provides best practice when assessing a building’s sustainability characteristics and reflecting
these characteristics in market value, fair value, market rent or investment value.

Further reading
RICS (2014) Global Guidance: Sustainability and Commercial Property Valuation, RICS Books, London.

18.10 The Valuer Registration Scheme

Key terms: VRS; Registered Valuer; RICS; Professional Standards; Red Book
From 2011 all UK practitioners undertaking valuations within RICS Valuation – Professional Standards
‘the Red Book’ are required to join the RICS Registered Valuers Scheme (also known as the Valuer
Registration Scheme, or VRS).
The scheme was introduced to ensure quality valuations as well as raise the credibility of valuers and
provide clear and consistent application of the valuation standards internationally.
Valuation services are used throughout the business world and include investment and corporate
finance transactions, assessment of company accounts and stock exchange listings. It is important that any
organisations relying on the expertise of a valuer are confident that the valuation is of the highest quality.
 Valuation 471
The registration scheme ensures consistency throughout the world and that all registered valuers:

● adhere to the RICS Valuation – Professional Standards;

● are committed to openness and transparency;
● are experts in their field;
● deliver credible high quality reports.

Any member of the professional body that has achieved valuation competency to level 3 and is
actively involved with the valuation of property under the RICS Valuation – Professional Standards
can apply to the RICS. Applications can be through their firm in which they work, individually or
as a sole practitioner.
Those professional members who qualified from 1 January 2012 who have not achieved level 3
must undertake a ‘Top up’ assessment if they wish to become registered.
The candidate is required to submit further evidence of experience to the RICS which will be
assessed by an appointed RICS professional registered valuer. The candidate must provide:

● evidence of work experience supervised by a registered valuer;

● case study using work-based evidence;
● continuing professional development (CPD) record.

Further reading
RICS (2010) Regulation, Rules for the Registration of Schemes, RICS, London.
RICS (2010) Regulation, Appendix A – RICS Valuer Registration, RICS, London.
RICS (2011) Why use a RICS registered valuer, RICS, London.

18.11 The comparative method

Key terms: comparable evidence; transactions; open market; lease terms; rent reviews; specification;
location; quantum
The comparative (or comparison) method is one of the five core methods of valuation and is the most
widely used by the surveying profession. When understating a comparative valuation you are directly
comparing the subject property with similar properties that have recently transacted – these are known
as comparables.
In a buoyant market the method is relatively straightforward as there are regular and plentiful transac-
tions. In a poor market (such as that which we are experiencing today) it becomes much harder and there
is a greater emphasis on a valuer’s experience and skill to analyse the comparable evidence effectively.
One of the greatest difficulties when valuing commercial property using the comparative method
is that it compares like with like, but no two properties are identical. Even properties within the same
developments can differ slightly.

Sourcing comparative information

The collection of comparable evidence begins on inspection. It is important to understand the area
surrounding the property you are valuing. Are there any adjoining units available to the market? Have
there been any new lettings, refurbishments or developments that may aid in the search for recent
transactions? A good tip on any inspection is to take note of agent’s boards and people to contact who
may help you in your search. Other sources of information may include your employer’s database and
records, national property websites and databases, local agents and auction results.
472 Lynn Johnson and Becky Thomson
Analysing rental comparables
Once a thorough search has been undertaken the comparables must be analysed. The comparables
should be very similar to the property being valued and comprise recent transactions that have occurred
in the open market and on arm’s length terms, i.e. between two parties who are not materially related.
These transactions also need to be verifiable and consistent with current market activity. Provided that
this criteria is met, the method can provide an accurate indication of value.
When analysing each comparable we need to consider a number of different aspects:

Location
When considering rental comparables we need to prioritise those within the same location. If we are
considering an office suite within the central business district (CBD) of a city centre, then we need
to consider similar office properties within the same city centre location. The disparity is too great
between rental values within a CBD and rental values on the edge of a city centre.

Transaction date
The best evidence is formed through recent transactions. This is because the most recent rents agreed will
provide a good indication of current market conditions for the specific type of property that you are valuing.

Arm’s length
Comparable transactions need to be unbiased and reflect the current market. Therefore you should only
analyse transactions that have taken place at ‘arm’s length’. For example, if a retail unit is let to an adjoin-
ing occupier for expansion, the landlord and tenant have an existing relationship so the new lease may
be agreed at a lower rent. In this instance, the transaction has not been completed at arm’s length terms.

Specification and layout

The internal layout of each comparable and how this compares to the subject property should also be
considered. In terms of offices, tenants require modern space that accommodates their technological needs.
Many older office suites are compartmentalised, lacking in modern fixtures (such as air conditioning) and
have unsightly perimeter trunking; while newer offices are open plan and have raised access floors and
suspended ceilings. In terms of industrial properties, factors such as high eaves height, good access and yard
space command higher rental values. Older buildings including listed buildings may have restrictions that
prevent them being adapted to suit modern requirements and, therefore, this must also be considered.

Size
The larger a property, the less rent (per square metre/foot) a tenant will be expected to pay. Industrial
units provide a good example of the quantum that a tenant may be offered, i.e. an established industrial
estate in the north-east of England commands in the order of £75.35 per sq m (£7.00 per sq ft) for
small units of approximately 464.50 sq m (5,000 sq ft) while the larger units of over 4,645 sq m (50,000
sq ft) may only achieve £43.06 per sq m (£4.00 per sq ft).
Offices also benefit from quantum, and size should also be taken into consideration, while retail
property, larger supermarkets and department stores are valued on a per square metre/per square foot
basis and therefore benefit from quantum allowance, but smaller shops are let on a Zone A rate basis.
 Valuation 473
Lease terms
When compiling comparable data an important factor is the lease terms which have been agreed on
any letting. The length of the lease, rent review pattern and repairing obligations can all impact on
the rent achieved for that particular property, i.e. a tenant agreeing to take a 5-year lease will often
pay more rent than a tenant taking a 15-year lease, as the landlord is agreeing to a shorter lease which
will impact on the value of the investment. Frequent rent reviews (every 3 years) are detrimental to a
tenant but beneficial for the landlord, so a landlord may offer a lower rent to a tenant that is prepared
to agree to more rent reviews in the lease. Conversely, a rent may be higher if there is longer between
rent review periods or no rent review at all. Restrictive covenants in a lease could also impact on value,
i.e. due to increased competition for a retail unit, a tenant may agree to a tight user clause.
In a perfect world a valuer could obtain all of this information, but unfortunately this is rarely the
case in practice. Therefore, valuers regularly have to make a number of assumptions that can impact
on valuation accuracy.

Further reading
Blackledge, M. (2009) ‘Introducing Property Valuation’, Routledge, London.

18.12 Valuation accuracy

Key terms: valuation report; RICS; Mallinson Report; Red Book; Carsberg Report
A valuation is a professional opinion at a single point in time.
(RICS, 2011)

The accuracy of valuation is a topic area that has been discussed and analysed at length. When report-
ing a valuation, any information provided must not be misleading but simply present the valuer’s
professional matter of opinion. It is a valuer’s duty to highlight any factors that could impact on cer-
tainty, but the extent of the commentary will depend on the purpose of valuation and report format,
and also what information the valuer has agreed to present to their client.
Following the 1990 property market crash there was an increase in litigation against valuers due
to the fact that many had over-valued property in a transitional market. The Royal Institution of
Chartered Surveyors (RICS) commissioned the Mallinson Report in 1994 which made a total of 43
recommendations on how regulation of valuation could be improved, and was the catalyst for the
modern version of the RICS Red Book.
Mallinson’s recommendations included a focus on the improvement of communications between
clients and valuers, the need for consistent reporting, the express statement of operational param-
eters for valuers, an improvement of skills and mathematical models and improved access to data.
Recommendation 34 was perhaps one of the most important – ‘common professional standards and
methods should be developed for measuring and expressing valuation uncertainty’. The RICS subse-
quently published the RICS Appraisal and Valuation Manual (4th edition) Sept 1995 which combined
all previous sets of standards in one improved volume.
Another important review of valuation accuracy took place in the Carsberg Report which was pub-
lished in 2002 in response to studies revealing client influence on investment valuations. The major
recommendation was that the RICS should establish an acceptable method by which uncertainty
could be expressed but not confuse users of the valuation. This would mean agreeing with appropriate
representative bodies the circumstances and format in which the valuer would convey uncertainty in
a uniform and useful manner.
474 Lynn Johnson and Becky Thomson
The result of this is that the current version of the Red Book, the RICS Valuation – Professional
Standards 2014, includes Valuation Practice Guidance – Applications (VPGA) 9 on Valuations in mar-
kets susceptible to change: certainty and uncertainty.

The status of the valuer – any valuers undertaking valuations in accordance with the Red Book
should be suitably qualified and have relevant expertise in their field. They should also be acting
independently of any influence and without any conflict of interest.
Inherent uncertainty – a valuer should be open about inherent uncertainty caused by factors such as
unusual or unique property character, the quantification of hope value, i.e. development poten-
tial, a special purchaser or certain assumptions that they have been asked to make.
Restrictions on enquiries – if a valuer is unable to obtain certain information, then this could com-
promise the accuracy of their valuation. The Red Book requires all sources of information to be
stated in a report, so attention must be drawn to any limitations.
Market instability – valuers need to accept that there may be unforeseen financial circumstances
which can be impacted by macro-economic, legal, political or natural events. Working in such
circumstances can be testing for the valuer, so judgements should be expressed clearly.

In order to ensure their opinion of value is as accurate as it can be, and to minimise their liability, valu-
ers must remain compliant with not only the RICS Code of Conduct Rules for Members and Firms
but also the RICS Valuation – Professional Standards 2014. It is also recommended that valuers refer
to any additional guidance such as the RICS Valuation Information Papers and ensure that they are
covered by appropriate levels of professional indemnity insurance.

Further reading
RICS (2011) ‘Report on PII for Valuations in the UK’ available at: https://consultations.rics.org/gf2.
ti/f/278818/6396741.1/PDF/-/16377_RICS_PII_Report%204.pdf (accessed 26/11/2013).
RICS (2014) Valuation Professional Standards, RICS, London.

18.13 Depreciated replacement cost

Key terms: depreciation; obsolescence; market value; comparable evidence
Depreciated replacement cost (DRC) is used to value properties where there is no active market, e.g.
schools, libraries, museums, power stations etc. There is a lack of demand for the property in its exist-
ing use, other than from the party using it.
The method assumes that the owner cannot buy another similar product on the market, so it is
necessary to purchase a site and rebuild the property in order to replace the asset. It is based on the
concept that a buyer would not pay more to buy the subject property than the cost of constructing an
equivalent new one. This cost then becomes the measure of the value of the property.
The main purpose for valuing such specialist properties is because they are assets, and their value
still needs to be recorded in the balance sheets of company accounts. If a specialist property was
surplus to company requirements, i.e. unused and waiting to be sold off, then this method would
be not be appropriate and a valuation method reflecting the alternative non-specialist use would be
used.
DRC is often referred to as a method of the last resort, and it should only be used if other methods
such as comparison, investment or profits do not give a reliable value.
The methodology can be summarised as follows:
 Valuation 475
Cost of constructing the building
(Including fees)
Less
Allowance for age and depreciation
Equals
Net replacement costs
Plus
The cost of land
Equals
Depreciated replacement cost.

The valuer is costing the erection of a modern equivalent building, from a greenfield site to a com-
pleted building which provides the same level of service (as at the date of the valuation).
When the subject property is a new building, costing the equivalent building will be relatively simple.
However, if the subject property is an older building, then its replacement will be an alternative build-
ing offering the same facility but not the same physical qualities. The valuer will have to make decisions
about the appropriate size and specification of the equivalent building (which must give comparable
performance and usefulness to the owner). Both size and specification may differ in comparison to the
subject property, due to current building techniques and layout design being more efficient than at the
original construction date. The following elements will make up the total cost of construction.

Building costs
These costs include site works, installation of services, infrastructure, construction of premises, finishes,
fitting out and a contingency (3%). Costing may be obtained from actual costs of the subject building
with adjustments for inflation; standard costs from the RICS Building Cost Information Service; or a
specialist quantity surveyor.

Professional fees
These fees are usually assumed at 12–15 per cent of the total build costs (including statutory fees for
planning and building regulations).

Interim finance
Allowance is made for financing during the construction period taking into account the likely method of
payment. We account for interest charges by multiplying the total build costs by the formula (1 + i )n – 1.

VAT
Irrecoverable VAT may be allowed as a cost item.

Allowance for age and depreciation

In theory, a purchaser would pay less for an imperfect older property than for a modern equivalent.
Therefore, in order to value an older specialist property using cost-based valuation, it is necessary to
depreciate the construction costs of the equivalent modern asset. The valuer is now reflecting the dif-
ferences between the modern equivalent and the actual subject property.
476 Lynn Johnson and Becky Thomson
The basis of value for the cost of land is market value, but for the current use. There may be prob-
lems in achieving a figure from the market as there is unlikely to be direct comparable evidence for
the actual user because the user is specialist. This is therefore often the most difficult aspect of a DRC
valuation as you need market evidence to support land values for a specialist property type that does
not have a market! The cost of land may also be high compared with the cost of construction, e.g.
public sector property in city centres or schools with large sites in residential areas may have very high
land values due to alternative use.
The valuer is estimating the cost of a suitable site for a modern equivalent to their subject property.
This may be the actual site on which the current property stands, or it may be a different site because
the assumption is that the current operator would buy the least expensive option for operational pur-
poses. With regard to location, it may be that the current location is essential for operational purposes
or that the current location is now considered too expensive, e.g. a fire station in a city centre could
be relocated to an out-of-town location close to local road networks.

Example 1
You have been asked to value the freehold interest in a specialist storage facility which is government
owned and used to store national treasures. The building was purpose built 15 years ago and it has been
agreed that the method of valuation will be the DRC approach.
The property has an area of 8,200 m² GIA (gross internal area) and an estimated remaining life of 60
years. The site of 2.1 ha is well located on a site close to the M40 with neighbouring business park and
residential land uses. Only 1 ha is built on – the rest is open space and is not expected to be developed
by the owner. Comparable evidence shows land in this location selling for £1,200,000 ha for business
use and twice this for residential use. The build costs are estimated at £1,300 per m² for a modern
equivalent building and the build period would be 2 years. You have been informed that finance costs
are 6 per cent per annum and VAT is recoverable.

Total building costs £10,660,000

Professional fees (15% of TBC) £1,599,000
Contingency (3% of TBC + fees) £367,770
Finance costs at 6% for 2 years (0.1236 × (TBC + fees)) £1,515,212
Total cost of construction £14,141,982

Less
Allowance for age and obsolescence (straight line approach)
£14,141,982 × (60 ÷ 75) = £11,313,586
Net replacement cost £11,313,586
Plus
The cost of land

Only 1 ha would be included in the DRC valuation as that is all that has been built on. The remaining
1.1 ha would be valued on the basis of MV.
 Valuation 477
1 ha @ £1,200,000 based on comparable evidence £1,200,000
Depreciated replacement cost
Net replacement cost + Cost of land = DRC
£11,313,586 + £1,200,000 = £12,513,586
(subject to the prospect and viability of the continuance of the occupation and use)

Further reading
Shapiro, E., Mackmin, D. and Sams, G. (2013) Modern Methods of Valuation, Routledge, Abingdon, pp. 344–348.

18.14 Valuing leasehold interests

Key terms: profit rent; ARY; equated yield; premium
There may be more than one legal interest in a property, and it is the legal interest that produces a
rental income and has a value. Freehold interests are perpetual, but leasehold interests have a set term
and often have little or no value, because the rent being paid is market rent. However, it is possible for
a leasehold interest to generate a profit rent.
A profit rent occurs when the rent paid to the landlord is less than the market rent that could be
achieved were the property to be sublet, and the difference between the two accrues to the tenant. A
leasehold interest that generates a profit rent has a value and the interest can be sold to realise a capital
amount, often referred to as a premium.
As a lease has a fixed term, we therefore know that income will not continue into perpetuity and
will only be receivable for a defined period of time. However, if a tenant occupies land or property
under a long lease (commonly in excess of 99 years) with a low ground rent and permission to sub-
let, a valuer will assume that they have the security of a virtual freehold and use the freehold valuation
approaches. If a long lease has an unexpired term of 50 years or more and the subtenant is paying market
rent, we can value the income into perpetuity:

Example 1
A large shopping centre is let on a 99-year head lease that has 68 years unexpired. The head rent is
fixed at £1,000 per annum and there is provision for subletting. Market rent is currently £367,000 per
annum. Comparable freehold retail investments let at market rent are achieving yields of 6 per cent at
sale. Calculate the value of the leasehold interest:

Profit rent £366,000 per annum

Term of profit rent 68 years
Yield adjustment 6% (+2% for additional risk) = 8%
Profit rent £366,000 per annum
YP in perp @ 8%* 12.5
Premium £4,575,000

* Even though we are utilising the same methodology, this is a leasehold investment rather than a free-
hold and therefore we need to adjust the yield up by 1–2 per cent to reflect this.
478 Lynn Johnson and Becky Thomson
If a long lease has an unexpired term of less than 50 years, then we apply YP single rate for the number
of years that profit rent will be receivable:

Example 2
A large shopping centre is let on a 99-year head lease that has 24 years unexpired. The head rent is
fixed at £1,000 per annum and there is provision for subletting. Market rent is currently £367,000.
Comparable freehold retail investments let at market rent are achieving yields of 6 per cent at sale.
Calculate the value of the leasehold interest.

Profit rent £366,000 per annum

Term of profit rent 24 years
Yield adjustment 6% (+2% for additional risk) = 8%
Profit rent £366,000 per annum
YP single rate @ 8% for 24 years 10.5288
Premium £3,853,541

Short-term leasehold interests rarely have a profit rent, and if they do, it tends to be much lower than
long–medium term leases. Short-term profits rents are also receivable for a much shorter period of
time (a short-term leasehold interest is subject to rent reviews which eradicate profit rent). This type
of interest is far riskier than a freehold investment, so traditionally it has been valued using the dual
rate approach.
However, given the characteristics of leasehold interests, the most appropriate and effective way
of valuing them, particularly if the profit rent is likely to vary during the term of the lease, is to use a
DCF approach:

Example 3
A city centre office building owned by Granite Properties is let on a 99-year head lease to Grey Mare
Asset Management. The lease has 20 years unexpired at a fixed head rent of £10,000 per annum. It
was sublet 5 years ago to Chipchase Accountants (with Granite Properties’ consent) on a modern
25-year lease with 5-yearly rent reviews, and the passing rent was recently reviewed to £90,000 per
annum FRI. The freehold ARY for similar property is 7.5 per cent and the freehold target rate is cur-
rently 10 per cent.

Stage 1 (Find evidence of ARYs from recent market transactions)

7.5% – provided in the question, but derived from analysis of recent market transactions
Stage 2 (Calculate the freehold investor’s target rate of return)
10% – provided in the question, but determined with reference to a secure low risk rate (10–15 year
gilt redemption yield plus property risk premium)
Stage 3 (Calculate the rate of rental growth expected by investors)
Equated yield (10%) – ARY (7.5%) + 0.5% = implied rental growth (3%)
Stage 4 (Use this rate of rental growth to calculate the cash flow generated by the leasehold interest for
the duration of the profit rent)
 Valuation 479
Table 18.14.1 assumes the same growth rate persists over the duration of the unexpired term.

Table 18.14.1 Rental cash flow

Period Initial rent Amount of £1 Rent (£)

@ 3%
Years 1 to 5 £90,000 – £90,000

Years 6 to 10 £90,000 1.1593 £104,337

Years 11 to 15 £104,337 1.1593 £120,958

Years 16 to 20 £120,958 1.1593 £140,227

Stage 5 (Look at the risks to the leasehold income and decide on an appropriate leasehold target rate
to reflect those risks)
This is influenced by a complex range of factors, including current market conditions, the terms of
the leases and the covenant strength of the tenants. In this worked example, we can assume a ‘mark-
up’ of 1 per cent to the freehold target rate. If, however, in the valuer’s judgement the leasehold
interest is judged to be of greater risk, the degree of mark-up may be 2 per cent or more.
Stage 6 (Discount the profit rent cash flow at the leasehold target rate to calculate the present value of
the leasehold cash flow)
The market value of the leasehold interest, assuming an investor’s leasehold target rate of 11 per
cent, is £747,500 (Table 18.14.2). This is the price that Grey Mare Asset Management should seek to
sell their leasehold interest for.

Table 18.14.2 Present value of cash flow

Period Income Less head rent Profit rent YP PV of £1 Net present

@ 11% @ 11% value
1 to 5 90,000 10,000 80,000 3.6959 – 295,672

6 to 10 104,337 10,000 94,337 3.6959 0.5934 206,895

11 to 15 120,958 10,000 110,958 3.6959 0.3522 144,434

16 to 20 140,227 10,000 130,227 3.6959 0.2090 100,593

Total £747,593

Further reading
Blackledge, M. (2009) Introducing Property Valuation, Routledge, Abingdon, pp. 240–259.
480 Lynn Johnson and Becky Thomson
18.15 Asset valuations
Key terms: existing use value; market value; depreciated replacement cost; valuation date
The RICS Valuation – Professional Standards (2014) covers the valuation for financial statements
under UK Valuation Standard 1 (UKVS 1).
Asset valuations are carried out for companies who own and occupy properties and include them
as fixed tangible assets in financial statements in accordance with UK General Accepted Accounting
Principles (UK GAAP).
Assets held by a company may include owner occupied property, investment property, vacant
property, development land or vacant land.
Once a valuer is instructed to undertake an asset valuation, the basis of value for each asset should be
agreed before any further work is undertaken. The basis of value in accordance with RICS Valuation
– Professional Standards UKVS 1 include:

● existing use value (EUV) defined under UKVS1.3;

● market value (MV) defined under VS3.2;
● depreciated replacement cost (DRC).

Existing use value

EUV is applied to property other than specialist property that is owner occupied and solely used for
the purpose of the business.
The definition is very similar to market value; however, it assumes that the willing buyer is granted
vacant possession and any potential alternative use is disregarded – i.e. the asset would be purchased in
the market by a company continuing to use the property for the same purpose.

Market value
MV is applied to property that is surplus to requirements or held as an investment by the company.
The investment will be generating an income and can be sold in the market at market value.

Depreciated replacement cost

DRC basis of value is applied to property that is classed as specialist. This basis of value will be dis-
cussed at some length by the valuer and their client before being implemented.
Specialist properties are those that are rarely sold in the market and do not generate any profit,
therefore there are no market transactions with which to compare. Examples of these include hospitals,
schools, libraries, museums, power stations or churches.
(DRC is covered in Concept 18.13).

Frequency of valuations
Although annual revaluations are not a requirement, Financial Reporting Standard 15 (FRS 15) pro-
vides guidance on revaluation and recommends the following good practice:

● Full valuations are undertaken at no less than every 5 years with interval valuation in every three.
● If there is a material change in the property then revaluation should occur in years one, two and four.
● A rolling programme should be put in place for portfolio properties in order that each property
is covered over a 5-year cycle. Any material changes to any of the properties within the portfolio
will be covered by interim valuations.
 Valuation 481
Valuation date
The date of valuation is agreed between the valuer and company before the valuation is undertaken.
The date is usually dictated by the company’s financial year. A valuer may find they are working to
a date in advance of the preparation of the valuation and therefore this must be referred to in any
published reference.

Case study 1: Industrial Estate, Eaglescliffe

The property is an owner-occupied industrial property providing a GIA of 23,225 sq m (250,000 sq ft)
(Figure 18.15.1).
A substantial part of the factory, approximately 4,645 sq m (50,000 sq ft), is unused by the occupier
and is surplus to requirement. The unused section can be accessed separately and has been partitioned
by the occupier in order to let it as a separate entity. The valuation date is 31 March 2014.

Existing use value for the occupied part of the factory

Market rent
18,580 sq m × £21.53 = £400,000 per annum
200,000 sq ft × £2.00 per sq ft = £400,000 per annum

Market rent £400,000 per annum

YP in perp @ 11% 9.0909
Existing use value £3,636,364
Say £3,640,000

Void periods have been ignored, as a similar company would take occupation of the property with
immediate effect from the date of valuation on 31 March 2014.

Figure 18.15.1 Industrial Estate, Eaglescliffe.

482 Lynn Johnson and Becky Thomson
Provide a market value for the surplus accommodation
The surplus accommodation benefits from a separate access to that of the main factory and has been par-
titioned from the remainder of the used floor space. It can be let to another occupier without impinging
on the company’s business and occupation. It can therefore be valued on the basis of market value.

Market rent
4,645 sq m × £21.53 per sq m = £100,000 per annum
50,000 sq ft × £2.00 per sq ft = £100,000 per annum

Market rent £100,000 per annum

YP in perp @ 11% 9.0909
PV for 1 years @ 11% 0.9009
Market value £818,999
Say £820,000

On this basis the valuer must consider void periods and rent free offered in order to let the property
at the market rent of £21.53 per sq m (£2.00 per sq ft). The market rent is deferred over this period.

Costs
In accordance with the RICS Valuation – Professional Standards a valuer must not include acquisition
or disposal costs in the valuation although if requested by the client these are stated as a separate figure.

Further reading
RICS Valuation – Professional Standards (2014), UK Valuation Standard 1 Valuations for financial statements, RICS, London.
RICS Valuation – Professional Standards (2014), UK appendix 1 Accounting Concepts and terms used in FRS15 and
SSAP 19, RICS, London.

18.16 Valuing trading properties

Key terms: goodwill; fair maintainable operating profit; profit and loss
A trading property is a specialist type of property which has certain defining characteristics:

● The property is designed/adapted for a specific trading use, e.g. a cinema can really only be used as a
cinema – another type of business could not simply occupy it and operate successfully without
making any alterations to the building design.
● The property enjoys an element of monopoly, e.g. any property that requires a licence, such as a pub,
has a monopoly over other types of property in that area that do not hold a licence.
● Ownership of the property passes with the sale of the business – some freehold interests will be sold as
a going concern which means that the property comes with the benefit of a trading business, e.g. a
publican purchasing a new pub will gain the benefit of the business as well as ownership of the
property itself.
● There are other assets in addition to land and buildings – a trading property will have other valuable
assets such as fixtures/fittings and goodwill which are fundamental to the success of the trader and
are discussed in more detail below.
 Valuation 483
● Value is based directly on trading potential for the specific use – instead of using other comparable
properties or rental income as our basis of value, we look at the potential for profit when valuing
trading property.

The difference between an operational trading property and other types of commercial property is
that the asset can often include more than land and buildings. A trading property is typically made up
of the following elements:

1 Legal interests in land

This can include either freehold or leasehold title.
2 Trade fixtures and fittings
In addition to the actual ‘bricks and mortar’, a trading property will also have a number of perma-
nent fixtures and fittings that will be fundamental to trading. For example, a bar and beer pumps
would be essential to a property trading as a pub; beds and bedroom furniture would be funda-
mental to the successful trading of a hotel etc. Such fixtures and fittings carry an additional value
that has to be accounted for in a profits method valuation.
3 Transferable goodwill
When valuing a trading property, it can be difficult for valuers to distinguish between the trading
potential of a property, and the goodwill that is associated with a current owner. For example,
a pub or restaurant with an excellent reputation will have some goodwill value, but when the
current owner sells the property and moves on, the goodwill could go with them. Transferable
goodwill is inherent in the property itself and brings economic trading benefit e.g. due to location
or a monopoly position.
4 The benefit of any transferable licences
The valuer should assume in their valuation that the proposed purchaser has the ability to obtain
or renew any existing licences, consents, certificates or permits.

The majority of operators will decide whether or not to take a specialist trading property based on the
profits that they can earn from running their business – if they cannot make an adequate profit, they
will not take the premises. Therefore, the profits method is the most appropriate method for valuing
the majority of specialist trading property, and can be used to find both market rent and market value.
In order to find market value using the profits method, the valuer has to determine the potential
profitability that could be achieved by a competent operator of the business. This is known as the fair
maintainable operating profit (FMOP). This figure is then capitalised using a YP multiplier (in prac-
tice, surveyors will refer to multipliers rather than yield percentages when discussing profits valuations).
The basic methodology is outlined below:

Turnover
Income from all the potential trading strands within the operational entity
Less
Purchases
Costs that support business turnover i.e. food, drink etc.
Equals
Gross profits
484 Lynn Johnson and Becky Thomson
Less
Reasonable working expenses
Running costs for the operational entity e.g. wages, fuel, repairs and maintenance etc.
Equals
Fair maintainable operating profit
Multiplied by
YP multiplier
Equals
Market value

Even when using the profits method, the comparison method forms the basis of all judgements regard-
ing the individual components, e.g. adjustments to the accounts, choice of multiplier etc. Once market
value has been established using the profits method, it may be checked by comparable sales evidence
using direct capital comparison.
To carry out a profits valuation, the valuer will need to draw up a hypothetical profit and loss account
for the subject trading property based on a reasonably competent operator running the business.
This mean they will require a full set of accounts for at least three years of trading so that they can
determine the reasonable levels of turnover, purchase costs and fixed costs for the business in order to
arrive at the FMOP. Where there are no accounts available, the valuer would need to forecast their
own based on any business plans for the subject operational entity and their market knowledge of
similar businesses. The valuer must have confidence in the reliability of the accounts provided by the
client and seek verification or auditing if in doubt of their accuracy.
The accounts provided by the current operator reflect only the existing business under current
management at the current time. If the income and expenditure figures are above or below the norm
for that type of business, the valuer will need to make adjustments to the actual figures. This is a critical
stage in a profits valuation and requires a great deal of expertise on the part of the valuer.
Although a YP multiplier is used to capitalise the profit, it is not determined as an ARY per cent
but as a multiplier that is analysed from comparable sales transactions. However, the multiplier still
reflects the valuer’s opinion of the associated risks, so the more profitable the business, the higher the
YP multiplier.

Further reading
Baum, A., Nunnington, N. and Mackmin, D. (2007) The Income Approach to Property Valuation, 5th edn, Estates Gazette
Books, London, ch. 12, p. 231.
Blackledge, M. (2009) Introducing Property Valuation, Routledge, Abingdon, ch. 14, p. 289.
Day, H. and Kelton, R. (2007) ‘The valuation of licensed property’, Journal of Property Investment & Finance, 25(3):
321–327.
Index

Pages in italic denote a table/figure.

abandonment 370–2 beta value 193

acceleration 321, 322 bids, successful 104
acquisition surveys 57–8 bill of quantities (BoQ) 303–4, 305
active fund management 197–9 biomass 403–5
adjudication 315–16 BloKlok houses 159
advertising 9–10 boards 8–9
affordability, housing 384–5 booms 167, 168–9
ageing population 91; housing of 400–1 boutique hotels 90
agency: types of 6–8 brainstorming 340
agreements: option 245–6; promotional 247–8, 247 breach of covenant 284–5, 289
air source heat pump (ASHP) 417–18 break clause 27–8, 34, 36, 296
airspace 228 BREEAM (Building Research Establishment Assessment
alienation 293–5 Method) 114, 310, 405–6
alkali-silica reaction (ASR) 68 bridging loan 174
all risks yield (ARY) 452–3 British Council of Offices (BCO) 85
annual residential property tax (ARPT) 170, 438, 438 British Geological Survey 273
anti-social behaviour (ASB) 391–2 British Property Federation (BPF) 37, 241, 295
Anti-Social Behaviour Orders (ASBOs) 392 brochure, marketing see marketing brochure
Arbitration Act (1996) 288 brownfield land 358, 365
archaeological sites 211–12 buildability of site 127–8
area based initiatives (ABIs) 374–5 Building Act (1984) 99–101
Areas of Outstanding Natural Beauty (AONBs) 219, 220 building control: in England and Wales 99–101
asbestos 75–8, 297 Building Cost Information Service (BCIS) 97–8, 123–4
asking price 18–19 building costs 98, 98, 123–4
asset management 198 building information modelling (BIM) 95–6, 344–6
asset specific risk 193 building insurance 283
asset valuations 480–2 building pathology 53–6
asset value 177, 179 building ready for occupation, sale of 25
asset-backed security (ABS) 200 Building Regulations 99–101, 414
assignment: marketing a property by way of an 26–8 building related illness (BRI) 112–13
assured/assured shorthold tenancy 397 Building Research Establishment Environmental
auction 22–4 Assessment Method see BREEAM
building services, managing 111–12
balance sheets 175 building surveying 51–78; acquisition surveys 57–8;
Bank of England 173 building pathology 53–6; common defects in
bankruptcy 299 property types 51–2; concrete defects 67–9;
banks 173–4 construction components and types 52–3; dampness
banner 9 in buildings 60–2; diagnostic surveys 58; dilapidations
barn conversion 213 surveys 59; maintenance surveys 58; movement
base year 204 in buildings 64–7; partial surveys 58–9; roofs and
benchmarking 337–9, 338 cladding 72–5; schedules of condition 59; timber
bespoke contracts 312, 318–19 defects 62–3; valuation surveys 57
486 Index
business cycle 167, 167, 170 contribution of sector to GDP 79; factors contribut-
business parks 84 ing to quality of 81; industrial 86–8; leases 282–3;
Business Protection from Misleading Marketing leisure 90–1; main types of 79; offices 84–6; owner-
Regulations (2008) 250 ship 79–80, 80; private finance initiatives (PFIs)
business rates 43, 439–40 81–4, 82; private investors 80–1; retail 88–9; student
buy-to-let 189, 199–200 accommodation 93–4, 94
commercial property investment 187–9
call options 245 Commercial Rent Arrears Recovery see CRAR
Campaign for the Protection of Rural England (CPRE) common land 243–4
258 Commonhold and Leasehold Reform Act (2002) 180,
capital allowances 359 231
Capital Asset Pricing Model (CAPM) 193–4 commonhold schemes 231
capital gains tax 430 Commons Act (2006) 243, 244
carbon dioxide emissions 16, 409, 412 community engagement: and regeneration 369–70, 369
carbonation 67–8 Community Infrastructure Levy (CIL) 275, 286–7
care homes 91–3 compact cities 354–6
Carsberg Report (2002) 473 company accounts 174–6
cartels 117, 118, 156 Company Voluntary Arrangement (CVA) 300
cash flow 131, 175, 335–9, 444–7 comparative method 471–3
cavity wall insulation 412, 430 competition: imperfect 154–5, 155; non-price 156;
cement: high alumina (HAC) 68–9; ordinary Portland 66 perfect 150, 153–4, 153
central banks 173 competitive tendering 103–4, 324, 325
chancel repair liability 242 completion date 19
change 326, 327, 328 conciliation 314
charities 185–6, 372 concrete 71; cracking 67, 68; defects 67–9, 71; and
chattels 229–30 frame structures 71
chloride attack 68 concrete cancer 68
choice-based lettings (CBL) 387 condensation 54, 55, 62
chrysotile 77 conditional contracts 246–7, 248
Church of England 221, 222 consequential improvements 100–1
churches 221–2 conservation areas: and planning 266
cities: compact 354–6; shrinking 356–7; and sustainable Considerate Constructors Scheme (CCS) 116
development 403 Construction Act (1996) 312, 335
Civic Amenities Act (1967) 266 construction costs 98
Civil Aviation Act (1982) 228 Construction Design Management Regulations (CDM)
Civil Procedure Rules (1998) 348 312
Civil Procedure Rules and the Dilapidations Protocol construction firms 102–3
(2012) 299–300 Construction Industry Board 325
cladding 74–5; asbestos in 77 construction law 311–12
clawback 248–9 construction management 328
clean money 46 construction/construction industry 97–118, 121; and
clearing banks 173, 183–4 BIM 344–6; building control in England and Wales
client, reporting to the 2–5 99–101; Building Cost Information Service (BCIS)
climate change 422 97–8, 123–4; competitive tendering 103–4; compo-
Climate Change Act (2008) 409, 412 nents/types 52–3; and contracts 318; design and build
cloud computing 15 (D&B) 105–6; fraud in 117–18; managing 108–9;
co-ownership of land 232–4 managing building services 111–12; modern meth-
coal mining 272 ods of 106–7; and partnering 324–6; planning and
coastal and marine heritage 212–13 organising 109–11; and sick building syndrome (SBS)
Code for Leasing Business Premises 33, 40, 283 112–14; sustainable 114–17, 310
Code for Sustainable Homes 407–8 Consumer Protection Regulations 5, 39, 250
cold bridging 55 contaminated land 366–7
cold roofs 74 contingency sum 124
collateralised debt obligations (CDOs) 200 contract clauses 319
collusion 117 contractor’s proposal (CP) 105
combined heat and power (CHP) 408–9 contract(s) 227–8; administration of 330–3; bespoke
command economy 147–8 312, 318–19; conditional 246–7, 248; Joint Contracts
commercial property 6–7, 79–96; and building infor- Tribunal (JCT) 314, 316, 330; standard forms of
mation modelling (BIM) 95–6; care home 91–3; 316–18
 Index 487
contractual claims 319–22, 323 backed vehicles (LABVs) 139–40, 139; main phases
contractual quantum 321 of 121, 122; public sector 134; redevelopment 134–5,
Control of Asbestos Regulations: (2006) 297; (2012) 136; and refurbishment 136–7, 137; and residual
77–8 value 138–9; site assembly and acquisition 127–9
copyhold land 242 development corporations 350–2, 351
corporate location/relocation 210 development costs 122–4; build costs 123; contingency
corporate real estate asset management 208–10, 209 sum 124; finance/interest 124; land acquisition/
corporate social responsibility (CSR) 469 assembly 123; site investigation/works 123
corporation tax 430, 432–3 development value (DV) 129
correlation coefficient 190, 191 diagnostic surveys 58
corrosion 67, 70 dilapidations 299–300; surveys 59
cost breakdown structure 324 direct property investment 179
cost checking 309 dirty money 46
cost control 306–10 Disability Discrimination Act 59
cost planning 306–10 discounted cash flow see DCF approach
cost value reconciliation (CVR) 324, 333–5 discounting/discount rates 204–5
cost-benefit analysis (CBA) 145, 151–2 disposal, methods of 18–24; auction 22–4; private treaty
costs, development see development costs 18–21, 20; tender 21–2
council houses 379 dispute resolution 312–16; adjudication 315–16;
council tax 438–9 alternative (ADR) 313–14; conciliation 314; expert
covenants: freehold 236–7, 237; restrictive 249 determination 315; mediation 314–15; negotiation
cover-pricing 118 313
CRAR (Commercial Rent Arrears Recovery) 284, 289, Dispute Resolution Boards 315
290 disruption 320, 321
CRC Energy Efficiency Scheme 414 distress 284
credit crunch 170–1, 173–4, 200, 201, 363 distribution centres 87
critical path methodology 323 diversification 190, 191, 192; naïve 198
currencies: and exchange rates 171–2 dominant/servient tenements 237, 237, 238–40
drainage systems, sustainable urban 422–4, 423
damp meter 54, 54 duty of care 40
damp proof course 60–1
damp proof membrane (DPM) 71–2 easements 238–40, 239, 240–1
damp/dampness 54, 55, 55, 60–2; and condensation 62; ecclesiastical exemption 221–2
and floors 71–2; and leaks 62; penetrating 62; rising economic efficiency 145–7, 147–8, 159
60–2, 61; and timber defects 63, 71 economic growth 163–4, 164
Data Protection Act 40 economic rent 161–2, 162, 441
DCF (discounted cash flow) approach 131, 460, 462–5, economics 141–72; command economy 147–8; cost-
478 benefit analysis (CBA) 145, 151–2; credit crunch
debentures 176 170–1, 173–4, 200, 201, 363; currencies and
debt finance 126 exchange rates 171–2; economic efficiency 145–7;
Decent Homes Standard 379, 391 economies of scale 102, 158–9, 159; externalities
deed 228 148–9; fiscal policy 166–7; and globalisation 169–70;
defect costing 53 gross domestic product (GDP) 162–3; imperfect
defects in buildings: and building pathology 53–6; by competition 154–5, 155; market economy 146, 147,
property type 51–2; and further investigations 54 150; market failure 150–1; mixed economy 148;
demand 142–3 mobility of labour 159–60; monopoly 156–8, 157;
demand curve 143, 143; kinked 155, 156 multiplier 165–6; oligopoly 155–6, 156; pareto opti-
demolition: and ecclesiastical buildings 222 mality 144–5, 144; perfect competition 150, 153–4,
depopulation 356, 357, 358 153; property cycles 167–9, 168, 170; property rights
depreciated replacement cost (DRC) 474–7, 480 160–1; resource allocation 141–2, 145–6, 148, 150;
depreciation 177 supply and demand 142–4
deregulation 173, 206 economies of scale 102, 158–9, 159
design and build (D&B) 105–6, 327–8 efficient market theory 190
design novation 106 effluxion of time 296–7
developers 119–20 Egan Report (1998) 325, 335, 337
development 119–40; definition 120–1; evaluation and electric vehicles (EVs) 409–11
appraisal methods 129–31, 138; factors for assess- element unit quantities (EUQ) 309
ing rationale for 121; finance and funding 125–7, element unit rates (EUR) 309
125; intensity of site use 132–3, 132; and local asset embodied energy 115–16, 116, 419
488 Index
employer’s requirements (ERs) 105 fiscal policy 166–7
Energy Act: (2008) 413; (2011) 17, 412, 413 fishing/fishing rights 215–16
Energy Company Obligation (ECO) 413 5-6-10 model 337
Energy Performance of Buildings (EPBD) 16 fixtures 229–30
Energy Performance Certificate (EPC) 4, 16–18, 57 flexibility 40
energy policy: and the build environment 412–15 flooding 128
energy use: and sustainability 16 floor plans, architects 2
engagement, terms of 5–6 floors 52, 71–2; and dampness 71–2; defects 71; distor-
engineering solutions 111 tion to 54; solid 71–2; timber 71
English Heritage (EH) 212–13, 218, 222 flying freehold 381
Enterprise Act (2002) 299 food courts 91
enterprise risk management (ERM) 341–2 foreign direct investment 169
Enterprise Zones (EZs) 352, 359–61 Forest Authority 216
Environment Agency (EA) 223, 224 forestry/forests 216–18, 226
Environmental Impact Assessments (EIAs) 273, 415–17, forfeiture 284, 290, 295–6
416 formal/binding tender 21–2
environmental management systems (EMS) 116–17 foundation movement 64–5
Environmental Protection Act (1990) 366 foyer movement 399
environmental sensitivity 113 frames, structural see structural frames
environmental sustainability see sustainability fraud: in construction 117–18
equity finance 126–7 Fraud Act (2006) 40
equity release 181 freehold 160, 209, 231, 380–1
Estate Agents Act (1979) 5, 6 freehold covenants 236–8, 237
Estate Agents Regulations (1991) 5 freehold ground rent 179–80
Estates Gazettes 9 freehold sale 25
estimating 103–4 full repairing and insuring lease (FRI) 34, 282–3, 299
ethics 331 functional analysis 340
European Environment Agency 223 funding: development 125–7; and regeneration 362–4
evaluation and appraisal methods 129–31 fungal attack: and timber 63
exchange of contracts 19
exchange rates 171–2 gap funding 367
existing use value (EUV) 129, 480 gazumping 21
exit strategies: and leases 295–7 gazundering 21
expert evidence 347–8 GCHQ Cheltenham 83
expert immunity 348 gearing, financial 177–8, 178
expert witnesses 346–8 gentrification 370–2
externalities 148–9, 150 gilts 180–1
Global Transparency Index 169
facilities management 300–2 globalisation 169–70
Fair Maintainable Operating Profit (FMOP) 92 government spending 166
false offers 40 green belt 258–9
false statements 250–1 Green Building Council of Australia 469–70
farm buildings 213–15 green buildings 469–70
fee simple absolute 160 Green Deal 17, 412–13, 430
Feed-in Tariff 413 Green Guide to Specification, The 115
fees 4, 5–6 green leases 469
felling licences 216–17 green roofs 423
final accounts 333 greenhouse gas emissions 409–10, 412
finance 173–84; banks 173–4; bridging loan 174; company gross domestic product (GDP) 162–3
accounts 174–6; debentures 176; depreciation 177; gross national product (GNP) 162–3, 164
development 125–7, 125; freehold ground rent 179– ground lease 28–31
80; liquidity 179; mortgages 182–3; reverse yield gap ground rent 29; freehold 179–80
180–1; sale and leaseback 181; sources of 183–4, 184 ground source heat pump (GSHP) 417–18
financial gearing 177–8, 178 Growth and Infrastructure Act (2013) 276
financial reporting 332 guarantor 33
Fire Control project 82–3 gutters 73
fire insurance valuation (FIV) 57
first refusal 249 hardcore/layer method 448–51
first time buyers 381, 382 heads of terms 43–5
 Index 489
health care property 79 insolvency 299–300
Health Protection Agency (HPA) 224 Insolvency Act (1986) 299
health and safety 48–50, 297–8 inspection 1–2
Health and Safety at Work Act (1974) 48, 297 instruction 5
heat pumps 417–18 insufficient cover 67
Help to Buy scheme 166, 183 insurance, building 283
Heritage Act (1983) 218 Interim Possession Order (IPO) 292
heritage coasts 220 interim valuations 331–2
Heseltine, Michael 354 internal rate of return (IRR) 131
high alumina cement (HAC) 68–9 internal repairing and insuring lease (FRI) 282–3, 299
high street 88, 89 international property investment 171–2, 206–7
higher education 93 International Union for Conservation of Nature (IUCN)
highways 244–5 220
Highways Act (1980) 244, 245 Internet: and marketing 12
Historic Environment Records (HERs) 218, 219 introductory fee 8
historic parkland 218–19 investment property 25
Home Information Packs 21 Investment Property Databank (IPD) 198, 202, 203
Homebuyer Report 57 investments 185–210; active fund management 197–9;
Homebuyer’s Survey and Valuation (HSV) 57 broad objectives of 187; buy-to-let 189, 199–200;
homelessness 385–6, 394 Capital Asset Pricing Model (CAPM) 193–4; com-
Homelessness Act (2002) 385 mercial property 187–9; corporate real estate asset
Homes and Communities Agency (HCA) 364 management 208–10, 209; discounting/discount rates
hope value (HV) 129 204–5; international property 206–7; land banking
hotel sector 90 201–2; Modern Portfolio Theory (MPT) 190–2;
housing 371; affordability in 384–5; and older popula- mortgage-backed securities 200–1; portfolio strategy
tion 400–1; social see social housing 189–90; property indices 202–4, 203; property
Housing Act: (1988) 199; (1996) 385 investment market 186–7; Property Unit Trusts
Housing Association Grants 379 (PUTs) 196–7; REITs 185, 189, 194, 196; residen-
housing associations 379, 386 tial property 199–200; risk and return 194–5, 195;
housing benefit 388–9, 389 Transparency Index 207–8, 207
housing management (private rented sector) 393–8; investor developers 120
allocating property 388, 393–4; managing tenancies investors 185–6
396–8; rent collection and recovery 394–5; repairing invitation to treat 18
property 395–6 iron frames: defects in 70–1
housing management (social housing) 386–98; allocat-
ing property 386–8, 387; managing tenancies 391–3; joint agency 7–8
rent collection and recovery 388–90, 389; repairing Joint Contracts Tribunal (JCT) contracts 314, 316, 330
property 390–1 joint sole agency 7–8
housing support: independent living 398–9; specialist joint tenancy 232–3, 233
supported housing 399–400 joint ventures 127, 247
hybrid cars 410
Keynes, J.M. 165
ICE database 115 Koyo Australia 117
imperfect competition 154–5, 155
income: circular flow of 165, 165 labour: mobility of 159–60
income cash flows 444–7 land: co-ownership of 232–4; legal definition of 228–9;
income statement 175 ownership of 230–1; sale of 25
income tax 430, 431–2 land banking 201–2
independent living 398–9 land with a building requiring a major refurbishment,
individual voluntary arrangement (IVA) 299 sale of 25
indoor air quality (IAQ) 113 land hoarding 201
industrial estates 88 land management 211–26; archaeological sites 211–12;
industrial property 79, 86–8, 158–9, 188 coastal and marine heritage 212–13; farm buildings
inflation 180 213–15; fishing and fishing rights 215–16; historic
informal/non-binding tender 21 parkland 218–19; National Parks 219, 225–6, 225;
information technology: and marketing 14–16 protected landscapes 219–20; religious buildings
inheritance tax 430, 433 220–2; tress and forestry 216–18; waste disposal sites
injunction 285 222–4
insect attack: and timber 63 land registration 235–6
490 Index
Land Registration Act: (1925) 235, 242; (2002) 202, lime/lime mortars 66
229, 235, 242, 292 liquidity 179
Land Registry 215, 235–6, 242 Listed Buildings 17, 221; and planning 264–6
land tenure 128 local asset backed vehicles (LABVs) 139–40, 139
land value: definitions of 129 Local Development Plan 253–5, 255
land value tax 440–3, 441, 442 Local Enterprise Partnerships (LEPs) 363, 364
landfills 222–4 Local Housing Allowance 377
Landlord and Tenant Act: (1927) 28, 293–4; (1954) 27, local planning authorities (LPAs) 252, 253, 261, 273
37, 291–2; (1985) 396; (1988) 293–4 local publications: and advertising 9–10
Landlord and Tenant (Covenants) Act: (1995) 293; local rates 42–3
(1996) 27 Localism Act (2011) 267, 268, 364, 394
Landlord and Tenant (Notice of Rent) (England) logistics 109–10
Regulations (2004) 180
landscapes, protected 219–20 mailing list/mail shot 11
Latham Report 325, 335, 337 maintenance surveys 58
law 227–51; common land and town and village greens Mallinson Report (1994) 473
243–4; conditional contracts 246–7, 248; construc- management contracting 328
tion 311–12; contracts 227–8; easements 238–40, manorial rights 242
239, 240–1; false statements and misleading omissions mansion tax 437–8
250–1; fixtures and chattels 229–30; freehold cov- marginal revenue product (MRP) 132–3, 132, 133
enants 236–8, 237; highways 244–5; land registration Marine Management Organisation (MMO) 213
235–6; lease/licence distinction 234–5; legal defini- market clearing price 144
tion of land 228–9; manorial land and chancel repair market economy 146, 147, 150
liability 242; option agreements 245–6; overage/ market equilibrium 143–4, 146
clawback 248–9; ownership of land 230–1; pre- market failure 150–1
emption rights 249; profit à prendre 240; promotion marketing brochure 8, 12–14
agreements 247–8, 247; trusts and co-ownership of marketing a property 25–38; by assignment of a long
land 232–4, 233; wayleaves 242–3 ground lease 28–31; by way of an assignment 26–8;
Law of Distress Amendment Act (1908) 289 by way of a sub lease 35–7; freehold sale 25–6; to let
Law of Property Act (1925) 228, 230–1, 237, 295 on a new lease 31–5
Law of Property (Miscellaneous Provisions) Act (1989) marketing suite 10
19, 228 marketing/marketing plan 4, 8–12, 38–9; and informa-
Leadership in Energy and Environmental Design (LEED) tion technology 14–16
114 Markowitz, H.M. 190, 191, 192
leaks 62 marriage value 129
lease incentives 457–62 mass manufacturing 158
lease re-gearing 198, 282 materials: and embodied energy 115–16, 116; sustainable
leasehold 160, 209, 231, 380–1 114–15
leasehold interests 282; and valuation 477–9 maverick firm 118
Leasehold Property (Repairs) Act (1938) 285 meadows 226
lease(s) 26–8, 160; and alienation 293–5; and breach of mediation 314–15
covenant 284–5; in commercial property 282–3; and merger value 129
dilapidations 299–300; distinction between licence Mineral Policy Statements (MPSs) 271
and 234–5; exit strategies 295–7; fixed term 231; Mineral Safeguarding Areas (MSAs) 272, 273
green 469; ground 28–31; long ground 28–31; occu- minerals/minerals planning 229, 270–3
pational 35; periodic 231; short form 3, 33; sub 35–6, mines 229
35–7; tenancies at will 231; termination of business minimum efficient scale (MES) 158
291–2; terms of 27; types of 231 MIRAS (mortgage interest relief at source) 432
legislation: and money laundering 46; and planning misleading omissions 250–1
252–6; see also law misleading options 39
leisure property 79, 90–1 misrepresentation 250–1
letting on a new lease 31–5 mixed economy 148
licences: distinction between lease and 234–5; felling mobility of labour 159–60
216–17 modern management 198
Licensing Act (2003) 90 modern methods of construction (MMC) 106–7
life cycle assessment (LCA) 115, 418–19 Modern Portfolio Theory (MPT) 190–2
life cycle costing (LCC) 310–11 modular construction 107
Lifetime Homes 398 money laundering 45–8
light: right to 240–1, 293 Money Laundering Regulations (2007) 46–7
 Index 491
monopoly 156–8, 157 Partnering Agreement 329
moorlands 225 Partnership Investment Programme (PIP) 367
mortgage-backed securities 200–1 partnership working: and regeneration 361–2
mortgages 182–3; fixed rate 182; flexible 182; Help to passive management 190, 197
Buy scheme 166, 183; interest-only 182; repayment pension funds 185
182; tracker 182; valuations 57; variable rate 182 perfect competition 150, 153–4, 153
movement in buildings 64–7 performance specification 111
multi-occupied building 3, 15, 18, 32, 34, 37, 41, 283 permitted development rights (PDRs) 214
multiple agency 8 photovoltaics 424–5, 426
multiple chemical sensitivity (MCS) 113 pitched roofs 72–3
multiplier 165–6 planning 252–80; Community Infrastructure Levy (CIL)
275, 286–7; conservation areas 266; and construction
National Environmental Policy Act (NEPA) (US) 415 110–11; decision making 259–62, 260; and green
national income 163, 165 belt 258–9; and legislation 252–6; listed buildings
National Land Use Database (NLUD) 365 264–6; minerals 270–3; neighbourhood 267–9; settle-
National Parks 219, 225–6, 225 ment hierarchy 273–5, 275; strategic 257; transport
National Parks and Access to the Countryside Act (1949) and infrastructure 269–70
219, 220 Planning Act (2008) 276
National Planning policy Framework (NPPF) 252–3, planning appeals 278–80
271, 272, 273, 414 planning application/permission process 260–2, 263, 275
national publications: and advertising 9 Planning and Compulsory Purchase Act (2004) 254–5,
negotiating 40–1 259
negotiating margin 40 planning obligations 275–6
neighbourhood planning 267–9 polluter pays principle 366
neoliberal urban policy 352–4 population: ageing of 91; UK 92
net annual returns (NARs) 135, 136 portfolio strategy 189–90
net effective rent 457–61 post-construction 121
New Engineering Contract 316 preconstruction 121
New Rules of Measurement 304, 305–6 pre-emption rights 249
Newcastle City Council 258–9 pre-fabrication 107
newsletter 12 Prescription Act (1832) 240
Nido 94 prescriptive rights 293
non-price competition 156 preservation in situ 212
non-statutory designations 220 press release 11
previously developed land (PDL) 365
occupation costs 41–3 price and design risk 308
occupational lease 35 price fixing 117
occupier presentations 11 private finance initiatives (PFIs) 81–4, 82, 330, 363
off site manufacture (OSM) 107 private investors 80–1
offers 39, 227; false 40 private rented sector 377–8
office design 84, 85, 85–6 private treaty 18–21, 20
Office of Fair Trading (OFT) 5, 6 Proceeds of Crime Act (2002) 46
offices 79, 84–6; and letting 32 Procter & Gamble 117
offshoring 169 procurement methods 108, 326–30
oligopoly 117, 155–6, 156 production possibilities curve (PPC) 141–2, 142, 146
Olympic Games (London) (2012) 108–9 production possibility frontier 163, 164
online shopping 89 profit à prendre 240
OPEC (Organization of Petroleum Exporting Countries) project management 322–4, 323
117 prolongation 321, 321
open market valuations (OMV) 57 promotion agreements 247–8, 247
option agreements 245–6 property asset management 281–302; alienation 293–5;
over-rented property 446, 446, 453–7 breach of covenant 284–5; commercial service
overage 248–9, 454—5, 454 charges 285–6; dilapidations 299–300; exit strategies
owner occupation 380–2, 381, 382–3 295–7; facilities management 300–2; health and safety
297–8; insolvency 299–300; Landlord and Tenant
Pareto optimality 144–5, 144, 151 Act (1954) Pt II 291–2; leases in commercial prop-
parkland, historic 218–19 erty 282–3; proactive management to recover rent
partial surveys 58–9 289–90; and rent 286–7, 287; rent reviews 288–9;
partnering 324–6, 329 squatters and adverse possessions 292–3
492 Index
property cycles 167–9, 168, 170 renewable energy 403–4, 424, 426, 428
property development 120; funding of 125–7, 125 Renewable Heat Incentive (RHI) 405, 413
property indices 202–4, 203 Renewables Obligation (RO) 413
property investment market 186–7 renovation 136
property rights 160–1 rent collection and recovery: of arrears 289–90; private
property types: common defects 51–2 rented sector 394–5; social housing 388–90, 389
Property Unit Trusts see PUTs rent deposit 33
Property Week 9 rent reviews 27–8, 33, 36, 288–9
protected landscapes 219–20 rent to buy 383
public house 90 rent voids 177
public private partnerships (PPPs) 140, 363 rental valuation 28, 37
public sector development 134 renting 26–35; fitting out 34–5; repair/refurbishment 34;
put options 245 service charge 34
PUTs (Property Unit Trusts) 185, 196–7 rent(s) 41, 286–7, 287, 377; concessionary 287; headline
287; interim 292; net effective 457–61; proactive
quantity surveying 303–48; benchmarking 337–9, 338; management to recover 289–90; social housing
bespoke contracts 312, 318–19; building informa- 388–90, 389; stepped 287, 287; turnover 287
tion modelling (BIM) 344–6; cash flow 335–7; repairing property: private rented sector 395–6; social
construction law 311–12; contract administration housing 390–1
330–3; contractual claims 319–22, 323; cost planning reporting to the client 2–5
and cost control 306–10; cost value reconcilia- reserve fund 286
tion 333–5; dispute resolution 312–16, 313; expert residential density gradient 355, 355
witnesses 346–8; life cycle costing 310–11; measur- residential property 377–401; affordability in housing
ing and quantification 303–4, 304; New Rules of 384–5; homelessness 385–6, 394; housing an older
Measurement (NRM) 304, 305–6; partnering 324–6; population 400–1; housing management (private
procurement methods 326–30; project management rented sector) 393–8; housing management (social
322–4, 323; risk management 341–4, 344; standard housing) 386–93; housing support 398–400; owner
forms of contract 316–17; value management 339–41 occupation 380–2, 381; private rented sector 377–8;
social housing sector 379–80
rack rented property 444–5, 445 residential property investment 199–200
rainwater harvesting 423 residual method 129, 130–1, 138
ransom strips 249 residual value 138–9
rateable value (RV) 42–3 resource allocation 141–2, 145–6, 148, 150
rates 42 restaurants 91
ratio analysis 175–6 restrictive covenant 249
real estate investment trusts see REITs retail parks 88
reception 10–11 retail property 79, 88–9
recourse loan 184 Rethinking Construction report 106–7
recycling 222–3 retrofit 137, 419–21
redevelopment 134–5, 136, 177 reverse yield gap 180–1
refurbishment 136–7, 137, 177, 198, 281 ribbon development 258
regeneration 349–76; area based initiatives (ABIs) 374–5; Ricardo, David 162, 441
brownfield land 358, 365; community engage- RICS (Royal Institute of Chartered Surveyors) 33,
ment 369–70, 369; compact cities and urban sprawl 97; Blue Book 394; Code of Service Charges in
354–6; contaminated land 366–7; defining urban 349; Commercial Property 285; domestic surveys mar-
development corporations and regeneration agencies keted by 57
350–2, 351; Enterprise Zones (EZs) 352, 359–61; Rights of Light Act (1959) 293
funding and finance for 362–4; gap funding 367; gen- ring fencing 39
trification and abandonment 370–2; neoliberal urban risk 193, 326, 327, 328; quantification of 343, 344
policy 352–4; partnership working 361–2; shrinking risk assessments 297
cities 356–7; and social enterprise 372–3; and tax risk management 341–4, 344
incremental financing 375–6; urban renaissance 357–9 risk and return 194–5, 195
regional development agencies (RDAs) 363 roadside restaurants 91
Regional Growth Fund 364 Rogers Report 358, 371
Regional Spatial Strategies (RSS) 256 roofs 52, 72–4; and asbestos 77; cladding 74–5; concrete
reinstatement valuation 97–8 and clay tiles 73; flat 73–4; green 423; leaking 54;
REITs (real estate investment trusts) 185, 189, 194, 196 pitched 72–3; slate coverings 73
religious buildings 220–2 Royal Institution of Chartered Surveyors see RICS
remediation 366–7 rules of interpretation 319
 Index 493
S.25/S.26 notice 291–2 Stockley Park 84
S.34 disregards 289 strategic management 208
safety see health and safety strategic planning 257
sale and leaseback 181, 209, 209 structural frames: defects in 69–71
Salmon and Freshwater Fisheries Act (1975) 216 structural movement 64
schedules of condition 59 structural survey 58
Scheme for Construction Contracts Regulations (1998) student accommodation 93–4, 94
315–16 sub lease 35–7
searches 19 sub-prime lending 201
Section 106 agreements 262, 275, 276 subcontracting 102, 311
securitisation 200 subject to contract 43, 228
security 48–50 subletting 294–5
security of tenure 34 subsidence 64, 64–5
self-certification 99 sulphate attack 66, 68, 69
Serious Organised Crime Agency (SOCA) 47 supermarkets 88, 89
service charges 34, 41–2, 285–6 supply and demand 142–4
services 52; managing building 111–12 supported housing schemes 398–400
services design 111 surrender 296
settlement 64, 64–5 surveying/surveys see building surveying/surveys
settlement hierarchy 273–5, 275 suspicious active report (SAR) 47
shared equity 383 sustainability 208, 324, 402–29; biomass 403–5;
shared ownership 382–3 Building Research Establishment Environmental
shopping malls 88 Assessment Method (BREEAM) 114, 310, 405–6;
shops 188 Code for Sustainable Homes 407–8; combined heat
short form leases 3, 33 and power (CHP) 408–9; electric vehicles (EVs)
shrinking cities 356–7 409–11; energy policy and the built environment
sick building syndrome (SBS) 112–14 412–15; and energy use 16; Environmental Impact
sinking fund 286 Assessment (EIA) 415–17, 416; ground/air source
site 121; buildability of 127–8; and definition of land heat pumps 417–18; life cycle assessment (LCA)
value 129; intensity of use 132–3, 132; and land 418–19; retrofit 419–21; solar power photovoltaics
tenure 128; purchase of 128–9 424–5, 426; solar water heating 426–8, 429; urban
site investigations 123, 127–8 drainage systems 422–4, 423; and valuation 469–70;
site plan 110 wind turbines 428–9
Sites and Monuments Records (SMRs) 212, 218 sustainability appraisal (SA) 421–2, 421
smart meters 413–14 sustainable buildings 114
social enterprise: and regeneration 372–3 sustainable construction 114–17, 310
social housing 379–80, 380; allocating of 386–8, 387, sustainable development 273–4, 402–3
388; managing tenancies 391–3; rent collection and sustainable refurbishment 136–7
recovery 388–90, 389; repairing property 390–1; and systematic risk 193
retrofit 430–1
social networks 16 tablets 16
solar power photovoltaics 424–5, 426 ‘taking bids off the wall’ 23
solar water heating 426–8, 429 tax incremental financing (TIF) 364, 375–6
sole agency 7 taxation/taxes 166, 430–43; annual residential property
sole selling rights 7 tax (ARPT) 170, 438, 438; capital gains tax 430;
specialist supported housing 399 corporation tax 430, 432–3; council tax 438–9; direct
specific performance 284–5 taxes 430–1; income tax 430, 431–2; indirect taxes
specification 303 434; inheritance tax 430, 433; land value tax (LVT)
specification guides 12 440–3, 441, 442; landfill tax 223; mansion tax 437–8;
speculative hoarding 201 rating and uniform business rates 439–40; and REITs
spillover costs 149, 150, 151, 152 196; stamp duty 123, 160, 436–7, 436; VAT (value
squatters 292–3 added tax) 434–6, 435
Stamp Duty Land Tax (SDLT) 123, 160, 436–7, 436 Tay Bridge disaster (1879) 70
standard forms of contract 312, 316–18 Technology and Construction Court (TCC) 312
standard method of measurement (SMM) 304, 305 tenancy: assured 397; assured shorthold 397; joint 232–3,
standards of living 164 233; regulated 397
statutory designations 220 tenancy agreement 392, 396
steel corrosion 65–6, 68, 70 tenancy in common 232–3, 233
steel frames 69–70 Tenancy Deposit Scheme (TDS) 394
494 Index
tenancy management: private rented sector 396–8; social Urban Regeneration Company (URC) 351, 351
housing 391–3 urban renaissance 357–9
tenancy of will 282 urban sprawl 258, 354–6, 403
tender/tendering 21–2, 103–4; formal/binding 21–2; Urban Task Force (UTF) 357–8; Report (1999) 358–9,
informal/non-binding 21; measured form 104; multi- 371
stage 106; open 104; selective 104; serial 104; single Urban White Paper (UWP) 358–9, 371
stage 106; successful bids 104; target cost 104 urbanisation 403
term and reversion 447–8, 447 Use Classes Order (2010) 87
Tesco 89
thermal and moisture movement 65 vacant property, valuation of 465–8
3D modelling 15–16 valuation 3–4, 444–84; accuracy of 473–4; all risks yield
timber: defects 62–3, 71; hardwood and softwood 62; (ARY) 452–3; analysing tenant incentives 457–62;
and moisture movement 65; use of is buildings 63 asset 480–2; comparative method 471–3; depreciated
Town and Country Planning Act: (1947) 258, 270; replacement cost (DRC) 474–7; discounted cash flow
(1990) 120, 217, 245, 275, 276, 278 (DCF) approach 460, 462–5, 478; hardcore/layer
Town and Country Planning Association 257 method 448–51, 454, 455; income cash flows 444–7;
Town and Country Planning (General Permitted and leasehold interests 477–9; over-rented property
Development) Order (1995) 214 446, 446, 453–7; and sustainability 469–70; term
Town and Country Planning (Trees) Regulations (1999) and reversion 447–8, 447; trading properties 482–4;
217 vacant property 465–8
Town and Country Planning (Use Classes) Order (1987) Valuation Office Agency (VOA) 42–3, 438
90, 214 valuation surveys 57
town and village greens 243–4 valuation of variations 332, 333
trader developers 119–20 value engineering 340
trading properties, valuation 482–4 value management 339–41
traditional management 198 value planning 340
transfer earnings 162 value review 340
Transparency Index 207–8, 207 Valuer’s Registration Scheme (VRS) 470–1
Transport Act (2000) 270 variations, valuation of 332, 333
transport and infrastructure planning 269–70 VAT (value added tax) 434–6, 435
Treasure Act (1996) 229 viewings 38; health and safety issues 48–50
Treasury: new office accommodation for the 83
Tree Preservation Order (TPO) 217 walls 52; cracking of 54, 64, 65; tilting of due to subsid-
trees 65, 216–18 ence/settlement 65
Tribunal, Courts and Enforcement Act (2007) 289, 290 warehouses 87
trust 327 warm roofs 74
trusts 185–6, 232–4 waste disposal sites 222–4
Trusts of Land and Appointment of Trustees Act (1996) wayleaves 242–3
232 weathering 63
TV/radio: and marketing 12 websites 15
wetlands 225
UK Land Investments (UKLI) 202 wind turbines 428–9
under-rented property 445–6, 446 witnesses, expert 346–8
uniform business rate (UBR) 43, 439–40 woodlands 226
Unilever 117 wrought iron 70
universities 93–4
Urban Development Corporations (UDCs) 350–2, 351 yield 81; and reverse yield gap 180–1
urban drainage systems, sustainable 422–4, 423
urban policy 349; neoliberal 352–4 zero carbon buildings/homes 408, 414, 419
urban regeneration see regeneration