What Family Lawyers Need to Know about Valuing Mixed Property Portfolios in Financial Remedy Proceedings
Published: 03/07/2023 08:00
Over the past decade, a number of cases have come before the Family Court involving property portfolios. These cases have ranged from the seminal case of Prest v Petrodel Resources Ltd & Ors  UKSC 34 through to the case of ND (By her Litigation Friend) v GD  EWFC 53, where provision for end-of-life care was in issue.
Property portfolios can be complex due to being comprised of different asset classes (residential, commercial and land) but also complicated further by use (by a family business for example). Where there are businesses, it is important to consider whether the property or land which is used by the business has its own value. Enterprises such as market gardening businesses or builders’ merchants, for example, often own property in urban areas which can be very valuable. In April 2023, it was reported that Travis Perkins builders’ merchants sold and leased back seven of its sites in the Midlands and Southeast raising £23 million. A further complicating feature of property portfolios are charges across the whole or part, such as floating charges. These must be properly understood as they are likely to impact both on computation and on distribution in a financial remedies case. Getting to grips not only with value, but also with how that can or will be released can be crucial and will often require expert evidence to be obtained. It is also important to note that in many cases involving a portfolio, one party may have significantly more knowledge and understanding than the other. When acting for the financially weaker party, instructing a shadow expert at an early stage to assist in understanding what expertise may be required and what needs to be produced can be vital.
A tenancy schedule
A key starting point when it comes to valuation of a portfolio is a full tenancy schedule. This should contain an overview of all the main information contained in all leases/licences/tenancy agreements, identities of tenants, rents per annum, any concessions and square footage of the properties within the portfolio as well as the tenure the properties are held on. In some cases, where a portfolio is managed it may be done professionally. Where the portfolio is managed by the owners themselves, it may exist in various documents. However, where there is a portfolio there should be a tenancy schedule and this is the first document to request. This enables practitioners and clients to begin to build an understanding of the portfolio make up and can be used to inform questionnaires, Part 25 applications, valuations and (if necessary), cross-examination.
If you type into a search engine ‘free local house valuation’, the top results will include estate agents offering free ‘valuations’. What is produced by estate agents are market appraisals or opinion based on experience of house sales in the local area. This is not the same or equivalent to a property valuation. Most estate agent market appraisals provided in writing will state clearly that what has been provided is not a ‘formal valuation’ and that as such, they will accept no liability for the appraisal of what the property might fetch if put to the market. This is not to say that a market appraisal will be insufficient in certain cases involving a family home and perhaps one other asset. Estate agents are local experts and based on this expertise are able to provide an assessment of what a property may sell for. This is not a formal (or ‘Red Book’) valuation and may not be appropriate when it comes to valuing mixed asset property portfolios where valuation requires a more careful analysis.
A formal property valuation can only be carried out by Registered Valuers who are professional members of the Royal Institution of Chartered Surveyors (MRICS/FRICS Registered Valuer). When a formal valuation is carried out, it is completed in accordance with the RICS Valuation – Global Standards or the ‘RICS Red Book’. Not unlike the Family Division Red Book, the RICS Red Book details mandatory practices for RICS members undertaking valuation services.
The process of undertaking a Red Book valuation involves inspection of the property; research into matters that might affect the property, for example, planning, land designations, contamination, title and tenure, rights of way, etc; gathering, analysing and recording comparables; and undertaking valuation calculations. Clear benefits of a formal valuation include the level of expertise that will be applied to the assessment of value and that the valuation is underpinned by the valuer’s professional indemnity insurance. An obvious downside of a formal valuation is the higher cost to the client of obtaining a report and potential delay. There will be circumstances where the approach taken results in a RICS valuation coming in lower than a market appraisal. There will also be circumstances where a RICS valuer will identify hidden potential in a property which would increase its value if brought to market. A Red Book valuation is a reliable way in a portfolio case to compute value, which can then be used to inform distribution.
Valuations of residential property versus valuations of commercial property – vacant possession versus tenants in situ
When it comes to valuing property, it is important to first understand what type of property you are valuing.
When it comes to residential property, the valuation will usually be done on the basis of a sale with vacant possession. Vacant possession is a property law concept that refers to the legal obligation on the selling party to guarantee that the property is fit to be occupied and able to be accessed by the buyer at the time of sale. Most buyers of residential property are looking for properties with vacant possession and it tends to increase value of residential property for it to be offered to the market on this basis. There are circumstances where a residential property will be valued on the basis of having tenants in situ alongside the income stream that the tenants produce. This may alter the valuation, depending on the property.
When it comes to commercial property, the valuation will usually be obtained on the basis of the property being sold with tenants in situ. While an assumption of vacant possession is the normal basis on which to value residential property, should that special assumption be used in relation to commercial property it is more likely to have the effect of suppressing the value. Where a commercial property is sold with tenants in situ, the new owner will have the immediate benefit of that income and will not have to seek out new commercial tenants and absorb the costs in the interim. The value of a commercial property lies with tenants in situ and the income streams they provide to the owner, the reason most people own commercial property in the first place. To complete the valuation, the valuer will therefore need the full information on the terms of the occupation of the tenants in the property.
The decision as to whether a property should be valued with vacant possession or with tenants in situ is a very important one. If you are in any doubt about the basis on which you are instructing an expert to value a property, speak to the expert first to check.
Experts and the Family Court
Readers will likely be familiar with the rules that apply to the instruction of experts in family proceedings (Family Procedure Rules 2010 (SI 2010/2955) (FPR), Part 25). Applications to instruct experts must be made ahead of the first appointment to avoid potential cost consequences. Where there is a property portfolio, and the value is disputed, expert knowledge is likely to be required and must be considered at an early stage.
While it is trite, issues of admissibility are always important for family practitioners to have in mind when instructing an expert and bear repeating. The ‘Governing criteria’ on admissibility are helpfully set out in the President’s Memorandum: Experts in the Family Court (October 2021) (derived from the Supreme Court decision in Kennedy v Cordia (Services) LLP (Scotland)  UKSC 6 (per Lord Reed PSC)). In family proceedings, FPR PD 25B sets out at para 4.1(b) the requirement on experts to comply with the Standards set out in the Annex to the Practice Direction. These include all of those matters contained in the ‘Governing criteria’ for admissibility, and include requirements to have been active in the area of work; to have sufficient experience of the issues; to have familiarity with the breadth of current practice or opinion; and if the expert’s professional practice is regulated by a UK statutory body that they are in possession of a current licence, are up to date with CPD and have received appropriate training on the role of an expert in the Family Court. Where the expert is not subject to statutory registration, then FPR PD 25B, Annex, para 6 identifies alternative obligations to ensure compliance with appropriate professional standards.
The President’s recent judgment in Re C (‘Parental Alienation’; Instruction of Expert)  EWHC 345 (Fam), reiterated the need for practitioners to ensure that experts comply with the standards set out in FPR PD 25B. At , the President repeated what he stated in his 2021 Memorandum that:
‘The Family Court adopts a rigorous approach to the admission of expert evidence. As the references in this memorandum make plain, pseudo-science, which is not based on any established body of knowledge, will be inadmissible in the Family Court.’
Following Re C it is important for all practitioners to be satisfied ahead of experts being proposed to the court that they meet the standards in FPR PD 25B and that the evidence produced will be admissible.
The impartiality of an expert witness is also a key criterion for the admissibility of their evidence. It is important to bear in mind that the property world can be a small one, it is important to take steps ahead of agreeing the identity of an expert to confirm that they have no interests that might impact on their partiality. In the case of Field v Leeds City Council  EWCA Civ 3013, the Court of Appeal upheld a decision to exclude the evidence of a surveyor at an interim stage on the ground that his impartiality had not been demonstrated.
It may also be important to consider whether there needs to be a cap on the fees of experts under FPR 25.12(5) (see Loggie v Loggie  EWFC 2). This may be particularly important in cases involving large and complex portfolios and where costs of valuation are likely to be significant.
Letters of instruction
In Kennedy v Cordia the Supreme Court highlighted the responsibility of a party’s legal team for ‘making sure that an expert keeps to his or her role of giving the court useful information’.
In family proceedings, the key to ensuring that this responsibility is discharged is in the drafting of a clear and directive letter of instruction. This should include, by way of a link or copy enclosed, relevant parts of FPR Part 25 (including FPR 25.3 and FPR 25.14), FPR PD 25B and reference to the page limit set out in FPR PD 27A. The Law Society’s standard terms and conditions1 (dated January 2023) can be referenced for ease and include information to experts about the media attending hearings and transparency/the publication of judgments.
Instructions and valuation assumptions
When it comes to formal valuation of property (individually and collectively), an expert will consider what assumptions a willing purchaser would make on the date of valuation and the assumptions that at willing vendor would accept a price based upon.
Letters of instruction must clearly set out the basis on which a valuation is to be prepared and, if relevant, any assumptions that the valuer is to have in mind. It is important to understand that a valuation is an opinion of value on a given date. The valuer can only value under the market conditions at the time and will not take into account future events (positive or negative) that could not be known to him at the time of said valuation. It is therefore worth considering in advance if there are any specific dates that might impact on value (such as when a notice date on a break clause in a lease is approaching). This is particularly the case if the date being set for the valuation is in the past or if any major events that will have an effect on value are around the time of the valuation. This is a matter on which a shadow expert may be able to offer invaluable insights ahead of, or during, the drafting of a letter of instruction.
To help practitioners understand the impact of assumptions made on particular dates, two examples are set out below that are taken from real life examples but are intentionally extreme.
Example 1: What a difference a day makes – valuation of a commercial unit
The expert is instructed to value a unit on an industrial estate. The distribution unit is leased to a well-known company with a very strong covenant on a 25-year lease. The lease has a break clause at 10 years if 6 months’ notice is given by 25 November 2023. The unit is let of £500k per annum but with an Estimated Rental Value (ERV) of £400k per annum (over rented) and there are RPI increase at all reviews going forward within the lease.
Scenario A: The expert is instructed to value the property on 11 November 2023. The instructions provided do not detail any assumptions that the valuer is to make when approaching the valuation. In these circumstances, a prudent valuer would likely assume the following:
- the tenant is likely to exercise the break clause;
- consequently, there will be a void rental period;
- a new tenant will pay rent at £400k per annum ERV; and
- a new tenant may be weaker in lease terms than the strong previous tenant.
Scenario B: The expert is instructed to value the property on 26 November 2023, after the notice date on the break clause. The tenant did not break the lease and remains in situ. In these circumstances, a prudent valuer would likely assume the following:
- the rent is likely to increase in line with the last 5 years’ RPI (with a top-up to the review date); and
- the attractiveness of a 15+ year term is certain to be a good covenant.
The valuation provided using the assumptions of Scenario A could very conceivably come out at a value of, say, c. £4.2m. The valuation provided using Scenario B could well be c. £10.25m. It is important to stress that in both scenarios the valuer has discharged their professional obligations to the requisite standard; the assumptions used were appropriate and prudent for the date when the property was valued. However, the assumptions made due to the date on which the valuation was done lead to vastly different valuations.
Example 2: The potential impact of planning permission and consideration of overage clauses
It is also important to consider whether there could be any implications of, say, a new local plan in the pipeline for the value of property or land. In circumstances where you are dealing with land or property in areas where planning permission for a change of use might be achieved, the change in value can be very significant. In these circumstances ask your expert to consider the value of the property sold with an ‘overage clause’. Overage clauses are known as uplift or clawback provisions. This means that if planning permission is subsequently obtained, the seller will be entitled to a share in the uplift in the property’s value. A real example of this related to farmland which without planning was valued at £10k per acre. However, with increases in modern industrial land values and the benefit of a change of use, this could in certain parts of the country have easily moved to, say, £2m per acre (if planning permission is achieved). Put simplistically, if there were 100 acres of farmland, the overall difference to the value of the land pre- and post-planning could then be as much as £199m. Even a share of this upside could be very considerable indeed and far exceed the original value. Specific legal advice may be required if overage clauses are to be considered.
The two examples above highlight the challenges that may exist in valuing one asset within a portfolio. How those assets then interact with other assets in the portfolio, businesses or charges may also impact not only on value, but also as to distribution. Expert advice at an early stage may be invaluable in understanding not only the value of a portfolio but also, more importantly, how to extract from it what your client is seeking by way of a final settlement.
In some cases, distribution may require further expert evidence from a forensic accountant to advise on how liquid capital may be released from the portfolio to meet needs or for sharing, and how a fair outcome can ultimately be achieved.
It is hoped that this article has provided useful starting points and considerations for practitioners when it comes to dealing with cases involving a property portfolio comprised of different asset classes.