The high price of dishonest property deals

By Tim Martin

- Last updated on GMT

Related tags Jdw Renting

Martin: property market needs greater regulation
Martin: property market needs greater regulation
Wetherspoon's (JDW's) former retained agents Van de Berg (VdB) were paid £14m in fees between 1996 and 2005, and located about 600 pubs for us....

Wetherspoon's (JDW's) former retained agents Van de Berg (VdB) were paid £14m in fees between 1996 and 2005, and located about 600 pubs for us.

Following a tip-off and an extensive review of our historic property files, JDW believed it had found evidence that VdB had diverted a number of freeholds to third parties, themselves agents or property dealers, who had, in turn, rented or sold these properties to JDW on a "back to back" basis, making substantial profits in the process.

In his judgement of March this year on the consequent legal action, Mr Justice Peter Smith found that VdB and its directors had dishonestly and fraudulently diverted properties to third parties, to the detriment of JDW, and awarded provisional damages and costs to JDW.

However, the judge made clear that he was making no findings against the third parties themselves, since they were not represented in the case and there was no evidence that the third parties had knowledge of the fraud or dishonesty of the defendants.

This case raises a number of issues of public policy, which require close consideration by property buyers and sellers, their advisors and legislators.

One issue relates to the rules and ethics surrounding estate agents who also act as principals in property transactions (ie buying and selling property on their own behalves), and the extent of disclosure that is required. A second issue concerns the effect of fraudulent transactions in setting artificially high rental levels for properties in the A3 and

A4 markets.

The third issue concerns the extent to which excessively high rents, possibly linked to fraudulent transactions, played a part in the collapse, or the necessity for financial restructuring, of a number of important pub and restaurant companies in recent years. I believe agents acting as principals should be required formally to disclose their interest to all parties to a transaction and, in addition, a publicly visible property register should be established to record the property interests of estate agents, in order to create transparency for all sides in this important area.

Derisory disclosure

This is important for companies such as JDW, but is also important for the agents themselves, since it would protect their interests by making it difficult for fraudsters such as VdB to involve them in their schemes. The property market is vast, probably bigger than the stock market, yet, in my experience, the level of disclosure and compliance that is required is derisory in comparison to the stock market, and it is in the public interest for this situation to be rectified.

The second point of public interest relates to the effects of the fraudulent diversion of freeholds to third parties on overall rental levels in the licensed trade.

This partly depends on the extent of the fraud. There were about a dozen and a half pleaded properties in the VdB case, but these were sample properties only, and the defendants themselves indicated that there were a considerable number of additional properties diverted to third parties, allegedly at JDW's request, but of which we had no knowledge.

If this pattern of diversion of freeholds applies in respect of other pub and restaurant companies, as many agents believe it does, the potential for artificially high rental levels

is huge.

This is because even one high profile letting can be used as a comparable for a considerable number of other properties in similar locations, sometimes in other towns and cities.

Excessive rents

A good example relates to a transaction known as "Canterbury 2" in the trial, a property purchased by a third party for £500,000, which was simultaneously let to JDW for £75,000 per annum, (albeit with various incentives), an extremely high rent in relation to the freehold price. This rent in a high-profile location in a prosperous city would undoubtedly have been used as evidence for other rent reviews in Canterbury and possibly for reviews in other towns and cities in the region.

On VdB's advice JDW similarly signed up to take a lease in Eastbourne for £100,000, for premises that the judge found were fraudulently diverted to a third party for £525,000. By chance, this transaction did not proceed, but many others did in towns as diverse as St Albans, Bedford, Leamington Spa and Rotherham, for example.

These high-profile lettings to a relatively high-profile tenant will, in my opinion, have had a profound and distorting effect on property prices in the sector, and will have been compounded should similar fraudulent transactions have occurred at other pub and restaurant companies.

The third and linked issue relates to the role of fraud in the property industry, resulting in excessive rents to the large number of companies in the sector that have gone into administration, or that have undergone a painful financial restructuring, with banks and investors writing off hundreds of millions of pounds.

Almost the entire high-street pub industry has hit financial problems, with famous names such as Yates's, Litten Tree, Slug & Lettuce, Brannigans and a number of others running into serious problems.

It is noteworthy that all the main players have had their fingers burnt in the so-called high-street pub sector, where leasehold shops and banks have been converted into pubs. All the big pub companies and many regional brewers and other small companies have opened pubs in high streets throughout Britain in the recent past, but none will now touch these leases with a barge pole, because of the toxic effect of rent reviews in the past 15 years.

Disarray

Even JDW, the most successful of the high-street pub companies, helped enormously by the high percentage of freeholds we own (in spite of the influence of VdB's efforts), has refused point blank for a number of years to agree to open-market rent reviews, since we do not trust or believe the integrity of the comparable rental evidence used in the market.

In conclusion, the VdB case gives, in my opinion, an important clue as to the disarray in the high-street pub market, and demonstrates the need for the property industry, the Government and buyers and sellers to insist on higher levels of transparency in property transactions.

In my opinion, much of the comparable evidence used in pub and restaurant lettings needs to be treated with enormous scepticism, since it has been tainted by dishonesty and fraud, as the VdB case proves.

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