I am revisiting ITZA in the light of an experience I am enduring concerning some tenants that are inexperienced of rent review. Tenant contention is that an ITZA adopted/agreed for a previous review should be used again for a current review.
Unless the ITZA is documented in a binding agreement, there is no reason why an ITZA adopted/agreed for a previous rent review necessarily has to be used at a subsequent review. Often, the ITZA as before is used again, particularly when involving the same parties and/or same surveyors, and assuming no alterations or additions to the premises since the last review. In any event, it may not pay the landlord or the tenant to do so.
ITZA is surveyor-terminology for ‘(area) in terms of Zone A’. ‘Zoning’ is a measuring methodology that was invented originally by a surveyor for purpose of valuation for rating of shop property: different sizes and layouts can be converted into a common denominator for valuation purposes. Nowadays, zoning is used more widely for other valuation purposes and comparable evidence.
Having measured the premises correctly, the layout of the premises is designated in zones. Each zone is usually 20′ (6.096 m) depth, but 30’ (9.14 m) depth is used in some places. [Zoning for Rateable Value follows the usual convention, although in some places 15’0( 4.57m) 25’o (7.62m) and 20’0 (6.096m) might be used.]
The zone at the front of a shop is generally considered the most valuable area: the frontage of a shop is an important feature. The first zone is known as Zone A, the next Zone B, the next Zone C and so on. Generally, zoning ends at Zone D or E, with any other zones known as ‘Remainder’.
The issue arises through a muddling of the difference between ‘measuring methodology’ and ‘valuation methodology’. For valuation methodology, zones less valuable than Zone A are related to Zone A, usually by halving-back from Zone A so, for example, Zone A area is divided by 1, Zone B area is divided by 2, Zone C area is divided by 4, Zone D area divided by 8. Even so, depending upon other factors, the fraction (relativity) can be A/3, A/5, A/6, etc. In valuation opinion, there are no hard-and-fast rules, other than the analysis should be consistent.
At rent review to market rent (and market rent on renewal where the tenancy qualifies for renewal rights), the rental of the premises in question is unknown. Therefore, the starting point is not the ITZA for the premises in question, but the Zone A value obtained from the evidence in outline, the calculation for the evidence Zone A value is the evidence net rent divided by the evidence premises iTZA.
For example, let’s assume the evidence premises and the premises in question are identical. the evidence rent is £52,500 and the evidence ITZA 525 sqft, the ‘525’ comprising Zone A 400 divided by 1, Zone B 200 divided by 2 and Zone C 100 divided by 4. £52,500 divided by 525 = Zone A £100. However, if ITZA were based on A/1, B/3, C/5 then ITZA would be 486.7 sqft and Zone A £107.88
The landlord’s proposal is based on Zone A £100 and the landlord’s ITZA for the premises in question is 525. The tenant’s contention is that the previous ITZA 486.7 should again be used, so at £100 would equate to £48,666.
Obviously, it makes sense for the tenant to cling to an approach that is wrong, but the situation I find myself in – it is more complicated than the example I am using, involving as it does more than three zones – does rather highlight the need to ensure that the zoning relativities in devaluing the evidence for the Zone A value are the same as the ITZA relativities for the premises in question. The snag with tackling Zone A value without checking whether the condensed zoned areas for the respective ITZAs are on the same relativities can result in distortion of the market rent.