Developing Property Ethics

Developing Property Ethics
by Norma Cohen

Every industry offers ethical dilemmas for its practitioners, but real estate, perhaps, offers greater challenges than most as property transactions are often opaque and much activity is conducted in private. This probably affords more occasions for unethical behaviour. At a recent JABE seminar on ethical considerations in the property sector, I put questions to a panel of top property Developers.

Gerald Rothman, a director at Canary Wharf Group, thinks temptations are greater because far bigger numbers are involved and illustrated the perils: "You agree to sell your car for £10,000 but a competing buyer offers £10,500; here the price of ethical behaviour is only £500. But suppose you agree to sell a building for £100m and another buyer offers £105m? Then, the price of ethical behaviour is £5m, a price far more difficult to dismiss."

In Britain the industry operates by Caveat Emptor - Let the buyer beware - principle? Does the seller of a building need to disclose every bit of information that is sometimes not really available to the wider market, beyond which is required by law?

For example, if a buyer commissions a professional survey of a building, and there is an asbestos problem, known to the seller that is not discovered, does he have an obligation to disclose that shortcoming anyway?

Alternatively, a building on the market, is let to a financially-strapped tenant on a 25-year lease. The building would be much less valuable without the existing long lease. Does the seller have to disclose the financial condition of the existing tenant?

Rabbi Zvi Lieberman, ethical advisor to JABE, says that public information that the buyer can find out on his own would not be deceiving. However, the Shulchan Aruch states 'It is forbidden to deceive people in business dealings...if there is a fault in their purchase you must let the purchaser know.' In the case of the building with a distressed tenant, the buyer should conduct his own research into the financial condition of its occupier. Similarly, a professional retained to uncover potential liabilities is presumed to be competent to do precisely that. However, if the building were to be sold to a private buyer who had not carried out a survey, that might be different.

Chief Executive of Prestbury Investment Holdings, Nick Leslau, agrees that buyers have some responsibility to discover problems for themselves. He checks tenants' stability by calling their suppliers and previous landlords.

One could argue that there are certain questionable practices in the property industry such as confidentiality clauses in rental agreements, which keep individual rental rates secret. A tenant challenging a rent review at a shopping centre could be forced to pay too much rent or a purchaser of that shopping centre could be misled about the actual value of that property.

Rabbi Lieberman advises that information which can be known only by the purchaser or vendor, and no one else, can be deemed to be a stumbling block of sorts in the path of a blind man.

Other ethical dilemmas are posed by the perhaps too-prevalent practice of "gazumping"; that is, reneging on a deal to sell a building to one buyer when a second buyer offers a better price before the first deal can be concluded. Which set of principles should prevail? The principles which say that one's word is one's bond, or the principles which say that one is obligated to do the best for those who have entrusted you with their business, such as shareholders?

Jewish ethics require that, not only individuals, but companies themselves behave in ethical ways, even if that occasionally means turning down a better offer. Meanwhile, Rabbi Lieberman points out that in Jewish law, he who does not keep his word is cursed - a sombre warning to all would-be gazumpers.

And what of obligations of the parties to a contract above and beyond the terms of the contract? For instance, does a developer have an obligation to see to it that the life of a community is not disrupted while a new project is underway, beyond the measures demanded by the local authority?

Gerald Rothman gave an example of a dilemma Faced at Canary Wharf. "We came in and made property values soar. But what were our obligations to the local people?" Local residents brought an action over the loss of television reception because of the Canary Wharf Tower. And although there was no legal obligation, Olympia & York provided a TV repeater station for the residents. Rabbi Lieberman agrees that this was the right thing to do as Jewish tradition states that you should make good another individual's loss that you have caused.

What about a situation where a landlord discovers that a tenant had carried out significant structural works on a property without permission which the landlord would have probably agreed. It is perfectly legal for the landlord to demand compensatory payment for retrospective approval, but is it ethical?

"This is where we start to confuse niceness with ethics" says Joe Kaempfer, Chief Executive BAA McArthurlen UK Ltd. "And we don't have to be nice in business. If you wouldn't have let the tenant make that change, you should get the money."

In truth, the answer to these questions is rarely black and white. "The responsibility we all have is to condemn," concluded Rabbi Lieberman "but we have to accept that we all have weaknesses...It's tough dealing with money." Halachic law does provide guidance and each question should be examined on its own.