1.

UNIT 5: GENERAL
INTRODUCTION TO THE
ROLE AND LEGAL DUTIES OF
ARCHITECTS IN
ARBITRATION AND
VALUATION. Valuation and
1. To Define Cost, Price and Value Arbitration:
2. To Define Valuation and understand the
purpose of Valuation
3. To Understand Market Value and its types
4. To Understand Land Value and its Determining
Factors
5. To Understand how Valuation is done
6. To Understand Free-hold and Lease Hold Plots
and Sinking Fund
7. To Understand Arbitration, Its Salient Features
and an Architect’s Role in Arbitration
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Unit 5: Syllabus:
General Introduction to the Role and Legal duties of Architects in Arbitration and Valuation:

5.aValuation:
5.a.1 Statement: The role of an Architect in the valuation of Land/ Property as an immovable
Asset is that of an Expert.
Before we begin this discussion we must understand a few economic terms
1. Cost-The Amount that is required to produce, create or acquire. Cost is the amount incurred on
the inputs like land, labour, capital, enterprise, etc. for producing any product. It is the amount
of money spent by the company in the manufacturing of a product. For example- If a company
manufactures shoes, then the expenses incurred on raw materials, salaries, rent, interest, taxes,
duties, etc. determines the cost of the product.

2. Price- Price is the amount of money paid by the buyer to the seller in exchange for any product
and service. The amount charged by the seller for a product is known as its price, which includes
cost and the profit margin. For example- If you buy a product for Rs 250, then it is the price of
that product.

3. Value- The cost and additional amount that one is willing or not willing to pay for an intangible
reason or worth of something. Value is the usefulness of any product to a customer. It can never
be determined in terms of money and varies from customer to customer. For example- If you are
going to a gym by spending 1000 bucks a month, the output seen is worth the expense, then it is
the value that you create for a gym, regarding the service being offered there. Here the worth is
its value

A Comparative Statement among the three would be as follows

Basis for comparison Cost Price Value

Meaning Cost is the amount Price is the amount Value is the utility of a
incurred in producing paid for acquiring any good or service.
and maintaining product or service
something.
Ascertainment Cost is ascertained Price is ascertained Value is ascertained
from the producer's from the consumer's from the user's
perspective perspective perspective.

Estimation Through Fact Through Policy Through Opinion

Impact of variations in Cost of Inputs rise or Prices of products Value Remains

market fall increase or decrease unchanged

Money It can be calculated in It can also be It is not calculated in

terms of money calculated in monetary terms of money
terms

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5.a.2 Definition of Valuation: Valuation is defined as the determining process of a fair value of
a certain specific property for specific /certain purpose on a certain specified date.
• A property may mean a piece of land or a land only or a piece of land with a building. It becomes
necessary to adopt and establish an appropriate method of evaluation.
• Valuation is done in the local monetary unit. As in India the valuation would be in Rupees.
• Valuation is done by specially qualified Valuers who have received training and gathered
experience in this field.

5.a.3 Purposes of Valuation:

1. Valuation for sale or purchase:
A prospective buyer wants to know the reasonable value he must offer to the seller and vice-versa.
In most such cases after a series of meetings and deliberations a mutually acceptable sum is
arrived at for the deal.
2. Valuation for Legal Purposes.
Properties are valued for a number of legal purposes.
• Obtaining Probate of a will through a court of law.
• Division of Assets among the owners
• Determine the value of stamp duty.
• Determine the court fee
• Reserve Bid in terms of Auction of Properties

3. Valuation for Taxation.

Properties are required to be valued for •Tax Liability of the owner. •Assessment in the event of
gifting of property or sale of property. In many cases when an Individual owns properties beyond
certain limits he or she may have to pay Wealth Tax.

4. Valuation for Land Acquisition.

Any land that needs to be acquired by the local governing body as per the Land Acquisition Act 1894
needs to be valued so that adequate compensation may be paid to the owner in actual money or
land elsewhere as valued on the date of issue of ordinance.

5. Valuation for Accounting Purposes.

Properties are periodically valued to determine the assets of an Individual or Companies.

6. Valuation for Insurance Purposes.

Buildings are insured against any calamity like fire or earthquakes etc. In any such untoward
incidents and the owner claims the insurance, the buildings need to be valued and adequate
compensation be paid to the owner.

7. Valuation for Loan against property.

8. Valuation for Fair Distribution of Wealth in case of inherited property and its division amongst
inheritors.

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5.a.4 Market Value.

Market value of a property is the value a purchaser is willing to pay to the seller in a free and un-
restricted environment. This value is arrived after a series of mutual discussions and bargaining.
The numbers of transactions that have taken place determine the market value of an area. There
must be demand and supply. The land must be trade-able and transferable.

Characteristic of Market Value are

1. Vendor: Seller Should be willing to sell
2. Purchaser: Purchaser must be willing to buy.
3. No compulsions on either of the parties in the Transaction.
4. Urgent necessity of purchase or sale to be discarded. (Distress Sale or Purchase)
5. Disinclination of Vendor Seller to be ignored.
6. No sentimental Value.
7. Present and Future potentials are taken into account.

Accordingly Market Values are classified as

1. Fair Value: Fair Value is that value which is fair and reasonable to the seller and purchaser both.
This is determined by an expert Valuer taking into account all related features like Utility,
Satisfaction, Ability, and Availability.
2. Rate-able Value: This value is determined by the civic officials, Local Authorities for levying of
Municipal Tax, Property Tax, and Education Tax. This value is determined with the first
occupancy of the premises and remains unchanged unless there is change of use of premises or
some improvements are made to the premises.
3. Book Value: Depreciation: Every building grows old due to wear and tear and this reduces or
depreciates the value of the building. Depreciation is the value by which the property reduces in
value every year. Normally a building depreciates 5 – 10 % every year. The BOOK VALUE is this
deprecated value of the building.
4. Capitalized Value: A Building has some income value. The income yielding capacity is the basis
of working out the Capitalized Value. It is multiplied by a factor based on current rate of interest
for capitalization.

Another Term of Importance here which could be another Market Value (but I have excluded it and
mentioned it separately) that is Distress Value of Property
5. Distress Value. Property that is under a foreclosure order or is advertised for sale by its
mortgagee. Distressed property usually fetches a price that is much below its market value.
In real estate terminology, "distressed property" is when the loan amount on a property is
greater than the Market Fair Value. Distressed properties are homes whose owners cannot
maintain them. Either these properties suffer from neglect and are in poor condition, or
they are at risk of foreclosure due to non-payment of mortgage and/or taxes. Distressed
sales often occur at a loss because funds tied up in the asset are needed within a short
period of time

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5.a.5 The Mathematics of Valuation.

1. Valuation of Buildings. This is a relatively simple task. Precise Govt. rates are available in a
ready reckoner. This Multiplied with the area would give us the value of most properties.
However one has to depreciate the value depending on the age of the building. To arrive at the
actual market value one must also take into consideration factors like function of the Building,
importance of the Building, and most important the locality of the building

2. Valuation of Land. This is much more complex and numerous tangible and intangible factors
are involved. Land is said to be a scarce commodity.
Factors Affecting Valuation of Land:
1. Volatile Market Scenarios. ( Wars/Riots/Socio-economic Situations)
2. Annual Escalation. (Unlike Building Depreciation)
3. Demand and Supply (Shortages and Surplus)
4. Location and Topography. (Prime location, Terrain/Slope)
5. Tenure and Transferability. (Ownership/Tenants, Lease etc.)
6. Neighborhood and Locality. ( Class/Culture)
7. Physical Encumbrances. (Trees, Wells, Poles, H.T lines)
8. D.C. Rules and Regulations. (Land Use/Zoning)
9. Government Policies. (Reservations, Proposed Roads, Canals, Rivers.)
10. Sentimental/Emotional Issues. (Ancestry/ Heritage)

5.a.6 Methods of Valuation.

a.Government Method.
State Government prepares a ready reckoner for market values, which are updated
periodically and made available to the government departments, municipal authorities, to
levy taxes and stamp duty accordingly. This forms the basis of land evaluation.

b. Comparative Sales Method.

All Transactions have to be registered with the registrar of properties. This is done on a payment of
Stamp Duty for legalizing and recording the sale. The payment of Stamp Duty is subject to the
property rate and Transactions. A Comparison with similar sales/purchase shall help determine the
value of a property.

c.Hypothetical Lay-Out Method.

When the value of a large plot are to be determined, small lay-outs are made of comparable sizes
and access and values are made similar to all of them.

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d.Residual Method.
In case of valuation of properties with existing buildings, the land value component can be isolated
from combined land + building value of the property. The values can be derived from similar sales in
the neighborhood. This method involves estimation of building values by established method of
making B.O.Q with quantities, rates and amounts.

With Regards to Valuation two other important terms that frequently is brought to our notice are
• Freehold and Leasehold Land Tenure
• Sinking Fund. The second term is more to do with running of co-operative or
otherwise Societies.

5.a.7 Freehold and Leasehold Land Tenure

Freehold Property
If you have purchased a Freehold Property, then you own the land it is built on and also the house.
In the case of Apartments the owner of the house becomes a share holder in the property. You can
live there as long as you desire. You have the right to make alterations in the house or redo some
parts of the house obviously subject to local byelaws and permission from the local authorities
specially if you want to make structural changes (particularly with old buildings). In India
independent houses are sold as free hold property and Apartments are mostly on lease. However
many Apartments are also now being sold as freehold properties.
The freeholder of a property owns it outright, including the land it’s built on. Generally,
most houses are freehold properties although some might be leasehold – usually through
shared ownership schemes.

If you buy freehold, you are responsible for maintaining your property and land, so you’ll need to
budget for these costs.

The main benefit of freehold is that you don’t have to:

• worry about the lease running out, as you own the property outright
• deal with the freeholder (often known as the landlord)
• Pay ground rent, services charges and any other landlord charges.
However you have the pay out to maintain your piece of land and also the Property Tax.

Leasehold Property
Most flats and properties are owned leasehold
With a leasehold property, you own the property and its land for the length of your lease agreement
with the freeholder. When the lease ends, ownership returns to the freeholder unless you are able
to extend the lease.
When you buy a leasehold property, you’ll take over the lease from the previous owner, so before
making an offer you’ll need to consider:

• how many years are left on the lease

• how it may affect getting a mortgage and the property resale value
• how you’ll budget for service charges and related costs

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Advantages of a Leasehold Property

Relatively cheaper priced than a Freehold plot as the land cost to the developer is invariably less.

Leasehold Properties are safer to buy as they have clear titles and the Developer’s credentials
are also verified.

The responsibility to maintain the project usually lies upon the developer of the project

5.a.8 Sinking Fund:

1. In a Society:
Definition: In a Society, A Sinking Fund consists of contribution from all Members, at a rate
fixed at the General Body Meeting from time to time, subject to the minimum of 0.25 percent
per annum of the construction cost of each flat.
Utilization: On the Resolution passed at the meeting of the general body of the society, the
Sinking Fund may be used by the society for reconstruction of its building/buildings or for
carrying out such structural additions or alteration to the building/buildings, as in the opinion
of the Society’s Architect, would be necessary to strengthen them or for carrying out such
heavy repairs as may be certified by the Architect and on approval of General Body.
This is per the Model By-Laws of Maharashtra.
2. In Real Estate
A fund set aside from the income of a property along with its accrued interest that will be
enough to replace components of an improvement as they wear out
3. In Property
A sinking fund is an amount of money which is set aside to cover any major work which is
needed on a property in the future. Such funds are quite common with leasehold properties.

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5.b Arbitration
5.b.1 Definition: Arbitration means resolution of disputes between Parties. It is a Quasi= Judicial
Process to fairly and impartially resolve disputes between parties in accordance with Indian
Arbitration and Conciliation Acts 1966 before seeking Redressal in courts of Law.

5.b.2 Arbitration in Architectural Practice could be between

1. Between the contractor and the client
2. Between a Petty Contractor (and a recommended Vendor) and the Main Contractor.
3. Between the Architect and the Client

5.b.3 Types of Arbitration: An Architect is the sole Arbitrator in the first and the second cases.
I Joint Arbitration: If in case of dispute both the parties and either party reject the sole arbitration
of the architect, he may call for joint arbitration.

II Third Expert: If two Architects do not reach on a final award in case of Joint Arbitration, they
may appoint a third expert or umpire to decide and declare an award.

III Court of Law: If the dispute does not get settled in any of the above cases, then the dispute is
taken to the court of Law.

5.b.4 Salient Features

1. It is a quasi-judicial with the backing of the law in the form of the Indian Arbitration and
Conciliation Acts 1966. Hence Arbitration awards are accepted in all courts of law as “Legal”.
The process involves that both parties enter into an Arbitration Agreement.
2. Arbitration involves solving disputes which may be too small to be taken into court.
3. Arbitration makes sure that justice is given in the least possible time and yet the project
work continues which may not happen in a court of Law.
4. It is good to make Arbitration a pre-condition in Litigation.
5. Arbitration is relatively less time consuming and less expensive compared to courts of law.
6. If an Architect has been asked to Arbitrate upon a dis-agreement he shall charge separately
apart from his regular fees for the project (as mentioned in the contract). The expense is
generally borne by the party calling for the Arbitration or the party in whose favor the
judgment is given.
7. Although the Architect is the sole Arbitrator either or both parties may not accept his ruling.
8. Arbitration is practiced by Lawyers, Architects, Engineers and many qualified and
experienced persons to settle disputes out of courts

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9. Minutes or record of the Arbitration Proceedings are to be maintained as evidence in case

the matter is taken to a court of Law. Also the Award given by an Arbitrator is a Legal
Document that is acceptable in any court of Law.
10. In case of Joint Arbitration the expenses of each Arbitrator are to be paid by the respective
parties.
11. For the Expert or Third Umpire Arbitration, the expenses are to be borne by both parties.
12. The Award of the Arbitration is Final and Binding on both the parties although one or both
may seek Redressal in court.

5.c Theory Questions:

1. Explain Cost Price and Value with examples
2. Compare and contrast among Cost Price and Value
3. Define Valuation and Explain the various purposes of Valuation
4. Define Market Value and explain the different Market Values
5. Write a Short Note on Distress Value
6. How can Valuation be done. Explain the different methods to arrive at the value of a
property.
7. Write short notes on Free hold and Lease Hold Properties comparing and contrasting
between the two
8. What are the factors affecting value of a land
9. Write a Short note on Sinking Fund
10. Define Arbitration. Explain different kinds of Arbitration
11. Explain salient features of an Arbitration process.

Unit 5 Introduction to Valuation and Arbitration Compiled by Ar. Rajiv Raje @ Ar. Arthur Cutinho