Arbitration — Application for extension of time to remit award — Tenant’s expert sought discount for onerous nature of headline rent clause in rent review arbitration — Whether arbitrator entitled to reject discount without hearing evidence or submissions
In making his
award pursuant to the provisions of a rent review clause in a lease of office
premises, the arbitrator concluded that, when analysing comparable
transactions, the ‘additional’ or ‘inducement’ rent-free period (additional to
any period for fitting out) may be amortised and a suitable deduction made from
the ‘face’ or headline rent payable at the expiration of the rent-free period.
In Broadgate Square plc v Lehman Brothers Ltd [1995] 01 EG 111
the Court of Appeal upheld the decision of Harman J [1994] 1 EGLR 143 that the
arbitrator had erred in law in making deductions from the headline rent. Before
the arbitrator, the tenant’s valuer submitted that a deduction of 10% from his
valuation should be made to reflect the fact that the hypothetical rent review
clause was drawn on an onerous basis. The arbitrator decided that even if he
were wrong in making deductions from the headline rent, he would still reject
the submission for it might otherwise introduce an element of double counting.
The tenant applied about two weeks after Harman J’s decision for an extension
of time to have the award remitted to the arbitrator on the ground that there
had been a technical misconduct because the tenant’s valuer’s submission that
there should be a 10% discount for the onerous nature of the clause had not
been canvassed or addressed in evidence or argument before the arbitrator.
no serious, or indeed any, procedural mishap in the arbitration or any
technical misconduct on the part of the arbitrator. It would be double counting
to give the tenant a discount for the onerous rent review provision in
assessing a comparable containing the same provision. The failure of counsel to
refer to the point in submissions before the arbitrator did not disable the
arbitrator from relying on it. Advocates are not required, when making closing
speeches, to address every item of evidence in a case. The obscurity in the
arbitrator’s reference to rejecting the 10% discount was not sufficient to
justify an extension of time for the making of an application to remit. If time
had been extended, the substantive application would have been dismissed.
The following
cases are referred to in this report.
Broadgate
Square plc v Lehman Brothers Ltd [1994] 1
EGLR 143; [1994] 04 EG 135; [1995] 1 EGLR 97; [1995] 01 EG 111, CA
GKN
Centrax Gears Ltd v Matbro Ltd [1976] 2
Lloyd’s Rep 555
King v Thomas McKenna Ltd [1991] 2 QB 480; [1991] 2 WLR 1234;
[1991] 1 All ER 653, CA
Moran v Lloyd’s [1983] QB 542; [1983] 2 WLR 672; [1983] 2 All ER
200; [1983] 1 Lloyd’s Rep 472, CA
Zermalt
Holdings SA v Nu-Life Upholstery Repairs Ltd
[1985] 2 EGLR 14; (1985) 275 EG 1134
This was an
application by the tenant, Lehman Brothers Ltd, for an extension of time to
make an application under section 22 of the Arbitration Act 1950 to have
remitted to the arbitrator his award in arbitration proceedings with the
landlord, Broadgate Square plc.
David
Neuberger QC (instructed by Freshfields) appeared for the applicant; Kim
Lewison QC (instructed by Herbert Smith) represented the respondent.
Giving
judgment, MR STANLEY BURNTON QC said: This is an application by Lehman
Brothers Ltd (‘Lehman’) for an extension of time to apply for the remission of
awards made in two rent review arbitrations and published on April 14 1993 and
for remission of the awards to the arbitrator pursuant to section 22 of the
Arbitration Act 1950 if the time for the application is extended. For
convenience, I heard the application for an extension of time and the
substantive application together.
The
uncontentious facts of this matter are concisely set out in paras 5 to 18
[reproduced as an appendix at the end of this judgment] inclusive of Mr David
Neuberger QC’s skeleton argument, which I gratefully adopt and incorporate in
my judgment.
The crucial
paragraph in the arbitrator’s award is as follows:
(k) The
onerous rent review clause
Mr Hyder
[Lehman’s valuation expert] made a deduction of 10% from his valuation to
reflect the fact that the hypothetical rent review clause is drawn on the same
terms as the actual clause ie on an onerous basis. I do not regard the clause
as onerous and I reject the point. If my legal interpretation is held to have
been incorrect and no allowance or deduction should be made for rent free
periods, I should still reject Mr Hyder’s submission for a deduction, for it
might introduce an element of double counting.
(Emphasis
supplied.)
The crucial
words, for the purpose of this application, are those in italics. The
arbitrator’s rejection of Mr Hyder’s 10% allowance or deduction assumed its
present importance because Harman J and the Court of Appeal held that the
arbitrator’s legal interpretation on the main issue was wrong and the House of
Lords has rejected Lehman’s petition for leave to appeal.
Mr Neuberger
contended that there was a procedural mishap or technical misconduct on the
part of the arbitrator, on the basis that the reason given for rejecting Mr
Hyder’s ‘submission’ that there should be a discount of 10% for the onerous
nature of the rent review provisions of the leases was one which had not been
canvassed or addressed in evidence or argument before the arbitrator: see para
20 of Mr Neuberger’s skeleton [see appendix]. ‘Mishap’ is used here in the
sense used by Lord Donaldson MR in King v Thomas McKenna Ltd [1991]
2 QB 480. Mr Neuberger sought an extension of time for the making of this
application on the basis that Lehman’s delay was due at least in part to the
obscurity of the wording of the award in this
expressed a legal, rather than a factual, reason for the rejection of the
discount. They appealed in time against the award on this basis. However, at
the hearing of the appeal before Harman J, Broadgate successfully contended
that the words expressed a finding of fact, on a question of valuation and that
no appeal therefore lay. This point had not previously been taken. The present
application was commenced about two weeks after Harman J’s decision and it was
then stood over by consent, pending the final resolution of the appeals,
against his decision on the proper construction of the rent review provisions
of the leases: what Mr Neuberger referred to, in his skeleton, as ‘the main
issue’.
Mr Neuberger
submitted that if the application to remit had been made in time and been heard
by Harman J, and had succeeded, in all probability the matter would not have
been remitted to the arbitrator until after the determination of the appeals on
the main issue. On this basis, little or no actual delay has been caused by
Lehman’s failure to make this application timeously. The failure of Lehman’s
legal team to make this application promptly was due to their misunderstanding
of the nature of the reason given by the arbitrator for his rejection of the
discount, a misunderstanding caused or contributed to by the obscurity of this
part of the award. Finally, no prejudice has been caused to Broadgate by the
delay. On the other hand, the amount involved on this point is substantial: in
the region of £1m a year. Furthermore, although at the next review an
arbitrator will not be bound by the part of the award, and will be free to
decide whether or not a discount is appropriate having regard to the then state
of the market, there may not be a rent review at the next review date if the
commercial property market does not improve: rent reviews under the leases are
upwards only.
Broadgate does
not suggest that there has been any significant prejudice caused by the delay
in making this application, other than that it will now be more difficult for
the arbitrator to reconstruct his thought processes if the matter is now
remitted to him. However, it contends that the requirements of speed and
finality in arbitration require the court to dismiss the application for an
extension of time. I was referred to the decision of Bingham J in Zermalt
Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14*, in
which he said:
*Editor’s
note: Also reported at [1985] 275 EG 1134.
This is a
field in which the court is extremely strict in insisting on the time-limits to
avoid the lengthy and protracted hearings which used to afflict arbitration
matters. Only where good cause is shown and where there is no possibility of
prejudice will any extension of time be granted, and then only if the delay is
minor.
Mr Kim Lewison
QC, for Broadgate, submitted, and I accept, that the delay in the present case,
of some seven months, cannot be termed ‘minor’. The Zermalt Holdings
case was, however, a case in which the application was for the entire award to
be set aside and the arbitrator removed. I do not think that quite the same
strictness is required on an application such as the present. If I were
satisfied that there had been a serious procedural mishap, with potentially
substantial consequences, that Lehman had been misled as to its remedy because of
the obscurity of the award, and that no prejudice had been caused, I should
have been inclined to extend time. If this application had been made in time,
and if it had succeeded before Harman J, the probability is that his decision
would have been appealed; and the parties would have agreed to stand over the
actual remission to the arbitrator until the final determination of the appeal
on the main issue. I do not think that any significant delay has been caused by
the failure of Lehman to make this application within the time laid down.
If the
arbitrator dealt with the issue of the discount on the basis of facts or
argument which were not before him, and which the parties had no opportunity to
address, there was clearly a mishap or misconduct giving jurisdiction to make
an order section 22 of the Arbitration Act 1950. The jurisdiction under section
22 extends beyond cases of misconduct. In King v Thomas McKenna Ltd
[1991] 2 QB 480, Lord Donaldson said, at p491:
In my
judgment the remission jurisdiction extends beyond the four traditional grounds
to any cases where, notwithstanding that the arbitrators have acted with
complete propriety, due to mishap or misunderstanding, some aspects of the
dispute which has been the subject of the reference has not been considered and
adjudicated upon as fully or in a manner which the parties are entitled to
expect and it would be inequitable to allow any award to take effect
without some further consideration by the arbitrator.
It is to be
noted, however, that King v Thomas McKenna was a case in which
the point in question had not been considered by the arbitrators at all. In the
present case, as will be seen, I am satisfied that the point in question was
before the arbitrator and properly considered by him. I am not satisfied that
there was a serious, or indeed any, procedural mishap in the arbitration or any
technical misconduct on the part of the arbitrator. If the award was obscure,
it was for Lehman to pursue concurrently all its available remedies within the
time-limits laid down and to issue this application and to seek leave to appeal
in time. The obscurity of the arbitrator’s reasoning doubtless contributed to
the error of Lehman’s lawyers. However, I do not think that Lehman’s advisers
were misled by the wording of the award as to their client’s possible remedies:
the passage in question is obscure rather than misleading; and the possibility
of the reason given for the rejection of the discount being factual rather than
legal was inherent in the obscurity of the passage. Lehman’s legal team
incorrectly concluded that an issue of law was involved and failed to
appreciate that there might be an issue of fact and valuation.
Mr Lewison is,
I am satisfied, correct in his explanation of the words in italics. I should
mention that his explanation was not available to Harman J when this case came
before him: he did not see the transcripts, which were not relevant to the
appeal on questions of law. Mr Lewison referred me to a passage in the
cross-examination of Broadgate’s valuation witness, Mr Peter Jones [FRICS]. Mr
Jones was questioned on the issue of discount for a rent review provision
which, it was contended by Lehman, was perceived by the market to be onerous
or, as Mr Neuberger is quoted as saying ‘potentially disadvantageous’. Mr
Jones, in explaining why he made no deduction for the onerous rent review
provision in the leases in question, said that he had three comparables on that
basis, with similar rent review provisions.
It seems to me
that it would be double counting to give Lehman a discount for the onerous rent
review provision in assessing a comparable containing the same provision.
Certainly, the arbitrator was entitled to come to the view that double counting
would be involved. I am satisfied that it was to this that he referred in the
passage from his award set out above. The fact that counsel did not refer to
this in their submissions does not mean that the arbitrator was guilty of
technical misconduct, or that there was a procedural mishap. It was for the arbitrator
to decide what evidence was of importance; the failure of counsel to refer to
it did not disable him from relying on it. It is a frequent occurrence in
litigation that the tribunal takes a different view from the advocates as to
the importance of certain pieces of evidence; and conversely advocates are not
required, when making closing speeches, to address every item of evidence in a
case. The fact that the arbitrator did not call for submissions on this
evidence does not, in my judgment, justify remission.
The passage in
question is, I accept, and as I believe Harman J accepted, obscure. It is
difficult to determine whether the arbitrator rejected the claim for a discount
on the basis that he was satisfied that there was in fact double counting, or
only that there was a possibility of double counting. There would be double
counting only if the comparable referred to contained the same rent review
provision as the leases in issue; and there would be no double counting if in
fact the rent review provision was not onerous. It is possible that this is why
the arbitrator used the verb ‘might’. Be that as it may, however, this
obscurity is not sufficient, in my judgment, to justify an extension of time
for the making of this application or the granting of the
from his award set out above was properly before him. In the absence of good
reason to come to a contrary conclusion, I must assume that the arbitrator
acted correctly and decided rationally. It is not enough for me to suspect that
there might have been an injustice: I must be satisfied that there has been an
actual injustice: see GKN Centrax Gears v Matbro Ltd [1976] 2
Lloyd’s Rep 555. This must be particularly so where there is an application to
extend time. I am not so satisfied.
I add that
even if it were shown that the arbitrator’s reasoning was defective, on a
question which is conceded to be one of fact that would not justify remission
under section 22: cf the judgment of the Court of Appeal in Moran
v Lloyd’s [1983] QB 542, especially at p550B–E. The arbitrator clearly
rejected the case of Lehman on a question of fact and valuation. The parties to
an arbitration must accept any errors of fact made by the arbitrator acting
properly. Remission cannot be used to introduce a disguised appeal or rehearing
on issues of fact.
Accordingly, I
refuse to extend Lehman’s time for the making of the application to remit. If I
had extended time, I should none the less have dismissed its substantive
application. The application fails.
Application
dismissed.
|
APPENDIX |
|
Paras 5–20 of David Neuberger QC’s skeleton argument are as |
The leases
5. By two
leases each dated 31st December 1987, Broadgate granted to Lehman leases of 1
and 2 Broadgate respectively on effectively the same terms. The lease of 2
Broadgate (‘the lease’) is at 4–1. Each lease was for a term of 30 years and 6
months from 23rd July 1986 (4–9) and contained provisions for review of the
rent on 25th December 1991 and every fifth year thereafter in the Third
Schedule (4–54).
6. The
reviewed rent with effect from each review date was to be the ‘Open Market
Rent’ as defined on 4–55ff. This is the rent one would get for the premises on
the open market as at the review date on certain assumptions and subject to
certain disregards.
7. The Open
Market Rent is to be determined on the basis of two particular assumptions
which are central to the present application. First, the rent is to be that:
‘which would
reasonably be expected to become payable in respect of the Premises after
the expiry of a rent-free period of such length as would be negotiated in the
open market between a willing landlord and a willing tenant‘
(emphasis
supplied)
Secondly, the
Open Market Rent was to be fixed on the hypothesis of a letting (With certain
exceptions):
‘Upon the
term of this Lease‘
(emphasis
supplied)
8. For the
sake of convenience, these assumptions will be referred to as ‘the first
assumption’ and ‘the second assumption’ respectively.
Procedural
9. The
parties were unable to agree the reviewed rent, and accordingly the same was
referred to an Arbitrator, Mr Kinney under the provisions of paragraphs 3 and 4
of the Third Schedule to the lease (4–60,61). It was agreed that he would
decide the issue between the parties following a full hearing, where he would
have a legal assessor Mr Harper QC, and where legal issues would be debated and
witnesses, including expert witnesses, would be cross-examined.
10. As at the
review date, it was common practice for landlords to grant long rent-free
periods to induce tenants to take properties at significantly higher rents than
they would have been prepared to pay without the rent-free periods (per
the Arbitrator at 2–31). The principal issue of law between the parties was
whether the first assumption required the Arbitrator, as Broadgate contended,
to fix the reviewed rent at a level which could only be obtained by a landlord
if he was prepared to grant such a rent-free period, or, as Lehman contended,
whether that could not be the right construction, essentially because the
actual tenant was not getting the benefit of any rent-free period with effect
from the review date. (The level of rent for which Broadgate contended is often
known as ‘the headline rent’.) The issue will be referred to herein as ‘the
main issue’.
11. One of
the subsidiary issues between the parties, raised by Lehman, was that if
Broadgate was right on the main issue, then the hypothetical lease to be valued
for rent review purposes, containing as it would the same provisions for review
as the actual lease (in view of the second assumption), would have been
perceived by the market to be disadvantageous in this respect, and the
hypothetical tenant taking the lease would therefore reduce his rental bid to
take that into account. This will be referred to as ‘the subsidiary issue’.
12. In his
evidence before the Arbitrator, Lehman’s expert witness, Mr Hyder, contended
that the subsidiary issue would justify a discount in the rent of 10% (5–2/3).
Broadgate’s expert witness, Mr Jones, contended in his proof that no discount
was appropriate in this connection (paragraph 6.2.14 at 5–6/7). Each expert
maintained his respective position in his evidence in reply (5–9/10 per
Mr Hyder and 5–13/14 per Mr Jones).
13. In
cross-examination of the two expert witnesses, the point was again as one of
valuation (Mr Jones’ cross-examination at 5–16 to 19, and Mr Hyder is at 5–20
to 28. The nature of this evidence is not particularly significant for this
application.) In closing arguments, the point was again treated by both Counsel
as one of valuation (see Lehman’s argument at 5–29G to 30E and for Broadgate’s
argument see at 5–32A to C).
14. The
opinion of Mr Harper QC given to the Arbitrator on the main issue is to be
found in paragraphs 4–14 of his Opinion (at 3–2 to 7). At paragraph 15, he
deals with the subsidiary point (3–8) and so that it is ‘not a question of law;
it is for the valuers’.
15. In his
award, the Arbitrator dealt with the main issue at 2–28 to 33 and found in
favour of Lehman.
16. He dealt
with the subsidiary issue at paragraph (k) on page 58 of the reasons attached
to his award (2–66). He correctly referred to Mr Hyder’s 10% reduction, but
said that, as he had been in Lehman’s favour on the main issue, no deduction
was appropriate. (That must be right, because on Lehman’s case on the main
issue, the rent review clause is not onerous.) However, he went on to say:
‘If my legal
interpretation is held to have be (sic) incorrect and no allowance or
deduction should be made for rent-free periods, I would still reject Mr Hyder’s
submission for a deduction, for it might introduce an element of double
counting.’
17. Broadgate
appealed the Arbitrator’s decision on the main issue, on the basis that it
represented an error of law. Lehman issued a contingent cross appeal on his
finding of the subsidiary issue on the same basis. The appeals came on before
Harman J his decision being reported at [1994] 1 EGLR 143. He reversed the
Arbitrator on the main issue, being in favour of Broadgate. It then became
necessary to deal with Lehman’s cross appeal, which the Learned Judge did at
145J/K to 146C. Although he criticised the Arbitrator’s finding on this point,
(and Lehman respectfully adopts his criticisms at 145L and M) he effectively
held that it was inappropriate to remit the matter to the Arbitrator under
section 1(5) of the Arbitration Act 1979 (at 146B) in effect on the basis that
‘no question of law is raised by this part of the award’.
18. After the
decision of Harman J (29th November 1993) Lehman issued the present application
on 15th December 1993. Because Harman J gave leave to Lehman to appeal his
decision on the main issue, but not on the subsidiary issue, Lehman and
Broadgate agreed to keep the present application ‘on hold’ in case the Court of
Appeal took a different view from Harman J. The Court of Appeal in fact upheld
Harman J (at [1995] 01 EG 111), and the parties shortly after agreed that the
present application should proceed. Broadgate’s petition to the House of Lords
was rejected last week.
…
20. In the
instant case, insofar as the Arbitrator’s reason for rejecting Lehman’s
contention on the subsidiary issue is concerned, it is clearly not based on any
of the arguments or evidence put before him, nor on the advice of Mr Harper. He
seems to be suggesting that the parties cannot have intended that the rent
review clause in the hypothetical lease was intended to produce a ‘headline
rent’. That was not an argument raised before him nor could it have been.
For
further background see: [1994] 1 EGLR 143 and [1995] 1 EGLR 97.
