Landlord and tenant — Rent-review clause in lease — Arbitration Act 1950, section 27 — Appeal by lessees from refusal by chancery master of their application under section 27 for an extension of time to serve a counternotice under the review clause — Object of application was to enable lessees to refer to arbitration a dispute as to the rent payable under the review clause — Correspondence had taken place between lessors’ and lessees’ agents as to the rent, during which the period allowed to the lessees for service of a counternotice electing to invoke the arbitration procedure under the review clause expired — Nevertheless, the lessees served a counternotice and commenced the present proceedings seeking an extension of time on the ground of hardship — The master refused the extension, holding that section 27 required the existence of an arbitration agreement and that no such agreement could arise until a valid counternotice had been given; there was merely until then an unexercised option — In any case the master, if wrong on this point, would have held that there was no undue hardship — Held, on appeal, that the court was bound by Baron v Sunderland Corporation to decide that an essential element in an arbitration agreement was the existence of bilateral rights of reference — In the present case the clause conferred the right of election on the tenant alone, so that there was a lack of the essential mutuality required and consequently the lessees could not invoke section 27 of the Arbitration Act 1950 — A contrary submission based on Amalgamated Estates Ltd v Joystretch Manufacturing Ltd and Consolidated Investment and Contracting Co v Saponaria Shipping Co Ltd was rejected — The judge indicated that if he had been able to decide otherwise on the arbitration agreement point, he would, subject to a question of evidence, have found that undue hardship existed in the present case — Appeal dismissed, but leave to appeal given, if necessary — Observations by judge on undue hardship — Cash flow of trader not a decisive test
This was an
appeal by the plaintiff lessees of a property at 7 Ruislip Road, Greenford,
Middlesex, from a refusal by Master Chamberlain of their application under
section 27 of the Arbitration Act 1950 for extension of time to serve a
counternotice under the rent-review clause in the lease of the property. The
lessors, defendants, were The Development & Property Holding Co Ltd.
Mrs Reziya
Harrison (instructed by Peter Wheatley & Co, of Claygate) appeared on
behalf of the plaintiffs; Paul Dickens (instructed by Druces & Attlee)
represented the defendants.
Giving
judgment, PETER GIBSON J said: This is an appeal by the plaintiff, Tote
Bookmakers Ltd, from an order of Master Chamberlain on November 28 1984. By that
order the master refused an application by the plaintiff under section 27 of
the Arbitration Act 1950 for an extension of time to serve a counternotice
under a rent-review clause in a lease, the effect of which would be to refer to
arbitration a dispute on rent.
The plaintiff
is the lessee of 7 Ruislip Road, Greenford, Middlesex, under a lease dated
August 18 1975 and made between the defendant, The Development & Property
Holding Co Ltd as landlord, and T Benfield (Racing) Ltd as tenant. That tenant
assigned the lease to the plaintiff on November 19 1980.
By virtue of
the provisions of clause 2 and clause 5 of the lease the rent payable for the
period of five years commencing from December 25 1984 was to be the open market
rental value of the property, which should be (a) as specified in a notice in
writing from the lessor to the lessee, or (b) agreed between the parties before
the expiration of three months immediately after the date of such notice, or
(c):
determined at
the election of the lessee by counternotice in writing to the lessor not later
than three months after the lessor’s said notice time to be of the essence
hereof by an independent surveyor appointed for that purpose by the parties
jointly in writing or upon the failure to agree upon such appointment within
one month after the date of the said counternotice then by an independent
surveyor appointed for that purpose by the President for the time being of the
Royal Institution of Chartered Surveyors and every such determination shall be
made in accordance so far as not inconsistent herewith with the provisions of
the Arbitration Act 1950 or any statutory modification or re-enactment thereof
for the time being in force
— and I need
not read further.
The defendant
as lessor by its agents served a notice in writing in accordance with clause
5(ii)(a) of the lease. That notice was dated
per annum. The plaintiff promptly the next day instructed a surveyor, Mr B F
Woolf. His instructions were ‘to act in negotiating the rent review due on
December 25 1984 in accordance with the terms of the lease’ (I quote from the
letter to Mr Woolf from the plaintiff, dated June 13 1984). There was then
correspondence between the defendant’s agents and Mr Woolf. On July 17 Mr Woolf
wrote suggesting a rent of £4,000 and he wondered how the defendant’s agents
had arrived at their figure of £6,250. On July 27 the defendant’s agents
replied rejecting the figure of £4,000 and giving details of how they arrived
at their valuation, and they asked for the basis of Mr Woolf’s valuation. Mr
Woolf replied on August 1 giving details of how he had arrived at his
valuation. On August 9 the defendant’s agents replied, commenting on Mr Woolf’s
last letter, and saying:
We will
collate our rental evidence in the near future and place it before you,
although the writer will be away on holiday in two weeks’ time and may well be
unable to deal with the matter before he leaves, due to pressure of other work.
On August 13 Mr
Woolf wrote back offering to settle at £4,425 per annum, and saying he awaited
the defendant’s agents’ further comments. On August 29 the defendant’s agents
wrote saying that the partner concerned was on holiday, but would be returning
to the office in the second week in September and doubtless he would be in
touch with Mr Woolf in due course, and added that they were aware their clients
were not prepared to accept Mr Woolf’s offer. The next communication was
September 20 1984, that is to say after the three-months’ period for the
counternotice had expired. In that communication the defendant’s agents stated
that the plaintiff was out of time to serve a counternotice and [they] would be
seeking to implement the rent review at the figure of £6,250. At no time did
the defendant’s agents, it seems, fulfil their promise of August 9 to collate
and place their rental evidence before the plaintiff.
On October 30
the plaintiff served on the defendant what purported to be a counternotice
pursuant to clause 5(ii)(c) and commenced the present proceedings by
originating summons seeking an extension of time under section 27 of the
Arbitration Act 1950 and claiming that ‘unless such extension was given, undue
hardship would otherwise be caused to the plaintiff’. The hardship was
specified as the fact that the rent specified in the defendant’s notice
exceeded the open market rental value by £1,825. There is no admissible
evidence before me that the rental value is as claimed by the plaintiff.
I must now
read section 27 of the Arbitration Act. That provides:
Where the
terms of an agreement to refer future disputes to arbitration provide that any
claims to which the agreement applies shall be barred unless notice to appoint
an arbitrator is given or an arbitrator is appointed or some other step to
commence arbitration proceedings is taken within a time fixed by the agreement,
and a dispute arises to which the agreement applies, the High Court, if it is
of opinion that in the circumstances of the case undue hardship would otherwise
be caused, and notwithstanding that the time so fixed is expired, may on such
terms, if any, as the justice of the case may require, but without prejudice to
the provisions of any enactment limiting the time for the commencement of
arbitration proceedings, extend the time for such period as it thinks proper.
It is common
ground between the parties that the agreement to which section 27 refers is an
arbitration agreement as defined by section 32 of the Act, and that definition
is that it ‘means a written agreement to submit present or future differences
to arbitration, whether an arbitrator is named therein or not’.
The master
heard the originating summons and refused to extend time because he found there
was no arbitration agreement within section 27 of the Arbitration Act until and
unless the counternotice had been given. He added that, if he were wrong on
that, he would have held that the plaintiff had not suffered a financial
hardship out of proportion to his mistake, because when the figures claimed by
the plaintiff were set against the plaintiff’s trading turnover he could not
see hardship and he also took account of what he called the probability of a
successful action for negligence, presumably against Mr Woolf. I am not clear
as to what the learned master was referring when he referred to trading
turnover, still less am I clear that that can be any safe guide to the
financial prosperity of the plaintiff.
From this
decision of the master the plaintiff appeals. Mrs Harrison, appearing for the
plaintiff, submits that here there clearly was an arbitration agreement in the
lease, and that the test of undue hardship imposed by section 27 was also
satisfied.
Mr Dickens,
for the defendant, takes two points against the lease being an arbitration
agreement. First, unless and until the plaintiff elected for arbitration by
serving a counternotice, there was no arbitration agreement and the plaintiff
merely had an unexercised option. Second, an essential element of an
arbitration agreement is the existence of bilateral rights of reference, and
such rights were plainly not present in clause 5(ii)(c), conferring as it did
the right of election on the plaintiff alone. Mr Dickens also submitted that
there was no evidence of undue hardship.
As it seems to
me clear beyond question that there is authority binding on this court which
makes good Mr Dickens’ second submission, I shall go straight to the question
raised by that submission. For that submission Mr Dickens relies on the
decision of the Court of Appeal in Baron v Sunderland Corporation
[1966] 2 QB 56. In that case the schoolteacher plaintiff employed by the
defendant, the local education authority, sued the defendant for additional
salary, which he claimed was due to him in accordance with the provisions of
the Burnham Report. The defendant applied for a stay on the basis of a clause
in the Burnham Report which established a committee of reference for the
determination of any question relating to the interpretation of the Burnham
Report brought forward by a local education authority acting through the
authority’s panel or by any association of teachers acting through the
teachers’ panel. There was thus no right in the plaintiff himself to refer any
question to the committee. At first instance the county court judge granted a
stay under section 4 of the Arbitration Act which allowed a stay against any
party to an arbitration agreement commencing legal proceedings in the circumstances
there specified. The Court of Appeal, in what appears to have been an
unreserved judgment, not surprisingly allowed the appeal. Davies LJ said this
at p 64:
It seems to me
that this is about as unlike an arbitration clause as anything one could imagine.
It is necessary in an arbitration clause that each party shall agree to refer
disputes to arbitration; and it is an essential ingredient of an arbitration
clause that either party may, in the event of a dispute arising, refer it, in
the provided manner, to arbitration. In other words, the clause must give
bilateral rights of reference. The present clause, as I see it, does nothing of
the kind. It provides that the local education authority, acting through the
authorities’ panel, may ‘bring forward’ (to use the words in the report) the
question, or the Association of Teachers, acting through the teachers’ panel,
may do so, or, alternatively, by consent of the chairman, someone else may do
so. In the present case we do not know whether the teacher is a member of the
union or whether the teachers’ panel would be prepared to bring forward his
contention. We do not know whether the chairman would consent to the matter
being brought forward. As I say, there is a complete lack of mutuality in this
matter. Quite apart from that, I cannot, for myself, see that this committee of
22 really resembles anything like an arbitrator or arbitrators plus an umpire.
I think,
therefore, that on the ground on which he decided this case the judge was
wrong.
Davies LJ then
went on to deal with another point.
Russell LJ, in
his brief judgment, agreed but did not refer to the grounds which I have cited
from Davies LJ’s judgment.
Salmon LJ also
agreed, and said this at p 65:
The judge
approached this case as if section V of the Burnham Report were an arbitration
clause which is written into the contract of service between the teacher and
the local authority by the relevant statutory instrument. For my part, in spite
of the valiant attempts of Mr Percy
who was
counsel for the defendant
to persuade
us to the contrary, I think that this is the wrong approach, and I agree
entirely with the reasons given by Davies LJ for concluding that the judge’s
view is not tenable.
There is,
therefore, in that case clearly a ratio decidendi (though there are
others too) that ‘it is an essential ingredient of an arbitration clause that
either party may refer [a dispute arising] to arbitration, and that the clause
must give bilateral rights of reference’; and all this was said in the context
of what was meant by an arbitration agreement for the purposes of the
Arbitration Act.
There are
powerful criticisms of the relevant part of the decision of the Court of Appeal
in Russell on Arbitration 20th ed pp 38 and following, and Mustill
and Boyd’s Commercial Arbitration (1982) p 52. But unless it can be shown
that this part of the ratio decidendi of the Court of Appeal has been
overruled or there are other inconsistent decisions of the Court of Appeal
which permit me to prefer the ratio decidendi in such other decisions of
equal authority, then, whatever my personal views on the matter, I must loyally
accept the ratio of Baron. I would add that Baron was followed by
the Delhi High Court in Union of India v Bharat Engineering
Corporation ILR
so far as my decision is concerned.
Mrs Harrison
sought to persuade me that I need not follow the Baron case on a variety
of grounds. First, she submitted that the ratio in question was but one of
several on which the Court of Appeal decided the case. That is true, but it is
elementary jurisprudence that if a court decides on grounds (a), (b) and (c)
each constitutes ratio and is binding on an inferior court. It is not
permissible for me as the inferior court to pick and choose which I prefer.
Second, she submitted that the Baron case should be limited to its own
facts. The relevant part of Davies LJ’s judgment constituted a statement of
principle on the meaning of a term in the Arbitration Act. Having stated his
interpretation of the essential ingredient of an arbitration agreement, he then
applied that principle to the facts. The facts cannot alter the ratio. Then Mrs
Harrison said that the ratio was inconsistent with two subsequent Court of Appeal
cases.
One was Amalgamated
Estates Ltd v Joystretch Manufacturing Ltd (1980) 257 EG 489, [1981]
1 EGLR 96. In that case there was a rent-review clause which bore similarity to
the present rent-review clause, in that it provided in clause 3(a) for a landlord’s
notice specifying the proposed rent and in default of agreement it provided for
a reference to an arbitrator ‘at the election of the tenant by a counternotice
served not later than three months after the landlord’s trigger notice, time
being expressly made of the essence’. On December 8 1978 the landlord served
his notice specifying his proposed rent. On December 12 1978 the tenant replied
disagreeing with the rent increase proposed by the landlord. Two points were
taken and needed to be decided by the court. One was, should there be implied
into clause 3(a) words to the effect that the sum specified by the landlord
should be a bona fide and genuine pre-estimate of the open market rental value;
and, second, was the tenant’s letter of December 12 1978 a counternotice under
the clause providing for arbitration at the election of the tenant. Lawton LJ
at p 491 said this:
It is worthy
of note that, after the demand for rent at the new rate, which was made on
April 19 1979, the tenants did not seek the relief which, in my judgment, would
have been available to them under section 27 of the Arbitration Act 1950.
Then he set
out the section and continued:
That section
is of considerable importance, not only in relation to the construction and
effect of the letter of December 12 but to one of Mr de la Piquerie’s arguments
And I pause to
say that Mr de la Piquerie appeared on behalf of the appellant tenants
about the
need to imply a term. He laid great stress on the fact that the lease in
subclause 3(a) fixes the tenant with notice, even though he has not in fact
received the notice of the rent which the landlord wishes to charge him. But,
as was pointed out by Mr Hague
counsel for
the respondent landlord
when the
tenant was asked to pay the increased rent after the expiration of the three
months, he could have come to the court under section 27 and have applied for
an extension of time. The tenants in this case accept that they did receive
notice. They could have come to the court, even if they had not appreciated at
first what their rights were under clause 3(c); but they did not and, in those
circumstances, they cannot now complain about the operation of clause 3(c).
Thus Lawton LJ,
in dealing with the arguments that were put by the tenants, refers to section
27 as being applicable even though it was a case like the present, where there
were no bilateral rights of reference.
Templeman LJ
also referred to section 27, but only in passing and, to my mind, using
language which indicated a somewhat tentative view. He said this:
Apart
altogether from the provisions of section 27 of the Arbitration Act 1950, which
appear to give the tenant a remedy in appropriate circumstances, . . .
and then he
goes on to deal with another point. It cannot be said that the applicability of
section 27 was part of his ratio decidendi. O’Connor LJ, the third judge
of the Court of Appeal in the case, did not refer to section 27. I am,
therefore, quite at a loss to see how it can be said that that decision (in
which the Baron case was not considered) is a decision of the Court of
Appeal enabling me to ignore the Baron case.
The second
Court of Appeal authority relied on by Mrs Harrison was Consolidated
Investment & Contracting Co v Saponaria Shipping Co Ltd [1978] 1
WLR 986. A charterparty provided for arbitration and it also incorporated a
provision, Article III, r6 of the Hague Rules, that ‘in any event, the carrier
and the ship shall be discharged from all liability in respect of loss or
damage unless suit is brought within one year after delivery of the goods or
the date when the goods should have been delivered’. Section 27 was held
applicable. Mrs Harrison never in fact referred me to the wording of the
arbitration clause, which does not appear in the report. She was content to
accept that it provided for bilateral rights of reference. But, she said, it
was obvious that where there was a time-limit provided for in the Hague Rules,
which had expired, it would be for a party other than the carrier and the
shipowner to make the application seeking an extension of the time-limit. I
cannot see how this case can possibly amount to a decision enabling me to
prefer it to Baron. Ex concessis there were bilateral rights of
reference, and the fact that one party rather than another is the likely
referror pursuant to an arbitration clause is neither here nor there.
Next, Mrs
Harrison said that to treat a lease as being the equivalent of a unilateral
right in the form of an option to refer a dispute to arbitration is
inconsistent with the decision of the House of Lords in the case of United
Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904. She
referred me to a passage in the speech of Lord Diplock, at p 930, where he
disagrees with the previously suggested view that a rent-review clause
conferred on the landlord a unilateral option for the exercise of which time
was of the essence. But Lord Diplock was not saying that there could not be an
option or individual right exercisable by only one of the parties in the lease,
as he makes clear on p 929; and it is plain beyond argument that the tenant did
have a unilateral right in the present case to elect to go to arbitration.
Mrs Harrison
also submitted ‘that the expression ‘at the election of the lessee by
counternotice’ is to be regarded as a mere piece of machinery or a statement or
a notification that a dispute exists, and that in those circumstances both
parties have agreed that there should be arbitration’. I regret that that seems
to me to fly in the face of the clear language of the clause the effect of
which is that if and only if the tenant elects, then the matter will go to
arbitration.
In the result,
it seems to me that I am plainly bound by the ratio decidendi in the Baron
case and I am compelled to hold that here there is no arbitration agreement
because there are not bilateral rights of reference. That conclusion renders it
unnecessary for me to consider Mr Dickens’ alternative argument against there
being an arbitration agreement, and I think it undesirable that I should
express obiter views on the point.
It may,
however, assist, if I were to express my views briefly on the question of undue
hardship, if I had been able to reach a conclusion other than the one to which
I have said I have been compelled on the arbitration agreement point. Subject
to the evidential point, I would not have had any hesitation whatever in saying
that undue hardship had been shown in the present case. Hardship is caused when
a justifiable claim which may succeed is barred by a time-limit. Undue hardship
is caused when that hardship is not warranted by the circumstances. I cannot
see that the cashflow of a trading applicant, which can never be a safe guide
to the means of the applicant or otherwise to his prosperity, is a decisive
matter in relation to the consideration of the exercise of discretion.
Otherwise, every large company or wealthy individual would be unable to invoke
section 27, however monstrous the circumstances. In my judgment, it is
permissible to take account of the probability of an applicant recovering from
a third party in negligence, but in the present case I do not see how the
learned master was able to reach the conclusion that he did in relation to a
possible claim against Mr Woolf. I have already referred to the limits on the
instructions to Mr Woolf that he was instructed merely to negotiate, and it seems
to me I would be speculating to say that there was a probability of any
recovery from Mr Woolf, particularly in the circumstances which I have already
rehearsed as to the course of the negotiations. I have in mind especially the
failure by the defendant’s agents to honour their promise on August 9 to place
their rental evidence before Mr Woolf. For my part, I would have thought there
was ground for excusing the failure to serve a notice within the time-limit in
view of the course of those negotiations. Further, the delay was slight, a
matter of less than two months, and no hardship whatever has been shown to have
been suffered by the defendant. Accordingly, subject only to the evidential
point, and subject also to a possible term in relation to interest, so as to
compensate the defendant for being out of pocket for the rent to which he would
otherwise be entitled as a result of the delay in going to arbitration, I would
have granted the application if I had held that there was an arbitration
agreement.
The evidential
point that Mr Dickens takes is that there is no evidence before me that the
rent claimed by the plaintiff to be the true market value is the proper rent,
nor indeed that it is the plaintiff’s belief that it is the proper rent. Mrs
Harrison submits that it is sufficient that a claim should have been made. In
my judgment, it is appropriate that there is evidence on this point so that the
court can be satisfied that a real point needs to be litigated, otherwise a
mere claim could have been based on wholly false and unreal premises. However,
had I reached a different conclusion on the arbitration point, I would have
been minded to allow the application, subject to the filing of affidavit
evidence confirming what is at the moment mere hearsay as to Mr Woolf’s views
in an affidavit not by Mr Woolf. In the event, of course, the point does not
call for decision.
The appeal
was dismissed with costs. Leave to appeal was given, if it was necessary.
