Arbitration–Case stated under Arbitration Act 1950–Rent revision clause in letting of floors in an office block–Provision for arbitration in case of dispute–‘Fair rack rent rental value’ to be determined–Rent had to be fixed having regard to rental values then current and to the provisions of the lease–The lease contained restrictions on change of user and on assignment and underletting–Question whether arbitrator should have regard only to strict terms of lease or whether account could be taken of the possibility that the lessors might agree to relax the restrictions–Held by Court of Appeal, upholding decision of Slynn J, that the arbitrator must fix the rent on the basis of the strict terms of the lease and accordingly at the lower of the two figures mentioned in the case stated
This was an
appeal by the lessors from a decision by Slynn J on May 30 1977 on a case
stated by an arbitrator appointed under the lease by the President of the RICS.
The question raised by the arbitrator was whether in determining the rent of
part of an office block called St Anne House in Wellesley Road and Walpole
Road, Croydon, he was required to value in strict accord with certain
restrictions in the lease as to user and assignment and underletting or could take
account of possible relaxations. The arbitrator was P R S Downham FRICS. The
lessors were Plinth Property Investments Ltd, the present appellants, and the
lessees Mott, Hay & Anderson, a firm of consulting engineers, the present
respondents.
G Godfrey QC
and C Priday (instructed by Berwin Leighton) appeared on behalf of the
appellants; M Essayan QC and O Albery (instructed by Slaughter & May)
represented the respondents.
Giving
judgment, LORD DENNING MR said: This is a case involving the construction of a
rent review clause. A sum of over £300,000 is involved. It is only a short
clause in an underlease. It is an underlease of an office block called St Anne
House in Croydon. The lessors let the ground, third, fourth and eighth floors
of the building to the firm of Mott, Hay & Anderson, who are civil
engineers. The underlease was to run from April 1 1966 to June 21 1984. For the
first 10 years the rent was £32,914 a year. In these days of inflation the
lessors naturally put into an underlease a rent review clause: and, for the
last eight years, from April 1 1976, there was to be a rent review. An
arbitrator was to be appointed by the President of the Royal Institution of
Chartered Surveyors to fix the rent from April 1976. The underlease says–and
these are the important words–‘. . . the amount to be determined by the
arbitrator shall be of such amount as shall in the opinion of the arbitrator
represent the fair rack rental market value for the demised premises.’ Pausing there for a moment, the position is
that, if there had been no special clauses in this underlease affecting the
matter, at the present time the rent would have been fixed at a sum of over
£130,000 a year for these premises, as against the figure in 1966 of £32,914 a
year. The underlease goes on to say that the rent is to be fixed ‘having regard
to rental values of property then current and to the provisions of this
Underlease.’ That is the crux of the
case–‘having regard to . . . the provisions of this Underlease.’
One of the
important provisions of the underlease is a restriction on the tenants ‘not to
use the demised premises or any part thereof or suffer the same to be used
otherwise than as offices . . . in connection with the Lessee’s business of
Consulting Engineers.’ It seems to me
that that restriction would affect very seriously any rent which the lessee
would pay for the premises. He would not pay anywhere near the full market rent
if his use of the premises was restricted to the business of civil engineers.
For instance, he could not underlet them to a chartered accountant or any other
professional person or to a business firm.
I must also
read two other clauses about assigning or underletting. Clause 18(a) says:
‘That there shall not be any assignment underletting or parting with possession
of part only of the demised premises nor any underletting or parting with
possession or control of the demised premises.’
That clause was concerned with assigning part of the premises.
Then clause 18(b) goes on to deal with the assignment of the whole of
the premises. It says: ‘That there shall not be any assignment of the whole of
the demised premises without the previous written licence of the Lessors and
the Superior Lessors such licence not to be unreasonably withheld in the case
of a responsible assignee or underlessee.’
Although the
underlessees could assign the premises with the written licence of the lessors,
that did not affect the clause about user. If they assigned to anybody else,
the assignee would still be subject to the clause that they were not to be used
otherwise than as offices in connection with civil engineering business.
The point
before the arbitrator was this: if there was no restriction and the full market
rental was awarded, the rent would be £130,455, but if there was a restriction
confining it to people who could only use the premises for the business of
civil engineers, the rent would be £89,200. There was the conflict. Was the
rent for the last eight years of the term to be £130,455 a year or only
£89,200? Evidence was given before the
arbitrator by distinguished surveyors on each side and the arbitrator stated a
case for the opinion of the court. It was decided by Slynn J. Both the
arbitrator and the judge ruled in favour of the lower sum of £89,200. The
lessors appeal to this court. They say the correct amount should be the full
£130,455.
I will not
read the detailed questions stated by the arbitrator. No doubt they were framed
by counsel on each side. Mr Godfrey submitted that it is wrong to take the
restriction on user as having much effect on the rent because it was always
open to the lessor to relax it or waive it; and
higher rent from time to time. Mr Godfrey said that he would relax it or waive
it as a matter of business, and he would get a higher rent accordingly.
Accordingly the rent should be fixed at the high sum. I will read the one
important sentence in the case stated: ‘. . . whether the arbitrator can take
into account the fact that the landlord might consent to a change of user
and/or to an underletting of the whole or part of the premises.’ As Brandon LJ pointed out in the course of
the argument, it does not say ‘with or without consideration.’ Looking at it as a matter of practical business,
one has to remember that, owing to this restrictive clause, if the lessees
wanted to use the premises for any other purpose than the business of civil
engineers they would have to get the landlord’s agreement to do so. The
landlord would immediately say, ‘I’m not going to give my consent unless you
make it worth my while. If you pay me a substantial sum, then I’ll give my
consent for these premises to be used for some other business, such as the
business of a chartered accountant; but I am not going to give my consent
unless it is made worth my while.’ That
seems to me obvious as a matter of commercial practice. So this clause
(restricting the user of the premises to the business of consulting civil
engineers) obviously must have a very depressing effect on the rent. No one is
going to take premises of this kind with such a depressing restriction on them
unless there is a considerable discount on the rent. That is the way in which
the arbitrator viewed it. He could not possibly assess the rent on the basis
that a landlord will always relax or waive a clause of this kind wholly
gratuitously. A landlord would never do that unless he was paid a considerable
sum–and how is one to work that sum out?
It is all hypothetical. It is so intangible that, as a practical matter,
it cannot be done. I think the arbitrator was quite entitled to say that this
restrictive clause has such a depressing effect on the rent that the proper
rental value of these premises under the review clause for the succeeding eight
years should only be the figure of £89,200 and not the figure of £130,455.
We have been
referred to some of the cases, and some of the observations in them are quite
interesting, but I do not think it is necessary to go into them. It seems that
the arbitrator and the judge were quite right; and I would dismiss the appeal.
Agreeing, SHAW
LJ said: Mr Godfrey has, if he will allow me to say so, put forward on behalf
of the appellant lessors an argument as spirited and attractive as the terms of
the lease in question permit. But those terms inexorably defeat his submission
that the arbitrator should have taken account of the possibility that the
lessors might have relaxed the restriction on user. The lease says what matters
are to to be taken into account in determining the fair rack rental. They do
not include highly speculative factors, which are incapable of estimation on
any basis such as the chance that the landlord might waive the restriction on
user and, if he does, how much he would require to be paid for so doing.
Slynn J
arrived at the correct conclusion, and I would dismiss the appeal.
Also agreeing,
BRANDON LJ said: I am of the same opinion. It seems to me that when a lease
provides that the arbitrator is to have regard to the provisions of the lease,
it means the provisions that give rights and impose obligations on each of the
parties to it. What the arbitrator has to consider is what those rights and
obligations are on either side and assess the rent in the light of them. He is
not to say to himself ‘Those who have rights may not enforce them and those who
have obligations may not be required to perform them.’ He is to assume that the rights will be
enforced and the obligations will be performed. He is to look at the legal
position of the parties and nothing else.
I therefore
agree with the judgment of the learned judge.
The appeal to
the Court of Appeal was dismissed with costs. The order as to costs made by
Slynn J stood, ie that the defendants (the present respondents) were to have
the costs of the hearing before Slynn J of the case stated and the question of
the costs of the arbitration to be remitted to the arbitrator. Leave to appeal
to the House of Lords was refused.
