Arbitration Act 1979, section 1(3)(b) — Arbitration under rent review clause in lease of shop — Application by lessors to court for leave to appeal on a question of law arising out of award — Test to be applied by court in deciding whether to give leave to appeal — Lease provided for the current market rental value for the purposes of the rent review to be determined, in default of agreement between the parties, by an arbitrator appointed by the president of the RICS — The applicants complained about the way in which the arbitrator had dealt with a particular ‘comparable’ in arriving at his determination — The current market rental value of the subject shop was that of a shop with substantial fixtures and fittings — The ‘comparable’ in question was another shop in the same shopping centre let for a term of 20 years at a rent of £7,500 per annum with a premium of £9,000 paid for the landlord’s fittings — The arbitrator in valuing the subject property had, in agreement with the submissions of the lessees’ surveyors, but contrary to those of the lessors’ surveyors, disregarded the premium of £9,000 paid in respect of the ‘comparable’ — The point of law raised by the applicants was that there was no justification for this attitude — It was argued on behalf of the lessees that the point taken by the lessors was not a point of law at all but one of valuation practice — However, the question whether the arbitrator was entitled as a matter of law to deal with the premium in the way that he did was the very question which, if leave to appeal were given, would have to be decided by the judge hearing the appeal — The present issue before Warner J was what test should be applied in deciding whether to give leave to appeal — Held, applying the test adopted by the Vice-Chancellor in Lucas Industries plc v Welsh Development Agency, and distinguishing the cases of The Nema and The Antaios, that the question was whether he was left in real doubt as to whether the arbitrator was right in law — The answer to that was ‘yes’ — Following further the Vice-Chancellor’s guidance, Warner J did not state his reasons for this conclusion — He was satisfied, however, as required by section 1(4) of the 1979 Act, that the determination of the question of law concerned could substantially affect the rights of one of the parties, namely, the lessors, if only because there were pending rent reviews in relation to 11 other shops in the centre — Finally, Warner J gave leave to appeal to the Court of Appeal against his decision, because a question of principle was involved, that is, whether in a rent review case, where the dispute was not as to the interpretation of the review clause itself, as it was in the Lucas Industries case, it was nevertheless correct to apply the Vice-Chancellor’s test rather than those laid down in The Antaios and The Nema
The following
cases are referred to in this report.
Antaios
Compania Naviera SA v Salen Rederierna AB
[1985] AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229, HL
Lucas
Industries plc v Welsh Development Agency [1986]
Ch 500; [1986] 3 WLR 80; [1986] 2 All ER 858; [1986] 1 EGLR 147; (1986) 278 EG
878
Pioneer
Shipping v BTP Tioxide (‘The Nema’) [1982]
AC 724; [1981] 3 WLR 292; [1981] 2 All ER 1030, HL
This was an
application by Warrington and Runcorn Development Corporation, lessors of a
shop at 31 Dewhurst Road, in Birchwood Shopping Centre, Warrington, for leave
to appeal under section 1(3)(b) of the Arbitration Act 1979 on a question of
law arising out of the award of Mr J G Fifield FRICS under a rent review clause
in the lease of the property to the respondents, Greggs plc.
John M Male
(instructed by Speechly Bircham) appeared on behalf of the applicants; John V
Martin (instructed by Maughan & Hall, of Newcastle upon Tyne) represented
the respondents.
Giving judgment,
WARNER J said: This is an application under section 1(3)(b) of the Arbitration
Act 1979 for leave to appeal on a question of law arising out of an award made
on June 10 1986 by Mr J G Fifield, a Fellow of the Royal Institution of
Chartered Surveyors, as arbitrator under a rent review clause contained in a
lease granted by the applicant, the Warrington and Runcorn Development
Corporation (which I will call ‘the corporation’) to the respondent, Greggs plc
(which I will call ‘Greggs’). The lease, which was dated June 2 1981, was for a
term of 25 years from January 27 1981. The premises thereby demised were a
shop, 31 Dewhurst Road, in a modern shopping centre built by the corporation in
Warrington which is called the Birchwood Shopping Centre. The rent review
clause provides for rent reviews in the fifth and each subsequent fifth year of
the term and that for the purposes of each review the current market rental
value of the demised premises shall, in default of agreement between the
parties, be determined by an arbitrator appointed by the president of the Royal
Institution of Chartered Surveyors. Mr Fifield was, it appears, actually
appointed by a vicepresident of that institution, but nothing turns on that.
Mr Fifield
determined that the rent payable for 31 Dewhurst Road with effect from January
27 1986 should be £7,300 pa, which was rather more than had been contended for
on behalf of Greggs (which was £6,000) but substantially less than had been
contended for on behalf of the corporation (which was £11,000). Mr Fifield
reached his decision on the basis of two rounds of written submissions by the
parties’ respective surveyors, and of inspections that he himself made of the
demised premises and of the premises cited to him by the parties as
‘comparables’. There was no cross-examination of the parties’ surveyors. The
suggested comparables were five other shops in the same shopping centre. The
basis of the corporation’s application is the way in which Mr Fifield dealt
with one of those comparables, 19 Dewhurst Road, of which the corporation is
also the owner. It is common ground, so I understand, that no 19 was relet in
the open market by the corporation itself on March 4 1985 as a fitted-out shop
to a tenant called Bianca Needlecraft for the retail sale of wool and related
items and that the previous tenant of that shop had been in the same trade.
In considering
the submissions of the parties, and the decision of Mr Fifield relating to 19
Dewhurst Road, one has to bear in mind that, as a result of the combined effect
of a provision in the rent review clause itself and of an agreement between the
parties which preceded the lease, the relevant current market rental value of
no 31
fixtures and fittings which were listed in a schedule to that agreement and
which were put in by Greggs.
No 19 Dewhurst
Road was cited as a comparable by the corporation’s surveyor (who was in fact
its chief estates officer) in his initial written submissions. He mentioned,
among other things, that those premises had been let to Bianca Needlecraft by a
lease for a term of 20 years from March 4 1985 at a rent of £7,500 and that a
premium of £9,000 had been paid by the lessee for landlord’s fittings on the
signing of the lease. In working out the rental value of no 19 for the purposes
of comparison he took the premium into account.
Greggs’
surveyor had not relied on no 19 as a comparable in his initial submissions. In
his subsequent submissions commenting on the initial submissions of the
corporation’s surveyor, he expressed the opinion that there was no benefit to
be derived from consideration of no 19 as a comparable because the information
given by the corporation’s surveyor about it was, and I quote, ‘wholly
inadequate’. He pointed out that, and I quote again, ‘premiums are paid for a
variety of reasons, not always relating to value’. While acknowledging, after
having spoken to the tenant, that ‘undoubtedly, in this case the premium
related to cost and, specifically, the cost of fitting out the unit’, he added:
‘However, this unit was formerly occupied by an identical trader and part of
the premium must relate to goodwill.’
I must now, I
fear, use some more surveyors’ jargon. One basis on which surveyors estimate
the rental value of a shop is known, so it appears, as ‘devaluing to zone A’,
which means, so far as I can understand and so far as is relevant, ascertaining
the rental value of the shop in pounds per sq ft by reference to the value of
the front part of it. Mr Fifield, at the beginning of the statement of his
reasons for his award, announced that he would adopt that method.
The
corporation’s surveyor in his submissions had, taking into account the premium,
reached a rental value for no 19 ‘in terms of zone A’ of £14.95 per sq ft.
Ignoring the premium it would have been £10.44 per sq ft.
In his
statement of reasons Mr Fifield gave brief details of the five ‘comparables’
that had been cited to him and indicated why he proposed to discard one of
them. He then dealt in successive paragraphs with a number of specific points.
One of those paragraphs is in these terms:
The Landlords
have amortised the premium of £9,000 in respect of 19 Dewhurst Road. The
Tenant’s Surveyors have stated that this should be totally disregarded, as it
was a payment for fixtures, fittings and, possibly, goodwill, as the premises
were previously occupied by a similar trader. I agree with the Tenant’s
Surveyors and I have not made any allowance in my valuation.
Mr Fifield
then commented on each of the four ‘comparables’ that he had retained. He took
one of them, a letting of a shell unit at a rental value in terms of zone A of
£8.32, ‘as the minimum’, by which I understand him to have meant the bottom of
the bracket by reference to which he would assess the rent for no 31. On no 19
he commented as follows:
Devaluing to
Zone A £10.44 plus a premium of £9,000 some ten months before this review. I
have already stated earlier that I agree with the Tenant’s Surveyors that the
premium should be ignored. Both parties agree that this shop is better located
than the subject premises and I have, therefore, taken this rent, making an
allowance for ‘age’, as the maximum.
Mr Fifield
concluded that the appropriate rate for no 31 was ‘zone A £10’ plus an
allowance of 7 1/2% for the fact that no 31 has a return frontage.
The point of
law that the corporation wishes to take is that there was, in the
circumstances, no justification for Mr Fifield’s ignoring the premium paid in
respect of no 19, or at all events no justification for his ignoring it
completely. Mr Male, who appears for the corporation, submits that, moreover,
in so doing Mr Fifield went outside the evidence because Greggs’ surveyor had
not said that the premium should be ignored but that, because of the
uncertainties concerning the premium, no 19 should not be used as a
‘comparable’ at all. Mr Male concedes that that point of law is not accurately
formulated in the notice of motion that is before me and that if I grant leave
to appeal he will need leave to amend it.
It is material
that there are at present pending rent reviews concerning 11 other shops owned
by the corporation in the Birchwood Shopping Centre. In one of those cases Mr
Fifield has been appointed arbitrator. In the other 10 no arbitrator has yet
been appointed, but it is common ground that Mr Fifield may well be appointed
in each of them, because he is likely to be regarded by the president of the
Royal Institution of Chartered Surveyors (or by its vice-president) as
particularly qualified to deal with them. Even if Mr Fifield is not appointed,
his decision in the present case, if it stands, is likely to be used as
evidence in those other cases — see Bernstein & Reynolds’ Handbook of
Rent Review, p 815, para 8-5. So this is by no means a ‘one-off’ case from
the point of view of the corporation.
Mr Martin, who
appears for Greggs, submits in the first place that the point taken by the
corporation is not a point of law at all, but one of valuation practice. In support
of that submission Mr Martin referred me to the paragraph headed ‘Premiums’ at
p 816 of Bernstein & Reynolds’ Handbook of Rent Review. I will not
take up time reading that paragraph now (though I have read it over and over
again) because it seems to me that the question whether Mr Fifield was
entitled, as a matter of law, to deal with the premium here in the way that he
did is the very question that, if I give leave to appeal, the judge who hears
the appeal will have to determine. So I turn to the question what is the test
that I should apply in deciding whether to give leave to appeal.
As to that, Mr
Male submits that the correct test is that adopted by the Vice-Chancellor in Lucas
Industries plc v Welsh Development Agency [1986] 3 WLR 80*, ie
whether I am left in real doubt whether the arbitrator was right in law. Mr
Martin submits that that case is distinguishable and that I should apply the
test laid down by the House of Lords in The Nema [1982] AC 724 and The
Antaios [1985] AC 191, ie whether I am satisfied that there is a strong prima
facie case that the arbitrator was wrong in law. Mr Martin does not suggest
that I should apply the even more stringent test laid down by the House of
Lords in The Nema and The Antaios for the ‘one-off’ type of case,
ie whether I am satisfied that the arbitrator was obviously wrong.
*Editor’s
note: Also reported at [1986] 1 EGLR 147; (1986) 278 EG 878.
Mr Martin
points out, quite rightly, that none of the three considerations mentioned by
the Vice-Chancellor at p 83 B-E of the report of the Lucas Industries
case is material here, because we are not here concerned with the
interpretation of the rent review clause itself. In particular, the third
consideration, which the Vice-Chancellor regarded as the most important, does
not apply. The decision in this case will not be material on future reviews
between the same parties under the same lease, because by the time the next
review is due under that lease the letting of no 19 on March 4 1985 will be far
too remote in time to be acceptable as a ‘comparable’. Nor can Mr Fifield’s
decision give rise to any material issue estoppel.
The choice
before me is between holding, as Mr Martin urges me to do, that the test
adopted by the Vice-Chancellor in the Lucas Industries case is
applicable only in the type of case with which he was dealing, that is a case
turning on the interpretation of the rent review clause itself, and holding, as
Mr Male urges me to do, that that test is applicable to any arbitration arising
from a rent review clause, with the possible exception of a true ‘one-off’
case.
I have come to
the conclusion that the right course for me to adopt is that urged upon me by
Mr Male. The considerations that have led me to that conclusion are these.
First, I
respectfully agree with the Vice-Chancellor that neither in The Nema nor
in The Antaios was the House of Lords considering problems raised by
rent review clauses. A close examination of the speech of Lord Diplock in The
Nema evinces that he, and one must presume the other members of the House
of Lords who agreed with him, had in mind primarily arbitrations arising from
contracts made in the course of what may be described broadly as international
commerce. That is apparent from the whole tenor of his speech, from the first
paragraph onwards. The actual principle laid down by that decision was stated
by Lord Diplock at p 739 F-H of the report in these terms:
The judicial
discretion conferred by subsection (3)(b) to refuse leave to appeal from an
arbitrator’s award in the face of an objection by any of the parties to the
reference is in terms unfettered; but it must be exercised judicially; and
this, in the case of a dispute that parties have agreed to submit to
arbitration, involves deciding between the rival merits of assured finality on
the one hand and upon the other the resolution of doubts as to the accuracy of
the legal reasoning followed by the arbitrator in the course of arriving at his
award, having regard in that assessment to the nature and circumstances of the
particular dispute.
It seems to me
that the tests, or guidelines, laid down later in Lord Diplock’s speech (at pp
742-743) are simply those appropriate in the kind of dispute with which the
House was there primarily concerned.
passage in Lord Diplock’s speech in The Antaios where (at p 200 of the
report) he said, of the guidelines laid down in The Nema:
Like all
guidelines as to how judicial discretion should be exercised they are not
intended to be all-embracing or immutable, but subject to adaptation to match
changes in practices when these occur or to refinement to meet problems of
kinds that were not foreseen, and are not covered by, what was said by this
House in The Nema.
Second, the
point made by the Vice-Chancellor that the need to avoid delay and expense is
possibly not as great in rent review arbitrations as it is in ‘commercial’
arbitrations is valid for all rent review arbitrations, not only for those
where the point at issue turns on the interpretation of the rent review clause.
Third, it
seems to me that if I were to draw the distinction suggested by Mr Martin I
should be laying the foundations for copious and time-consuming arguments in
future cases arising from rent review clauses as to whether they fell into one
category or the other. It is not difficult to imagine the sort of fine
distinctions that might come to be made as a result. It seems to me far better
that it should be beyond argument that in all rent review cases (except
possibly true ‘one-off’ cases, as to which I say nothing) the discretion
conferred on the court by section 1(3)(b) of the Arbitration Act 1979 will be
exercised in accordance with the principle laid down by the Vice-Chancellor in
the Lucas Industries case.
I accordingly
ask myself whether, in this case, I am left in real doubt whether the
arbitrator was right in law. The answer is ‘yes’. Following further the
guidance of the Vice-Chancellor in the Lucas Industries case, I refrain
from stating my reasons for saying that. I am also satisfied (as required by
section 1(4) of the Act) that the determination of the question of law
concerned could substantially affect the rights of one of the parties, namely
the corporation, if only because of those 11 other cases. I therefore grant the
leave to appeal sought.
After
considering submissions as to leave to appeal against his decision to the Court
of Appeal, WARNER J said: I think this is obviously
a case where I should grant leave to appeal to the Court of Appeal against my
decision. Since I am required, it appears, to give my reasons for doing that, I
shall do so briefly. They are the reasons that Mr Martin has put forward in
asking for that leave, namely that my decision does involve a question of
principle, that is to say whether, in a case arising under a rent review
clause, where the dispute is not as to the interpretation of the rent review
clause itself, as it was in the Lucas Industries case, it is none the
less right to apply the test laid down by the Vice-Chancellor in that case
rather than the tests laid down in The Antaios and The Nema.
Having regard
to the vast number of rent review clauses and of disputes arising out of them
that there are in this country today, that is obviously a question of fairly
wide importance.
