Arbitration Act 1950, section 23(1) — Application by landlords to set aside award and to remove arbitrator appointed to determine rent under a rent review clause in a lease of shop premises — Judge’s comments on inappropriateness of the term ‘misconduct’ to describe what is in most cases ‘a procedural lapse of a kind that any arbitrator or magistrate or judge may be guilty of’ — In the present case there was no criticism of the professional integrity, impartiality or competence of the arbitrator — The complaint made by the applicants against the award was that, as reasons given for the award were alleged to show, the arbitrator had been influenced in his decision by matters which had not been raised by the parties and had not been put to the parties for their observations — Two matters in particular were said to be open to objection on this ground — The first was that the arbitrator had described the premises as a developer’s shell which would require considerable expenditure to bring up to a normal standard — The second was that, although both parties were agreed on an ‘equated zone A’ approach, the arbitrator said that mere extrapolation of the zone A values from small premises to large would give a wholly false valuation and that most tenants do not base their rental offers on an analysis of zoned areas but on wholly different criteria — Held that, although there was no personal reflection on the arbitrator, the landlords’ case against the award had been made out — Matters likely to form the subject of the decision, in so far as they are specific matters, should be exposed for the comments and submissions of the parties — Important statement by judge as to the distinction between the use of the arbitrator’s expertise in respect of general matters and the specific matters which must be put to the parties — Order made to set aside award and to remove arbitrator
This was an application by landlords, Zermalt Holdings SA, to set aside the award and to remove the arbitrator in the case of an arbitration concerning the open market rent of shop premises at 17 Chepstow Corner, London W2, of which the respondents, Nu-Life Upholstery Repairs Ltd, were the tenants under a 12-year lease. The arbitrator was Mr Leslie Kendall, a Fellow of the Royal Institution of Chartered Surveyors and an Associate of the Chartered Institute of Arbitrators.
Roger J Ellis (instructed by Grangewoods) appeared on behalf of the applicants; D Serota (instructed by Sattin & Co) represented the respondents.
Giving judgment, BINGHAM J said: This is an application under section 23 of the Arbitration Act 1950 to set aside the award of an arbitrator and to remove the arbitrator.
At the outset, and before making any allusion to the facts of the case at all, it is perhaps right to emphasise two things. The first is that, as a matter of general approach, the courts strive to uphold arbitration awards. They do not approach them with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults in awards and with the objective of upsetting or frustrating the process of arbitration. Far from it. The approach is to read an arbitration award in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it. The second point is this. The jurisdiction of the court under section 23 rests on what is, most unfortunately, called ‘misconduct’. That gives the impression that some impropriety or breach of professional conduct or lack of integrity or incompetence is involved. In 99 cases out of 100 an application under section 23 involves nothing of the kind. It involves, usually, merely a procedural lapse of a kind that any arbitrator or magistrate or judge may be guilty of. I should emphasise further, at the outset, that Mr Ellis, for the landlords in this application, disclaims any criticism whatever of the professional integrity, impartiality or competence of the arbitrator in this case.
The case concerns the shop premises on the ground floor and basement at 17 Chepstow Corner, London W2. Those premises were the subject of a lease made on November 18 1980 by the predecessors in title of the present landlords, Zermalt Holdings SA, to Nu-Life Upholstery Repairs Ltd as tenants. The lease was for 12 years at a rent of £7,500 per year with a provision for four-yearly rent reviews, those to be conducted on the usual basis, namely, of what the premises would let for in the open market as between a willing landlord and a willing tenant. The first rent review became due on September 29 1984 and, as the date approached, the parties were unable to agree the new rent for the premises, so accordingly the matter was referred to independent determination. The lease contained the provision that this independent determination could, at the option of the landlord, be made either by an expert or by an arbitrator; a surveyor being envisaged at the tribunal in either event.
In this case Mr Leslie Kendall, who is a Fellow of the Royal Institution of Chartered Surveyors and an Associate of the Chartered Institute of Arbitrators, was approached to decide on the proper rent and he was invited to do so as an arbitrator and not as an expert. The parties were represented by their respective surveyors: a Mr A Reiff, on behalf of the landlords, and a Mr T A Donoff on behalf of the tenants. The landlords were contending that the proper rent to be assessed on the review was a rent of £18,000 per annum, a spectacular increase over the rent reserved by agreement four years earlier, and the tenants were contending for a rent of £8,950. It was agreed that there should be no oral hearing but that the matter should be dealt with by exchange of letters and evidence; and the evidence before me shows that the procedure was expeditiously and properly followed. Letters were exchanged and duly copied to the other parties. Points were raised in correspondence by the arbitrator, again with copies to both parties. A meeting took place at which the arbitrator and the surveyors for both parties were present. Points made by one party were answered in correspondence by the other. Before the award was made the arbitrator inspected the subject premises both internally and externally and he also viewed, externally, certain of the comparable properties relied on. So far as the procedure and conduct of the arbitration is concerned it appears to have been a model both in the expedition with which the matter was conducted and in the scrupulous care with which each party was informed of any exchange between the other and the arbitrator.
Now the approach that was adopted by these parties, through their surveyors, to the question of valuation had a great deal in common. There was agreement as to the area of the basement and as to the proper rate per sq ft for the area of the basement. There was very nearly agreement on the area of the ground floor, the difference between the parties’ measurements being very slight. There was, furthermore, on the face of the documents submitted to the arbitrator, a common use by both parties of a system of valuation apparently known among the professionals as ‘equated zone A’. This formula apparently involves taking the front, or public part, of the shop and calling that zone A; calling the back, or private part, of the shop zone B and dividing by two the area of zone B and adding that half to zone A so as to get what is called ‘equated zone A’. Both parties adopted that approach and both parties adduced evidence of properties that were alleged to be comparable, analysing the rent on that basis. The parties, of course, commented on the comparables adduced and relied on by the other and the papers contain two references to the suggestion that certain rents upon which one or other party relied were higher than they would have been because of the smallness of the property. In a letter of November 13, in which the tenants’ original submissions were set out, it was suggested with reference to one of the comparables that the zone A rental value had a slightly higher value placed on it owing to the small amount of rent passing from the trading position and, furthermore, in a letter of November 15 the tenants’ surveyor commented on one of the landlords’ comparables and said that it had a very small shop frontage by any standards and that this usually raised up the zone A value for such small premises. But, broadly speaking, both parties adopted the equated zone A approach. The argument between them, based on the comparables which they adduced, was as to the proper|page:15| sum in £s per sq ft of the equated zone A. There was, in their submissions to the arbitrator, no difference between them and no general challenge to the correctness of the equated zone A approach.
The criticisms which are made of the award of the arbitrator rest on two of four paragraphs of the reasons which the arbitrator gave for his award. In paragraph 4(a) he said:
I find and hold (a) that the premises, which are used as a workroom on the ground floor and rough storage in the basement, are of very basic finish, viz bare floorboards and high ceilings to the ground floor and emulsioned bare brickwork in basement. They can virtually be described as a developer’s shell and would require considerable expenditure to bring them to a standard normally expected of shop premises.
Now Mr Ellis, who argued the matter for the landlords, contends that that paragraph reads as if the arbitrator is holding that the appropriate rent for these premises should be, to some extent, depressed on account of the state of the premises and the need for considerable expenditure to bring them up to a standard normally expected of shop premises. His complaint is that that is an aspect which was never explored, never referred to by the surveyors on either side, never put by the arbitrator to the surveyors on either side and, indeed, appeared for the first time in the award. It is, he submits, wrong in principle that the outcome of the arbitration should be affected by a matter which has never been in the arena of argument at all.
The arbitrator, who was informed by the tenants’ surveyors of the application to the court, wrote a letter on February 19 of this year in which he dealt with this matter. What he said was this:
Paragraph 4(a) merely describes the physical finish of the premises which was apparent on inspection. Nowhere, either in this paragraph or in the remainder of my award do I state that I have taken into account the condition or state of the premises, neither have I done so, for I entirely agree with paragraph 10 of Mr Reiff’s affidavit, viz ‘that it was obligatory to assume that the premises were properly repaired and used as a high-class retail shop in accordance with the Respondents’ covenants’. In referring to the lack of finishes that one would normally expect to find in shop premises I described them virtually as a developer’s shell and this is a fact which I discovered on inspection. It is perfectly true, as sworn by Mr Reiff, that I did not raise this matter with the parties’ surveyors for their comments, the reason for this is quite simply that my experience tallies to a great extent with Mr Reiff and I agree with most of the opinion he expressed in paragraph 11, viz ‘It is very common when letting shops to let a mere shell and that this fact has little or no effect on the rental to be paid.’ I would not say it has no effect, but it has little effect.
Accordingly, Mr Serota, for the tenants, relies strongly on the arbitrator’s letter and says that one should take that at its face value and accept that the arbitrator paid no attention whatever to the physical state of the premises in deciding the rents.
I have no reason to doubt that the arbitrator means what he says and genuinely believes that the state of the premises did not affect his mind. But I also feel obliged to read the award as it stands and this is one of four paragraphs in which the arbitrator is giving his reasons for the decision which he eventually reached. I am unable to ignore the fact that in addition to merely describing the premises he did make express reference to the need for considerable expenditure to bring them up to a standard normally expected of shop premises and I find it impossible to read this as anything other than an indication that a tenant might wish to pay less for the premises because of this prospective expenditure. Even if I am wrong and misread the arbitrator’s mind, I feel bound to say that, as it stands, paragraph 4(a) looks so much like a reason for the arbitrator’s eventual decision, or part of the reason for his reaching that decision, that justice would not appear to be done if the decision appeared to be affected by something which was never explored in argument at all. The arbitrator does not suggest, and indeed clearly disavows the suggestion, that this is a relevant consideration, and since it clearly appears in the award, as I read it, to have played some part in his thinking, it appears to me to be something which must invalidate the result to which he came.
The second attack which is made rests on paragraph 4(c) of the award, where the arbitrator says:
Whereas the zone A rents analysed by the claimants were the only ones based upon the actual lettings, as opposed to rent reviews, I have no doubt that it would give a wholly false evaluation to merely interpolate them to the much larger subject premises without adjustment and without regard to the resultant rental. Whilst analysis to zone A value is an accepted and useful guide to valuation by professionals it should be realised that most tenants, whether private and untutored or multiple and well advised, base their rental calculations on wholly different criteria which do not necessarily vary with the size of the premises to the same degree as zone A analysis would show.
Mr Ellis criticises those paragraphs because, he says, first the arbitrator expresses the view that mere extrapolation from small premises to large of the zone A values would give a wholly false valuation, which was something not submitted by either party and never argued and never explored and on which his clients had no opportunity to comment and, second, because the arbitrator suggests that the proper approach may rely on wholly different criteria and that, again, is said to have been something that was never argued or submitted or explored. It is a fact that the comparables which both parties adduced were of smaller properties and the argument seems to have been largely confined to determining the right poundage per sq ft for the subject property rather than on argument as to whether zone A values could be extrapolated from smaller to larger properties. This also is something that the arbitrator has dealt with in his letter. He says:
The key words in the first paragraph of 4(c) are ‘without adjustment’. I agree with the comments made by Mr Reiff in the second paragraph of paragraph 16 with the addition that when deciding on the appropriate zone A rate to apply one has regard also to the reliability of the comparables as being a true reflection of rental value and moreover to the differences in size of the respective units. In this particular case, for example, the claimants evidence was based on two properties having areas equated zone A of 335 sq ft and 304 sq ft as compared to the subject premises area equated zone A of 765 sq ft. All I was saying in the second paragraph of 4(c) of my award was that most tenants do not base their rental offers on an analysis to zoned areas but use different criteria. I believe it is for me to decide, as an arbitrator with an expertise in the matter, whether the resultant zone A rental figure, which was almost certainly never in the tenant’s mind when he made his offer, is reliable evidence upon which to base the valuation of other properties. By way of illustration, I know of two shopping schemes where key lettings were achieved prior to the remainder of the scheme coming up for review; the reviews were subsequently settled close to the zone A basis of the new lettings following which some of the units actually came on to the market and could not find assignees at nil premiums or even reverse premiums for a considerable time.
Mr Serota submits that the crux of the arbitrator’s finding comes in paragraph 4(d) where he expressed a preference for the respondents’ evidence of the Chepstow Corner properties. He submits that what the arbitrator has done both in his award and as explained in his letter is no more than any expert can legitimately do to bring his experience to bear on a formula which is submitted for his consideration. The essence of this case, Mr Serota argues, is that the arbitrator preferred the tenants’ values and applied those to the zone A calculation.
I fully accept and understand the difficulties in which an expert finds himself when acting as an arbitrator. There is an unavoidable inclination to rely on one’s own expertise and in respect of general matters that is not only not objectionable but is desirable and a very large part of the reason why an arbitrator with expert qualifications is chosen. Nevertheless, the rules of natural justice do require, even in an arbitration conducted by an expert, that matters which are likely to form the subject of decision, in so far as they are specific matters, should be exposed for the comments and submissions of the parties. If an arbitrator is impressed by a point that has never been raised by either side then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission then again it is his duty to give the parties a chance to comment. If he is to any extent relying on his own personal experience in a specific way then that again is something that he should mention so that it can be explored. It is not right that a decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in the decision against him. That is contrary both to the substance of justice and to its appearance, and on the facts of this case I think that the landlords’ case is made out.
In saying all that, I should emphasise that I am not concerned, and cannot legitimately be concerned, with the rightness of this decision as a decision. That is not a question for me and it is not a question which arises under section 23, which is concerned with procedural propriety. It may very well be that the sum which the arbitrator fixed was an entirely correct sum, and, indeed, an increase of 33% on a rent fixed by consent four years earlier would not seem ungenerous. None the less, I am obliged to give effect to the considerations urged before me on behalf of these landlords and, for the reasons that I have endeavoured to give, I conclude that the award must be set aside and the arbitrator removed, although I again repeat that that drastic sounding order should not be taken as any personal reflection upon him.
I deal with one last matter. The landlords have issued this notice of|page:16| motion one week out of time. They appear to have done that, first, because they gauged the 21 days permitted by the rules from the date on which they received the award rather than the date on which it was published and that they say is why they did not issue the notice of motion in time. 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. This, however, is, in my judgment, such a case and albeit with reluctance I feel it is right to extend the time and make the order that I have indicated.
The order was made for the award to be set aside and the arbitrator removed, the applicants to have the costs of the motion except costs of an application for an extension of time; the costs of the arbitration to be in the discretion of the new arbitrator, if appointed, and otherwise to be the subject of agreement. Liberty for the parties to apply.
