A recent case highlighted how Calderbank offers can be used in lease renewal disputes. Faiza Sorongi and Nicholas Smith consider the issues
Key points
• In considering how a Calderbank letter will influence the decision on an award of costs, the basic test is whether the claimant achieved more by rejecting the offer and continuing with the proceedings than he would have achieved if the offer was accepted.
• As a general rule, in 1954 Act lease renewal claims, a Calderbank offer will be compared to the market conditions at the valuation date of the rent awarded (whether that is the date of the award or court order or some other date agreed ?by the parties) rather than those conditions in place at the date of the Calderbank offer.
• In cases where the valuation date is ?the date of the award or court order, the party making a Calderbank offer should keep in mind changing market conditions and consider whether the value of the offer will remain relevant if rental values change.
Litigating lease renewal disputes can ?be costly since both sides can incur legal and surveyors’ costs, often over a significant period of time. One tactical way to limit or seek protection from ?costs is to make a Calderbank offer to ?the other side.
A “Calderbank offer”, derived from the Court of Appeal divorce case Calderbank v Calderbank [1975] 3 WLR 586, is a letter expressed to be an offer made “without prejudice save as to costs”. The effect is that the court or arbitrator will be unable to refer to the offer except when it is considering the issue of costs at the end of the proceedings.
In considering how a Calderbank letter will influence the decision on an award of costs, the basic test is whether the claimant achieved more by rejecting the offer and continuing with the proceedings than he would have achieved if the offer were accepted. If the claimant in the end has not achieved more than he would have achieved by accepting the offer, it is reasonable that the claimant should be ordered to pay the respondent’s costs after that date. If the claimant has achieved more by continuing, the respondent should pay the costs throughout.
Centreland Management LLP v HSBC Bank Pension Trust (UK) Ltd (2013), unreported, raised a number of interesting questions regarding Calderbank offers in the context of rent-only 1954 Act disputes and Vos J has provided useful guidance as to what an arbitrator should take into account when considering whether a Calderbank offer is to be viewed as a winning or losing offer.
Background to Centreland
The parties had agreed the terms of a lease renewal (including a backdated contractual term and rent commencement date) except for the rent. They referred the issue of rent to an arbitrator under Professional Arbitration on Court Terms (PACT), a scheme offered by the RICS and the Law Society as a form of alternative dispute resolution for lease renewal disputes.
The arbitration process took many months, at the end of which the arbitrator awarded a rent of £69,000 pa. The tenant’s Calderbank offer, made eight months prior to the date of the final award, was for £68,000 pa. A costs award was subsequently made under section 61 of the Arbitration Act 1996, under which each party was to bear its own costs, together with sharing the arbitrator’s costs equally.
Centreland’s appeal
The tenant appealed against the costs award under section 69 of the 1996 Act. The tenant argued that the arbitrator should have found that the tenant had made a winning offer, as the offer should have been contrasted not with the rent as awarded, but with the market rent at the date the offer was made, some eight months before.
Based on the material before the arbitrator, the market rent at the date of the offer would have produced a rent of under £68,000 pa. The tenant took the view that the arbitrator should have compared the Calderbank offer to the market rent as at the date of that offer rather than the rent awarded.
In practical terms, this would have required a time adjustment to the arbitrator’s award of £69,000 pa so as to strip out the element of that figure that was attributable to the rise in rental value since the date of the offer. Had the arbitrator done so, he would have found that the tenant’s Calderbank offer was better than the rent that would have been awarded by the arbitrator at the date of the offer, thereby making the tenant’s offer a successful one.
The court’s decision
The key question was whether the successful party had achieved more by rejecting the offer and going on with the arbitration than would have been achieved had the offer been accepted (as per Tramountana Armadora SA v Atlantic Shipping Co SA (The Vorros) [1978] 2 All ER 870).
Vos J held that there was no requirement at law to make the assessment as contended for by the tenant. The arbitrator had been right not to compare the Calderbank offer to the market rent at the date of the offer; the offer should be viewed as an offer for a rent as at the valuation date, being the date of the arbitrator’s award, rather than some earlier date.
The landlord had done better financially overall (especially having regard to the retrospective rent commencement date as agreed by the parties), in rejecting the offer and proceeding with the arbitration. Consequently, the arbitrator had been justified in regarding the offer made as a losing offer.
The tenant’s appeal was dismissed.
Ignore at your peril
The lease renewal process can be lengthy and protracted. In a fluctuating market, the parties should be aware that although their Calderbank offer may be a genuine offer to settle at the date it is made, the rent proposed may become out of date and the parties’ protection as to costs may fall away. Likewise, the opposing party may choose not to accept a valid offer at the time it is made because they know that the final award or court hearing is some months away, by which time they expect market rents to have moved in their favour.
This case acts as a strong reminder ?that one cannot ignore the effect of changing market conditions on the ?“real value” of an offer of rent made by way of a Calderbank offer in a lease renewal claim, especially where costs protection is a priority.
Faiza Sorongi is a property litigation associate at Stephenson Harwood LLP and Nicholas Smith is a director in ?Jones Lang LaSalle’s West End lease advisory team
