Landlord and tenant — Rent review clause in long lease of office block — Appeal from award of arbitrator under section 1(2) of Arbitration Act 1979 on a question of law — Large sums involved in difference between landlords and tenants — Lease provided that the amount to be determined by arbitrator should in his opinion represent a fair yearly rent having regard to rental values current for property let without a premium with vacant possession — Main issue was whether arbitrator was to assume that the building was available for letting with vacant possession (as tenants contended) or whether he was to assume that it was already let (as landlords contended) — On this issue the arbitrator preferred the landlords’ approach, although he allowed a deduction of 10% for size — Lloyd J decided that the tenants’ construction, under which the arbitrator was to assume that the entire building was vacant, was correct — This construction produced a yearly rental of £6,065,000 as compared with the landlords’ figure of £7,451,000 — Tenants’ appeal allowed and arbitrator’s award varied — Leave given to appeal to Court of Appeal
This was an
appeal from the award of an arbitrator, Mr J R King-Smith FRICS, on a question
of law concerning the true construction of a rent review clause in a lease of
an important office block in Bishopsgate in the City of London. The appellants,
under section 1(2) of the Arbitration Act 1979, were 99 Bishopsgate Ltd, the
tenants under a lease of 98 years from September 29 1975. The respondents to
this appeal, the Prudential Assurance Co Ltd, were the landlords. In addition
to the appeal by 99 Bishopsgate Ltd there was a motion by Prudential to remit
the award under section 22 of the Arbitration Act 1950.
T L G Cullen
QC and Miss H Williamson (instructed by Stephenson Harwood) appeared on behalf
of the appellants; Ronald Bernstein QC and Christopher Priday (instructed by R
J Hunter) represented the respondents.
Giving a
reserved judgment, LLOYD J said: This is an appeal from an award of an
arbitrator, Mr J R King-Smith, on a question of law. The case concerns the true
construction of a rent review clause in a lease. The lease relates to a
prominent office block in Bishopsgate, consisting of two lower ground floors,
ground floor, mezzanine and 26 other floors. The office block was completed in
1975. The lease is dated September 29 1975. The landlords named in the lease
are the Prudential Assurance Co Ltd. They were the claimants in the
arbitration. The tenants named in the lease are Bishopsgate Developments Ltd.
The lease was subsequently assigned to 99 Bishopsgate Ltd, a subsidiary of the
Hong Kong Shanghai Bank Ltd. 99 Bishopsgate Ltd were the respondents in the
arbitration and are the appellants in this appeal.
The lease is
described in the award as a ‘speculative development’ lease. It provides for
the yearly rental value of the premises to be shared on an agreed basis. The
initial yearly rental value was agreed at £3,028,000. The initial rent was
£1,531,250, representing 50.6% of the initial yearly rental value. The initial
rent was designed to give the landlords the required return on their capital
outlay.
The duration
of the lease was 98 years from September 29 1975. It provides for rent reviews
every seven years. The first rent review fell due on September 29 1982. At each
rent review the rent may be revised upwards so as to maintain the landlords’
proportion of the yearly rental value, namely, 50.6%. Unfortunately the parties
were unable to agree the yearly rental value at the relevant date, namely,
March 25 1982. So the matter was referred to arbitration. By clause 1(d) of the
lease the arbitrator was required to determine the rent as follows:
. . . the
amount to be determined by the arbitrator shall be the amount which shall in
his opinion represent a fair yearly rent for the demised premises . . . having
regard to rental values current . . . for property let without a premium with
vacant possession and to the provisions of this Lease (other than the rent
hereby reserved) . . . Provided also that the arbitrator shall take no account
of (i) any effect on rent of any goodwill attributable to the demised premises
by reason of any trade or business carried on therein and (ii) any increase in
rental value of the demised premises solely attributable to the existence . . .
of any structural addition to the existing building . . .
The arbitrator
heard evidence and argument over many days. The figure at which he arrived for
the yearly rental value at March 25 1982 was £6,700,000. Both sides are dissatisfied
with that figure. The tenants say it is too high and that I ought to uphold the
arbitrator’s alternative award by which he arrived at a figure of £6,065,000.
The landlords say it is too low and that the arbitrator ought to have arrived
at a figure of about £7,451,000. There is thus a very great deal of money at
stake in this appeal.
The reason
why, according to the landlords, the arbitrator’s figure is too low is that he
has deducted 10% from the figure of £7,451,000 as a discount for size. The
landlords say that in so doing the arbitrator has been guilty of misconduct,
albeit of a most technical kind, or alternatively that there has been what is
now called a ‘procedural mishap’. In making the 10% discount, the landlords
say, the arbitrator has found for the tenants on a point which was not in issue
between the parties. Thus in addition to the tenants’ notice of motion under
section 1(2) of the 1979 Act, there is a notice of motion by the landlords to
remit under section 22 of the 1950 Act.
Before coming
to the arguments advanced on the hearing of this appeal, it is necessary to set
out, at greater length than normal, the issues as they appear in the pleadings,
and as they appeared to the arbitrator.
In their
statement of case the landlords say that, on the true construction of clause
1(d) of the lease, ‘yearly rental value’ means:
The amount
that in the opinion of the Arbitrator is a fair yearly rent for the tenant to
pay and for the landlord to receive for the premises having regard to rental
values current at a valuation date whether for property of comparable size to
the premises or for property of a smaller size whether within the premises or
elsewhere and having regard to the provisions of the lease and taking no
account of the matters specified in Clause 1(d) of the lease.
It will be
noticed that the landlords’ formulation nowhere refers to vacant possession,
whether for property of a comparable size or for property of a smaller size
within the premises (by which is presumably meant one or more of the floors) or
elsewhere.
In calculating
their figure for the revised rent, the landlords take a figure for the rental
value of each floor in turn, so arriving at a total for the building as a
whole. They make two relatively minor adjustments to the total figure. Since
these are not in dispute, I need not refer to them further.
The tenants,
in their statement of case, also adopt a floor-by-floor approach. In each case
the figure, as one would expect, is somewhat lower. The tenants then make three
important deductions, namely (1) 10% discount for size, (2) 20% discount to
take account of the length of the lease and (3) an average of 16 months
rent-free period over seven years.
By way of
amplification, the tenants explain that:
The
Arbitrator is to have regard to rental values current as at
March 25 1982
for property
let without a premium with vacant possession
their
emphasis, not mine
that is to
say (a) that the existence of any subletting of the whole or any part of the
demised premises on March 25 1982 must be ignored; (b) an allowance must be
made for the rent-free fitting-out period that would be required by an incoming
tenant.
In their reply
the landlords take issue with the deductions (1)-(3) above. Since the paragraph
is important I will set it out in full:
The Claimant
denies that Clause 1(d) of the Lease must be construed in the manner contended
for by the Respondent. In particular, the Claimant denies the Respondent’s
assertion that the Arbitrator has to determine a rent on the assumption that
the premises are available to be let; the Arbitrator has to have regard
to values current for property let. The adjustments [(1) (2) and (3)]
cannot be made.
Thus the main
issue on the pleadings (apart from any difference as to the figures themselves)
was whether the arbitrator was to assume that the building was available for
letting with vacant possession, or whether he was to assume it was already let.
In the event, the arbitrator allowed the deduction of item (1), namely, 10%
discount for size, but not items (2) or (3).
On the central
question of construction, the arbitrator evidently preferred the landlords’
approach. But I am bound to say that I find his reasons hard to follow. A
crucial step in his reasoning seems to have been the reading in of the words
‘having regard to’ before the words ‘provisions of the lease’ in clause 1(d).
For myself, I should have thought that the words ‘having regard to’ govern all
that follow, until one comes to the proviso. Indeed, Mr Cullen, for the
tenants, conceded as much. I do not see what is gained by reading in the words
a second time. Nor do I see why, assuming the words are read in a second time, that
helps the landlords’ construction.
The arbitrator
gives three specific reasons for ‘importing’ the words a second time, and
hence, apparently, for preferring the landlords’ construction. These are:
(1) the nature
of the original parties to the lease,
(2) that it is
unlikely that all the provisions in the lease, eg replacement of plant
and machinery, would apply to property let with vacant possession, and
(3) that he has
to have regard (at least to some extent) to current rental values for property
let with vacant possession.
The first and
second of these reasons are, to my mind, neutral; the third, if anything,
favours the tenants’ construction. The matter becomes even more puzzling when
one comes to a heading in the award ‘Other valuation considerations’. I will
set out the three paragraphs in full:
In arriving at
my findings and Award, I have ignored the existence of the present Parties to
the subject lease since from my earlier findings above as to the interpretation
of the rent review Clause 1(d), it is necessary for me to pay no regard to the
existing Parties including particularly the existing lessee or any
under-lessees because of the guidance given as to the basis of valuation namely
‘. . . having regard to rental values current as at such day for property let
without a premium with vacant possession . . .’.
This approach
appears to be consistent with the approaches adopted by both the Claimants and
the Respondents Expert Witnesses, in that their respective schedules of
comparables included lettings and rent reviews of entire properties and also
lettings and rent reviews of individual floors within larger blocks — although
had there been a perfect comparable comprising a City Central Core tower office
block of approximately the same size which was vacant and had been let on or
shortly before March 25 1982, this probably would have provided the best
evidence for the purpose of the yearly rental value to be found under Clause
1(d).
I accept the
evidence given during the hearing that it was unlikely, and possibly very
unlikely that if the building were vacant a tenant would be found who would
require the entire building for his own occupation, and that in the event of
the building being physically vacant and available to let the most likely
lessee would be a tenant, similar to the Hong Kong Shanghai Bank, who would
require a substantial part of the premises, for his own occupation, and who
would sublet the remainder.
These
paragraphs, particularly the second, seem to me to suggest that, other things
being equal, the arbitrator would have preferred the tenants’ construction, but
that, since there were no perfect comparables on that construction, he was
driven back to the landlords’ construction.
Yet that
cannot be right, for the arbitrator starts his alternative award with the
words:
Under my
alternative Award it is necessary for me to assume that the entire building is
vacant.
And later in
his alternative award the arbitrator says:
Thus if my
analysis and interpretation of the rent review Clause 1(d) referred to earlier
is incorrect, and I was required to have regard to the entire subject premises
being vacant, I would find and award . . .
So much for
the award itself. I confess that I would have been easier in my mind if I could
be sure why it was that the arbitrator decided in favour of the landlords’
construction. But in the end it is on the arguments advanced before me that I
must decide this appeal. It is to those arguments that I now turn.
In their
notice of appeal the tenants support the alternative award on the ground that
the reference to ‘property let . . . with vacant possession’ necessarily
requires the arbitrator to assume the demised premises to be vacant. Mr Cullen
argued that there could be no conceivable point in directing the arbitrator to
have regard to comparable lettings with vacant possession, if the subject
premises were to be assumed to be let. I find that argument irresistible.
Indeed, unless there is something I have missed, I should have thought it was
almost self-evident.
In support of
the arbitrator’s conclusion, Mr Bernstein relies on the absence of any
direction in the proviso to take no account of the tenant-being in occupation.
He submits that the express inclusion of two of the statutory ‘disregards’ set
out in section 34 of the Landlord and Tenant Act 1954 leads necessarily to the
inference that the parties did not intend the arbitrator to take no account of
the first disregard: expressio unius est exclusio alterius — or, rather,
exclusio unius est inclusio alterius.
I do not regard
that as an argument of any great weight. The draftsman well have thought that,
having already directed the arbitrators to have regard to property let with
vacant possession, he
the point among the express ‘disregards’ would have been otiose and therefore
perhaps confusing.
Mr Bernstein
also had a more subtle argument. The direction to have regard to ‘property let
. . . with vacant possession’ meant that the arbitrator had to have regard to
rental values of individual floors on the assumption that they were being let
with vacant possession, but not the building as a whole. He submits that
that is what the arbitrator has in fact done. The figures at p 19 of the award
are all, he says, vacant possession values and take account, so far as may have
been appropriate, of a rent-free period for fitting out.
My first
observation as to that argument is that it is inconsistent with the landlords’
pleading, which I have already quoted. The landlords invite the arbitrator to
have regard to ‘rental values current at a valuation date whether for property
of comparable size to the premises or for property of a smaller size whether
within the premises or elsewhere . . .’
It is
difficult to read this pleading as inviting the arbitrator to have regard to
property of a comparable size on a let basis and property of a smaller size
within the premises on a vacant possession basis. It must be one or the other;
not both. Mr Bernstein recognised this difficulty. He accordingly invited me to
amend the landlords’ statement of case by omitting the words ‘whether for
property of comparable size to the premises’ and adding the words ‘let with
vacant possession’ after the words ‘property of a smaller size . . . within the
premises’.
But there is a
second, and to my mind conclusive, reason why I cannot accept Mr Bernstein’s
argument. If the figures on p 19 are, as he argues, figures arrived at on the
assumption of vacant possession of each of the floors, and therefore take
account of any rent-free period that might be appropriate in letting the
floors, the alternative award would, as I see it, be allowing a rent-free
period twice over; once in relation to each of the floors and once in relation
to the building as a whole. Neither Mr Bernstein nor Mr Cullen could explain
how that could ever be the appropriate approach on any conceivable state of the
market. If the floors could all be let without a rent-free period, then there
would be no need for a rent-free period for the building as a whole. If, per
contra, the market was such that a rent-free period should be allowed in
relation to each of the floors, I cannot see that a further rent-free
period would be appropriate, as the arbitrator has clearly found in his
alternative award, for the building as a whole.
At one stage
of the hearing it occurred to me that I might be compelled to remit the award
of my own motion in order to find out precisely what it is that the figures on
p 19 are meant to represent. But on reflection, I do not regard this as
necessary. It seems to me that the tenants’ construction, under which the
arbitrator was to assume that the entire building was vacant, is so clearly
right that I can adopt the alternative award without more ado. The landlords’
construction, as developed by Mr Bernstein, required the arbitrator to assume
that all the floors were to be let with vacant possession but not the building
as a whole. I find that concept hard to grasp. If it is indeed what was intended,
then I think much clearer language would have been used. I prefer the much
simpler construction put forward by the tenants.
It is true, as
Mr Bernstein pointed out, and the arbitrator has found, that there were
unlikely to be precise comparables for the building as a whole let with vacant
possession. To that extent there might have been difficulty in applying the
tenants’ construction, even though there be no difficulty in the construction
itself. In the event, there appears to have been no such difficulty, as can be
seen from the alternative award.
Mr Cullen
referred me to two cases, which so far as they go, support the conclusion at
which I have arrived: Avon County Council v Alliance Property Co Ltd
(1981) 258 ESTATES GAZETTE 1181, and Segama NV v Penny Le Roy Ltd
(1983) 269 ESTATES GAZETTE 322. But in a case of this sort, depending as it
does on the precise language of the rent review clause in question, I find that
I can get little help from other decided cases.
The same also
applies to a case relied on by Mr Bernstein: Ponsford v HMS Aerosols
Ltd [1979] AC 63. If anything, that case supports the tenants’
construction, in so far as it decides that ‘fair yearly rent’ is not
inconsistent with fair market rent.
Finally Mr
Bernstein invited me to remember that this is an award of an arbitrator who is
an expert in his field and that I should not reverse his award unless convinced
he is wrong. This court always has great respect for the awards of expert
arbitrators, especially when, as in this case, they have so much more
experience than I have in the particular field. But for the reasons I have
mentioned, I have been persuaded that the arbitrator was wrong and that his
alternative award should be upheld.
I would hold
that, in arriving at his figure for the yearly rental value for the demised
premises, the arbitrator was required to assume that the entire building was
being let with vacant possession.
As for the
landlords’ motion to remit, Mr Bernstein accepts that, if I should be against
him on the tenants’ appeal, his motion would be bound to fail. But his argument
will live for another day, should a higher court take a different view.
In the result
the tenants’ motion succeeds, and the landlords’ motion fails, apart from one
small point on which the arbitrator fell into error, and which has sensibly
been agreed between the parties.
The tenants’
appeal was allowed with costs. Leave to appeal to the Court of Appeal was
granted.
