by Delyth Williams
A question on which the writer’s opinion is frequently sought, by both practitioners and students alike, is in what circumstances would one opt for determination of rent at rent review in default of agreement by an independent expert rather than by arbitration? The question, however, demands a fundamental analysis of the differences, and similarities, of the role and functions of an arbitrator as opposed to an independent expert.
Does the title matter?
The distinction between the arbitrator and independent expert is frequently difficult to draw in practice and the title allocated in the document, usually the lease, is not always conclusive, but sometimes can be. In Sutcliffe v Thackrah [4] AC 727, a firm of architects designed a house for the plaintiff and were subsequently appointed architects and quantity surveyors pursuant to the standard form of contract entered into. The firm issued interim certificates to the builders but, before the construction was completed, the plaintiff terminated the contract with the builders and engaged other builders to complete the work.
The plaintiff commenced an action against the firm of architects alleging negligence and breach of duty in supervising the construction of the house and certification for work not undertaken or improperly carried out. The House of Lords was of the opinion that, unless appointed under a specific agreement, in issuing interim certificates an architect did not act as an arbitrator between the parties. The architect was under a duty to act fairly in making his valuation and could be liable in negligence to a building owner.
Of particular interest in the present context are the comments of Lord Reid at p 735 where he stated:
In this country judicial duties do not involve investigation. They do not arise until there is a dispute. The parties to a dispute agree to submit the dispute for decision. Each party to it submits his evidence and contention in one form or another. It is then the function of the arbitrator to form a judgment and reach a decision.
In other forms of professional activity the professional man is generally left to make his own investigation. In the end he must make a decision but it is a different kind of decision. He is not determining a dispute: he is deciding what to do in all the circumstances. He may go wrong because he has at some stage failed to take due care and that may not be difficult to prove. But coming to a wrong but honest decision on material submitted for adjudication is rarely due to negligence or lack of care, and it is seldom due to such gross failure to exercise professional skill as would amount to negligence. It is in the vast majority of cases due to error of judgment and there is so much room for differences of opinion in reaching a decision of a judicial character that even the most skilled and experienced arbitrator or other person acting in a judicial capacity may not infrequently reach a decision which others think is plainly wrong.
It would thus appear that it is the nature of the role and not the description allocated to it in the lease or other document which is important. The essential difference is that the arbitrator exercises the judicial function of determining a dispute on the evidence and submissions of the parties, while the independent expert has the duty of investigation and discovery of the facts and determining on the basis of his own knowledge and experience.
In Palacath Ltd v Flanagan [5] 1 EGLR 86; (1985) 274 EG 143, the rent review clause provided, inter alia, that the surveyor would act as an expert and not as an arbitrator and would consider any statement of reasons or valuation or report submitted to him but would not in any way be limited or fettered. In addition, the surveyor would be entitled to rely on his own judgment and opinion. It was agreed that there were indications in the lease that the parties contemplated that the surveyor was to perform a judicial or quasi-judicial function. Mars-Jones J held that, although certain provisions in the lease suggested a judicial process, the ultimate test was whether the surveyor was obliged to act on the evidence and submissions of the parties or on his own expert opinion and, in all the circumstances, the latter was the case. In the instant case, the defendant was not obliged to make findings accepting or rejecting the opposing contentions and he was appointed to give his own independent expert judgment after reading the material supplied by the parties and giving it such weight as he thought fit.
The capacity of a person appointed was also considered in North Eastern Co-operative Society Ltd v Newcastle upon Tyne City Council [7] 1 EGLR 142; (1986) 282 EG 1409, where the lease provided that the rent review should be as agreed by the parties or, in default of agreement, as determined by an independent surveyor agreed by the parties or, in default of such agreement, by an arbitrator nominated by the president of the RICS “and this lease shall be deemed for this purpose to be a submission to arbitration within the Arbitration Act 1950”. The question was whether the independent surveyor (who was, in fact, appointed by the agreement of the parties and not by the president) was to be regarded as an arbitrator under the 1950 Act or as an expert valuer. The plaintiff lessees wished to challenge the surveyor’s assessment of the rack-rental value and argued that it would be strange if the person appointed by agreement between the parties was not to act in the same capacity as the person to be appointed by the president of the RICS. Scott J held that, although the indicia were not very strong, it was intended that the independent surveyor should act as an expert if appointed by the agreement of the parties but that he should act as an arbitrator if appointed, in default of such agreement, by the president of the RICS.
In the interesting case of Langham House Developments Ltd v Brompton Securities Ltd (1980) 256 EG 719, the rent review clause in question provided, inter alia:
… the landlord shall have the right not more than 12 nor less than three months prior to the 25th day of December in the years 1978, 1983 and 1988 and in every third year thereafter by giving to the tenant notice in writing of such desire to call for a review of the said yearly rent [and if he does so] it shall be such sum as shall within the period of one month from the service of the said notice be agreed between the landlord and the tenant or in default of such agreement shall be determined by a chartered surveyor nominated by the President for the time being of the Royal Institution of Chartered Surveyors to be that at which having regard to the terms of this underlease (other than the amount of rent currently payable) the demised premises might reasonably be expected to be let in the open market by a willing lessor to a willing lessee there being ignored the matters set out in the Landlord and Tenant Act 1954 section 34(1) (as amended by the Law of Property Act 1969) and any statutory restrictions on the amounts of rentals.
Sir Robert Megarry V-C held, inter alia, that the context showed that the chartered surveyor nominated was to act as an independent expert and not in the role of an arbitrator. The draftsman of the clause had not used any of the language which prescribed arbitration in the underlease which preceded the clause in question.
A similar decision was reached in Safeway Food Stores Ltd v Banderway Ltd (1983) 267 EG 850, where a lease of just over 90 years provided for rent review at the 21st, 42nd, 63rd and 84th years. The rent review clause provided that the revised rent should be determined by each party appointing a qualified valuer to negotiate on its behalf. The clause added further that:
In the event of such valuers not having reached such agreement by the expiry of a period of four weeks next following the date of the service of the said notice they shall agree upon an umpire to settle the question whose decision shall be final and binding upon both parties and if within the before mentioned period of ten days either party shall not have appointed a valuer as aforesaid or if within the said period of one week next following the said period of four weeks the said two valuers shall not have agreed upon such umpire or such an umpire shall not have been appointed then in the first contingency the other party and in the second contingency either party may request the President for the time being of the Royal Institution of Chartered Surveyors to appoint a member of that Body (but not the valuer appointed as aforesaid by either party) to settle the question and the parties hereto shall be bound as aforesaid by the decision of the person so appointed.
Goulding J held, inter alia, that the person appointed as the “umpire” was to act as an independent expert or valuer as the question of determining the “… fair market rent of the demised premises …” was a matter of the valuer’s expertise. Further, the court was of the opinion that this was a logical conclusion where one of the parties to the lease was in default in appointing a valuer to negotiate and the person appointed to the role of umpire would supply the valuation input. Goulding J was also of the opinion that, as the draftsman had referred expressly to a “single arbitration in accordance with and subject to the provisions of the Arbitration Act 1950” in another clause in the lease, this amounted to a strong indication that the person appointed as “umpire” under the rent review clause was not to act as arbitrator.
Distinction: the role
In the context of the developing case law, the rent review clause may allow (or even require) the parties to make representations to the person appointed to determine the revised rent. In this context, a person appointed as an arbitrator will always take evidence from the parties so that the parties can present evidence (if they so wish). A clause providing for the determination of a revised rent by an independent expert will not usually provide for the taking of evidence but will place reliance on the independent expert’s own knowledge and experience. The independent expert has a duty of investigation to discover the facts and relevant transactions, but he may receive evidence of such from the parties. It is often stated that the arbitrator must act on the evidence adduced before him.
Alongside the essential difference between the judicial role of the arbitrator and the role of the independent expert is the question of “When can an arbitrator use his own knowledge?”. This was considered in Fox v P G Wellfair Ltd (1982) 263 EG 589 and, more particularly, in the context of rent review arbitration in Top Shop Estates Ltd v Danino [5] 1 EGLR 9; (1984) 273 EG 197, where the arbitrator’s awards were attacked on three grounds, namely:
(i) he made use of his own knowledge without the consent of the parties or affording the parties an opportunity to comment;
(ii) he initiated a series of pedestrian counts without the consent or knowledge of the parties; and
(iii) he accepted unsupported evidence from a party which he “validated” himself without affording the other parties an opportunity of dealing with it.
Leggatt J held that an arbitrator should use his special expertise to evaluate evidence (not to supply it) and, further, he must not receive evidence in the absence of a party or use any particular factual knowledge acquired in other proceedings. The awards were set aside.
Distinction: procedural aspects
Where the person appointed to determine the revised rent is to act as an arbitrator, the procedure is governed by the Arbitration Acts 1950 and 1979.
On the other hand, there is no legislation which covers the procedure to be adopted by an independent expert, although the rent review clause may state, in outline or detail, what type of procedure is to be adopted, for example, with making submissions. It is to be noted that the Arbitration Act 1950 requires, under section 12(1), that the parties submit to be examined by the arbitrator in relation to the matters in dispute and produce before the arbitrator all documents within their possession which may be required or called for. In addition, a party to an arbitration may ask the arbitrator to order discovery of documents under the general obligation under section 12(1) of the Arbitration Act 1950. The procedural aspects highlighted under the Arbitration Acts 1950 and 1979 are not applicable to determination by an independent expert.
Distinction: challenging the determination
The determination of an arbitrator may be set aside, for example, on the grounds of misconduct, error of law or procedural mishap. The recent cases on this subject were covered by the author in “Arbitration law update” [0] 27 EG 60, but two earlier cases illustrate the points raised. In Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14; (1985) 275 EG 1134, the landlords made an application to set aside the award and to remove the arbitrator appointed to determine the rent under a rent review clause in a lease of shop premises. In this case, there was no criticism of the professional integrity, impartiality or competence of the arbitrator, but the landlords alleged that (as the reasons 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. In particular, two matters were challenged, namely:
(i)the arbitrator had described the premises as a developer’s shell which would require considerable expenditure to bring up to a normal standard; and
(ii)while both parties agreed on an equated zone A approach, the arbitrator had said that the mere extrapolation of zone A values from small premises to large would give a wholly false valuation.
Bingham J held that, although there was no personal reflection on the arbitrator, the landlords had made out their case.
An arbitrator’s award was also sought to be set aside in Shield Properties & Investments Ltd v Anglo-Overseas Transport Co Ltd [5] 1 EGLR 7; (1984) 273 EG 69. In this case, the rent review award was challenged by the tenants on three grounds, namely:
(i) incorrect reception of evidence of “without prejudice” discussions;
(ii) incorrect admission of hearsay evidence from the landlords on the subject of comparables; and
(iii) a failure by the arbitrator to disclose to the tenants a letter written on behalf of the landlords to the arbitrator.
On the first point, there was a conflict of affidavit evidence but, assuming that the discussions were “without prejudice”, the tenants took no steps to halt the arbitration proceedings. On the second and third points, the probable reason for the arbitrator’s failure to copy the letter to the tenants was that he found the alleged comparables in the letter to be of little help. Bingham J held that the arbitrator had not been guilty of technical misconduct but that there had been a procedural irregularity in not supplying the tenants with a copy of the letter. The award was remitted to the arbitrator for reconsideration but without any criticism of his fairness or personal conduct.
It is difficult to challenge the determination of an independent expert and it is clear from the decision in A Hudson Pty Ltd v Legal & General Life of Australia Ltd [6] 2 EGLR 130; (1986) 280 EG 1434 that the courts are not, in general, in favour of challenges to experts’ determinations. Lord Templeman stressed that the courts would not encourage forensic attacks on valuations by experts where those attacks are based on textual criticisms more appropriate to the measured analysis of fiscal legislation.
In Apus Properties Ltd v Douglas Farrow & Co Ltd [9] 2 EGLR 265, the determination of an independent expert was challenged in a case involving complex issues of fact and law. The demised premises encompassed two office buildings which, at some time, had been made intercommunicating through doorways at all levels in the party walls. The plaintiffs were the freeholders (whose interest was purchased by the underlessees) and the defendants were the original tenants (whose successors had got into difficulties leading to forfeiture of the lease) and two sureties. The lease in question was for a term from February 11 1977 to September 19 1985 and contained a rent review clause with a review date at September 29 1980. In pursuance of this rent review, an independent expert was appointed to determine the rent in the absence of agreement. The rent review clause was in fairly usual form providing, inter alia, that no account should be taken of improvements carried out by a tenant (otherwise than under obligation) and, in addition, the lease contained a severely restricted user provision ruling out use for sales by auction and as an advertising station and restricting office use to offices in connection with the tenants’ business of property management and dealings with ancillary legal offices. A licence granted for an underletting, however, provided that this restrictive condition should be modified in relation to that underletting by allowing use as offices for chartered accountants. The court had to consider, inter alia:
(1) whether B (the independent expert) was in error because he failed to disregard improvements or because he determined the reviewed rent on the basis of a hypothetical lease containing the user condition as modified as opposed to the original condition;
(2) whether, if B’s determination was valid and it was correct to apply the user condition as varied,
(a) the original tenant was liable to pay the rent determined on that basis, and
(b) the two sureties were automatically discharged by reason of that variation;
(3) whether the forfeiture of the lease resulted in the discharge of the sureties.
On the first issue, Judge Hayman (sitting as a judge of the High Court) was of the opinion that B had not been in error in regard to the direction in the lease to disregard the improvements. Further, Judge Hayman found that B had been in error because, as a matter of construction, the condition had to be applied as it was at the commencement of the tenancy not as it was at the date of the review (which was after the condition had been relaxed by the modification).
On the second issue, Judge Hayman was of the opinion that the principle was that a material variation in the lease would discharge the surety unless he had consented to it.
Finally, on the third issue, Judge Hayman concluded that the sureties were not discharged by the forfeiture. (It is to be noted that this case is based on complex facts which the reader should peruse in detail.)
Distinction: immunity from negligence claim
In its classical sense, it is accepted that an arbitrator, in exercising a judicial function, is immune from a successful negligence claim while an independent expert is not. In practice, however, this distinction may be more apparent than real because errors or omissions amounting to negligence may be difficult to substantiate owing to the very nature of independent expert determinations.
In Arenson v Casson Beckman Rutley & Co [7] AC 405, the House of Lords affirmed the immunity of the arbitrator when acting in a judicial role and was of the opinion that the immunity of judges and arbitrators was exceptional to the general rule of liability for negligence. Lord Simon of Glaisdale, at p 424, added that:
… the essential prerequisite for him to claim immunity as an arbitrator is that, by the time the matter is submitted to him for decision, there should be a formulated dispute between at least two parties which his decision is required to resolve. It is not enough that parties who may be affected by the decision have opposed interests — still less that the decision is on a matter which is not agreed between them.
It is to be noted that their lordships held differing views on the question of the immunity. Lords Salmon and Fraser of Tullybelton were of the opinion that a person, even if formally appointed as an arbitrator, ought not in all cases to be afforded immunity, while Lord Kilbrandon was of the opinion that arbitrators operating either at common law or under the Arbitration Acts have no such immunity. (For an excellent discussion of these and other points, see the article by Professor J E Adams at (1984) 270 EG 27.)
Prior to the decision in Arenson, the Court of Appeal had affirmed the arbitrator’s immunity in Campbell v Edwards [6] 1 WLR 403. Lord Denning MR was of the opinion that an arbitrator is in a different position to a valuer, as the arbitrator cannot be sued by either party. The only remedy against the award of an arbitrator is that provided by the established procedure.
Arbitrator or independent expert?
Clarke and Adams: Rent Review and Variable Rents (2nd ed) at pp 264 and 265 suggests that the following factors may indicate the choice of an independent expert:
(i) where the property leased is not large and the initial rent modest;
(ii) where the property leased is one of a comparable number of similar units;
(iii) all simple cases;
(iv) where cheapness and speed are factors;
(iv) where the parties have acted in person.
The following are circumstances where arbitration is appropriate:
(i) whenever there is a clearly formulated dispute;
(ii) if the property is out of the ordinary or if difficulties are likely to arise.
Bernstein and Reynolds: Handbook of Rent Review para 1-69 suggests the following factors may influence the choice as to arbitrator or independent expert:
(a) that rent review clauses should provide for determination by arbitration except where the circumstances are such that the parties are likely to appoint (or procure the appointment of) a valuer who will thereafter be left to make the determination, without other valuers being instructed by the parties;
(b) that where an existing lease provides for determination by an expert, the parties should (before or after he is appointed) consider whether there are any complications making arbitration more appropriate. If they agree, they can by consent change the procedure to one of arbitration;
(c) if one or both parties is not the original lessor or lessee, they should bear in mind that an original lessee or surety may not be bound by an award unless he has consented to the change of procedure;
(d) he provision in a rent review clause that the surveyor shall act as arbitrator or independent expert as the case may be should be in terms that expressly permit the parties to the review to change the nature of his function. This will enable them to adapt the procedure to the circumstances then existing without raising the difficulty mentioned in (c) above.
Conclusion
An article of this nature can only hope to cover some of the basic areas of concern for the practitioner. The reader should refer to the excellent treatment of this subject in both Bernstein and Reynolds: Handbook of Rent Review and Clarke and Adams: Rent Review and Variable Rents for a fuller and more detailed consideration of the many issues raised.
