Open market rent — Award by arbitrator — Landlord appealing against award — Whether account should be taken of rent-free periods when calculating rent payable — High Court holding that rent review clause provided formula for calculation of rent actually payable and not a discounted figure
Broadgate Square plc was the landlord and Lehman Brothers Ltd the tenant of 2 Broadgate, London EC2. On April 4 1993 an award was made by an arbitrator on a rent review clause in the lease. Under that clause “open market rent” meant the best yearly rent which would reasonably be expected to become payable after the expiry of a rent-free period of such length as would be negotiated in the open market between a willing landlord and a willing tenant upon a letting of premises as a whole at the relevant review date. A question arose whether the arbitrator should include in the term “rent-free period” both the rent-free periods granted for fitting out and rent-free periods granted as an inducement to the tenant to take a lease of the premises. The arbitrator held that the correct way to treat the clause was to ignore rent-free periods granted for fitting out, but to make a deduction for rent-free periods that could be looked upon as taking the form of an inducement. The landlord appealed against the arbitrator’s award.
Held The appeal was allowed.
1. Clear words in a rent review clause, should be given effect to, but, subject to special circumstances, it was proper to give effect to the underlying commercial purposes of a rent review clause and to construe the words to give effect to that purpose.
2. Under the lease the rent was payable in respect of the premises after the expiry of a rent-free period. “The formula there was pointing to the rent which is actually payable and not then reduced by some discounted cash flow calculation to a discounted figure”. Thus, there was an error of law disclosed by the arbitrator’s award, although he was advised by his legal assessor correctly on what he should have done.
3. It had been argued that the rent review clause in the lease was onerous, but that was purely a question of fact for the arbitrator.
Terence Cullen QC and Kim Lewison QC (instructed by Herbert Smith) appeared for the landlord; David Neuberger QC (instructed by Freshfields) appeared for the tenant.
