Landlord and tenant–Arbitration Act 1979, section 1(2)–Rent review provisions in lease–Arbitrator’s award on rent challenged by landlords–Application for leave to appeal–Error of law alleged to be that arbitrator reached a finding on the facts at which no reasonable arbitrator could have arrived–Principle of Edwards v Bairstow invoked–Whether, applying the approach of the Court of Appeal in Ipswich Borough Council v Fisons, landlords could show strong prima facie grounds for an error of law on the part of the arbitrator–Landlords fail in the difficult task of convicting the arbitrator of an error of law in the use of comparables–Application for leave to appeal refused
involved in this case were a property at 8 Cheval Place, Knightsbridge, London
SW7, consisting of a ground floor used for retail purposes and two upper floors
used for residential purposes–The relevant lease included a prohibition of
assignment or subletting of part of the premises–The arbitrator approached the
assessment of rental value on the footing that the tenant would be obliged to
occupy the premises as a whole–The arbitrator concluded that correct rent was
£18,450 a year–In support of their submission of error of law in the award the
landlords made two specific complaints
complaint was that an examination of the facts as to the next-door property, at
6 Cheval Place, indicated that the arbitrator had failed to appreciate its
significance as a comparable; he had indeed dismissed it as of ‘limited
assistance’–This neighbouring property was in every respect similar to the
subject property, with a similar prohibition of alienation or subletting of a
part–There had been an agreed rent for it of £20,000 a year in 1986; and in
February 1990 a premium of £50,000 had been paid for the assignment of the
lease, suggesting that the rent of £20,000 was below the market rent–The
arbitrator had commented that premiums paid on assignment were unreliable
indicators of open market rental value–He had considered a large number of
comparables, including properties in Cheval Place other than nos 6 and 8–He
thought the Cheval Place comparables, apart from no 6 with its assignment in
1990, were ‘historic’–He concluded that the ground-floor shop at the subject
premises should be valued at a zone A rental value of £55–What the judge had to
ask himself was whether the arbitrator’s final conclusion, that the rent of the
subject premises should be £18,450 a year (including a zone A rent of £55 per
sq ft), was a conclusion which he could not have
arbitrator had given more explanation, it could not be said that he had reached
a conclusion which was not in law open to him
attack was that, in assessing the rental value of the upper residential floors,
the arbitrator had wrongly made deductions from the rental values evidenced by
open market comparables relating to separate residential accommodation–He had
done so to make what he considered to be necessary adjustments for the
inclusion of such items as management costs, voids and letting agents’ fees–It
seemed to the judge that in so doing the arbitrator was not guilty of any error
of law
the judge rejected the grounds put forward in support of the application for
leave to appeal–Leave refused
The following cases are referred to in
this report.
Edwards v Bairstow [1956] AC 14; [1955] 3
WLR 410; [1955] 3 All ER 48, HL
Ipswich Borough Council v Fisons plc [1990] Ch
709; [1990] 2 WLR 108; [1990] 1 All ER 730; [1990] 1 EGLR 17; [1990] 04 EG 127,
CA
Pioneer Shipping v BTP Tioxide Ltd (‘The
Nema’) [1982] AC 724; [1981] 3 WLR 292; [1981] 2 All ER 1030; [1981] 2
Lloyd’s Rep 239, HL
This was an application by the landlords,
Capital & Counties plc, for leave to appeal under section 1(2) of the
Arbitration Act 1979 from the award of the arbitrator, Mr Anthony Taylor, in an
arbitration concerned with the rent payable under the rent review clause in a
lease of 8 Cheval Place, Knightsbridge, London SW7. The tenant was Helios Hawa.
Benjamin Levy (instructed by Debenham
& Co) appeared on behalf of the plaintiff landlords; Edward Denehan
(instructed by Murray Maclean & Krieger) represented the defendant tenant.
Giving judgment, MILLETT J said:
This is an application for leave to appeal under section 1 of the Arbitration
Act 1979 from an award of an arbitrator made on November 23 1990. The
arbitration was concerned with the rent payable in accordance with a rent
review clause for a lease of 8 Cheval Place, Knightsbridge, London SW7. The
rent review date was June 24 1990. It was the first review date; other reviews
will take place in the future. The landlords are the owners of adjacent
properties and I believe the tenant itself is a lessee of one of the properties
in the neighbourhood.
It is conceded that this is a question
which materially affects the rights of the parties and that the principle that
I should apply is to be found in the Court of Appeal decision of Ipswich
Borough Council v Fisons [1990] 1 EGLR 17; that is to say, there
must be strong prima facie grounds for thinking that the arbitrator has
erred in law before I can give leave to appeal.
There is one further difficulty in the
landlords’ way (for the appeal is by the landlords). They cannot point to any
error of law strictly so-called, but they say that the arbitrator has gone
wrong on the facts and reached a finding which ‘no reasonable arbitrator could
have come to’. They rely on the case of Edwards v Bairstow [1956]
AC 14 for the principle that, where an inferior tribunal reaches a conclusion
to which no properly instructed tribunal could reach on the evidence, that is
to be treated as an error of law for the purposes of an appeal. In The Nema
[1982] AC 724 that doctrine was imported into applications for leave to appeal
under section 1 of the Arbitration Act 1979. Accordingly, I have to find strong
prima facie grounds for thinking that the arbitrator reached a
conclusion which was not open to him on the material before him, because if he
did so he made an error in law.
He reached the conclusion that the
correct rent for the subject premises was £18,450 pa. The property consists of
a ground floor used for retail purposes and two upper floors used for
residential purposes. There was a clause in the lease which prohibited the
assignment or subletting of part and, accordingly, the arbitrator approached
the valuation of the rental value of the premises on the footing that the
tenant would be obliged to occupy the premises as a whole, occupying the ground
floor for retail purposes and the two upper floors for residential purposes.
There are two complaints which the
landlords make. The first, and by far the more significant, is that the result
is surprising when one observes that the very next-door property, 6 Cheval
Place, was let in March 1986 at a rent of £20,000 a year. The arbitrator’s
award has annexed to it a list of comparables, and 6 Cheval Place appears in
every respect to be similar to the subject premises. The lease was for 25 years
with effect from March 25 1986, with a review every five years, there was a
similar prohibition on alienation or subletting in part, the permitted use was
retail on the ground and basement, with offices or residential on the first and
second floors, and the rent agreed was £20,000 a year from March 25 1986. That
lease was assigned in February 1990 and a premium of £50,000 was paid for the
lease, which would suggest prima facie that the incoming assignee
considered that the rent fixed four years before was already below the market
rent. Yet the rental value of the subject premises next door, which are not
significantly different in any respect, has been valued as at June 1990 by the
arbitrator at £18,450, a conclusion which is, on those facts alone, surprising.
The landlords submit that the arbitrator must have failed to take into account
the comparable which was closest to the subject premises.
The arbitrator in fact took into account
a large number of comparables and made comments on each. When he dealt with 6
Cheval Place he said:
I note the rent agreed in 1986, and the
premium paid in February 1990. I also note the landlords’ expert’s analysis of
the premium upon assignment. The premiums paid upon assignment are unreliable
indicators of open market rental value, and the transaction is of limited
assistance to me.
In that context it would appear that the
landlords’ submission is correct. The arbitrator was indicating in that passage
only that the assignment itself and the amount of the premium were of limited
assistance and was not saying anything about the original grant of the lease in
1986. Having dealt with a large number of comparables, he then turned back to
the comparables in Cheval Place (for there had been two others besides no 6)
and said:
The comparables in Cheval Place, apart
from the assignment at no 6, are historic. They suggest rental values of about
£40 and £45 in zone A in September 1988 and December 1987 respectively. Neither
party has expressed an opinion as to the movement of rents in Cheval Place
between the dates of these comparables and the review date of the subject
premises, but I infer that the landlord’s surveyor believes rental growth to
have been very nearly 100%, while the tenant’s estimate appears to be about
15%.
He concluded that the ground-floor shop
at the subject premises (8 Cheval Place) should be valued at a zone A rate of
£55. The passage that I have cited has been strongly criticised by counsel for
the landlords. He submits that the arbitrator cannot have been taking no 6 into
account at all, since he said: ‘The comparables in Cheval Place, apart from the
assignment of no 6, are historic’ (all three comparables were historic), but
continued: ‘They suggest rental values . . . in September 1988 and
December 1987 respectively’ (and that must refer to the other two comparables).
The landlords submit that the arbitrator must have forgotten all about the
closest comparable of all, the very next-door premises, 6 Cheval Place, which
gave an even more historic rental value in 1986. I am not convinced that that
is what happened. Certainly, the arbitrator’s reasoning is not full and he
gives no explanation for the way in which he has approached the original lease
of 6 Cheval Place. He says that he had noted the rent there.
What I have to ask myself is whether his
final conclusion, that the rent of the subject premises should be £18,450 pa
(including a zone A rate of £55 per sq ft for the ground floor) is a conclusion
which he could not have reached on the evidence before him, including the
comparable at no 6. Counsel asked me, semi-rhetorically, ‘What will happen when
the rent review of no 6 comes up? The
arbitrator will look at no 8 and will approach the matter accordingly’. That
may well be so. The rent of the subject property itself is, in my experience,
rarely used as a comparable, although in one sense the subject premises
themselves are the closest possible comparable that one can have. But the
original grant of a lease may be a different case from a rent review decision,
and an arbitrator will look at a large number of comparables and will not
necessarily take the closest comparable as a guide, because he may come to the
conclusion that, bearing all the evidence before him in mind, that the closest
comparable was let at an excessive or unjustifiably low rent. In the present
case the arbitrator had many other comparables to consider. He took two other
comparables in Cheval Place and he seems to have approached the rental value of
the ground floor of the subject premises with regard to them. The fact that the
original lease of 8 Cheval Place then seems to the uninitiated to stick out
like a sore thumb does not mean that he was reaching a conclusion which was not
he took the view that the 1986 rent of 8 Cheval Place should not bear the
weight which the landlords thought it should; it would have been better if he
had not remained silent on the matter. But I cannot say that prima facie
the arbitrator has reached a conclusion which it was not possible for him to
reach on the evidence before him.
The second ground of complaint by the
landlords is that when it came to valuing the rental value of the two upstairs
floors, which were to be let for residential occupation, he made certain
deductions from the rental values established by the comparables. He said:
The residential comparables relate, with
one exception, to separate residential accommodation, let furnished for short
periods. I have accepted the contention of the tenant’s surveyor, that there
should be reductions from the rent established on these comparables.
If one looks back in the arbitration
award itself, one discovers that the contention was that rents achieved on the
open market residential lettings (that is the comparables) ‘needed to be
adjusted to allow for furniture and furnishings, management, voids and letting
agent’s fees’, although the tenant’s surveyor was not able to give the
arbitrator any guidance as to what deductions he thought should be appropriate;
he merely drew the arbitrator’s attention to the fact that some adjustment
would be necessary to the rental values established by those comparables. The
arbitrator accepted that contention and he evidently made some adjustments and
valued the residential accommodation accordingly.
It was submitted to me that the
arbitrator’s conclusion, which was correct, that he had to take account of the
fact that the tenant, under the lease of the subject premises, was not able to
sublet the residential accommodation separately and that the hypothetical
tenant must, therefore, occupy the whole building itself was inconsistent with
the reduction for management costs, voids and letting agent’s fees; although it
is accepted that some deduction would have to be made because the comparables were
let furnished. I am unable to see that the arbitrator erred, or erred in law;
in my judgment, prima facie he was right. Tenants taking short tenancies
would be obliged to pay rents which would reflect the fact that the landlords
would need, if they were to make a profit, to make some allowance for voids,
letting agent’s fees and the cost of management, whereas a tenant taking the
whole for a lengthy period would be relieving the landlords of such expense and
would, therefore, be in a strong position to negotiate a lower rent. At any
rate, if the arbitrator has come to the conclusion that, in order to make the
comparables more closely resemble the circumstances of the subject premises, it
was necessary for him to make some deduction from the rental values established
by the comparables, I cannot say that he was wrong. Nor can I say that there
are any prima facie grounds for thinking that he was erring in law.
Accordingly, I reject both grounds of the landlords’ application and I refuse
leave to appeal.
