Arbitration — Rent review award — Arbitration Act 1950, sections 22 and 23 — Misconduct or ‘procedural mishap’ — Arbitrator in this case was appointed to determine the open market rental value for the last seven years of a term of 21 years of a sports shop in a shopping centre — He notified the parties that he proposed to give them the opportunity of making submissions in writing but reserved the right to hold an oral hearing — He proposed certain rules of procedure — The parties were to submit their opinions on rental value together with the comparables on which they relied and the arbitrator would send each party’s submission to the other — Time would be allowed for counter-submissions, after which there would be no further correspondence — The arbitrator would, however, get in touch with the parties to discuss whether there should be an oral hearing — As to comparables, the general rules of evidence should apply; unless agreed, comparables should be within the direct knowledge of a party or supported by documentary evidence — Correspondence with the arbitrator should be by letter only, with an additional copy for forwarding to the other party
by the tenant’s surveyor contained schedules of comparables but gave no
indication as to whether he had direct knowledge of the transactions in
question — The arbitrator, and also the landlords’ surveyor, drew attention to
this omission — In reply, the tenant’s surveyor said that his firm had been
‘involved directly in the majority of the rent review negotiations’, but he did
not indicate which were the cases in which they had been directly involved — He
enclosed a letter from his client, the defendant, making some comments on the
premises and expressing the opinion that the rent he was offering seemed
generous — Although the arbitrator sent a copy of the counter-submissions by
the tenant’s surveyor to the landlords’ surveyor, he did not send a copy of
this letter from the defendant
argued that the arbitrator’s failure to enforce his own ground rules in regard
to comparables and his failure to send a copy of the tenant’s letter to the
landlords amounted to either misconduct or a ‘procedural mishap’, as
characterised in Shield Properties & Investments Ltd v Anglo-Overseas
Transport Co Ltd — The judge accepted this submission — The arbitrator had in
effect declared, by the rules laid down, that hearsay evidence by way of
comparables would be excluded, but as things turned out the arbitrator would
not know whether any particular comparable was based on hearsay or not — There
was nothing to suggest that the arbitrator had excluded the tenant’s
comparables from consideration — It was argued that, by not protesting further,
the landlords must be taken to have waived any objection to the use of the
tenant’s comparables by the arbitrator — The force of this argument was,
however, weakened by the consideration that the landlords’ surveyor was
entitled to assume that he could request an oral hearing at which he would have
a chance to raise the question of comparables with the arbitrator —
Unfortunately, the arbitrator did not carry out his promise to make contact
with the parties to discuss an oral hearing.
three mistakes — (1) the unsatisfactory way in which the tenant’s surveyor had
dealt with the inquiry about direct knowledge, (2) the omission of the
arbitrator to forward a copy of the tenant’s letter to the landlords’
surveyor, and (3) the arbitrator’s failure to discuss with the parties the
question of an oral hearing — Held that the result had been misconduct in the
proceedings or a procedural mishap — In the circumstances it would not be fair
to require the arbitrator to clear his mind of the view already formed, so that
the award would not be remitted but set aside — No order as to costs
The following
cases are referred to in this report.
GKN
Centrax Gears Ltd v Matbro Ltd [1976] 2
Lloyd’s Rep 555
Shield
Properties & Investments Ltd v Anglo-Overseas
Transport Co [1985] 1 EGLR 7; (1985) 273 EG 69
This was a
motion by the plaintiffs, Control Securities plc, the landlords of premises
consisting of a sports shop in the Leegate Shopping Centre in Lee Green, London
SE12, to set aside or remit the award of Mr David Williamson FRICS ACIArb in a
rent review arbitration between the plaintiffs and the defendant tenant, Mr C J
Spencer.
David
Neuberger QC (instructed by D J Freeman & Co) appeared on behalf of the
plaintiffs; N P Le Poidevin (instructed by Lionel J Lewis & Co) represented
the defendant.
Giving
judgment, HOFFMANN J said: There is before the court a motion to set aside or
remit under sections 22 or 23 of the Arbitration Act 1950 the award dated
November 18 1987 of Mr David Williamson FRICS ACIArb in a rent review
arbitration. The premises are a sports shop in a shopping centre called Leegate
in Lee Green, London SE12. They were let for a term of 21 years from June 24
1972 at an initial rent of £2,250 a year with seven-yearly rent reviews. At the
first review in 1979 the rent was increased to £4,500. The arbitrator had to
determine the open market rental value of the premises for the last seven years
of the term. The landlord was contending for a rent of £9,320 and the tenant
for £6,500. The arbitrator’s determination was £7,300.
The arbitrator
notified the parties of his appointment on July 28 1987. He said that he
proposed to give the parties the opportunity to make submissions and reserved
the right to hold an oral hearing or deal with the case on paper. He proposed
certain procedural rules, which were accepted by the parties. First, the
parties were to submit their opinions on rental value together with the
comparables on which they relied. Second, the arbitrator would send each
party’s submission to the other and allow a further 14 days for
counter-submissions. Third:
Following
receipt of the counter-submissions I will allow no further correspondence but I
will make contact with the parties to discuss whether the matter should proceed
by hearing or written submission.
Fourth,
parties would be required to agree details of accommodation and floor areas.
Fifth:
With regard
to comparables, these should follow the general rules of evidence and either
have been to the direct knowledge of the Surveyor concerned or supported by
documentary evidence or, in the alternative, I will accept comparables that
have been agreed between the parties.
The only other
rule to which I need refer is the seventh:
In order to
avoid any suggestion of improper conduct in my dealings as arbitrator, I would
be obliged if any communication with me would be by letter only and with an
additional copy which I will forward to the other party.
The landlord’s
surveyor, Mr R J K Bradford [ARICS], made a submission in which he relied
principally upon four lettings during the previous two or three years in the
Leegate shopping centre itself. The submission was supported by documentary
evidence and showed rents for zone A which varied from £12.50 to £17.50 per sq
ft. The tenant’s surveyor, Mr K E Fox [FRICS FRVA ACIArb], sent his first
submission on September 1. It attached two schedules of comparables. The first
was a list of 16 shops in the Lee area (including five lettings and one
assignment in Leegate) with rents varying from the equivalent of £3.50 to £11
per sq ft. The second was a list of nine shops in Lee Green, Orpington and
Bromley in which no actual rents were mentioned but the sq ft equivalents were
said to be from £2 to £10. Neither list gave any indication of whether Mr Fox
had direct knowledge of the transaction.
On September
22 the arbitrator wrote drawing attention to this omission. He said:
I would draw
your attention to the specific requirements as set out in my letter of
procedure dated July 28 1987, para 5 and would ask you to comply with this. You
will no doubt bear in mind that in this particular instance I am appointed as
arbitrator, not as independent expert, and it is not my policy to make my own
enquiries outside the evidence submitted.
Mr Bradford,
in his counter-submission for the landlord on October 5, made a similar point.
He said:
We are unable
to comment in detail upon the rental evidence provided in Mr Fox’s submission
as there are no lease details, details of floor areas or analysis of rents.
Furthermore the details are not witnessed by independent third parties.
On October 6
1987 Mr Fox sent his counter-submission. He enclosed a copy of a letter dated
September 30 which had been written by his client Mr Spencer. This made a
number of comments about the disadvantages of his premises — unswept pavements,
loitering drunks, broken glass, vandals, burglars and armed robbers — and said
that nearby premises were boarded up and unable to obtain insurance because the
neighbourhood was so dangerous. He expressed the opinion that the rent he was
offering seemed generous.
Mr Fox himself
made various comments on Mr Bradford’s comparables, some of which may have been
based on hearsay (‘We understand that the incoming lessee of no 25 has not been
professionally represented’.) In answer
to the comments that he had not adhered to the rule requiring direct knowledge
or documentary substantiation of comparables he said:
With regard
to the evidence which we have submitted on our client’s behalf we have been
involved directly in the majority of the rent review negotiations and we
believe that these more accurately represent true rental values in the area.
It is not
apparent from Mr Fox’s schedule which of his comparables were rent reviews
rather than new lettings and there is no way of knowing which of them fell
within the majority in which he (or his firm) had been directly involved.
The arbitrator
sent Mr Fox’s counter-submission to Mr Bradford, but unfortunately he does not
appear to have sent the letter of Mr Spencer to which it referred. Mr Bradford
did not ask for a copy. On October 13 the arbitrator wrote to Mr Bradford
saying:
I will be
making an inspection of the property; I do not think it is necessary for either
surveyor to be present and assume this is agreeable to you unless I hear
otherwise.
He did not
contact either party to discuss whether an oral hearing should be held but
published his award on November 18 1987.
Mr Neuberger
complains of two matters which he says amounted either to misconduct by the
arbitrator or a ‘procedural mishap’ (see Shield Properties & Investments
Ltd v Anglo-Overseas Transport Co Ltd [1985] 1 EGLR 7), which in
either case would justify setting aside or remitting the award. The first is the
arbitrator’s failure to enforce his rule of procedure which required
comparables to be based on direct knowledge or supported by documentary
evidence. The second is the arbitrator’s receipt of the letter from Mr Spencer
without communicating its contents to the landlord. He also said that the
letter itself included allegations based on hearsay and inadmissible evidence
of non-expert opinion by Mr Spencer about rental value. I do not think,
however, that these points add much weight to the landlord’s case based on
non-communication of the contents of the letter. Mr Le Poidevin says that the
erroneous reception of hearsay evidence of comparables is not of itself
misconduct: see Russell on Arbitration (20th ed 1982 at p 274 and GKN
Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555 per Lord
Denning MR at p 575 and per Bridge LJ at p583. This is true if the arbitrator
has made a ruling on admissibility which amounts to a mistake of law. In this
case, however, the arbitrator laid down the ground rules clearly enough by
saying that hearsay evidence of comparables would be excluded. He reminded the
tenant’s surveyor of the need to comply with that ruling, but the response was
quite inadequate. It provided no material on which the arbitrator could know
whether any particular comparable was based on hearsay or not. Nevertheless,
there is nothing in the award to suggest that the arbitrator excluded the
tenant’s comparables from consideration. This was, in my judgment, not a
mistake of law but a procedural irregularity which could have caused injustice
to the landlord. Mr Bradford in his counter-submission complained of the lack
of verification of the tenant’s comparables and was, I think, entitled to
assume that the arbitrator would enforce his rules.
I rather suspect
that the only comparables relied upon by the tenant which the arbitrator found
of any value were those in the Leegate Centre itself. He may well have thought
that the landlord was in a position to verify whether or not these were
correct. But this is pure speculation. I am not in a position to say that the
arbitrator did not
excluded. As I am told that the rent fixed by the arbitrator is the equivalent
of about £10.50 per sq ft and the landlord’s Leegate comparables are, as I have
mentioned, between £12.50 and £17.50 per sq ft, it seems likely that he did to
some extent rely upon Mr Fox’s comparables.
In the
alternative, Mr Le Poidevin submitted that the landlord must be taken to have
waived any objection to the use of the tenant’s comparables by the arbitrator.
He saw Mr Fox’s counter-submission and knew that he had not provided any
documentary evidence or indicated which of his comparables were based upon
direct knowledge. Nevertheless, he made no further protest but allowed the
arbitrator to go ahead and publish his award six weeks later.
There would, I
think, have been more force in this submission if the arbitrator had not said
in his procedural regulations that after receipt of the counter-submissions he
would allow no further correspondence but would contact the parties to discuss
whether or not there should be an oral hearing. In those circumstances, I think
that Mr Bradford was entitled to assume that he should wait for the arbitrator
to contact him. When he heard from the arbitrator in accordance with the rules,
he would be able to say that he wanted an oral hearing in order to submit that
the tenant had provided no admissible comparables. In the event, however, the
only communication Mr Bradford received from the arbitrator before publication
of the award was a letter about an inspection of the premises, which was
clearly not the promised discussion about an oral hearing mentioned in the
arbitrator’s third procedural rule.
Mr Le Poidevin
makes a similar submission about the failure to pass on Mr Spencer’s letter. Mr
Bradford saw Mr Fox’s counter-submission which said that the letter was
enclosed. Nothing would have been easier than to telephone the arbitrator and
ask for it. Taken alone, I think that this may well have been a good answer.
But I do not think that I can deal with the question in isolation.
The whole
history of the arbitration is most unfortunate and this application appears to
be the combined result of three mistakes: first, the sloppy way in which Mr Fox
dealt with the arbitrator’s request that he comply with the ground rules on
comparables; second, the accidental error by the arbitrator in not forwarding a
copy of Mr Spencer’s letter to Mr Bradford; and, third, the arbitrator’s
apparent failure to remember that he had made a positive statement that after
written submissions he would discuss with the parties whether or not there
should be an oral hearing. Taken together, they leave me no alternative but to
say that there has been misconduct of the proceedings or a procedural mishap.
The only question is whether I should set the award aside or remit it to the
arbitrator. I do not think that in the circumstances it would be fair to
require the arbitrator to clear his mind of the view he has already formed and
revalue the premises on admissible evidence. I will therefore set aside the
award.
I must confess
to considerable sympathy with Mr Spencer. It is not his fault that the
arbitration went wrong, but he is likely to have to bear at least part of the
burden of additional costs. Furthermore, the level of rent fixed by the
arbitration is important for the landlord because it will be a comparable in
future negotiations with other tenants and affect the rental value of Leegate
as a whole. Mr Spencer, on the other hand, is concerned only with what he has
to pay for his modest shop. Taking these matters into account, the costs in
this motion should, in my judgment, not follow the event but there should be no
order as to costs.
