Landlord and tenant — Rent review provisions — Arbitration — Rent of casino — Admissibility in evidence of trading accounts — Unusual clauses — Appeal by consent from interim award of arbitrator — Question as to admissibility in rent review of material which would have been confidential to tenant and therefore not available to any hypothetical lessor or lessee in the open market at the rent review date — Landlords’ surveyor by extrapolation from published accounts of other casinos estimated pre-tax profit of subject casino (the Golden Nugget Casino) to be £4.9m a year — Tenants wished to put in evidence their actual trading accounts, which appeared to show that profit never in fact exceeded £1m — Landlords objected and arbitrator ruled that the trading accounts were inadmissible — In Cornwall Coast Country Club v Cardgrange Ltd, following the principle of Lynall v Inland Revenue Commissioners, it was held, in the case of another casino, that the admissible evidence as to profit-earning capacity would be confined to that which was available to prospective tenants in the hypothetical open market — Held that this rule would have been applicable to the present case if it were not for unusual provisions in the lease in paragraphs concerned with the appointment of an arbitrator in the event of dispute — These provided that the arbitrator must require the production by the lessee of trading accounts upon request by the lessor — It was further provided that for the purpose of determining rental value the lessee would not be required to produce such accounts except on a confidential basis and only to, and if requested by, the arbitrator — Although not expressly concerned with the admissibility of evidence, these curious provisions indicated that the information provided was available ‘for the purpose of determining rental value’ — Hence the information could not be excluded on the ground that it would not have been available on the open market — Appeal from arbitrator allowed
The following
cases are referred to in this report.
Cornwall
Coast Country Club v Cardgrange Ltd [1987] 1
EGLR 146; (1987) 282 EG 1664
Lynall
v Inland Revenue Commissioners [1972] AC
680; [1971] 3 WLR 759; [1971] 3 All ER 914, HL
This was an
appeal by consent from an interim award of Mr W G Nutley FRICS. The premises
which were the subject of the award were the Golden Nugget Casino in Coventry
Street, London W1. The appellants were the tenants, London Clubs Ltd, and the
respondents were the landlords, Electricity Supply Nominees Ltd.
David
Neuberger QC (instructed by M J Kusel & Co) appeared on behalf of the
appellants; Paul Morgan (instructed by Jaques & Lewis) represented the
respondents.
Giving
judgment, HOFFMANN J said: This is an appeal by consent of the parties from an
interim award of Mr W G Nutley FRICS in a rent review arbitration. The premises
are the Golden Nugget Casino in Coventry Street. The arbitrator is engaged in
deciding what, in the words of the fourth schedule to the lease, was the best
yearly rent at which the demised premises ‘are worth to be let in the open
market by a willing lessor to a willing lessee’ upon certain specified
assumptions on the rent review date, which was September 28 1985.
The interim
award is concerned with the admissibility in evidence of accounts and other
documents concerning the tenant’s trading at the premises, which would have
been confidential to the tenant and therefore not available to any hypothetical
lessor or lessee in the open market at the rent review date. The arbitrator
decided that they were inadmissible. In coming to that conclusion he applied
the general principles of admissibility stated by Scott J in Cornwall Coast
Country Club v Cardgrange Ltd [1987] 1 EGLR 146. He also said that
the lease did not contain any agreement to modify those principles.
Each side has
already put before the arbitrator the evidence of an expert surveyor. Both
agree that in the case of casinos the rents paid for other premises are of
limited assistance in deciding what the open market rent for these premises
would be. Both agree that the market’s estimate of the profit-earning capacity
of the Golden Nugget would be highly relevant for this purpose.
Now the
landlord’s surveyor has, by extrapolation from the published accounts of other
casinos, expressed the opinion that the pre-taxed profit of the Golden Nugget
would be estimated by the market to be £4.9m a year. The accounts for the
Golden Nugget itself are not published because the company which owned it at
the relevant date also owned five other London casinos and its published
accounts are not broken down. But the tenant wants to put in evidence the
actual accounts, which appear to show that the profit has never in fact
exceeded £1m. The landlords objected and the arbitrator has ruled that they are
inadmissible.
In the Cardgrange
case, which also concerned the accounts of a casino, Scott J followed the
principle laid down by the House of
held that the only admissible evidence of the profit-earning capacity of the
casino was evidence available to a prospective lessee in the open market. In
this appeal, Mr Neuberger has submitted that the learned judge was wrong. He
said that evidence of actual earnings, even if not available in the open
market, was admissible to test the value of expert estimates of what the
profit-earning capacity would have been. If it showed, as appeared here to be
the case, that actual profits were nothing like what the expert said the market
would have assumed, the arbitrator would be entitled to take that into account
in assessing the value of the expert’s evidence.
In my
judgment, this submission is based upon a false assumption about the issue
before the arbitrator. He is concerned not with the actual earning capacity but
with how the market would have assessed earning capacity. The open market may
be a false market in the sense that it is based upon false assumptions, but it
is still the open market. I do not see how information about profitability
which the market did not know can be relevant to the question of what the
market would have thought.
The cases in
which post-review-date transactions are admissible seem to me to stand on quite
a different basis. An open market transaction at a later date may, by applying
the presumption of continuity, afford a legitimate basis for an inference that
a transaction on similar terms would have taken place at an earlier date. Of
course the presumption may be rebutted by showing that the market, at the later
date, was possessed of information not previously available. But there is no
reason in principle why relevant inferences cannot be drawn from subsequent
events. But this is not the kind of reasoning upon which the tenants in this
case want to rely. I am therefore not persuaded that Scott J was wrong and I
propose to follow his decision.
The next
question is whether that principle has been expressly or impliedly modified by
the terms of the lease. For that purpose two provisions are relevant. First, in
para 4(i) of the fourth schedule, which deals principally with the appointment
of an arbitrator in the event of disagreement between the parties, it was
provided that:
The
arbitrator shall require the production by the Lessee of the accounts and
details mentioned in subparagraph (ii) of this paragraph upon request by the
Lessor.
Subpara (ii)
reads:
For the
purpose of determining rental value hereunder the Lessee shall not be required
to produce accounts or details of its business carried on at the demised
premises except on a confidential basis only to and if requested by an
arbitrator appointed in pursuance of paragraph 4(i) of this Schedule.
Neither of
those provisions is expressly concerned with the admissibility of evidence or
the basis of valuation. They both deal with the right to production of accounts
and details of the business carried on by the tenant and the limited right of
the tenant to keep that information confidential. It seems to me, however, that
those provisions only make sense on the basis that there was a common
assumption that such information would be admissible, as para 4(ii) says, ‘for
the purpose of determining rental value’.
In the light
of the principle in the Lynall case, that can only mean that the parties
were regarding the open market as having to be treated as possessed of such
information. In that respect there is, in my view, an implied agreement similar
to that which was enacted by Parliament when reversing the Lynall
decision by section 51(3) of the Finance Act 1973.
Mr Morgan
submitted that the provisions of paras 4(i) and 4(ii) give the landlord an
election to decide whether to demand the documents or not and that it would be
very strange if the basis of the valuation could be altered at the election of
one or other of the parties. I agree. It seems to me that the only fair way to
construe those provisions is to treat them as dealing solely with the position
which may arise if the tenant does not wish to disclose the documents. For that
purpose they give the landlord a right to require production and a tenant a
limited protection against their disclosure. Having said that, however, it
would seem to me equally strange that the landlord should have the right to put
before the arbitrator documents which are inadmissible for the purpose stated
in para 4(ii), namely determining the rental value. And in order to avoid that
anomaly, it is, in my view, a necessary implication that the parties have
accepted their admissibility. Such admissibility is a general underlying
assumption and does not depend on whether or not the landlord or arbitrator has
made a request under para 4(i) or 4(ii). For those reasons, I would allow the
appeal and rule that all documents falling within the description in para
4(ii), namely accounts and details of the business carried on at the premises,
are in principle admissible for the purposes of valuation. That does not mean
that some of them may not, on account of their remoteness from the
profit-earning capacity of the casino, be excluded as irrelevant. What it does,
in my view, mean is that they cannot be excluded on the grounds that they would
not have been available on the open market.
The appeal
was allowed with costs. Leave to appeal to the Court of Appeal was refused.
