Rent review — Arbitration — Serious irregularity — Whether arbitrator erring in making deductions from rent for matters not raised by parties without affording claimant opportunity to comment — Whether arbitrator erring in relying upon comparable without evidence as to reason for premium paid on that property — Claim allowed
The claimant was the landlord and the defendant was the tenant under a 99-year lease, dated February 1959, of commercial premises in Newcastle-upon-Tyne. The lease provided for 21-year rent reviews, and, at the time of the February 2001 review, the passing rent was £27,000. The parties referred the determination of the new rent to an arbitrator appointed by the RICS.
In an arbitration conducted by written submissions, the claimant contended for a rent of £126,000, while the defendant submitted that the rent should not be increased. The arbitrator rejected the latter submission, and set the rent at £35,000 pa. In doing so, he took a figure of £53,440 for the ground floor and basement of the property only, on the basis that the upper floors were likely to remain vacant. He then made deductions of £10,000 and £8,500 to reflect, respectively: (i) the value of a rent-free period that would have been agreed in recognition of the likely cost to the tenant of certain works, including renewal of services; and (ii) the tenant’s liability for the upper parts of the building. In making his award, he relied upon one comparable in particular, in respect of which he ignored, when calculating rent per square foot, a premium of £350,000 paid on the property, on the assumption that it was a payment for the fitting-out of the premises.
The claimant sought to set aside that award, under section 68 of the Arbitration Act 1996, on the ground of serious irregularity. It contended that the arbitrator had erred, inter alia, in: (i) making deductions in respect of matters that neither side had raised, with the result that the claimant had been denied an opportunity to deal with them; and (ii) relying upon a comparable upon which a premium had been paid in the absence of any evidence as to the reason for that premium (enquiries having since established that only £30,000 of the £350,000 premium was attributable to fixtures and fittings).
Held: Claim allowed.
1. The arbitrator’s decision to allow an annual equivalent of £10,000 pa in respect of a rent-free period constituted a serious irregularity. That notional rent-free period appeared, on the face of it, to be a very substantial one, and the arbitrator ought to have allowed the parties an opportunity to comment upon the principle of a rent-free period and its duration: Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14 and Handley v Nationwide Anglia Building Society [1992] 2 EGLR 114 applied. His failure to do so had, in the circumstances, caused substantial injustice to the claimant. The deduction in respect of the upper floors of the property was also a serious irregularity.
2. The premium of £350,000 paid on the property, relied upon by the arbitrator as a comparable, was potentially important in the calculating the rent if part of the premium related to rent. There had been no factual basis for the arbitrator’s decision to treat the entire premium as payment for the fitting out of the premises. A finding that no properly instructed tribunal could have reached on the evidence amounted to an error of law: Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 applied; Geogas SA v Trammo Gas Ltd, unreported 5 November 1992 (The Baleares) [1993] 1 Lloyd’s Rep 215 per Steyn LJ and Secretary of State for the Environment, Transport and the Regions v Reed International plc [1994] 1 EGLR 22 not followed. There was a serious irregularity in the arbitrator’s significant reliance upon that property, without taking into account the substantial premium, in the absence of any basis for preferring one view of the premium over another, and without giving the claimant an opportunity to investigate further. That irregularity had caused substantial injustice to the claimant. The arbitrator’s award would be remitted to him for reconsideration in the light of the court’s judgment.
Norman Primost (instructed by Ferster & Co) appeared for the claimant; Timothy Dutton (instructed by Clifford Chance) appeared for the defendant.
Sally Dobson, barrister
