Landlord and tenant — Rent review provisions — Arbitration — Application by landlords under Arbitration Act 1950 for remission of award for reconsideration on ground of procedural mishap or technical misconduct — Application by tenants for leave to appeal against award on a question of law pursuant to the Arbitration Act 1979 — Both applications dismissed — ‘Valuation is not an exact science and comparables cannot be applied slavishly’ — Court of Appeal’s guidance in Ipswich Borough Council v Fisons plc referred to — In present instance there was neither an obvious error nor a strong prima facie case of error
the present case was for a term of 25 years from June 24 1984 with a provision
for rent review every 25 years — The arbitration which gave rise to questions
concerned the rent review for the second five years of the term, commencing on
June 24 1989 — The lease referred to the appointment of an independent surveyor
but it was clear that he was to act as an arbitrator, not as an expert — The
review provisions included assumptions that the property was fit for immediate
occupation and use and that the covenants by the parties had been fully
performed and observed — It was also provided that regard was to be had to the
open market rental values current at the relevant review date
by landlords to remit
landlords’ application to remit on the ground of procedural mishap or technical
misconduct was based on a complaint that the arbitrator had gone outside the
evidence put before him and reached a decision without giving the parties an
opportunity of arguing about the two matters of which criticism had been made —
It was said that the arbitrator had taken account of a rent-free period
provided for in the letting despite the fact that the experts of both parties
had agreed that no such allowance should be made — It was also said that the
adjustment made by the arbitrator in the rent of a comparable, an ‘uplift’ of
8.23%, was inconsistent with evidence that the minimum uplift should have been
10% — Ferris J rejected both points as grounds for the remission of the award —
The rent-free period was only one of a combination of factors taken into
account by the arbitrator in adjusting the rent and a complaint of this kind
about the uplift was equivalent to treating the arbitrator as a calculator
rather than an arbitrator exercising his independent professional judgment
by tenants for leave to appeal
usually required to give reasons for a decision on leave, Ferris J indicated
briefly why he rejected the tenants’ application for leave to appeal — He
referred to the decisions of the House of Lords in The Nema and The Antaios and
the
case was a ‘one-off’ contract, for which leave to appeal required an obvious
case of error–The arbitrator had decided that the assumption he was required by
the lease to make, that the property was fit for immediate occupation and use,
obliged him to leave out of account certain admitted inherent defects in the
windows and curtain-walling–Ferris J held that he was quite unable to regard
the arbitrator’s award as being based on an obvious error in this
respect–Indeed, he could not even say that there was a strong prima facie case
of error–The application for leave to appeal was accordingly refused
applications were dismissed–Application for leave to appeal to the Court of
Appeal against the judgment of Ferris J refused
The following cases are referred to in
this report.
Antaios Compania Naviera SA v Salen Rederierna AB
[1985] AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229; [1984] 2 Lloyd’s Rep 235,
HL
Bulk Oil (Zug) AG v Sun International Ltd
(No2) [1986] 2 All ER 744; [1984] 1 Lloyd’s Rep 531; [1984] 2 CMLR 91
Ipswich Borough Council v Fisons plc [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
These were two applications arising out
of an award by an arbitrator, Mr Ian Vaughan Oddy, determining the rent under
rent review provisions in the lease of an office building now known as Lex
House, Connaught Place, London W2. The lessors were Oriel House BV and the
lessees were Lex Services plc.
Paul Morgan (instructed by Berwin
Leighton) appeared on behalf of Lex Services plc; David Neuberger QC
(instructed by Brecher & Co) represented Oriel House BV.
Giving judgment, FERRIS J said: I
have before me two applications arising out of an award made by an arbitrator,
Mr Ian Vaughan Oddy [FRICS FRVA FCIArb]. By that award he determined the rent
payable during a period of five years commencing on June 24 1989 under a lease
of an office building now known as Lex House, Connaught Place, London W2.
The first application is by Oriel House
BV, which is now the lessor for the purposes of the lease, and is for an order
that the arbitrator’s award be remitted to him for reconsideration or revision
on the ground of a procedural mishap or technical misconduct by him.
The second application is by Lex Services
plc, which is the lessee under the lease, and is for leave to appeal against
the award on a question of law pursuant to section 1(3)(b) of the
Arbitration Act 1979.
The lease is dated September 3 1984 and
it was made between the Church Commissioners for England as lessor and Lex
Services plc as lessee. By it the Church Commissioners demised what is now
known as Lex House to Lex Services for a term of 25 years from June 24 1984.
The lease provided for a rent review every five years.
The arbitration was concerned with the
rent payable for the review period consisting of the second five years of the
term. By the third schedule to the lease it was provided that if the parties
were unable to agree the rent for a review period the rent for that review
period should be that:
determined by an independent surveyor to
be the yearly rent at the relevant review date for the property (a) on the
following assumptions at that date, (i) that the property is fit for immediate
occupation and use
— then I omit some words and I also omit
(ii) —
(iii)
that the covenants herein contained on the part of the lessors and the
lessee have been fully performed and observed and having regard to open market
rental values current at the relevant review date.
The other provisions of the third
schedule are not material to the applications which are before me.
At some time after the lease was granted
the reversion expectant thereon was assigned by the Church Commissioners to
Oriel House BV. When the rent for the review period commencing on June 24 1989
came to be fixed the parties were unable to agree upon the new rent and the
determination of that rent was referred to Mr Oddy as the independent surveyor
for the purposes of the provision I have just read. It is clear from a
provision of the lease which I have not read that Mr Oddy was to act as an
arbitrator in accordance with the Arbitration Acts.
Two of the issues which arose at the
arbitration were: (1) the proper use of certain comparables about which
evidence was given to the arbitrator; and (2) what effect the existence of
certain admitted defects in the property ought to have upon the new rent having
regard to the assumptions which were required to be made. Broadly speaking, the
first issue gives rise to the application to remit which is made by Oriel House
and the second issue gives rise to the application for leave to appeal which is
made by Lex Services.
Application to remit
As one would expect, evidence of a number
of comparables was adduced before the arbitrator. As is also commonly the case
even the closest comparables were not exactly equivalent to Lex House and much
of the expert evidence before the arbitrator was directed to the question of how
to apply those comparables to the letting of Lex House. It was common ground
that the main comparable was a property known as York House in Great Cumberland
Place. But two questions in particular arose in relation to the use of this
comparable in order to fix the rent of Lex House. The first question was what
adjustment, if any, ought to be made to reflect the fact that the letting of
York House provided for a rent-free period of three months. The second question
was the amount by which the rent determined from Lex House ought to exceed the
rent agreed for York House, it being common ground that some uplift ought to be
made. The application to remit is based upon contentions that the arbitrator
resolved these issues in a way which was not open to him or would not have been
open to him if he had proceeded correctly.
As to the three months’ rent-free period
Mr David Neuberger QC, on behalf of Oriel House, took me to transcripts of the
material parts of the evidence of Mr Nicholas C Ridley [ARICS], an expert called
on behalf of Oriel House, and of Mr Norman Rose [FRICS], an expert called on
behalf of Lex Services. Mr Ridley made it clear in cross-examination that in
analysing the letting of York House he had made no allowance for the three
months’ rent-free period and did not know on what basis that rent-free period
had been allowed. Mr Rose, when he was cross-examined, was asked: ‘Do you agree
that Mr Ridley was right not to allow for a rent-free period there’ — that is
to say on the letting of York House — ‘when comparing it to these premises’ —
that is to say Lex House — and he answered unequivocally ‘Yes’. He was then
asked other questions about the matter which he answered somewhat less clearly,
but the general effect of his evidence appears to have been that the three
months’ rent-free period was irrelevant.
Mr Neuberger now complains that in making
his award the arbitrator has adjusted the rent obtained for York House in order
to reflect, among other considerations, the three months’ rent-free period and
that it was not permissible for him to do this having regard to the
uncontradicted view of Mr Ridley and Mr Rose that the rent-free period was
irrelevant. Oriel House called another expert witness, Mr Richard Posner [BA
Econ], but he did not deal with this matter.
I now come to what the arbitrator said
about York House. In para 6.10 of his award he said:
In evidence it was agreed that the
letting of York House had been agreed at a figure at the top of the range of
possible values. My attention was also drawn to the fact that a three month,
rent-free period was given which had not been allowed for in the analysis of
the rent and the demise included a high ratio of car parking. It was clear to
me that a combination of these factors had served to produce a rent which was
possibly marginally higher than would otherwise have been expected. It seemed
that I should have some regard to these factors and, in order to make a fair
comparison with some other comparables, that I should down-value this
comparable by perhaps 50p or £1 per square foot.
In para 7.1 of his award he referred back
to his analysis of York House and other comparables and said:
I reached the conclusion that the right
relationship between the values of the properties to which my attention had
been directed was to show a descending scale of value starting at Cavendish
Square. I placed Cavendish Square at around £55 to £56, Portman Square in the
low £50s, International House, Chilton Street at £47 and York House, Great
Cumberland Place at approximately £42.50. There were various factors affecting
the rent which was paid at York House (para 6.10) and as the definition of rent
in the Lex House lease did not suggest that a best rent situation applied I
decided that taking a more reasonable value in York House would result in
focusing upon the right level within the rental hierarchy. This led me to the
conclusion that if Lex House had been located where York House now stands, on
the basis that the building was without defect, its basic rental value would be
£46 per square foot.
Mr Neuberger’s complaint is that the
arbitrator was not entitled to make an adjustment to the rental value of York
House to reflect a factor which was regarded as irrelevant by both experts who
gave evidence on the point, particularly when his intention to do so was not
put to the witnesses or to counsel who argued the case before him.
The second complaint raised by Mr
Neuberger concerns the way in which the arbitrator made an uplift in the rental
value of York House in order to arrive at the rent of Lex House. I have already
read the passage in the award in which the arbitrator, having attributed an
adjusted rent of £42.50 per sq ft to York House, concluded that if Lex House
stood where York House now stands this basic rental value would be £46 per sq
ft. £46 is 8.23% more than £42.50. Mr Neuberger says that the expert witnesses
agreed that the uplift should be at least 10% and that in applying an uplift of
only 8.23% the arbitrator did something which it was not open to him to do.
It is common ground that the expert
witnesses called on behalf of Oriel House gave evidence in support of an uplift
of more than 10%, so I was not taken to the details of their evidence. What Mr
Rose said about the matter is, I think, encapsulated in an answer in which he
said:
If Lex House were to move to where York
House is then it would be worth about 10% more.
In the context of Mr Rose’s other answers
on the point he clearly meant that Lex House, which was a superior building,
would command about 10% more rent than York House if it were located where York
House is located.
The jurisdiction to remit an award which
Oriel House asks me to exercise is conferred by section 22 of the Arbitration
Act 1950. It was common ground between the parties that the jurisdiction is
discretionary. It was aouse is located.
The jurisdiction to remit an award which
Oriel House asks me to exercise is conferred by section 22 of the Arbitration
Act 1950. It was common ground between the parties that the jurisdiction is
discretionary. It was also common ground that the jurisdiction can be invoked
only on limited grounds. Mr Neuberger argued that the arbitrator was guilty of
technical misconduct in that he had gone outside the evidence and he said that
this was a different thing from deciding the case against the weight of the
evidence. The arbitrator, said Mr Neuberger, has failed to give the parties a
proper opportunity of arguing on the two matters where complaint was made. Mr
Neuberger took me to passages in Russell on Arbitration, 20th ed, at pp
417 and 421 and relied particularly upon a statement in Mustill and Boyd:
Commercial Arbitration, 2nd ed, at p 312, where, having discussed the
conditions which must be observed at an oral hearing, the authors remark as
follows:
Again, the parties are entitled to assume
that the award will be based solely on the evidence and argument deployed up to
the moment when the hearing is concluded. Any departure from this general
approach is likely to give rise to injustice and to a breach of one of the various
principles discussed above. If the arbitrator decides the case on a point which
he has invented for himself he creates surprise and deprives the parties of
their rights to address full arguments on the case which they have to answer.
Mr Paul Morgan, on behalf of Lex
Services, referred me to the decision of Bingham J in Bulk Oil (Zug) AG
v Sun International Ltd [1984] 1 Lloyd’s Rep 531 at p 532 where he
summarised the principles applicable to the exercise of the court’s supervisory
jurisdiction over arbitration provisions. Mr Morgan relied particularly on the
observation which formed part of Bingham J’s discussion of the conditional
right of appeal on a point of law given by section 1 of the 1979 Act that:
The court will continue to set its face
against entertaining questions of fact framed in the form of a question whether
there was any evidence to support a particular finding.
Mr Morgan also relied on what Bingham J
said about section 22, procedural mishap and misconduct, in his principles
numbered (4), (5) and (6), which I will not read here.
In my judgment, this is not a case where
I ought to remit the award to the arbitrator on either of the grounds put
forward by Mr Neuberger. As to taking into account the rent-free period, it is
apparent from para 6.10 of the award that this was only one of ‘a combination
of factors’ which led the arbitrator to adjust the rent of York House. The
other factors were the agreement of the letting at the top of the range of
possible values and the high ratio of car parking included in the demise.
Valuation is not an exact science and comparables cannot be applied slavishly.
When, as here, parties appoint an independent surveyor to determine a rent, it
is not to be expected, in my view, that he will ignore his own expertise in
applying comparables to the case with which he has to deal. The mere fact that
the expert witnesses for the parties seem to have agreed that the three months’
rent-free period was not material to their analysis did not, in my view, make
this forbidden ground for the arbitrator. Moreover, it is not apparent what
weight he gave to this factor in relation to the weight which he gave to other
factors which he mentioned.
In my judgment, the arbitrator’s approach
to the York House comparable in this respect cannot fairly be characterised as
technical misconduct or even as procedural mishap and it provides no basis for
remitting the award to him. Even if I were wrong about this I would not think
it right in the circumstances of this case and in the exercise of my discretion
to remit the award on this ground.
As to the point about a minimum uplift of
10%, I regard the complaint as even less well grounded in fact. Mr Rose’s
evidence was that the rent ought to be ‘about 10% more’. The arbitrator adopted
at this stage of his calculations a rent which was 8.23% more. To regard this
as going outside Mr Rose’s evidence would, in my judgment, be to treat the
arbitrator as a calculator rather than as an independent surveyor charged with
the task of determining a rent as arbitrator. I cannot regard this as any kind
of misconduct or procedural mishap. Even if it were, it would not, in my view,
be a case where I ought to exercise my discretion to remit the award, even
though I bear in mind that the difference between an uplift of 8.23% and an
uplift of 10% is about 70p per sq ft pa which, for a building of the size of
Lex House, comes to over £20,000 pa.
Application for leave to appeal
I turn now to the application by Lex
Services for leave to appeal. In The Antaios [1985] AC 191 Lord Diplock,
with whose speech the rest of their lordships agreed, said at p 205 that a
judge ought not normally to give reasons for a grant or refusal of leave under
section 1(3)(b) of the 1979 Act. To a great extent I propose to observe that
injunction. I go outside it only because I have had to give a reasoned decision
on the application by Oriel House to remit the award and because it seems to me
to be right in the circumstances of this case to indicate the approach which I
have adopted to the application for leave. The basis of the arbitrator’s award
was that in fixing the rent for the five-year period in question no allowance
was to be made in respect of the existence of certain admitted inherent defects
in the windows or curtain-walling of Lex House. At the review date these were
about to be remedied and they were in fact remedied over the next four to six
months, the cost being borne by the original lessor, the Church Commissioners.
The arbitrator held that the assumption which he was required to make by the
third schedule to the lease that the property was fit for immediate occupation
and use required him to leave these defects out of account.
As to the principles on which the court
is to act in granting or refusing leave I was referred to the decision of the
Court of Appeal in Ipswich Borough Council v Fisons plc [1990] 2
WLR 108*. As it was not practicable for me to give an immediate decision at the
conclusion of argument I have also, since hearing argument, refreshed my memory
of the decisions of the House of Lords in The Nema [1982] AC 724 and in The
Antaios [1985] AC 191, to which I have already referred. I am satisfied
that the determination of the question or questions of law implicit in the
arbitrator’s decision could substantially affect the rights of Lex Services and
Oriel House. Accordingly, section 1(4) of the 1979 Act does not prevent me from
granting leave. However, I should grant leave only if I am satisfied that it is
right to do so within the principles which appear from the decided cases which
I have mentioned. It is apparent that in applying those principles one
important matter to be considered is whether the issue arises on what has been
described as a one-off contract or on a contract which is expressed in standard
terms.
*Editor’s note: Also reported at [1990] 1
EGLR 17.
In my judgment, the present case is a
one-off contract. Although an assumption that the property is fit for
occupation and use is frequently required to be made in rent review cases, the
circumstances which were relevant to the making of that assumption in the
present case were highly unusual. Moreover, the existence of those
circumstances at the 1989 review date will not, on any view of the matter, have
any impact on the operation of the rent review provisions in relation to Lex
House on future rent reviews under the lease. In the Ipswich case the
Court of Appeal rejected the test which
namely whether there was a real doubt whether the arbitrator was right. The
Court of Appeal said that the test must always be based upon at least a
suspicion that the arbitrator had gone wrong. Taking those words in isolation,
that might seem to be a less stringent test. But the Court of Appeal went on to
apply the tests which appear from the two House of Lords decisions. For one-off
contracts an obvious case of error has to be shown. For standard terms a strong
prima facie case of error is required.
I have read and reread the arbitrator’s
award and I hope I have taken full account of both the oral and written
submissions of Mr Morgan on behalf of Lex Services. The application of the rent
review provisions to the unusual circumstances of this case was not an easy
matter. However, I am quite unable to regard the arbitrator’s award as being
based upon obvious error. Indeed, I could not even say that there is a strong prima
facie case of error. Accordingly, I refuse leave to appeal.
No order for costs; leave to appeal
refused.
