Landlord and tenant — Rent review clause in lease — Arbitration Act 1979, section 1(3) — Application for leave to appeal on a question of law arising out of arbitrator’s award — Guidelines given by House of Lords in The Nema and The Antaios as to the correct judicial approach to the exercise of discretion in regard to leave to appeal under the 1979 Act — Extent to which such guidelines, concerned with appeals against decisions of commercial arbitrators, apply to appeals from arbitrators dealing with rent review clauses — Vice-Chancellor’s reasons for concluding that such guidelines are not capable of direct application to the latter and his formulation as to the correct approach to them — In the case of disputes concerned with the standard terms of commercial contracts, the House of Lords had laid it down that leave to appeal should be given if the judge is satisfied that there is a strong prima facie case that the arbitrator is wrong in law; in the ‘one-off’ type of case the judge should only give leave if satisfied that the arbitrator is obviously wrong — Such criteria are difficult, if not impossible, to apply to arbitrations on rent review clauses — Such clauses in no way correspond to the standard printed terms in commercial contracts; they give rise to questions of law of general application; and the arbitrator’s decision can constitute an issue estoppel affecting future reviews — The approach should be that if the judge is left in real doubt as to whether the arbitrator was right in law he should grant leave to appeal — In the present case the review clause did not specify the terms of the hypothetical lease and the question was whether such terms should embody the very strict provisions as to alienation and user in the actual lease or the much less restrictive provisions on which the premises would have been let by the lessors in accordance with standard forms which they had introduced by the revision date — The arbitrator had determined that the hypothetical lease should embody the latter, less restrictive, terms — Applying his own test, the Vice-Chancellor concluded that he was left in real doubt as to whether the arbitrator was right — He was satisfied that, as required by section 1(4) of the 1979 Act, the determination of the question could substantially affect the rights of the parties — Leave to appeal accordingly granted
This was an
application by Lucas Industries plc under section 1(3) of the Arbitration Act
1979 for leave to appeal on a question of law arising out of an award made by
Mr D W Marsh FRICS. The arbitration concerned a lease for 25 years from May 11
1978 granted by the Welsh Development Agency in respect of Unit 4, Tafarnaubach
Industrial Estate, Tafarnaubach, Mid Glamorgan, and the question arose under
the rent review clause in the lease.
D J
Pearce-Higgins (instructed by Evershed & Tomkinson, of Birmingham) appeared
on behalf of the applicants; Kirk Reynolds (instructed by J E Bradwick, Welsh
Development Agency) represented the Agency.
Giving
judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This is an application under
section 1(3) of the Arbitration Act 1979 for leave to appeal on a question of
law arising out of an award made by Mr D W Marsh as arbitrator. The arbitration
concerned the rent payable under a rent review clause contained in a lease. As
is now usual in such cases, the application for leave to appeal has been
referred by a judge of the Commercial Court for determination by a judge of the
Chancery Division.
The rent
review clause is contained in a lease dated December 21 1978 granted by the
Welsh Development Agency (‘the Agency’). The term of 25 years from May 11 1978
granted by the lease is now vested in the applicant, Lucas Industries plc. The
rent reserved by the lease during the first five years of the term was £32,500
pa and for the remainder of the term a yearly rent to be agreed or determined
from time to time as provided in clause 4 of the lease. Clause 4 provides for
five-yearly rent reviews. The machinery is that the Agency gives to the lessee
notice of the proposed revised rent and the lessee can then give a
counternotice requiring the rent to be fixed by arbitration. Such a
counternotice was given at the first review date and Mr Marsh (a surveyor) was
appointed the arbitrator. Clause 4(b) provides as follows:
The amount of
the yearly rent payable from the appropriate revision date shall be the sum
equivalent to the amount which represents the rental value in the open market
on a date being three calendar months immediately before the appropriate
revision date of the demised premises properly maintained in accordance with
the covenants on the part of the Lessee herein contained . . . .
It should be
noted that that formula does not specify the terms of the lease on which the
property is to be deemed to be let to the hypothetical tenant.
The lease
dated December 21 1978 contained covenants imposing restrictions as to user and
alienation. The user covenant is as follows:
. . . not to
use the demised premises . . . for any other business than the . . .
manufacture of vehicle and industrial braking and suspension systems and
purposes ancillary thereto and the manufacture of such other products to which
the Agency may give prior approval in writing.
The covenant
against alienation provides an absolute bar on alienation subject to a very
limited concession permitting assignment or sharing possession with a
subsidiary or holding company of the lessee.
The lease
dated December 21 1978 was in the standard form of lease then adopted by the
Agency (Type A). In 1980 the Agency introduced a new standard form (Type B)
which permits change of use for any light and general industrial purposes and
permits assignment of the whole of the demised premises, in both cases subject
to the landlord’s consent such consent not to be unreasonably withheld. If the
demised premises were being let for the first time by the Agency as at the
revision date, the Agency would have let on the terms of the Type B lease, ie
on terms much less restrictive as to user and alienation than those contained
in the 1978 lease.
One of the
main issues on the arbitration was whether in fixing the rent obtainable on the
open market the arbitrator should assume a letting to the hypothetical tenant
on terms as to user and alienation being those in the actual lease or those in
a lease of Type B. In a carefully reasoned award, the arbitrator adopted the
Agency’s submission that the hypothetical letting should be on the terms of a
Type B lease. The question which Lucas wish to raise on appeal is whether the
arbitrator erred in law in so holding.
Under section
1(3) an appeal against the decision of the arbitrator can only be brought with
the consent of all parties or with the leave of the court. Under section 1(4)
the court is directed not to grant leave unless it considers that, having
regard to all the circumstances, the determination of the question of law
concerned could substantially affect the rights of one or more of the parties
to the arbitration agreement. There are two decisions of the House of Lords
laying down guidelines as to how a judge should approach the exercise of the
discretion to give leave to appeal, viz Pioneer Shipping Ltd v B T B
Tioxide Ltd (The Nema) [1982] AC 724 and Antaios Compania Naviera SA
v Salen Rederierna AB (The Antaios) [1985] AC 191. Those cases (and many
others in lower courts) have all been concerned with appeals against decisions
of commercial arbitrators. Difficulty has been experienced in determining the
extent to which those guidelines are applicable to appeals from arbitrators
under rent review clauses. It is for that reason that in this case I have, with
some trepidation, decided to give my reasons, a practice which Lord Diplock in The
Antaios (at pp 205-6) characterised as not ‘normally’ desirable for a
‘commercial’ judge to adopt.
As the
speeches in the House of Lords make clear, the purpose behind the changes
introduced by the 1979 Act was to get rid of the use made of so-called points
of law to cause delay and expense in arbitrations arising out of commercial and
shipping contracts. In that context the House of Lords has drawn a distinction
between those cases which involve terms contained in a standard form commercial
contract widely adopted in a particular field (eg The New York Produce Exchange
time-charter form) and those which involve a one-off contract or event. In the
case of disputes concerned with standard terms of commercial contracts, leave
should be given if the judge is satisfied that there is a strong prima facie
case that the arbitrator was wrong in law. In the one-off type of case, the
judge should only give leave if satisfied that the arbitrator was obviously
wrong.
This approach
is difficult, if not impossible, to apply to arbitrations on rent review
clauses. First, although there are precedents of such clauses in the books,
they are frequently modified in practice: they in no way correspond to the
standard printed terms of contract commonly incorporated into commercial
contracts. Second, although the exact words used in rent review clauses vary
from lease to lease, there are questions of law which apply generally to rent
review clauses of a particular type, eg the question in this case whether in
the absence of express provision the hypothetical lease is to be treated as
having the same terms as the actual lease between the parties. Third (and to my
mind the most important), save in the case of the last review, the proper legal
effect of a rent review clause will be material on future reviews between the
same parties under the same lease. Thus in the present case exactly the same
point will arise between these parties (or their successors in title) on the
reviews which will have to take place in the 10th, 15th and 20th years of the
term. There are strong dicta which suggest that the decision by the arbitrator
on this point of law will constitute an issue estoppel which will prevent a
different arbitrator taking a different view of the point of law on future
reviews: see per Diplock LJ in Fidelitas Shipping Co Ltd v V/O
Exportchleb [1966] 1 QB 630 at p643. In all the commercial decisions I have
seen, the point of law in question has always been ‘one-off’ as between the
parties to the arbitration and did not regulate their future contractual
relationships.
For these
reasons, I do not think that the House of Lords guidelines are capable of
direct application to arbitrations on rent review clauses. I take some comfort
from the fact that in The Antaios (at p200B) Lord Diplock said that the
guidelines are not immutable but subject to adaptation to meet problems of
kinds that were not foreseen and are not covered by what was said in The
Nema. In my judgment, in neither of the cases in the House of Lords were
they considering problems raised by rent review clauses.
What then
should be the correct approach? All that
the House of Lords has said about the need to avoid delay and expense in
commercial arbitrations is applicable to rent review arbitrations, although
possibly to a lesser extent. Accordingly the need to avoid appeals on
over-ingenious points of law which have no real prospect of success is equally
applicable to arbitrations on rent review clauses. But, in my judgment, in
cases where the same point of law will regulate future rent reviews a lower
standard than a strong prima facie case is appropriate. If, after
hearing submissions, I am left in real doubt whether the arbitrator was right
in law, it seems to me appropriate to grant leave so that the law regulating
the future relationship of the parties can be authoritatively determined by the
court. This is especially so in a case such as the present where the decision
on the point of law is likely to be of importance in relation to all rent
review clauses which do not specify what are to be the terms of the
hypothetical lease. There are many such clauses, especially those drafted some
years ago.
Adopting that
test, I am left in real doubt whether the arbitrator was right in the
conclusion which he reached. I am also satisfied (as required by section 1(4)
of the 1979 Act) that the determination of that question could substantially
affect the rights of parties. Following the House of Lords guidelines I do not
think it appropriate to give my reasons: to do so would merely embarrass the
judge who will have to determine the question after full argument.
Finally I
should mention that the Agency has granted other leases of Type A and the same
point will arise on the rent review clauses in those leases. I would have
granted leave to appeal in the absence of this factor; but it provides an
additional reason for so doing.
Leave to
appeal granted.
