Scottish Court of Session (Outer House)
Business premises – Rent review clause – Valuation – Lease providing for rent by reference to 7% gross annual turnover – Dispute arising between parties as to rental valuation – Arbitrator basing rent review on open market valuation – Whether arbitrator erring in law by failing to refer to 7% gross annual turnover – Appeal allowed
The petitioner was the landlord of premises operated as a public house by the respondent tenant. The lease ran from May 1980 for 99 years and contained a rent provision under which the tenant was to pay to the landlord 7% of the gross annual turnover of the business, subject to a minimum rent of £17,500 pa and a maximum rent of £30,000. A five-yearly rent review provision stated that the landlord or the tenant might at their discretion, by notice in writing, require that the minimum and maximum amounts of rent payable should be determined by an arbitrator if they were not agreed.
In September 2009, the petitioner gave notice of its intention to seek a review of the minimum and maximum amounts of rent payable by the respondent. After failed attempts to reach an agreement, an arbitrator was appointed who rejected the petitioner’s contention that the minimum and maximum figures should be referable to 7% of the annual gross turnover of the business. Instead he had regard to market rents for other public house leases in the area and fixed the levels at +/- 15% of 5% of the annual turnover of the business. He took the view that 5% of turnover was a fair market rent for the ground lease.
The petitioner brought a legal error appeal under the Arbitration (Scotland) Act 2010 on the basis that the arbitrator had ignored or given insufficient weight to the terms of the rent provisions. It contended that the purpose of a review was to protect the landlord from the effect of an unusually poor period of trading and to safeguard the tenant from an unduly high rent caused by an exceptionally good period of trading; it did not open up the standard rate of rent for a wider reconsideration in accordance with general market conditions.
The respondent argued that the arbitrator had adopted a commercially sound construction by using the market level of rent to achieve the commercial purpose of ensuring that an adequate level of guaranteed income would be achieved so as to make the property a commercially attractive investment.
Held: The appeal was allowed.
(1) The court’s task was to decide whether the arbitrator’s decision amounted to an error in law, in that he failed to follow the intention of the parties as expressed in the lease. In the absence of unusual factors, the arbitrator could not simply ignore 7% of the gross annual turnover when making his determination. He should not proceed solely by reference to rental levels in respect of other properties which were leased on very different rental terms. The arbitrator’s approach did less than justice to the full terms of the rental provisions in the lease. It was not consistent with the original parties’ agreement and the arbitrator had erred by fixing the figures solely by reference to general market conditions.
(2) The arbitrator, as a chartered surveyor with expertise in this area of work, was entitled to exercise his discretion or judgment by considering whether there were any relevant special circumstances relating to the recent gross turnover which had to be taken into account, as well as inflation forecasts and likely trends in the trade, as he was setting the figures for the next five years. The arbitrator also had to decide on the figures themselves, including whether he wished to set the minimum figure in the region of current turnover, or materially below it and determine the maximum figure. If the appropriate reference to 7% of turnover had been adopted, that decision would have fallen within his reasonable discretion.
(3) In general, a landlord would be reluctant, over 99 years, to tie the rent exclusively to a percentage of turnover, which might fluctuate for a wide variety of reasons. The minimum and maximum figures and the review provisions in the lease provided some protection to the landlord concerned as to the investment value of his property. An arbitrator would be expected to have that in mind when fixing the minimum figure as this was not a pure percentage of turnover lease. The arbitrator was not absolutely tied to 7% of turnover. However, special circumstances aside, the exercise had to be carried out under reference to a rental of 7% of gross annual turnover. Instead, the arbitrator had relied solely on market rental evidence based on other tenanted public houses in the area. That was not an open-market rental lease, although the arbitrator had effectively treated it as such. The lease made no mention of open market levels; but there was specific agreement as to a rental based on 7% of turnover.
(4) Throughout the lease, the commercial purpose was to maintain a link between the rental payments and 7% of the gross annual turnover of the public house business. In general, rent review provisions were designed to reflect changes in the value of money and real increases or decreases in the value of property. Nonetheless, the current review had to take place within the framework of the specific bargain struck by the original parties to the particular lease: GREA Real Property Investments Ltd v Williams [1979] 1 EGLR 121 applied.
Iain Clark, Solicitor Advocate (of Young & Partners LLP) appeared for the petitioner; Jonathan Broome (instructed by Wright, Johnston & Mackenzie LLP) appeared for the respondent.
Eileen O’Grady, barrister
