Landlord and tenant — Rent review clause in underlease — Arbitrator’s award challenged — Arbitration Act 1950, Arbitration Act 1979 — Leave to appeal on questions of law sought under section 1(3)(b) of the 1979 Act with the object of securing an order under section 1(2) for the setting aside or remission of the award — Alternatively, in relation to certain questions, an order sought for remission of the award under section 22 of the 1950 Act
were the leaseholders of an office building in Wolverhampton, defendants being
the underlessees — The complications in the case were due to the fact that the
underlease comprised both old premises and new premises with somewhat different
histories — The underlease, for a 30-year-term from March 25 1982, provided for
rent reviews at five-year intervals and for arbitration in the event (which
happened) of failure to agree on the reviewed rent — The arbitrator was
directed to ‘disregard’ the effect on rent of any improvement carried out by
the underlessees — The rent of the old premises was to be the higher of £23,280
or the open market rent; the rent in respect of the new premises was to be the
higher of the ‘interest rent’ (the interest on certain lessee’s works) and the
open market rent
failed to agree on the rent at the first review and an arbitrator was appointed
— Contrary to the approach favoured by the parties, he determined separate sums
by way of rent for the old and new premises, £29,062 for the old premises and
£31,403 for the new — He decided that the ‘lessee’s works’ should be
disregarded and put the value of these works at 22p per sq ft per annum
plaintiffs complained of three matters in the award — The first complaint, as
to certain old 1971 improvements, was based on a misconception; the matter was
not in issue — The second was that the arbitrator should have determined, but
did not determine, the open market rental value of the old and new premises
together — The third complaint was that the ‘lessee’s works’ should have been,
but were not in fact, disregarded
first of all dealt with the application for remission under section 22 of the
1950 Act — The Court of Appeal in Moran v Lloyd’s had made it clear
that sections 22 and 23 of the 1950 Act should not be used as a method of
circumventing the restrictions on the power of the courts to intervene in
arbitral proceedings which had been introduced by the 1979 Act — If the
plaintiffs were to succeed in the present case it would have to be by the
machinery of section 1 of the 1979 Act — For an appeal under section 1 of the
1979 Act the leave of the court was required in the absence of consent — Two
conditions had to be satisfied before leave could be given — These were (1)
that the court must be left in real doubt as to whether the arbitrator was
right in law, and (2) that the court must be satisfied 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 (section 1(4))
nothing now in the first point (as to the 1971 improvements) — As regards the
second and third complaints, the judge was not satisfied that the determination
of the questions raised could substantially affect the rights of one or both parties
— After detailed consideration he refused leave to appeal in regard to both
matters — Although the word ‘could’ in section 1(4) contemplated the
possibility that the determination would affect the rights of a party, there
must be a real and not merely a fanciful possibility in the light of all the
circumstances — The judge refrained from saying anything on the merits of the
third question — Leave to appeal refused
The following
cases are referred to in this report.
Lucas Industries plc v Welsh Development Agency
[1986] Ch 500; [1986] 3 WLR 80; [1986] 2 All ER 858; [1986] 1 EGLR 147; (1986)
278 EG 878
Moran v Lloyd’s [1983] QB 542; [1983] 2
WLR 672; [1983] 2 All ER 200; [1983] 1 Lloyd’s Rep 51
Segama NV v Penny Le Roy Ltd [1984] EGD 74;
(1984) 269 EG 322, [1984] 1 EGLR 109
Shield Properties & Investments Ltd v Anglo-Overseas Transport
Co [1985] 1 EGLR 7; (1985) 273 EG 69
This was an
originating motion by which the plaintiffs, Manders Property (Estates) Ltd,
sought leave under section 1(3)(b) of the Arbitration Act 1979 to appeal under
section 1(2) of the Act on questions arising out of an award by Mr J C Ankcorn
FRICS, who had been appointed to determine the market rent of Victoria House,
an office property in the Mander Centre of Wolverhampton. If the leave were
granted the plaintiffs sought an order to set aside, alternatively to remit,
the award. In the alternative, in respect of two of the three questions raised,
the plaintiffs sought an order for remission under section 22 of the
Arbitration Act 1950. The defendants were Magnet House Properties Ltd. The
plaintiffs were the underlessors and the defendants the underlessees of the
property.
Kirk Reynolds
(instructed by Mawby & Steward, of Wolverhampton) appeared on behalf of the
plaintiffs; Jonathan Gaunt (instructed by Bischoff & Co) represented the
defendants.
Giving
judgment, PETER GIBSON J said: The plaintiff, Manders Property (Estates) Ltd,
seeks leave under section 1(3)(b) of the Arbitration Act 1979 to appeal under
section 1(2) of that Act on three questions of law arising out of the award of
an arbitrator appointed to determine the market rent of an office property in
Wolverhampton on a rent review. If leave is granted, the plaintiff seeks by its
originating notice of motion an order setting aside the award, alternatively an
order to remit the award to the arbitrator. Alternatively to its application
for leave on two of the three questions, the plaintiff seeks an order under
section 22 of the Arbitration Act 1950 for the remission of the award to the
arbitrator on the ground that the arbitrator failed to give effect to matters
which were common ground between the plaintiff and the defendant, Magnet House
Properties Ltd (‘Magnet’) in the arbitration.
The property
in question is Victoria House in the Mander Centre of Wolverhampton. The
original building of that name (‘the old premises’) was constructed in 1971,
but an extension to it (‘the new premises’) was built in 1982. The original
tenant of the old premises was GREA Real Property Investments Ltd (‘GREA’),
which in 1971 carried out certain works of improvement (‘the 1971
improvements’) to the shell of the old premises. By an underlease dated
December 14 1977 Manders Property (Wolverhampton) Ltd (‘MPWL’), which was then
the landlord of the old premises, granted an underlease to GREA of the old
premises for a term of 35 years from March 25 1966. On September 18 1981 an
agreement (‘the agreement’) was entered into by MPWL, therein called ‘the
Lessor’, GREA, therein called ‘the Tenant’, and Magnet, therein called ‘the
Lessee’. The agreement stated that GREA wished to surrender its underlease and
MPWL agreed to accept such surrender, on condition of the grant to Magnet of an
underlease comprising the
part of Magnet therein contained, MPWL agreed to grant the new underlease to
Magnet from the day after completion of surrender to March 24 1982 and
thereafter for the term of 30 years. The agreement was expressed to be
conditional upon MPWL’s obtaining a building contract for works called ‘the
Lessor’s Works’, which included erecting the shell of the new premises, such
contract to be a fixed price contract not exceeding £253,000. MPWL was to pay
for the Lessor’s Works, but by reference to the actual costs of that contract a
rent called ‘the Interest Rent’ relevant to the new underlease was to be
agreed, such rent being 15% of those costs. The surrender by GREA was to take
place once the Lessor’s Works had been completed and possession of the demised
premises was to be taken by Magnet the day following completion of the
surrender. The new underlease was to be granted when certain other works called
‘the Lessee’s Works’ had been completed to Magnet’s satisfaction and the
interest rent determined. The Lessee’s Works were to be carried out by MPWL on
behalf of Magnet but at Magnet’s expense and to the reasonable satisfaction of
Magnet’s architects.
The works
which affected both the old premises and the new premises were briefly
described in Appendix D:
Alter counters in reception area
Kitchen fittings
Curtains
Redecoration
Reposition existing light fittings and
provide new as necessary
Alter suspended ceiling where required
Internal partitioning
Carpets and carpet tiles throughout
Electrical wiring for lighting and power
circuits
Such other works as may be agreed in
writing between the Lessor and the Tenant.
The new underlease was to be in the form
of an underlease annexed to the agreement. Clause 11 provided that Magnet
should apply for planning and other permissions and the clause ended:
And it is hereby agreed and declared that
the Lessee’s Works and shall not be declared to be improvements in respect of
which any claim shall be made by the Lessee.
The words ‘the Lessee’s Works’ come at
the end of a page and it appears that some words may well have been omitted
thereafter as otherwise the next word, ‘and’, has no meaning. However, there
has been no claim to rectify the agreement and I must accordingly read the
provision ignoring the word ‘and’. Clause 14 provided that the Lessee’s Works
should become and remain the property of the Lessor.
The annexed
form of underlease provided that MPWL (therein called ‘the Lessors’) let the
old and the new premises to Magnet (therein called ‘the Lessee’). The rent in
respect of the old premises was to be the higher of £23,280 or the open market
rent at the relevant date of review. The rent in respect of the new premises
was to be the higher of the interest rent or the open market rent of the new premises
at the date thereof or at any subsequent relevant date of review.
Clause 7(5)
provided for rent reviews at March 25 1987 and at five-year intervals
thereafter during the term. If the lessors and the lessee were unable to reach
agreement on the rent, the question whether any, and if so what, increase ought
to be made in the rent was to be referred to an arbitrator. By clause 7(5)(d)
the arbitrator was to determine the open market rent of the premises. I need
not set out how that rent was defined, save for one of the matters which the
arbitrator was required to disregard:
(m) The effect on rent of any improvement carried
out by the Lessee or any person deriving title under the Lessee otherwise than
in pursuance of an obligation to the Lessors.
For the purpose of the rent review clause
the area of the entire premises and of the old and the new premises were to be
specified.
MPWL duly
completed the Lessor’s Works and GREA surrendered its underlease. It would
appear likely from the fact that rent was payable under the completed new
underlease from July 1 1982 that Magnet then took possession of Victoria House.
MPWL completed the Lessee’s Works, the interest rent was agreed at £31,403 and
on July 3 1984 the new underlease was executed by MPWL and Magnet in the form
of the draft that had been annexed to the agreement with only minor
alterations. The term was for 30 years from March 25 1982 and for the purpose
of the rent review clause the area of the demised premises was agreed at 11,000
sq ft; 7,750 sq ft being the old premises and 3,250 sq ft being the new
premises.
The reversion
immediately expectant upon the term of the underlease was vested in the
plaintiff on September 28 1985. The plaintiff and Magnet were unable to agree
the open market rent at the first review date and Mr J C Ankcorn FRICS was
appointed as arbitrator by the president of the Royal Institution of Chartered
Surveyors. The parties made written submissions to the arbitrator and in
respect of points of law they supplied opinions of, or submissions drafted by,
counsel who now appear before me, Mr Reynolds for the plaintiff and Mr Gaunt
for the lessee.
Magnet
initially contended that the premises were to be valued as a shell and that
even the 1971 improvements were to be disregarded, but later, as Mr Gaunt’s
opinion, which was submitted to the arbitrator, made clear, Magnet accepted
that the 1971 improvements should not be disregarded. Magnet appears to have
overlooked that the 1971 improvements were carried out not by Magnet but by
GREA, so that on the wording of the underlease there was never any possibility
of disregarding those improvements. The parties were in the event agreed, as is
apparent from the material put before the arbitrator, on all points of law save
one. That point was whether the effect on rent of the Lessee’s Works was to be
disregarded. Initially the plaintiff agreed with Magnet that it was to be
disregarded but later contended for the contrary conclusion. It was averred by
both parties that the correct approach was that the open market rent of the old
and the new premises together should be assessed and that in this process those
matters properly to be disregarded in relation to the premises should be
disregarded; that rent should then be apportioned as between the old premises
and the new premises in the proportions which their respective areas bore to
the whole of the demised premises (approximately 70% and 30%); the rent of the
old premises was then to be the higher of £23,280 and the rent apportioned
thereto, while the rent of the new premises was to be the higher of £31,403 and
the rent apportioned thereto.
The arbitrator
made his award on May 11 1988. He referred in para 2 to the issue whether
certain works were to be considered as tenant’s improvements and therefore
disregarded in accordance with clause 7(5)(d)(iii). In para 4 he said:
On the question of the ‘disregards’, the
evidence of the Lessees is more persuasive, but I find it difficult to accept
the valuation implications submitted to me by either party.
In para 5:
I Determine and Award that the Lessees
succeed on the legal argument and that the Tenant’s Works shall be disregarded.
I put the value of these works at 22p per square foot per annum.
In para 7:
I hereby Award and Determine that the
open market rental value of the ‘Old Premises’ at the date of the Rent Notice
shall be calculated at a rate of £3.75 per square foot and that accordingly,
under the terms of the lease, the rent payable, with effect from the 25th March
1987, shall be:
|
In respect of the ‘Old |
£29,062 |
|
In respect of the ‘New |
£31,403 |
|
Total Rent Payable as from |
£60,465 |
On March 11 the parties together sought clarification from the
arbitrator on two points. The first was whether the open market rental value of
£3.75 per sq ft was intended to be applicable only to the old premises or to
the new premises as well, subject to the substitution of the interest rent if
higher. On March 17 the arbitrator replied that the open market rental value
was intended to be applicable only to the old premises. The second was whether
the 22p value of the Tenant’s Works disregarded by the arbitrator was to apply
only to the old premises or to the new premises or to both. The arbitrator
replied that the 22p value of the disregarded works related solely to the old
premises.
There are
three points in the award as clarified which are the subject of complaint by
the plaintiff. First, the 1971 improvements should not have been, but were,
disregarded by the arbitrator. Second, the arbitrator should have determined,
but did not determine, the open market rental value of both the old and new
premises together. In so determining, the effect on rent of the works
disregarded should have been, but was not, assessed in relation to both the old
and new premises together. Third, the Lessee’s Works should have been, but were
not, disregarded. On the first and second complaints Magnet agrees with the
plaintiff on what the arbitrator should have done but denies that the
arbitrator acted otherwise. It disputes the correctness in law of the third
complaint.
The first and
second complaints are the matters which, Mr Reynolds submitted, entitle him to
ask for a remission under section 22 of the Arbitration Act 1950. As this does
not require the court to consider whether leave should be granted, it is
convenient to deal with this point first. Section 22, on its face, gives the
court a general discretion to remit a matter referred to arbitration to the
reconsideration of the arbitrator, and although the grounds on which the courts
will remit have been severely limited by judicial decision, Mr Reynolds
submitted that what had occurred fell within the words of Bingham J in Shield
Properties & Investments Ltd v Anglo-Overseas Transport Co Ltd
[1985] 1 EGLR 7 at p 9, as being ‘a mishap or misunderstanding or error in
procedure in the course of this arbitration which could lead, or might have
led, to an unjust result’. In the Shield case a remission was ordered,
there having occurred something akin to a breach of the rules of natural
justice, which led one party to have a justified sense that he may have been
prejudiced by the procedural course which the arbitration took. The facts of
the present case, however, are quite different and it seems to me that, if Mr
Reynolds were right in his suggestion that the arbitrator erred in respect of
the first and second complaints, the arbitrator would have made errors of law
which could give rise to questions of law for the purpose of section 1 of the
1979 Act. In Moran v Lloyd’s [1983] QB 542 at p 549 the Court of
Appeal warned against using section 22 to circumvent the restrictions upon the
court’s power to intervene. As is stated in Mustill and Boyd, Commercial
Arbitration (1982), p 502:
It is always tempting for the court to
intervene in a case where it feels that the arbitrator has gone wrong and that
one of the parties has suffered an injustice. Yet the cases show that this
temptation has consistently and stoutly been resisted.
I therefore think that I should decline
to exercise the power of remission in section 22. If the plaintiff is to
succeed, it will have to do so via section 1 of the 1979 Act.
For there to
be an appeal under section 1, in the absence of consent, the court must give
leave. It is common ground before me that two conditions must be satisfied if
leave is to be given. One is that the court must be left in real doubt whether
the arbitrator was right in law (see Lucas Industries plc v Welsh
Development Agency [1986] Ch 500). The other is that the court must
consider that, having regard to all the circumstances, the determination of the
question of law concerned could substantially affect the rights of one or both
of the parties (section 1 (4)). Ordinarily, both questions would be considered
by the court as preliminary matters at a hearing in advance of the substantive
hearing of the originating notice of motion which will of course be dependent
on the grant of leave. In the present case, partly because of the application
for remission and because both parties requested that, should I grant leave, I
should also deal with the matters raised by the originating notice of motion, I
have heard full argument on all the points in issue without determining in
advance the question of leave, but it is of course to that question that I must
turn immediately.
I shall deal
first with the point relating to the 1971 improvements. Mr Reynolds submitted
that the arbitrator’s words in para 5 of the award, ‘I Determine and Award that
. . . the Tenant’s Works shall be disregarded,’ show that the arbitrator
disregarded the 1971 improvements, notwithstanding the fact that it was common
ground that those improvements should not be disregarded. To my mind the
arbitrator is simply describing as ‘the Tenant’s Works’ the works which are
defined in the underlease as ‘the Lessee’s Works’, and that is supported by the
context. As Mr Gaunt pointed out, in para 2 of the award the arbitrator had
referred to an issue on tenant’s improvements and in para 4 had found the
‘evidence’ of Magnet more persuasive on the ‘disregards’. Clearly he was there
referring to the question of disregarding the effect of the Lessee’s Works,
there being an issue on that point. There was no issue on the 1971 improvements
and what Magnet had said in respect of those improvements could not be more
persuasive than what the plaintiff had said because Magnet had conceded the
point. I would add that the valuation of 22p is not so large as to lead fairly
to the conclusion that therein the arbitrator must have included a sum for the
1971 improvements. Accordingly, there is no reason to think that the arbitrator
disregarded the 1971 improvements. The application for leave on this point
fails in limine.
I turn to the
other matters of complaint by the plaintiff. By reason of the language of
section 1(2) and (4) I must consider whether each question of law concerned is
such that its determination could substantially affect the rights of one or
more of the parties. There are two points on the statutory language on which I
should comment briefly. The first is that, as Mr Reynolds stressed, the
statutory condition uses the word ‘could’, so that it is enough that the court
should consider that there is a possibility that the determination of the
question will substantially affect the rights of one or more of the parties.
But that must be a real and not a fanciful possibility in the light of all the
circumstances. In the present case the plaintiff has not sought to add to the
material that was before the arbitrator to establish the reality of the
possibility, and it is to that material that I must look. The second is the
significance of the word ‘substantially’ in relation to affecting the rights of
the parties. Such a term lacks precision, but I take it to mean more than
merely not de minimis (see Mustill and Boyd op cit at p 556). As
Mr Gaunt aptly put it, awards by an arbitrator are not to be subjected to fine
tuning. There is a public interest in the finality of arbitral awards and it is
only errors of law of real and major consequence that will be allowed to
proceed to appeal. Although, as Mr Reynolds pointed out, it is the rights of
one or more of the parties that must be affected, in relation to a rent review
arbitration it is hard to see how the affecting of the parties’ rights can be
assessed other than by reference to the economic effects for the parties.
The question
of law raised by the second point is whether on the true construction of the
1984 underlease the rental value (assessed applying any relevant ‘disregards’)
of the old premises should be ascertained separately from the new premises (as
distinct from being a proportionate part of the rental value, assessed applying
any relevant ‘disregards’, of the old and new premises together). Could the
determination of the question substantially affect the rights of one or both
parties? Mr Reynolds frankly
acknowledged that, had the arbitrator assessed the rental value in the way that
the parties now agree he should have done, it is not possible to say whether
that value would increase or decrease. But he suggested that there were three
factors which could cause a substantially lower valuation to be appropriate.
First, he pointed to the age of the old premises and suggested that the
arbitrator may well have given to them a lower value than the new premises.
Magnet submitted to the arbitrator that the age of the old premises should be
taken into consideration, but, apart from that single reference, the age of the
old premises did not feature in the parties’ submissions. That is hardly
surprising, given that in 1982 the old premises were only 11 years old and that
the new premises were built to a matching specification. Let me nevertheless
accept that there is a real possibility that a higher rental value could have
been placed by the arbitrator on the new premises than the old premises. However,
a very much higher rent would have to be attributed to the new premises,
comprising as they do only 30% of the total premises, to make a significant
increase to the overall rent per sq ft, and there is nothing in the material
before me to suggest that that is a real possibility. Second, Mr Reynolds
pointed to the size of the old premises as compared with the size of the old
and new premises together and suggested that the increased size of the total
premises might have caused a significantly higher increased rental rate per
square foot. But there is nothing whatever in the material before the
arbitrator to suggest that the difference between premises of 7,750 sq ft and
premises of 11,000 sq ft affected their respective rental rates. Third, Mr
Reynolds pointed to the fact that the arbitrator had apparently limited his
disregard of tenant’s improvements to the old premises, whereas the value per
sq ft of those improvements might have been higher than the value of the
improvements to the new premises. The evidence does not bear this out. It was
common ground that £49,750 was spent on the 1982 improvements. A letter dated
April 29 1988 from the plaintiff suggests that £24,451 of that sum should be
apportioned as to £17,176 to the old premises and £7,275 to the new premises.
That represents a close approximation to their respective floor areas. These
three factors, taken together, do not lead me to the conclusion that the
determination of this question of law could substantially affect the rights of
the plaintiff in the sense of benefiting it. Further, as Mr Gaunt pointed out,
if the arbitrator had valued the old premises separately, he would have omitted
the depreciatory effect of the interest rent having to be paid in respect of
the new premises if it exceeded the market rent. The interest rent per sq ft
was £9.66 as against the market rent of £3.75, and while I do not think that
the arbitrator should have taken into account the fact that interest rent would
be payable in respect of the new premises for the five-year period from 1987,
he could and should have taken into account the fact that the interest rent
would be payable in 1992 and
exceeded the market rent. Accordingly, it may well be that the determination of
the question of law would in fact adversely affect the plaintiff. That makes it
even less of a real possibility that the determination of the question would
substantially benefit the plaintiff. It follows that I must refuse the plaintiff’s
application for leave on this question.
The
plaintiff’s third complaint raises the question of law whether the effect of
the Lessee’s Works should, on the true construction of the underlease, be
disregarded. The first point that I must consider is whether the determination
of this question could substantially affect the rights of the parties. There is
no dispute as to quantum for the first five years from the 1987 rent review.
The annual rent would be increased by £1,705 if the effect of the Lessee’s
Works were disregarded. That is only 2.8% of the total rent and Mr Gaunt
submitted that the substantiality test was not satisfied. Mr Reynolds in turn
submitted that by reason of the doctrine of issue estoppel the plaintiff would
probably not be allowed to argue on subsequent rent reviews that the effect of
the Lessee’s Works should be disregarded. Mr Gaunt did not dispute this but
contended that the effect was likely to diminish as time went by. That seems to
me to be correct. By the time of the next rent review, 1992, the Lessee’s Works
would be 10 years old. I have already drawn attention to the nature of those
works, including, as they do, depreciating items such as curtains,
redecorations and carpeting. There is no real possibility of a percentage
figure of 2.8% increasing as time goes by, and the strong probability is that
it will diminish. While the determination of the question of substantiality is
not confined to a consideration of percentages, that plainly is a most relevant
factor. Tempting though it is for the court to treat the determination of this
question as having a substantial effect in order to deal with the merits of the
question of law, I have reluctantly come to the conclusion that it would be
wrong to do so. In my judgment, notwithstanding the continuing effect of the
determination of the question beyond the five-year period commencing with the
1987 rent review, having regard to all the circumstances, including the total
rent payable, it cannot properly be said that the effect could be substantial.
That view
seems to me to be consistent at least with the approach of Staughton J in Segama
NV v Penny Le Roy Ltd (1983) 269 EG 322, [1984] 1 EGLR 109, another
rent review case which was mentioned in the course of argument but not actually
cited to me. The judge there considered whether the fact that the determination
of the question then in issue could have increased the annual rent from £18,250
to £19,250 for five years substantially affected the rights of the parties and
said:
In the context of a rent of £18,250 a
year that is not substantial.
The difference in rent in that case, as a
percentage, is almost double the 2.8% in the present case. He went on to
consider whether the fact that rent reviews were pending in respect of two
other houses of the landlord in the same street could be taken into account. On
the assumption that figures of a similar order were appropriate, he said that
the total amount in issue would be £15,000 instead of £5,000 and commented:
That is bordering on the substantial in
the context of this case.
The latter remarks were made obiter,
as the judge held that it was not right to take into consideration that which
only indirectly affected one of the parties, but it is of interest that, in the
context of a case in which the total rent for the five years for the premises
in question was £91,250, he considered £15,000 only as bordering on the
substantial. The facts of that case differ from those of the present in that
there was no question of issue estoppel affecting the determination of rent for
another 20 years but, as I have already indicated, the likelihood is that in
the present case the determination of the question will have only a diminishing
effect on the rent in the next and subsequent reviews.
Accordingly, I
must refuse leave to appeal on this question too, and in the circumstances,
despite counsel’s interesting and careful arguments, I shall refrain from
saying anything on the merits of the third question.
