Lease – Rent review – Arbitration – Claimant tenant and defendant landlord entering into agreement for underlease – Underlease containing rent review clause – Parties failing to agree amount of yearly rent value – Issue being referred to arbitration – Claimant seeking reconsideration of arbitrator’s award – Whether award containing serious irregularity – Application granted
The defendant landlord owned a property that comprised a small parade of shops with flats on the floor above. The claimant had an underlease of the property granted for a period of around 99 years from 29 September 1964; and the lease was a full repairing and insuring lease with rent reviews every 21 years.
The second rent review fell due in September 2006. The parties failed to agree the yearly rent value adn the question of the amount of a fair annual rent was referred to arbitration. The arbitration was conducted by reference to written materials alone, and the arbitrator made his calculation on the basis that the occupational leases provided the best evidence for the market rents for shops and flats. Following adjustments to reflect the real monetary value of the notional stream of rental income in the hands of the notional tenant, the arbitrator concluded that the yearly rent value for the demised premises should be £118,000 pa.
The claimant applied, under section 68 of the Arbitration Act 1996, for an order remitting the award for reconsideration on the basis that the arbitrator’s approach allowed for no element of profit in respect of the lease for the notional tenant. The failure to deal with a substantial issue between the parties was serious irregularity that justified court intervention in an arbitration award, pursuant to section 68(2)(d) of the 1996 Act.
Held: The application was granted.
The arbitrator was required to determine the notional market rent that a notional tenant would pay in respect of the demised premises for the remaining term of the lease. The court should not read an arbitration award with a meticulous eye, endeavouring to pick holes and discover inconsistencies and faults with the object of upsetting or frustrating the process of arbitration. However, if the central reasoning in an award was illogical, the court might intervene: Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14; (1985) 275 EG 1134applied.
Section 68(2)(d) was designed to cover those issues whose determination was essential to a decision on the claims or specific defences raised in the course of the reference: Fidelity Management SA v Myriad International Holdings BV [2005] EWHC 1193 (Comm); [2005] 2 All ER (Comm) 312 applied; World Trade Corporation Ltd v C Czarnikow Sugar Ltd [2004] EWHC 2332 (Comm); [2004] 2 All ER (Comm) 813 considered.
In the instant case, the arbitrator had failed to determine and allow for the notional tenant’s profit element, which was, on his reasoning, a matter essential to the issue that he had to resolve. That failure fell within section 68(2)(d) in that it amounted to a serious irregularity by virtue of which he had failed to deal with the basic issue of the fair yearly rent. It had caused substantial injustice and deprived the claimant of the benefit of a rationally arbitral award. The award that had been made was flawed in a way that might cause the claimant substantial financial detriment in having to pay an excessive amount of rent under the lease for an extended period of time.
Guy Fetherstonhaugh QC (instructed by McGrigors LLP) appeared for the claimant; Wayne Clark (instructed by Mace & Jones, of Manchester) appeared for the defendant.
Eileen O’Grady, barrister
