Landlord and tenant — Rent review — Determination by expert — Originating summons issued to determine questions arising in rent review — Whether questions to be determined by expert under lease — Whether originating summons should be struck out
By a lease dated 8 July 1968 the plaintiff tenant
held a term of a narrow strip of land used with adjoining land as a substantial
electricity substation. The rent was subject to a review from 24 June 1994.
Under the terms of the rent review clause, a valuer was appointed as an expert
on 20 December 1995. In determining whether any and if so what rent increase
ought to be made, the rent review clause directed the valuer to observe certain
directions and disregards. In respect of the review, the tenant contended for a
rent of £25,000 and the landlord for £914,925. The tenant issued an originating
summons seeking the determination of a number of questions, including the
meaning of the demised premises, the identification of the improvement works
carried out by the tenant, the extent of the fixtures and fittings and as to
the assumed access. The defendant landlord’s application to strike the summons
was allowed by Pumfrey J: see [1998] 2 EGLR 85; [1998] 32 EG 90. The plaintiff
appealed.
allowed. Whether the rent review provisions in the lease excluded the
jurisdiction of the court to construe the lease turned on the construction of
the provisions of the particular lease. It was clear from the provisions of the
rent review clause that the single valuer appointed as the expert had the
exclusive power to determine the question referred to him. That question was
the valuation question of whether any and if so what increase ought to be made
in the rent payable. But the rent review clause did not stop at that, as it
directed that the valuer should observe certain agreed contractual directions
and disregards. The terms of the lease did not confer on the valuer, either
expressly or by implication, the sole and exclusive power to construe the
lease: Norwich Union Life Insurance Society v P&O Property
Holdings Ltd [1993] 1 EGLR 164 distinguished. In that case, unlike the
present case, there were no limits set on the expert’s power to determine an
increase in rent.
The following cases are
referred to in this report
British Shipbuilders v VSEL Consortium plc [1997] 1 Lloyd’s Rep 106
Director General of Telecommunications v Mercury Communications Ltd, unreported 22 July 1994
Mercury Communications Ltd v Director General of Telecommunications [1996] 1 WLR 48;
[1996] 1 All ER 575, HL
National Grid Co plc v M25 Group Ltd, [1998] 2 EGLR 85; [1998] 32 EG 90, Ch
Norwich Union Life Insurance Society v P&O Property Holdings Ltd [1993] 1 EGLR 164; [1993] 13
EG 108
This was an appeal by the
plaintiff, National Grid Co plc, from a decision of Pumfrey J, who had allowed
an application by the defendant, M25 Group Ltd, to strike out the originating
summons issued by the plaintiff.
Jonathan Brock QC and Alexander Hill-Smith
(instructed by Brookstreet Des Roches) appeared for the appellant; Guy
Fetherstonhaugh (instructed by Wallace & Partners) represented the
respondent.
Giving judgment, MUMMERY LJ said:
Introduction
This is an appeal against the order made on 19
March 1998 by Pumfrey J striking out an originating summons, dated 30 March
1997, by which the appellant, National Grid Co plc, sought a series of
declarations on the construction of a lease of 8 July 1968. The declarations
related to the conduct of a rent review by a valuer appointed under the terms
of the lease.
Pumfrey J granted leave to appeal. On 28 August
1998 the Court of Appeal (Simon Brown, Auld and Chadwick LJJ) dismissed a
renewed application by National Grid for an order that its appeal should be
expedited.
There was a further flurry of activity on 9
October 1998 when, on a motion by National Grid, a consent order was made by
Pumfrey J. The order was made on various undertakings given by National Grid
and upon an agreement by the parties that, within 14 days of receipt of the
interim account of the expert, they would pay 50% each of that account. On the
basis of those undertakings and that agreement the parties agreed to instruct
the expert:
to stay all further proceedings in his
determination of the rent payable under the said lease until determination of
the appeal currently pending in these proceedings before the Court of Appeal or
the determination of any application for leave or appeal to the House of Lords
from any decision of the Court of Appeal, if any.
The issue that has produced such strong contention
between the parties is a dry legal dispute about jurisdiction: does the court
have jurisdiction to determine the questions raised in the originating summons?
Or should those questions be determined exclusively by the independent valuer?
The grounds on which it was sought by summons
dated
11 November 1997 to strike out National Grid’s originating summons were want of
jurisdiction and abuse of the process. The dispute becomes a little more
comprehensible once it is appreciated that as much as £10m might be at stake on
the ultimate result of this dispute.
Factual background
The lease
The lease of 8 July 1968 was made between the
predecessors in title of the parties to these proceedings. The landlord was
British Waterways Board. The respondent, M25 Group Ltd, is now entitled to the
freehold
is its successor in title to the residue of the term.
The lease was for a 60-year term from 24 June
1964. The subject-matter of the lease was described in the parcels clause as
follows:
ALL THAT piece of land having an area of 3,420 sq
yds or thereabouts situate on the North side of the Grand Union Canal at Acton
Lane partly in the London Borough of Ealing and partly in the London Borough of
Brent formerly at Willesden and Acton in the County of Middlesex as the same is
delineated on the plan annexed to these presents and thereon verged blue (all
such premises being hereinafter called ‘the demised premises’ which expression
shall whether context so admits include all additions or improvements hereafter
made to the demised premises and all fixtures drains and other works now or
hereafter thereon and the Waterway wall fences walls and gates thereof and any
fences walls or gates hereafter erected by the lessee on the demised premises
but without any right of access thereto over the Board’s adjoining land.
The original rent was agreed at £830 pa. On a
review on 23 June 1979 it was increased to £5,500 pa. It was also provided in
the lease that before the expiration of the 30th and 45th year of the term
(June 1994 and June 2009 respectively) the landlord could serve on the lessee a
rent notice providing for the increase of the rent, and thereupon certain provisions
should have effect. There was provision for service of a counternotice calling
on the landlord to negotiate with the lessee the amount of rent from the
expiration of the 30th and 45th years.
The provisions that have given rise to the present
dispute relate to the machinery for rent review contained in clause 1(3) and
(4), which provide as follows:
If the Lessee shall serve on the Board a
counter-notice calling upon the Board to negotiate with them as aforesaid then
the parties hereto shall forthwith consult together and use their best
endeavours to reach agreement as to the amount of the rent to be paid hereunder
as from… the expiration of the 30th and 45th years but failing agreement within
one month after service of such counter-notice (or within such extended period
as the parties hereto shall mutually agree) the question of whether any and if
so what increase ought to be made in the rent payable hereunder as from… the
expiration of the 30th or 45th year shall be referred to the valuation of a single
valuer who (failing agreement between the parties hereto) shall be nominated on
the joint application of the parties hereto (or if either of them shall neglect
forthwith to concur in such application then on the sole application of the
other of them) by the President for the time being of the Royal Institution of
Chartered Surveyors.
(4) The valuer shall determine the question so
referred to him by ascertaining the rent at which the demised premises might
reasonably be expected to be let in the open market for the remainder of the
term hereby granted as between a willing lessor and willing lessee as at the
date of the Rent Notice having regard to the terms of this Lease other than
those relating to rent but disregarding
(a) any effect on rent of the fact that the
Lessee has been in occupation of the demised premises
(b) any goodwill which shall have become attached
to the demised premises since the commencement of the term hereby granted by
reason of the carrying on thereat of the business of the Lessee and
(c) any effect on rent of any improvement carried
out by the lessee otherwise than in pursuance of an obligation to the Board.
And if the rent so ascertained exceeds the rent
payable hereunder the difference shall be the increase in the rent payable hereunder.
It is agreed between the parties that the valuer
so appointed acts as an expert and not as an arbitrator.
The lease contained other provisions including
covenants by the lessee to keep the demised premises in good and substantial
repair and condition and not to assign, charge, sublet or part with possession
of the whole or any part of the demised premises or part with these presents
except to another electricity board after obtaining the board’s written
consent, such consent not to be unreasonably withheld. There was also a
provision in clause 4(3) that:
all electric and other machinery apparatus wires
and cables placed by the Lessee in on or under the demised premises during the
said term shall be and remain the property of the Lessee who shall be entitled
subject to the provisions of sub-clauses (7) and (12) of Clause 3 herein before
contained to remove or replace the same making good any damage caused to the
demised premises by such removal.
The rent review procedure
The material review date was 24 June 1994. In
February 1994 National Grid served a rent notice. The parties were unable to
reach agreement. National Grid proposed a rent of £25,000 pa. M25 Group
proposed a value of £914,925 pa.
On 20 December 1995 the president of the RICS
appointed Mr Ivor French frics to
determine the dispute between the parties. Mr French is a partner in a firm of
chartered surveyors, Leighton Goldhill. The parties made legal representations
to him and Mr French himself instructed a legal assessor to assist him.
It is not in dispute that the questions of law
canvassed by National Grid and M25 Group with the valuer give rise to serious
questions of law, which are the subject of the declarations sought in the
originating summons. National Grid seeks the determination of the court on
eight questions set out in the originating summons as follows:
(1) A declaration that upon the true construction
on the above-mentioned lease the demised premises for the purposes of the
valuation to be conducted by reference to clause 1(4) in determining rent
payable from the 24 June 1994 comprises the piece of land having an area of
3,420 sq yds described in clause 1 without any buildings or other structures
thereon.
(2) A declaration as to the nature and extent of
the demised premises for the purposes of the said calculation.
(3) A declaration that any improvement carried
out by the Central Electricity Generating Board on the said demised premises
falls to be disregarded for the purposes of the said calculation by reference
to clause 1(4)(c) of the said lease.
(4) A declaration as to the identity and extent
of all or any improvements falling to be disregarded for the purposes of the
said calculation by reference to clause 1(4)(c) of the said lease.
(5) A declaration as to the identity of all or
any tenant’s fixtures or chattels on the premises demised by the lease falling
to be disregarded for the purposes of the said calculation in respect of the
rent so payable from the 24 June 1994.
(6) A declaration as to what if any access to the
said premises is to be assumed to exist for the purposes of calculating the
rent so payable from the 24 June 1994.
(7) The declaration that upon the true
construction of the said lease the plaintiff does not fall within the category
of the willing lessee for the purposes of the hypothetical transaction required
to assumed by clause 1(4) of the said lease.
(8) A declaration that the hypothetical lease for
the purposes of the transaction posited by clause 1(4) of the said lease would
contain a provision identical to clause 3(13) thereof.
With the exception of the declaration set out in
para (5), which is not pursued, the declarations all relate to issues of law
concerning the hypothetical lease that the valuer is obliged to assume in
accordance with clause 1(4) for the purposes of his rental valuation.
The judgment
On the application by M25 Group to strike out the
originating summons on the ground that the jurisdiction of the court to
determine those questions had been ousted by the terms of the lease, the judge
held that the court had no jurisdiction to determine these questions for the
following reasons:
1. The questions raised in the originating summons
are questions that must be determined by the expert ‘on his way to reaching his
determination to the new rent’ under clause 1(4). He said:
They are questions of interpretation that the
expert has necessarily to undertake along the way to determine the rent.
2. Those questions had been remitted by the terms
of the lease to the expert to determine, exclusively of the power of the court.
3. He was required to reach this result by the
reasoning in the decision of the Court of Appeal in Norwich Union Life
Insurance Society v P&O Property Holdings Ltd [1993] 1 EGLR 164,
a decision that was not overruled by the later decision of the House of Lords
in Mercury Communications Ltd v Director General of
Telecommunications [1996] 1 WLR 48.
4. If, contrary to his conclusion, he had a
discretion in the matter, he would have held that the court should construe the
lease in advance of the determination of valuation by the expert. He said:
Although it is not strictly necessary for me to do
so, I should add a word concerning factors that would have affected my
discretion if I considered that I had one. It is plain that there has been
serious delay in this rent review. However, I do not consider that this delay
had caused the landlord significant prejudice, since Mr Brock was prepared to
concede that the landlord should be protected by the payment of interest at the
going judgment rate since 6 June 1997. It is true also that all the matters
have already been ventilated before the expert, but it seems to me that this is
principally a question of costs, which the tenant is perfectly capable of
paying. In the end, I consider that the questions being both seriously arguable
and central to the question of valuation and having potentially a very substantial
effect on the determination should have been decided by the court, and I would
have exercised my discretion to permit the originating summons to proceed,
staying the rent review proceedings if necessary.
Submissions of National Grid
Mr Jonathan Brock QC made the following
submissions on behalf of National Grid:
1. The critical question is whether the issues on
the construction of the lease are within the exclusive authority of the expert,
as decision-maker on the question of the revised rent. Serious questions of
construction arise. Their determination substantially affects the continuing
rights of the parties under the lease. They would normally be appropriate for
consideration by the court.
2. Issues of construction of documents do not
become exclusively the province of an expert merely because a conclusion has to
be reached by him on those issues in order to make his decision on valuation.
3. The lease requires the expert to determine the
rent on the basis of the facts and matters set out in clause 1(4) and in
accordance with the true construction of the lease. The parties have not,
however, entrusted to the valuer the exclusive task of determining the
construction of the lease.
4. Even in a case where a matter is within the
remit of an expert, the court retains a discretion to determine matters of law
for itself. The judge was correct in concluding that any discretion that he
might have ought to be exercised in favour of the determination of those issues
by the court in advance of the expert’s valuation of the rent. Those issues are
complex. Mr French does not profess to have any expertise in determining
questions of construction. The determination of the questions of construction
will make a huge difference to the eventual outcome of the valuation procedure.
Time and expense may be wasted if the expert proceeds to his determination on
valuation on a legal basis that is later held to be incorrect in law.
Submissions of M25 Group
Mr Guy Fetherstonhaugh made the following
submissions on behalf of M25 Group:
1. The judge was right to hold that the expert
appointed by the parties had exclusive jurisdiction to resolve the questions of
construction. That was part of carrying out the functions that the parties had
entrusted to him and to him alone. The lease did not confine him to determining
questions of fact. It was the duty of an expert, when necessary, to grapple
with questions of construction.
2. That approach to the construction of the lease
was consistent with the modern trend towards alternative dispute resolution and
keeping cases out of the courts.
3. If the court has a discretion to determine the
issues, it should decline to do so at this late stage, and it should stay the
proceedings accordingly. In this case, the parties had already embarked on the
rent review procedure. Mr French was ready to give his determination now. The
court’s decision on issues of construction would not be made until after the
expert had arrived at his determination. Nothing could be done by the court to
prevent him from arriving at his determination on valuation and from notifying
it to the parties. Nothing would be gained from incurring additional expense in
litigating identical issues in the court. Mr Fetherstonhaugh emphasised that,
on the question of discretion, the judge had wrongly thought that he had
jurisdiction to stay the expert’s review. No such jurisdiction existed. There
was not even before him any application by National Grid to stay the expert’s
determination. Until the expert had given his decision, and until it was clear
that he had proceeded on an incorrect construction, there was nothing that the
court could stop him from doing. If the court had a discretion (which he
contended it did not have), the judge was wrong in his reasoning as to how it
should be exercised.
Conclusion
I would allow this appeal for these reasons:
1. It is common ground that the question of
whether the rent review provisions in the lease exclude the jurisdiction of the
court to construe the lease turns on the construction of the provisions in the
particular lease. On questions of construction, little assistance can be gained
from authority. As Sir Donald Nicholls V-C said in Norwich Union Life
Insurance Society v P&O Property Holdings Ltd [1993] 1 EGLR 164
at p166K:
On this question of interpretation, each
agreement must depend on its own terms, read in its own context. Comparing one
case and one document with another gives, at best, very limited assistance.
2. It is clear from the provisions of clause 1(3)
and (4) that the single valuer appointed by the President of the RICS has the
exclusive power to determine the question referred to him. But what is that
question? It is the valuation question identified in clause 1(3) of the lease,
namely:
the question of whether any or if so what
increase ought to be made in the rent payable…
It is for the single valuer and not for the court
to determine that question. If clause 1 had stopped at subclause (3), I
would agree that the court would have no jurisdiction to entertain proceedings
for a decision of the court on the valuation question referred to the valuer.
3. In this lease, however, the parties agreed
that, in determining the question referred to him, the valuer should observe
certain agreed contractual directions. The directions contained in clause 1(4)
are of three kinds: first, that he shall ascertain the rent on an open market
basis for the remainder of the term as between a willing lessor and a willing
lessee as at the date of the rent notice; second, he is to have regard to the
terms of the lease other than those relating to rent; and, third, he is to
disregard the three particular factors listed in (a), (b) and (c), namely the
occupation of the lessee, any goodwill attached to the premises and the effect
on the rent of any improvement carried out by the lessee otherwise than in
pursuance of an obligation to the board. The valuer must ascertain the rent in
accordance with these contractual criteria. He can only lawfully do what he was
appointed to do under the lease. If he does something that he was not appointed
to do, he is acting outside his terms of reference. He does not have a
completely free hand in deciding the question of what increase ought to be made
in the rent payable. Whether he is acting within the perimeter of his
contractual power depends on ascertaining the correct limits of the power
conferred on him by the lease. Those limits are ascertained by a process of
construction of the lease. The terms of the lease do not confer on the valuer,
either expressly or by implication, the sole and exclusive power to construe
the lease.
4. Do any of the decided cases prevent this
particular lease from having this effect? In my judgment, they do not. Counsel
for M25 Group relied most strongly on the decision of this court in the Norwich
Union case (supra) and on the summary of the principles governing
the status of decisions of a person occupying a role of an expert usefully
summarised in the judgment of Lightman J in British Shipbuilders v VSEL
Consortium plc [1997] 1 Lloyd’s Rep 106 at p109. That passage was set out
in the judgment of Pumfrey J.
5. As for the Norwich Union case (supra),
I would follow the guidance of the Vice-Chancellor in that case on the
importance of looking at the terms of each particular agreement in its own
context. The Court of Appeal upheld the decision of the Vice-Chancellor that
the questions raised by the originating summons were matters that fell to be
determined by the expert. The relevant provision is set out in p165 of the
report. The provision was contained in a funding agreement, which provided that
a dispute arising out of it should be referred to an expert for determination.
It was provided in clause 6(9) of that agreement that
be regarded as the completion date’ was a matter that should be referred ‘to an
independent and appropriate person acting as an expert’. It was then provided
that the completion date should be that ‘so determined’. The court held that it
was the function of that expert and not of the court to make the decision
entrusted to the expert. The Vice-Chancellor said at p166C-D:
In my view, the key question on this application
is whether the society is entitled to have the court, rather than Mr Reilly
[the expert], determine the matters raised by the originating summons. If yes,
then an injunction will follow, subject always to questions of the so-called
balance of convenience. If not, not. Whether the society is so entitled in turn
depends on what, as a question of interpretation of the funding agreement, is
the ambit of the matters entrusted by the parties to the nominated arbiter for
determination by him . . . If, on the proper construction of the agreement, the
question sought to be put to the court is an issue within the scope of the
matters remitted to the nominated arbiter, then (by definition) the parties
have chosen, for better or for worse, to have that question determined by a
tribunal other than the court.
In answering that question of interpretation, I
must apply the ordinary principles of construction. I must have regard to the
language used and interpret that in the context of the funding agreement and
its provisions as a whole. I must have in mind the commercial background to the
agreement.
The Vice-Chancellor observed at p166G that the
parties to a contract entered into a clause such as clause 6(9):
with the object of obtaining a speedy and
conclusive determination on the matter in dispute by the tribunal they have
chosen. They are not readily to be taken to have intended that any necessary
pre-requisite to that determination which raises a question of law, is to be
outside the matter so remitted. On the contrary, they are unlikely to have
intended that fine and nice distinctions were to be drawn between factual
matters which fall within the expert’s remit and questions of law or questions
of mixed law and fact which do not.
He therefore held that it was not for the court to
intervene or take away from the valuer the determination of those questions.
In the Court of Appeal Dillon LJ held at p168M
that the questions raised in the originating summons in that case were:
entirely within the remit of the nominated
arbiter since they are matters which he must necessarily decide as he proceeds
to amass and marshall the design documents for the purposes of determining
whether the development has been completed in accordance with the design
documents.
He concluded on p169F:
The function of the expert is to make the decision
and that is not the function of the court where the decision has been entrusted
to the expert. It is otherwise if both parties agree — as they often do — to
get a ruling from the court to determine the basis on which an expert is to
proceed, and if it is practical to assist the court will do so. But here there
is no such agreement.
In my judgment, that case is readily
distinguishable from the present by reason of the presence in this lease of
clause 1(4), which sets limits on the expert’s power to determine an increase
in rent. No such limits were set on the power of the expert in the Norwich
Union case.
6. On this point I agree with the analysis in the
dissenting judgment of Hoffmann LJ in Director General of Telecommunications
v Mercury Communications Ltd (transcript 22 July 1994), which was upheld
in the House of Lords in [1996] 1 WLR 48. At p32 of the Court of Appeal
transcript Hoffmann LJ said:
So in questions in which the parties have
entrusted the power of decision to a valuer or other decision-maker, the courts
will not interfere either before or after the decision. This is because the
courts’ views about the right answer to the question are irrelevant. On the
other hand, the court will intervene if the decision-maker has gone outside the
limits of his decision-making authority.
One must be careful about what is meant by ‘the
decision-making authority’. By ‘decision-making authority’ I mean the power to
make the wrong decision, in the sense of a decision different to that which the
court would have made. Where the decision-maker is asked to decide in
accordance with certain principles, he must obviously inform himself of those
principles and this may mean having, in a trivial sense, to ‘decide’ what they
mean. It does not follow that the question of what the principles mean is a
matter within his decision-making authority in the sense that the parties have
agreed to be bound by his views. Even if the language used by the parties is
ambiguous, it must (unless void for uncertainty) have a meaning.
Accordingly, if the decision-maker has acted upon
what in the court’s view was the wrong meaning, he has gone outside his
decision-making authority.
In the House of Lords, Lord Slynn took the same
approach: see [1996] 1 WLR 48 at pp58C-59B.
7. It is common ground that, even if the
jurisdiction of the court is not excluded, the court has a discretion to
decline to resolve the issue of construction in advance of the expert’s
determination. In this case the judge helpfully indicated how he would have
exercised the discretion that he had earlier held he did not have. He would not
have stayed the court proceedings. I would not disagree with the judge’s
assessment of the factors affecting the exercise of his discretion. It is
impossible to say that his conclusion on the discretionary position was plainly
wrong or that he made any error of principle.
For the reasons stated I would allow the appeal
and I would not stay the proceedings. As for the position of the valuer, he was
not a party to this appeal and he was not represented at the hearing. It would
not therefore be right to make any decision as to what he should or should not
do. I would only add that, as at present advised, I would agree with the
observations of Chadwick and Simon Brown LJJ on the power of the court to stay
the determination of the valuation: see the judgments given on 28 August 1998.
THORPE and STUART-SMITH LJJ
agreed and did not add anything.
Appeal allowed. Cross-appeal dismissed.
