Landlord and tenant — Rent review clause in lease — Arbitration on true construction of a provision — Application for leave to appeal from arbitrator’s award — Arbitration Act 1979, section 1(3)(b) — Guidelines for grant of leave — Harman J in the present case felt real doubt about the correctness of the arbitrator’s ruling and, applying the guidelines then given by the Vice-Chancellor in Lucas Industries plc v Welsh Development Agency, granted leave to appeal — However, on hearing that these guidelines were shortly to be considered by the Court of Appeal in Ipswich Borough Council v Fisons plc, Harman J also gave leave to appeal against his own decision to the Court of Appeal — That court, applying the new guidelines in the Ipswich case, allowed the appeal
in the present case which gave rise to the dispute was whether, on the true
construction of the lease, certain suspended ceilings, light fittings and
carpets were to be taken into account on the rent review — The answer made a
difference to the reviewed rent, £850,000 pa if (as the landlords contended)
they should be taken into account, £800,000 if (as the tenants contended) they
should not — The arbitrator ruled that the equipment in question should not be
taken into account — The landlords applied for leave to appeal under section
1(3) of the 1979 Act — As mentioned above, Harman J felt real doubt as to the
ruling and granted leave — The lease, it should be said, included a provision
that the items in question were to be treated as tenant’s fixtures and fittings
even though they were not removable unless replaced and even though they were
to become the property of the landlord at the end of the lease
Borough Council v Fisons plc Lord Donaldson of Lymington MR had explained that it
might well be that in most rent review disputes the ‘standard terms’ approach
would be justified, so that a strong prima facie case of error by the
arbitrator should be shown before leave to appeal is given — It was true that
‘strong’ was an imprecise word and the degree of strength called for was left
to the exercise of judicial discretion in the circumstances of the particular
case — The bottom line was, however, that the judge concluded that there was a
more or less strong, but still ‘strong,’ prima facie case that the arbitrator
had erred in law — It was now law that this stricter test should be applied
instead of the Lucas test that leave to appeal should be given if the judge was
‘left in real doubt’ as to whether the arbitrator was right in law — Harman J
had directed himself correctly in accordance with the law as it then stood, but
since then the law had moved on — Although in the present case cogent
criticisms could be made of the reasoning of the arbitrator, the court was not
satisfied that a strong prima facie case had been made out that he had erred in
law — The appeal from Harman J’s decision must accordingly be allowed
The following
cases are referred to in this report.
Antaios
Compania Naviera SA v Salen Rederierna AB [1985]
AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229; [1984] 2 Lloyd’s Rep 235, HL
Ipswich
Borough Council v Fisons plc [1990] 2 WLR
108; [1990] 1 All ER 730; [1990] 1 EGLR 17; [1990] 04 EG 127, CA
Pioneer
Shipping v BTP Tioxide Ltd (‘The Nema’) [1982]
AC 724; [1981] 3 WLR 292; [1981] 2 All ER 1030; [1981] 2 Lloyd’s Rep 239, HL
Retla
Steamship Co v Gryphon Shipping SA [1982] 1
Lloyd’s Rep 55
In this appeal
the Court of Appeal had to determine whether the judge, Harman J, was right to
grant leave to appeal to the High Court under section 1(3) of the Arbitration
Act 1979 from the award of the arbitrator in regard to the rent review
provisions in the lease of a property known as Cementation House situated in
the main road between Rickmansworth and Denham.
Kirk Reynolds
(instructed by the solicitors’ department of the Prudential Assurance Co Ltd)
appeared on behalf of the landlords; Patrick Talbot (instructed by Ashurst
Morris Crisp) represented the tenants, Trafalgar House Group Estates Ltd (sued
as Trafalgar House Group Premises Ltd).
Giving the
first judgment at the invitation of Neill LJ, STAUGHTON LJ said: In March 1977
there was a lease of Cementation House which lies on the main road between
Rickmansworth and Denham. The landlords were Prudential Assurance Co Ltd and
the tenants were Trafalgar House Group Estates Ltd, sued as Trafalgar House
Group Premises Ltd. The term was for 35 years and the initial rent was
£380,000. There were to be rent reviews every five years. This case concerns
the second review as at March 25 1987.
The third
schedule in the lease provided that, in the absence of agreement, the revised
rent should be determined at the option of the landlord either by an arbitrator
or by an expert valuer acting as an expert and not as an arbitrator, ‘such
arbitrator or valuer to be a Fellow of Royal Institution of Chartered Surveyors
and to be nominated by the President for the time being of that Institution on
the application of the Landlord’.
The parties
were unable to agree on a revised rent, and Mr P L Banks FRICS was appointed
arbitrator. The nature of the dispute then became clear, as was set out
subsequently in the award:
During the
course of the reference to Mr Banks the parties agreed that the amount of the
revised rent depended upon the correct answer to a question of law arising out
of the terms of the lease. They also agreed alternative amounts for the revised
rent, dependent upon whether the answer to the question was favourable to the
Claimant or the Respondent.
The question
and the alternative amounts were formulated as follows:
‘Whether upon a true construction of the
Lease . . . the annual rent payable from 25th March 1987 (the review date)
should be £800,000 (as contended by the Respondent) or £850,000 (as contended
by the Claimant) dependent on whether the suspended ceilings light fittings and
carpets are to be taken into account on review.’
It was then
agreed that Mr Banks would retire from his post as arbitrator and be replaced
by Mr Derek Wood QC.
By his award
made on May 9 1989 he ruled that the equipment in question should not be taken
into account. Consequently the revised rent was £800,000 pa and not £850,000.
The landlords applied for
application came before Harman J on October 27 1989.
It might have
been argued that the first point to be decided was whether the question of law
could substantially affect the rights of the parties in terms of section 1(4)
of the Act. After all, the amount in dispute was only 1/17 of the revised
annual rent. However, it was conceded that the rights of the parties could be
substantially affected by the answer to the question of law, so I need say no
more about that. In the case of Retla Steamship Co v Gryphon Shipping
SA [1982] 1 Lloyd’s Rep 55 a judge at first instance held that a point of
law which affected only one-eighth of the total amount in the dispute did not
substantially affect the rights of the parties. However, that was in the early
days of the 1979 Arbitration Act. Furthermore, the decision was given on the
afternoon of October 1 and may possibly need to be reconsidered one day.
The issue
before the judge turned on the degree of conviction that he had to hold as to
the correctness of the award before he could grant leave to appeal. At that
time two decisions of the Vice-Chancellor had laid down that the Nema and
Antaios guidelines, while applicable to disputes in commerce and trade,
did not apply to rent review disputes. In the latter class of case the judge
had only to feel real doubt as to whether the arbitrator was right before he
could be justified in granting leave.
Harman J did
feel real doubt and so he did grant leave. However, he was told that the second
of the Vice-Chancellor’s cases, Ipswich Borough Council v Fisons plc,
was shortly to be considered by the Court of Appeal. So he took the unusual
step of granting leave to appeal to this court, under section 1(6A), from his
decision to grant leave to appeal from the arbitrator to the High Court. In my
view, if I may say so, the judge was wholly right to take that course in the
circumstances.
So we now have
to determine whether or not the judge was right to grant leave to appeal to the
High Court on the law as it now stands.
This court
decided Ipswich Borough Council v Fisons plc [1990] 2 WLR 108* on
November 24 1989. The only reasoned judgment was that of Lord Donaldson of Lymington
MR. Nothing would be gained by repeating his analysis of the Nema and Antaios
decisions, so I can turn at once to what he said about their application to
rent review cases at p 114:
The House of
Lords’ guidelines with regard to one-off contracts, that an obvious case of
error should be shown, I think assumed that the effect would also be one-off.
This might well be true of the last rent review, particularly if the remainder
of the lease were relatively short. It would not, however, be true of earlier
rent reviews. There the long-term effect on subsequent reviews would be
analogous to the effect of decisions on standard terms, the only difference
being that the same, rather than different, parties might be affected.
Accordingly
it may well be that in most rent review disputes the ‘standard terms’ approach
will be justified: a strong prima facie case of error should be shown.
But ‘strong’ is an imprecise term and I do not think that the House of Lords
intended that the same degree of strength should be called for in every case.
This is, after all, a matter which Parliament has left to the exercise of
judicial discretion. Consistency of approach is important, but it must not
negative a discretion based upon the facts of individual cases.
So how strong
is strong? No meter can be applied or
indeed devised. It is a matter of relative values. If the chosen arbitrator is
a lawyer and the problem is purely one of construction, the parties must be
assumed to have had good reason for relying upon his expertise and the
presumption in favour of finality or, to put it the other way round, the
strength needed to rebut it will be greater. So too if the dispute really
centres upon an issue calling for non-legal expertise, albeit with some
underlying question of law, and the chosen arbitrator has that expertise. But
if the chosen arbitrator is not a lawyer and the whole dispute centres upon a
difficult question of law, less strength may be required.
Similarly,
the degree of strength will be affected by whether the clause in question is
one of a class commonly encountered, so that others would benefit from an
authoritative decision on its meaning or application, and I see no reason why
some account should not be taken of the seriousness of the consequences to the
parties of the arbitrator’s error, if error there be. But the bottom line must
always, I think, be that the judge concludes that there is a more or less
strong, but still ‘strong’, prima facie case that the arbitrator has
erred in law. To adopt any other approach would be to fly in the face of the
legislative preference for finality.
*Editor’s
note: Also reported at [1990] 1 EGLR 17.
Harman J,
through no fault of his own, did not apply that test. He instead applied the
test laid down by the Vice-Chancellor in two cases as to whether he had real
doubt that the award was right. Since that is no longer the right test in view
of the decision of this court after Harman J’s judgment, it falls to us to look
at the matter afresh.
I then turn to
look at the dispute in this case and see if the Ipswich Borough Council test
is satisfied. That test is whether the court forms a strong prima facie view
that the arbitrator was wrong, although ‘strong’ may be a relative term in the
circumstances. I do not form such a view.
Lord Diplock
in the case of Antaios Compania Naviera SA v Salen Rederierna AB [1985]
AC 191 said that it was in general unwise of judges at first instance to
express views on the merits either when granting leave to appeal or when
refusing it. If I may say so, I can fully understand that ruling. If the judge
refuses leave to appeal but makes observations, it may be thought he is
providing a precedent, after what is supposed to be a fairly summary hearing.
If he grants leave to appeal and expresses a view on the merits, he may
embarrass or inhibit the judge who has to hear the substantive appeal.
It seems to me
that these observations may apply equally to this court, although it is to be
observed that in the Ipswich Borough Council case itself the Master of
the Rolls did express some views on the substantive merits.
For my part I
am content to say in this case, applying the test laid down by the Master of
the Rolls in the Ipswich Borough Council case, that I would not grant
leave to appeal to the High Court. Accordingly this appeal should be allowed.
Agreeing, NICHOLLS
LJ said: Mr Reynolds has directed some powerful and, I think, cogent
criticisms at part of the reasoning of the arbitrator. Despite this, he has
not, in my view, made out a strong prima facie case that overall the
arbitrator reached the wrong conclusion on the wording of this particular
lease, which includes a provision that the items in question were to be treated
as tenant’s fixtures and fittings even though they were not removable unless
replaced and even though they were to be become the property of the landlord at
the end of the lease.
Accordingly,
I, too, would allow this appeal. The judge directed himself correctly in
accordance with the law as it then stood, but since then the law has moved on.
Applying the test enunciated by this court in the Ipswich case, I also
would refuse leave to appeal to the High Court under section 1(3) of the
Arbitration Act 1979.
Also agreeing,
NEILL LJ said: I agree with the opinion expressed by Nicholls LJ
that cogent criticisms can be made of the reasoning of the arbitrator.
Nevertheless I am not satisfied that a strong prima facie case has been
made out that the arbitrator was wrong in law.
Accordingly,
I, too, would agree that this appeal should be allowed for the reasons given by
Staughton LJ.
The appeal
was allowed with costs.
