Landlord and tenant — Rent review clause — Arbitration award — Application out of time for leave to appeal under section 1 of the Arbitration Act 1979 — Guidelines for exercise of judge’s discretion to grant leave to appeal considered in relation to rent review cases — Lucas Industries plc v Welsh Development Agency — The issue before the arbitrator concerned the effect of a provision in the rent review clause in the lease of the subject property — This was a lease for 99 years from December 25 1965, providing for a rising rent for the first three years and thereafter four reviews at 21-year intervals during the residue of the term — The particular provision in dispute required the arbitrator in determining the rent to disregard any effect on rent of any improvement carried out by the lessees — Three parcels of land fell within this disregarding requirement, two of them having buildings erected on them and one without any building — There was no ‘hope value’ in relation to the unbuilt land — The arbitrator determined that the former two parcels should be valued at site value and the latter parcel at nil value — The present proceedings were brought with a view to testing the correctness of that award
1(4) of the Arbitration Act 1979 the court was directed not to grant leave to
appeal against the arbitrator’s decision unless it considered that, having
regard to all the circumstances, the determination of the relevant question of
law could substantially affect the rights of one or more of the parties — That
condition was satisfied here — However, in addition to the statutory direction,
the House of Lords had laid down guidelines as to how a judge should approach
the exercise of his discretion to give leave — In Lucas Industries plc v Welsh
Development Agency Browne-Wilkinson V-C had adapted the House of Lords
guidelines to arbitrations on rent review clauses — The test in cases where the
same point of law would regulate future rent reviews was that leave should be
granted if the judge is left in real doubt as to whether the arbitrator was
right in law — Was there a real doubt in the present case?
decided that he had no real doubt that the arbitrator was correct in his
determination and (in this respect not following the Vice-Chancellor’s course
in the Lucas case) he gave reasons for his view — He accepted that there was a
presumption against either landlord or tenant obtaining an advantage referable
to a factor which had no existence as between the actual landlord and the
actual tenant — Here, however, there was a factor which had such existence,
namely, the planning position relating to the two parcels on which buildings
had been erected — He did not think that the review clause required the
arbitrator to disregard not only the existence of the buildings but also the planning
situation — The arbitrator had reached the correct conclusion — As
regards the application for leave being out of time, the judge would not have
refused leave for this reason if he had decided the substantial point otherwise
— Leave to appeal refused
The following
cases are referred to in this report.
Basingstoke
and Deane Borough Council v The Host Group Ltd [1988]
1 WLR 348; [1987] 2 EGLR 147; (1987) 284 EG 1587, CA
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
Pearl
Assurance plc v Shaw [1985] 1 EGLR 92;
(1984) 274 EG 490
In this
summons Railstore Ltd sought leave to appeal against the award of the
arbitrator, Mr Owen Collett-Smith FRICS, under section 1 of the Arbitration Act
1979 and also sought an extension of time for making the application for leave.
Railstore Ltd were the lessees under the lease containing the rent review
clause in issue, the lessors being Playdale Ltd. The land affected comprised part
of the demise in 1968 of more than 5 acres on the south side of the railway at
Gidea Park, Romford.
Kirk Reynolds
(instructed by Durrant Piesse, agents for Robinson Kelly, of Shoeburyness,
Essex) appeared on behalf of the applicants, Railstore Ltd; David Neuberger QC
(instructed by Devonshires) represented the respondents, Playdale Ltd.
Giving
judgment, KNOX J said: This is a summons in which the respondent to a motion,
Railstore Ltd, asks for leave to appeal against the award of Mr Owen
Collett-Smith on October 29 1987, pursuant to section 1 of the Arbitration Act
1979, and also that the time for applying for such leave and for appealing be
extended notwithstanding that the time fixed by Ord 73, r 5 has expired.
The claimant
is the landlord, Playdale Ltd. The award mentioned was an award under a rent
review provision under a lease which was dated March 15 1968 made between the
British Railways Board, the predecessors in title to the claimant, of the one
part, and Railstore, the respondent (the applicant in the summons), as the
tenant of the other part.
The demise was
of somewhat more than 5 acres on the south side of the British Railways railway
at Gidea Park, Romford, together with certain works and buildings for a term of
99 years from Christmas Day 1965 with a stepped rent for the first three years
rising to £11,000, and subject to a proviso for review at every 21-year
interval during those 99 years, that is to say on four occasions. The precise
mechanics of the rent review are not in issue. What is in issue is the precise
effect of the provision in clause 1(4)(c) of the lease which, so far as
relevant, reads as follows:
The
arbitrator 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 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 any effect on rent of any improvement carried
out by the lessees otherwise than in pursuance of the obligation to the board
hereinafter contained.
No question
arises in relation to that, so that the critical words are those which require
the arbitrator to disregard any effect on rent of any improvement carried out
by the lessees.
Factually,
there is no dispute but that three parcels of land are the subject of that
disregarding operation. Two go together, and they actually have buildings on
them — buildings G and H they are called in the award. The third one is called,
misleadingly, building J. I say ‘misleadingly’ because, as the arbitrator makes
quite clear, there is or was at the relevant time, no building at all, and
therefore that was not notionally but actually a piece of vacant land. The buildings
on G and H were put up by the tenant, and there is no doubt but that that was a
perfectly lawful operation, and they are therefore occupied for the purposes of
the lease, which is that of industrial warehousing, in a perfectly lawful
manner.
The issue
which has arisen between the parties depends on the planning fact, which again
is not in dispute, at least as regards the site of building J, that there is no
hope value in relation to development on unbuilt land in the period over which
one has to have regard for the purposes of the rent review provisions. What the
surveyor actually said in his award on this score is this:
It is agreed,
therefore, that the buildings to be valued are buildings A, B, C, D, E and F.
Buildings G and H are to be totally disregarded as being tenant’s improvements,
and building J on the plan has not been built. It is not agreed between the
surveyors as to the likely use of the vacant land. The landlord’s surveyor
contends that this has a value for open storage or some form of development.
The tenant’s surveyor, on the other hand, states that the planning department
of the London Borough of Havering made it quite clear that all requests for the
vacant land to be used for open storage or parking purposes have met with refusal
on the grounds of poor access and that further development would only be
allowed if an alternative new road could be made available for commercial
traffic only rather than, as at present, through a residential estate.
The arbitrator
in fact divided the contending views with regard to rent between the landlord’s
surveyor on the one hand, who naturally chose high figures, and the tenant’s
surveyor, who, equally naturally, chose rather lower ones. But the hypothesis
on which he dealt with buildings G and H is described in para 13 of his award
as follows:
So far as the
land available is concerned, I have determined that the land on which buildings
G and H stand should be valued as site value, as of course the tenants have had
the benefit of its use subsequent to the erection of the buildings,
and then in
the next paragraph, also sadly numbered 13, he says:
The site on
which building J was intended to be developed I feel must be ignored as the
building has not been constructed, and in the light of the attitude of the
local authority, development of this land, even for open storage purposes,
would be strongly opposed.
I deduce from
that, fairly clearly, I think, that he has placed a nil value on the site of
building J, the notional building, because of the absence of hope value,
whereas he has placed a site value, disregarding the existence of the building,
on the site of buildings G and H. The question which arises is whether he was
right to adopt that attitude.
The award was
published on October 29 1987 and the notice of motion by way of appeal was not
issued in due time. The summons that is before me for leave to extend time is
dated December 22 1987, and the 21 days that are allowed under Ord 73, r 5
were, of course, infringed by roughly a month. It is perfectly clear that the
reason for the delay is the successive ignorance of the relevant time-limit by
the surveyor for the lessee and his solicitor. Equally it is not disputed that
no actual harm can be pointed to by the landlords as a result of that delay.
The question I
have to determine arises under section 1 of the Arbitration Act 1979, which
provides, so far as relevant:
an appeal
shall lie to the High Court on any question of law arising out of an award made
on an arbitration agreement; and on the determination of such appeal the High
Court may by order — (a) confirm, vary or set aside the award; or (b)
remit the award . . .
Subsection (3)
of section 1 reads: ‘An appeal under this section may be brought by any of the
parties to the reference’ — (a) does not apply — ‘or (b) subject
to section 3 below’ — which does not apply — ‘with the leave of the court’, and
subsection (4) of section 1 provides:
The High
Court shall not grant leave under subsection (3)(b) unless it considers
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 to the arbitration agreement; and the court may make any leave which it
gives conditional on the applicant complying with such conditions as it
considers appropriate.
There is no
doubt but that the requirements of subsection (4) of section 1 are complied
with because the difference is of the order of £20,000 per annum, and that
seems to me to be substantial on any view and it has not been argued to the
contrary.
The test that
I should apply has been the subject of a decision by the Vice-Chancellor which,
although Mr Neuberger reserved the right to argue to the contrary should it be
necessary in the Court of Appeal, it is accepted by both parties is binding
upon me. In Lucas Industries plc v Welsh Development Agency
[1986] Ch 500 at p 504* Sir Nicolas Browne-Wilkinson V-C, said:
What then
should be the correct approach? All that
the House of Lords has said† about the
need to avoid delay and expense in commercial arbitrations is applicable to
rent review arbitrations, although possibly to a lesser extent. Accordingly the
need to avoid appeals on over ingenious points of law which have no real
prospect of success is equally applicable to arbitrations on rent review
clauses. But, in my judgment, in cases where the same point of law will
regulate future rent reviews a lower standard than a strong prima facie case is
appropriate. If, after hearing submissions, I am left in real doubt whether the
arbitrator was right in law, it seems to me appropriate to grant leave so that
the law regulating the future relationship of the parties can be
authoritatively determined by the court. This is especially so in a case such
as the present
relation to all rent review clauses which do not specify what are to be the
terms of the hypothetical lease. There are many such clauses, especially those
drafted some years ago.
*Editor’s
note: Also reported at [1986] 1 EGLR 147 at p 148.
† Editor’s
note: Two decisions of the House of Lords are referred to, namely The Nema
[1982] AC 724 and The Antaios [1985] AC 191.
The question,
therefore, that I have to decide, besides the question of delay, is whether I
am in any real doubt that the arbitrator was right in reaching the conclusion
which he did reach.
I am not. I
say that for the following reasons, and it is I think incumbent on me not to
follow the converse course, which the Vice-Chancellor was entirely justified in
adopting, of not giving reasons when one gives leave, because if one refuses
leave quite different considerations apply. It seems to me that the arbitrator
was right, for the following reasons. First of all, I am impressed by the basic
requirement of rent review clauses as set out in the decision of Basingstoke
and Deane Borough Council v Host Group Ltd [1988] 1 WLR 348, which
contains quotations of, notably, an earlier decision of Vinelott J in a case
called Pearl Assurance plc v Shaw (1985) 274 EG 490 at p 492,
where that learned judge is reported as having said:
I think the
court should lean against a construction which requires the rent fixed on
revision to be ascertained without regard to the use which, under the lease,
the tenant is entitled to make of the demised premises, unless, of course, that
intention is spelled out in reasonably clear terms. Otherwise, the effect of
the review might be to impose on a tenant an obligation to pay a rent
appropriate to a very profitable use, but one very obnoxious to the landlord,
and one which he had been careful to forbid in the strongest possible terms —
the effect, that is, of making the tenant pay for something which he not only has
not got, but which he cannot require the landlord to give him.
That was
quoted with approval in the judgment of the Court of Appeal in the Basingstoke
case at p 355 and was described as a cogent passage very pertinent to their
case. The Court of Appeal a little later on the same page said:
The fact
that, unusually, the rent being reviewed is a ground rent, does not show or
even suggest that in this case, where the landlord is to obtain an up-to-date
rent for the site, unlike the ordinary case, where the landlord obtains an
up-to-date rent for the site plus the buildings, the parties intended that (to
adapt the words of Sir Nicolas Browne-Wilkinson V-C in the British Gas case
[1986] 1 WLR 401) the landlord was to get a rent for the site additionally
inflated by a factor which has no reference either to changes in the value of
money or in the value of the site as demised but which is referable to a factor
having no existence as between the actual landlord and the actual tenant: for
instance, the additional rent which could be obtained for the site if the
actual, existing lease did not contain use restrictions. To up-date the ground
rent the valuer is to disregard the value of the buildings on the site. But we
can see no more reason why, in doing so, he should disregard (or, more
precisely, the parties can be supposed to have intended that he should
disregard) the other subsisting terms of the actual, existing lease in this
case than in any other case.
It seems to me
that, first of all, obviously there is no great difference between the landlord
not being allowed to obtain an uncovenanted bonus by charging rent for an
activity which he takes care to forbid on the one hand and a tenant not paying
rent for something that he does in fact get on the other.
Second, the Basingstoke
case does make it clear, if it were not before, that similar considerations
apply to sites which are to be treated as not having had improvements effected
upon them in the shape of buildings as applied to cases where there are
buildings which are not to be disregarded.
Third, the
formulation by the Court of Appeal seems to me to be of assistance in that it
shows that what a landlord was not to get was a rent additionally inflated by a
factor which had no reference either to changes in the value of money or in the
value of the site as demised but which was referable to a factor having no
existence as between the actual landlord and the actual tenant.
Mr Reynolds,
in his cogent submissions, suggested that ‘any effect’ (these are, of course,
the words in the relevant clause in the lease) on rent of improvements was wide
enough not only to require a disregard of the increase in value attributable to
the existence of the building but also to require a disregard of the actual
planning permission situation consequent on the existence and occupation of
those buildings.
In my
judgment, what the Basingstoke case has made clear is that there is a
strong presumption against either the landlord or the tenant obtaining an
advantage which is referable to a factor which has no existence as between the
actual landlord and the actual tenant. Now here there plainly is a factor which
has existence as between the landlord and the tenant in the shape of the
existing planning permission on what are called buildings G and H, and, unless
the clause compelled one to disregard not only the existence of the buildings
but also the planning situation which their existence had led to, I have no
doubt that the court would not adopt such an attitude.
I am fortified
in that conclusion by the extremely capricious effect of the contrary view. If
there were the situation which obtained here, namely that at the period when
the lease was granted there was an expectation of planning permission which
ripened into fact so that a building was erected and thereafter the planning
law either went through a legislative or a policy change at some ex
hypothesi wholly uncertain date in the future, this (as it seems to me)
quite fortuitous event, which might fall on either side of a rent review date,
could, if the tenants are right in their argument, have the effect of radically
altering the rent which it would be proper for the tenant to pay in respect of
a totally undisturbed and unaffected occupation pursuant to the lawful planning
permission that the tenant earlier obtained. That, too, seems to me to be a
result that one would accept only if one were absolutely driven to it, and it
does not seem to me that one is in any sense driven to it in this case.
Finally, an
argument was addressed to me that the terminology of this particular clause was
narrow in this sense, in that what was to be disregarded was the effect on rent
of any improvement and that that formulation is perhaps terminologically rather
less wide than disregarding the existence of a building, which is sometimes a
turn of phrase that is used in this type of clause. That argument I regard as
of somewhat marginal character and certainly would not be by itself one that
would remove any real doubt from my mind.
So far as
delay is concerned, I would have granted leave in this case, had I got that
far, because I am impressed by the fact that no harm has been suffered by the
landlord, and although I entirely accept the proposition that rules are there
to be obeyed rather than disregarded, this would not, in my judgment, have been
a case for insisting on a strict compliance with the terms of the rule.
However, that point is, in the circumstances, an academic one.
I therefore
propose to refuse leave to appeal.
