by Delyth Williams
This is the concluding half of the article “Rent review — 1989 update” which began in last week’s issue at p 22.
Arbitration and other issues
A challenge to an arbitrator’s order on the grounds of alleged misconduct or procedural mishap was successful in Control Securities plc v Spencer [9] 1 EGLR 136; [1989] 07 EG 82 where an arbitrator was appointed to determine the rental value of the last seven years of a 21-year lease of a sports shop. On his appointment, the arbitrator proposed certain rules of procedure which included the following rules, namely that the parties had to submit their respective opinions of rental value and comparables; and that the general rules of evidence applied to the comparables, which had to be within the direct knowledge of the surveyor concerned, supported by documentary evidence or agreed between the parties. An opportunity was given for counter-submissions, following which the arbitrator was of the opinion that “I will allow no further correspondence but will make contact with the parties to discuss whether the matter should proceed by hearing or written submission”. All communications were to be through the arbitrator.
Submissions made by the tenant’s surveyor contained details of a number of shops but gave no indication whether the surveyor had direct knowledge of the transactions.
The arbitrator wrote to the surveyor on September 22 1987 drawing attention to this omission, and the landlord’s surveyor, in his counter-submissions of October 5 1987, made the same point. The tenant’s surveyor dealt with these points in his counter-submissions of October 6 1987, saying “we have been involved directly in the majority of the rent review negotiations and we believe that these more accurately represent true rental values in the area” and he also referred to a letter he enclosed written by his client commenting on the property. Although the arbitrator sent the tenant’s counter-submissions to the landlord’s surveyor, he failed to send the tenant’s letter. The arbitrator did not contact either party to discuss whether an oral hearing should be held and published his award on November 18 1987.
Hoffmann J held that there was misconduct of the proceedings or a procedural mishap. Although the landlord’s surveyor might have objected at the time to the receipt of inadmissible evidence and to the failure to send a copy of the tenant’s letter, the arbitrator had proceeded to an award without an oral hearing and this was contrary to the indication that he would discuss with the parties whether an oral hearing was required. The landlord’s surveyor was entitled to assume that he should wait for the arbitrator to contact him about that matter.
In Leeds Permanent Building Society v Latchmere Properties Ltd [9] 1 EGLR 140; [1989] 20 EG 128, the tenants sought leave to apply for an order under section 1(5) of the Arbitration Act 1979 and, if leave was given, to apply for an order that the arbitrator determining the rent review dispute state the reasons for his award in sufficient detail to enable a court, in the event of an appeal, to consider any question of law arising out of the award. The relevant provisions under the 1979 Act are as follows:
(5) Subject to subsection (6) below, if an award is made and, on an application made by any of the parties to the reference —
(a) with the consent of all the other parties to the reference, or
(b) subject to section 3 below, with the leave of the court,
it appears to the High Court that the award does not or does not sufficiently set out the reasons for the award, the court may order the arbitrator or umpire concerned to state the reasons for his award in sufficient detail to enable the court, should an appeal be brought under this section, to consider any question of law arising out of the award.
(6) In any case where an award is made without any reason being given, the High Court shall not make an order under subsection (5) above unless it is satisfied —
(a) that before the award was made one of the parties to the reference gave notice to the arbitrator or umpire concerned that a reasoned award would be required; or
(b) that there is some special reason why such a notice was not given.
The landlords had not consented to the application, so that the tenants had to seek an order under section 1(6) and, as neither party had given notice to the arbitrator that reasons would be required, the tenants had to persuade the learned judge that there was some special reason why such a notice had not been given. Warner J held that in the instant case there was no special reason within section 1(6)(b) of the Arbitration Act 1979 so that the tenants’ application failed.
Leave to appeal under section 1(2) of the Arbitration Act 1979 or, alternatively, for the arbitrator’s award to be set aside under section 22 of the Arbitration Act 1950 was sought in Fine Fare Ltd v Kenmore Investments Ltd [9] 1 EGLR 143; [1989] 21 EG 81. In this case the demised premises were a superstore in Luton and the arbitration in question was of the first rent review in a lease for a term of 35 years. In the instant case, there was a dispute as to whether a particular comparable (which had been related to a superstore in Swindon) had been valued on a shell or fitted-out basis by the expert who undertook the valuation. The arbitrator requested a clarification, but this resulted in more confusion and, in his award, he said he was satisfied that the Swindon store had been valued on a shell basis at £8.50 per sq ft.
The tenants contended that this conclusion, as a finding of fact, was erroneous and, on the authority of Edwards v Bairstow [6] AC 14, that the true and only reasonable conclusion contradicted the finding of the arbitrator. Peter Gibson J was of the opinion that, on the question of law, he had to be satisfied that the evidence before the arbitrator was bound to lead to the conclusion that the Swindon store was valued on a fitted-out basis, but he came to the conclusion that there was evidence both for and against the arbitrator’s view. Further, the judge was not satisfied that any procedural mishap had occurred and concluded by stating:
…this case has demonstrated how important it is that arbitrators and experts should expressly state in their awards whether they are valuing premises on a shell or fitted out basis.
In Ipswich Borough Council v Fisons plc [0] 04EG 127, the Court of Appeal considered the proper test to apply in granting leave to appeal under section 1(4) of the Arbitration Act 1979 which provides that:
the High Court shall not grant leave … 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
In this case, the appellant company, under an agreement of 1955, constructed an office block on land owned by the respondent and, as part of that agreement, was granted a lease for 99 years without provision for rent review. However, the agreement of 1955 contained an undertaking, in clause 25, by the respondents to offer certain land for car parking for a term expiring at the date of expiry of the main lease, but by 1982 the provisions of clause 25 had expired and the parties entered into a further agreement whereby the time to offer a lease of the car park was extended. A lease of the car park land was offered in October 1986 containing a three-year rent review clause and was to expire at the same time as the main lease. The appellant contended that the new lease should be on the same terms as the 1955 lease and, therefore, should not contain rent reviews. In accordance with the arbitration clause in the 1982 agreement, the dispute was referred to an arbitrator, who decided that, as the agreements of 1955 and 1982 were both enforceable, the car park lease should not contain rent reviews.
The Court of Appeal was of the opinion that the decision on whether or not to grant leave to appeal from an arbitrator’s award to the High Court should be arrived at after only brief argument and the court should approach the question with a bias towards finality. The guidelines from “The Nema” [2] AC 724 and “The Antaios” [1985] AC 191 cases might require adaptation if, in particular cases, the problem was not covered by the reasoning and approach adopted in those decisions. The Court of Appeal was of the opinion that the guidelines could be applied to rent review cases, as some such clauses bore a close resemblance to each other as to be similar to standard contract clauses. The court concluded that, in applying the test of real doubt in Lucas Industries plc v Welsh Development Agency [1986] 1 EGLR 147; [1986] 278 EG 878, the Vice-Chancellor applied the wrong test. A strong prima facie case that the arbitrator had made an error of law had to be made out and the analysis of the arbitrator’s award showed that such was the case.
In Manders Property (Estates) Ltd v Magnet House Properties Ltd [9] 2 EGLR 126; [1989] 42 EG 111 the facts of the case were complicated but can be summarised as follows. The plaintiffs were the leaseholders of an office building and the defendants were the underlessees, but the underlease comprised both old premises and new premises. The underlease was for a term of 30 years from March 25 1982 with rent reviews at five-yearly intervals. In the event of arbitration, the arbitrator was directed to “disregard” the effect on rent of any improvement carried out by the underlessees, with the rent of the old premises being the higher of £23,280 or the open market rent and the rent in respect of the new premises being the “interest rent” (namely the interest on certain lessee’s works) or the open market rent, whichever was higher. At arbitration, contrary to the approach favoured by the parties, the arbitrator determined separate sums by way of rent for the old and new premises and decided that the “lessee’s works” should be disregarded and valued these works at 22p per sq ft pa.
Peter Gibson J was of the opinion that sections 22 and 23 of the Arbitration Act 1950 could not be used as a method of circumventing the restrictions on the power of the courts to intervene which had been introduced by the Arbitration Act 1979.
The learned judge considered that, for leave under section 1 of the 1979 Act, two conditions had to be satisfied, namely (a) that the court must be left in real doubt as to whether the arbitrator was right in law and (b) 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. Peter Gibson J refused leave to appeal. (It is to be noted that the test applied by the learned judge should now be read in the light of the decision in Ipswich Borough Council v Fisons plc.
Miscellaneous matters
The question of whether a firm of surveyors had been negligent in failing to apply and operate the rent review machinery in accordance with the underlease was the issue before Mr R A K Wright QC (sitting as a deputy judge) in Radjev v Becketts [9] 2 EGLR 144; [1989] 35 EG 107. In this case, the plaintiff was the lessee holding an underlease for 25 years from March 1976 which contained provision for rent reviews every five years. The underlessors were the tenants of the whole building and their headlease was subject to rent review provisions with the same dates as the underlease. The underlessors occupied premises next to the demised premises.
The underlease provided for the rent reviews to be on the basis of an “open market rent” and where the parties failed to agree a rent three months before the review date, the “lessor may at any time thereafter … require an independent surveyor to determine the rent”.
The rent review provisions further provided that, following his appointment, “Notice in writing of his appointment shall be given by the Surveyor to the Lessor and the Lessee and he shall invite each to submit within a specified period (which shall not exceed four weeks) a valuation accompanied if desired by a statement of reasons”. The independent surveyor was entitled to “act as an expert and not as an arbitrator and shall consider any valuation and reason submitted to him within the said period but shall not be in any way limited or fettered thereby”. At the time of the 1986 rent review, the lessors initially proposed a rent of £8,000, although they reduced this to £7,500 and the defendants, who were instructed to act for the plaintiffs, proposed a rent of £4,500. On August 22 1986, the independent surveyor was appointed and he called for representations by September 15 1986, but the defendants made no such representations on behalf of the plaintiff and the surveyor determined the rent at £9,200.
The plaintiff claimed that the defendants had been negligent in failing to submit any representations; in failing to advise properly on the real open market value of the shop; in failing to inform the plaintiff of the lessors’ reduced offer; and in failing to warn the plaintiff that the rent might be fixed at a figure higher than that originally asked for by the lessors. The learned deputy judge held that the defendants were negligent in that they should have ensured that representations on the plaintiff’s behalf were submitted to the surveyor before the expiration of the time-limit fixed in accordance with the review provisions.
In Lansdown Estates Group Ltd v TNT Roadfreight (UK) Ltd [9] 2 EGLR 120; [1989] 38 EG 120, the lease in question was for a term of 30 years from 1981, with rent review provisions at five-yearly intervals. The defendants, who carried on the business of express road carriers of freight, required a larger area of loading space than normally provided in units on the industrial estate in question. The basic dispute between the parties was as to the construction of a definition in the rent review provisions of a “Standard Warehouse Building” as the intention was to use this definition to formulate a “comparable” instead of relying on an actual comparable building. The plaintiffs contended that the hypothetical building for rent review purposes should be assumed to enjoy a yard area of 1.75 acres (namely, the size of the area provided by the actual lease), while the defendants argued that the area should be assumed to be half an acre only, based on a “standard covered site ratio”, which appeared to be the half acre likely to be found in the case of a standard warehouse. The learned deputy judge held that the yard area to be taken into account was 1.75 acres. Further, the deputy judge was of the opinion that there was no evidence of either a common or unilateral mistake so that the claim for rectification would be dismissed.
In Apus Properties Ltd v Douglas Farrow & Co Ltd [9] 2 EGLR 265 the determination of an independent expert was challenged in a case involving complex issues of fact and law. The demised premises encompassed two office buildings which, at some time, had been made inter-communicating through doorways at all levels in the party walls. The plaintiffs were the freeholders (whose interest was purchased by the underlessees) and the defendants were the original tenants (whose successors had got into difficulties leading to forfeiture of the lease) and two sureties. The lease in question was for a term from February 11 1977 to September 19 1985 and contained a rent review clause with a review date at September 29 1980. In pursuance of this rent review, an independent expert was appointed to determine the rent in the absence of agreement. The rent review clause was in a fairly usual form providing, inter alia, that no account should be taken of improvements carried out by a tenant (otherwise than under obligation) and, in addition, the lease contained a severely restricted user provision ruling out use for sales by auction and as an advertising station and restricting office use to offices in connection with the tenants’ business of property management and dealings with ancillary legal offices. A licence granted for an underletting, however, provided that this restrictive condition should be modified in relation to that underletting by allowing use as offices for chartered accountants or some such professional purpose. The court had to consider, inter alia:
(1) whether B (the independent expert) was in error because he failed to disregard improvements or because he determined the reviewed rent on the basis of a hypothetical lease containing the user condition as modified as opposed to the original condition;
(2) whether, if B’s determination was valid and it was correct to apply the user condition as varied,
(a) the original tenant was liable to pay the rent determined on that basis, and
(b) the two sureties were automatically discharged by reason of that variation;
(3) whether the forfeiture of the lease resulted in the discharge of the sureties.
On the first issue, Judge Hayman (sitting as a judge of the High Court) was of the opinion that B had not been in error in regard to the direction in the lease to disregard the improvements. Further, Judge Hayman found that B had been in error because, as a matter of construction, the condition had to be applied as it was at the commencement of the tenancy not as it was at the date of the review (which was after the condition had been relaxed by the modification).
On the second issue, Judge Hayman was of the opinion that the principle was that a material variation in the lease would discharge the surety unless he had consented to it.
Finally, on the third issue, Judge Hayman concluded that the sureties were not discharged by the forfeiture. (It is to be noted that this case is based on complex facts which the reader should peruse in detail.)
