An arbitrator has been ordered to recalculate the rent for a Knightsbridge office premises on the basis that he had wrongly applied a discount for “onerous lease terms”.
Deputy High Court Judge John Jarvis QC held that, because the parties had not placed the issue of onerous terms “into the arena”, arbitrator Anthony Salata had not been entitled to apply such a discount.
In a ruling outlining subject jurisdiction for arbitrators, the judge added that Salata could have avoided the problem by “either writing to the parties seeking their comments as to the course that he proposed to adopt, or sending them a draft of the award and inviting their comments”.
Salata was appointed by the RICS in 2001 to determine a revised rent level for the lower-ground-floor offices at 1 Knightsbridge after the tenant, management consultant Gemini Consulting Ltd, failed to reach an agreement with landlord St George’s Investment Co.
Gemini holds an 11-year underlease of the premises, and leases the third floor of the building under a separate contract in similar terms.
Both Gemini and St George contended that the appropriate method of valuation was to take the reviewed rent for the third floor and to apply a discount, although they differed as to the amount of the discount and how it should be determined.
The arbitrator accepted the approach, and determined that the appropriate discount was 40% from the third-floor rent. However, in determining that the annual rent of the lower-ground floor should be £472,624, he incorporated a further 9% discount for onerous lease terms, including restricted user and reservations concerning access.
In so doing, the judge said, Salata had made his calculations on a basis that was contrary to the agreed assumptions between the parties ‑ a “serious irregularity”.
He held: “An arbitrator must not make an award based upon arguments or evidence that were not presented to him, or upon a basis that is contrary to the common assumption of the parties.”
He said that although an arbitrator is “entitled to use his expert knowledge to arrive at his award”, if he does take into account evidence that has not been called “it is his duty to expose those matters for comment by the party”.
He added that, since the application of an onerous terms discount on top of the third-floor discount method would result in double counting, the landlord had suffered “a substantial injustice”.
The arbitrator will now be required to reconsider the award in whole.
St George’s Investment Co v Gemini Consulting Ltd Chancery Division (Mr John Jarvis QC, sitting as a deputy judge of the division) 8 October 2004.
Edwin Johnson (instructed by Simmons & Simmons) appeared for the claimant; Stephen Jourdan (instructed by Oxley & Coward, of Rotherham) appeared for the defendant.
References: EGi Legal News 15/10/04
