Arbitration — Applications for leave to appeal and to remit — Rent review — Whether arbitrator had evidence to award uplift for overbid of actual tenant of adjoining building — Whether arbitrator failed to consider parties’ submissions in awarding uplift
The applicant Secretary
of State was the subtenant under two subleases dated July 28 1988 held from the
respondent sublessor in respect of two adjoining premises consisting of
contiguous multi-storey blocks, which are occupied for the purposes of the
Department of the Environment. In accordance with the provisions for rent
review under both subleases, an arbitrator was appointed to determine the rent
becoming due on May 7 1991. In making his award the arbitrator stated his
opinion that, in assessing the rent under each sublease, and faced with the
reality of a large organisation occupying the other half of the building and
appearing to be a potential active bidder, the hypothetical tenant would have
taken all steps to secure a tenancy: this hypothesis envisaged the possibility
of two bidders for each unit and therefore the hypothetical tenant would have
made a small overbid of £1 per sq ft. The applicant sought leave to appeal
under section 1(3) of the Arbitration Act 1979, on the grounds that there was
no evidence to support the overbid, and to remit the award under section 22 of
the Arbitration Act 1950, on the same grounds and further that the route by
which the arbitrator applied the uplift in rent was not one advanced by either
party in their respective surveyors’ written representations.
appeal under section 1(3) of the 1979 Act was dismissed because the basis of
the application, namely that there was no evidence to support the arbitrator’s
findings on the uplift, is insufficient; there was sufficient evidence before
the arbitrator, namely that the department occupied the other property in each
case, the proximity of each property and the ease of communication between
each. (2) The award should not be remitted because there was evidence before
the arbitrator. Further, in deciding to giving his reasons for uplifting the
rent, the arbitrator was exercising pure valuation experience on his part.
The following
cases are referred to in this report.
Baleares,
The [1993] 1 Lloyd’s Rep 215
King v Thomas McKenna Ltd [1991] 2 QB 480; [1991] 2 WLR 1234;
[1991] 1 All ER 653, CA
This was the
hearing of an application by the Secretary of State for the Environment under
section 1(3) of the Arbitration Act 1979 for leave to appeal and under section
22 of the Arbitration Act 1950 to remit an award of an arbitrator determining
rents payable under subleases held by the applicant from the respondent, Reed
International plc.
Paul Morgan QC
(instructed by the Treasury Solicitor) appeared for the applicant; David
Neuberger QC (instructed by D J Freeman) represented the respondent.
Giving
judgment, EVANS-LOMBE J said: I have before me two applications. The
first is for leave to appeal under section 1(3) of the Arbitration Act 1979,
leave being required solely for questions of law as are set out in the summons
arising from the arbitrator in this case applying an uplift to his award under
two rent review clauses of which he had been appointed by the parties as
arbitrator. The second application, after concessions, is to remit under
section 22 of the Arbitration Act 1950 the arbitrator’s award so that the
arbitrator can review that award as to the questions of uplift only.
The situation
on the ground is that the applicant, the Secretary of State for the Environment
(to whom I will refer as ‘the department’), is the subtenant under two
subleases from the respondent, Reed International plc (to whom I will refer as
‘Reed’), in respect of two adjoining premises, 83-85 Piccadilly (to which I
will refer as ‘no 83’) and 29 Bolton Street (to which I will refer as ‘no 29’).
These premises are contiguous multi-storey blocks and have been occupied by the
department for the purpose of that department’s administration. In the award
the arbitrator said this with relation to the premises:
The valuations
relate to two contiguous but hypothetically separate units within a single
structure each of about 42,000 sq ft with some services shared, but in
accordance with the lease provisions, separate rentals need to be assessed for
each demise.
In reality
the entire property is occupied by a Government department and there are no
physical signs in the building to indicate the separate hereditaments.
The underlease
of no 83 is dated June 28 1988 and, under it, rent is payable for the initial
period of the lease down to May 7 1991 of £997,450. The relevant rent review
clause is clause 5. That clause provides for a first review date in respect of
the rent at May 7 1991.
The provision
for arbitration is contained in subclause 3 of that clause, and provides as
follows:
Unless within
a period of three months after the relevant review date the parties have agreed
in writing upon the amount of the current market rental value then the same
shall be determined by an independent chartered surveyor (who shall act as an
arbitrator pursuant to the Arbitration Acts 1950 to 1979 or any statutory
modification or re-enactment thereof for the time being in force) such surveyor
to be agreed upon in writing by the landlord and the tenant or in the event of
failure so to agree for a further period of one month to be nominated at the
instance of either party by the President for the time being of the Royal
Institution of Chartered Surveyors and the decision of such surveyor shall be binding
on the landlord and the tenant and the fee payable in respect of any such
decision made by such surveyor shall be borne and paid by the parties in such
shares and in such manner as he shall determine.
The current
market rental value spoken of in that subclause is defined in subclause 1(ii)
in the following terms:
‘The current
market rental value’ at the review dates means the yearly rent obtainable
without taking any fine premium at which the demised premises might at the
relevant review date be reasonably expected to be let in the open market for a
term equivalent to the then unexpired term hereby created with vacant
possession under a lease on the same terms and conditions in all other respects
as in this present lease (but upon the assumption that the tenant has complied
with all its covenants and agreements herein contained) but disregarding —
(a) any goodwill that shall have attached to the
demised premises by the carrying on thereat of any business by the tenant and
any lawful subtenants of the tenant;
(b) any effect on the rent of the demised
premises of any improvements thereto that shall have been carried out by the
tenant or any lawful subtenant during the term hereby created other than
pursuant to an obligation to the landlord (not being an obligation to comply
with statutes or other legislation or the directions of the public);
(c) any effect on rent of the fact that the
tenant and the tenant’s predecessors in title have been in occupation of the
demised premises.
The sublease
in respect of no 29 was also dated June 28 and provided for a rent of £742,200
for the first period of the tenancy, also to May 7 1991. The review provisions
contained in that sublease were to all intents and purposes precisely the same
as those in respect of the sublease of no 83. The parties were not able to
agree on a new rent becoming due on May 7 1991. Accordingly, Mr Samuel Levy
[FRICS], of Jones Lang Wootton, was appointed an arbitrator. The arbitration
was to be conducted in writing. On June 30 a Mr Spencer King [BSc FRICS], of
Debenham Tewson & Chinnocks, for Reed, made submissions to the arbitrator.
At para 9.12 he refers to:
(c) any
effect on rent that the tenant has been in occupation of the demised
premises . . .
And the
submission is:
9.13 It is
accepted therefore that the tenant’s occupation of the actual premises is to be
ignored. There is no requirement however that the occupation of the tenant in
the adjoining property is to be ignored. In respect of either review,
therefore, the tenant of the adjoining building will be assumed to be in the
market with a requirement for accommodation suited by the subject property
demised under either lease, which it is assumed will be vacant.
9.14 Clearly,
the tenant of the adjoining building may be expected to bid very competitively
for the subject premises. This is particularly so having regard to the ease of
intercommunication, as demonstrated by the existing arrangements, and the
ability to secure the arrangements for the provision of services and recovery
of costs between the two buildings.
9.15 It is my
experience that a bid from the adjoining owner may not be precluded by the
assumption of a reasonable rent. This situation seems analogous to the bid for
vacant space within a multi-occupied building from a tenant already within the
complex.
9.16 I attach
at Appendix I an extract from the reasoned award by Mr Graham Plumbe in the
Millbank arbitration in which both you and I were involved. He specifically
rejected the proposition that such bid represented that of a special purchaser
and as such should be disregarded in the assessment of a reasonable rent.
9.17 The
extent of the overbid is difficult to quantify, although I believe this is a
factor which should be taken into account in view of the inter-relationship
between these two buildings and their current occupation.
At para
12.2.6, Mr King says:
Having
calculated the rental values of each building, I have made a nominal increase
of 5%. This is to reflect the bid that could be anticipated from the tenant of
the adjoining building who would form part of the market and was known to have
a space requirement at the relevant time.
He then went
on to apply an uplift to his assessment of the rent, which amounted to some
£82,850 in respect of no 83 and £87,700 in respect of no 29.
The
counter-submission from the department was made by a Mr Adrian Smith [ARICS].
What Mr Smith says starts at para 9.13 and is:
I can make no
sense of the suggestion that the tenant of the adjoining building will be
assumed to be in the market with a requirement for accommodation suited by the
subject property demised under either lease. All we are required to assume is
that there will be a hypothetical willing lessee for the vacant premises. This
is not the actual occupier as Mr King seems to suggest.
The approach
to the possibility of a bid being made by the occupier of the premises
adjoining the subject premises is dealt with by the decision in the Chancery
Division of First Leisure Trading Ltd v Dorita Properties Ltd
[1991]* and I attach a copy of the case . . . The conclusion from this case is
that the arbitrator is not required to assume either that the adjoining
occupier is or is not a hypothetical tenant. The matter must rest on the facts.
*Editor’s
note: Reported at [1991] 1 EGLR 133.
Mr King has
offered no evidence to support his contention in this paragraph.
There is
nothing unusual about the physical layout of each building when considered
separately and there is, accordingly, no reason why the tenant of the adjoining
building (whoever he might be) would put in a higher bid to secure the subject
premises; nor for that matter is there any reason to suppose that the tenant of
the adjoining building would be the only potential bidder for the subject
premises, thus enabling him to put in a lower bid.
The same
applies in relation to the question of service charge recovery. The provisions
are workable . . .
He deals with
that, and then continuing at para 9.15:
I attach at
Appendix 2 an extract from the Reasoned Award of Mr Stanton [in another case].
In this case
a similar ‘special purchaser’ bid argument arose out of the Secretary of State
for the Environment’s position as tenant in the building under a number of
leases. There, as here, the issue was not the question of whether there was
such an argument admissible in law but whether in fact ‘precise evidence was
introduced to indicate that the Secretary of State for the Environment would
have required these floors so badly as to consider making an overbid’.
Mr King had
not introduced any evidence to this effect.
Attached to Mr
Smith’s submission was a letter. This is a letter addressed to Mr Smith from a
Mr Glenn, deputy head of Division of Property Holdings, the Government agency,
and materially it says:
You ask me if
there was a demand at the rent review dates from any arm of Government for
approximately 40,000 sq ft of office space.
There was
not. However, in the latter part of June, Savills were instructed to identify
market options, to be considered with properties available on the Government
Estate for meeting a potential requirement of some 35,000 to 50,000 sq ft. The
search covered an area bounded by Baker Street to the West, Oxford
Street/Holborn to the South, City Road to the East and King’s Cross/Euston to
the North
— And I notice
in parenthesis that that does not include the area of either of these buildings
—
Further, at
that time, it was known that as a result of Government policy in relocating
staff from London some 2m square feet of space in the Government Estate was
likely to be surplus to requirements and available within 4-5 years of the
review date. This had imported a strong policy presumption that new demands
would, wherever possible, be met from the existing Estate. The Government has
few holdings in Mayfair/St James’s, because the location tends not to suit
Department’s operational requirements, and rents are high. Indeed the occupying
Government Department in the subject buildings is itself actively planning to
leave Mayfair.
In the
circumstances there would have been no possibility of a commitment to take a
building the size of either no 83 Piccadilly or no 29 Bolton Street in Mayfair
or St James’s on the date in question.
I do, however,
note in passing that there appears to have been no attempt by the department to
dispose of either of the subleases of no 83 or no 29 although the arbitrator
makes no reference to this fact in his award.
There was a
counter-submission on behalf of Reed by Mr King also dated February 17 1992
where he says at para 4.1.2:
The potential
occupier of 83 Piccadilly would not be concerned by the implications on
security if the escape rights from no 29 Bolton Street are held by an
associated organisation. It is therefore worthwhile repeating, when considering
the rent review on 83 Piccadilly, the Secretary of State for the Environment is
assumed to be in 29 Bolton Street with a requirement suited by the subject
premises, from which he is assumed to have vacated. The hypothetical tenant
would therefore have to ignore any problems as a consequence of the adjoining
building if he is to compete on equal terms with the adjoining occupier.
Subsequent to
those submissions, there was correspondence between the parties and the
arbitrator, in the course of which an opinion of counsel, which had been
prepared for the department, was submitted to the arbitrator with the consent
of Reed. That matter is dealt with in the award of the arbitrator, which
followed on June 16 1992. What the arbitrator said was this, at para 3, under
the heading:
Proximity
of Adjoining Property
Mr King
argues that in each case the actual tenant of the adjoining unit should be
considered as a ‘special bidder’ who, requiring additional offices, would make
a higher bid, and he adopts an uplift of 5%, which I find unsupported in his
evidence. Mr Smith, for his part, produces evidence that the actual lessee of
both units had no requirement for additional offices at the date of the review.
In the
circumstances of these two units held on separate leases but within the reality
of a single structure, I find that this particular matter has caused concern to
me as I have been uncertain whether, in law, I am entitled to assume that both
units were vacant and hypothetically available for letting at the review date
or, when considering the rent for just the one property, that the other was let
and therefore the occupiers (whoever they shall be) could be considered as a
potential bidder for the subject unit.
I now have
the benefit of seeing a copy of a counsel’s opinion sent to me by Mr Smith but
with Mr King’s approval which illustrates the legal position and I understand
that the two surveyors are at idem that I should not assume that both units
were vacant at the review date. This point is no longer valid and has been
disregarded.
Moving on to
the other quasi legal point as to whether the hypothetical lessee of one unit
can be regarded as a special bidder for the other (and vice versa for the
second unit of space), I have considered the additional comments put to me by
both surveyors.
Although I
have received no evidence to show that the actual tenant of each unit would
have been prepared to overbid the market rental for the other section of the
property, I am of the opinion that faced with the reality of the substantial
organisation occupying the ‘other half’ of the building and appearing to be a
potential active bidder, the hypothetically willing tenant would have taken all
steps to secure a tenancy.
This
hypothesis envisages the possibility of two bidders for each unit — the
hypothetical tenant and the actual tenant of the other unit — and in these
circumstances I believe that the hypothetical tenant would have made a small overbid
which I measure in the terms of £1 per sq ft for prime office space in each
unit.
And he adds in
respect of no 83, therefore, a figure of some £39,014, and in respect of no 29
a figure of some £41,345 to the rent that he otherwise would arrive at as being
the ordinary market rent.
I will deal
with the application for leave first. Section 1 of the Arbitration Act 1979
provides materially as follows:
(2) Subject to subsection (3) below, 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 an appeal the
High Court may by order —
(a) confirm, vary or set aside the award; or
(b) remit the award to the reconsideration of the
arbitrator or umpire together with the court’s opinion on the question of law
which was the subject of the appeal;
and where the
award is remitted under paragraph (b) above the arbitrator or umpire
shall, unless the order otherwise directs, make his award within three months
after the date of the order.
(3) An appeal under this section may be brought
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.
The provisions
of section 3 are immaterial so far as the issues before me are concerned.
(4) The High Court shall not grant leave under
subsection (3)(b) above 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 upon the applicant complying with such conditions as it considers
appropriate.
It was
submitted for the department, first, that there was no evidence to support the
conclusion that an allowance by way of rental uplift was proper because the
department can be assumed to be prepared to pay the market rent so that an
overbid was necessary for any outsider to obtain possession. Second, it was
submitted that, there being no evidence to support the arbitrator’s conclusion,
there was raised a point of law within the provisions of section 1(2). Third,
that the arbitrator’s award granting the uplift was a matter which
substantially affected the interests of the department as a party to the
arbitration within the meaning of section 1(4).
I will deal
with the third submission first by accepting it. It seems to me that,
notwithstanding that the uplift represented a small percentage of the total
rent awarded, it was none the less a material matter representing rather more
than £80,000 pa in respect of both sets of premises.
I now turn to
deal with the second submission. In the course of argument I was referred to
the decision of the Court of Appeal in The Baleares [1993] 1 Lloyd’s Rep
215. I do not need to refer to the facts of this case because, in the passage
from the judgment of Steyn LJ, which appears at p231, he deals generally with
the question of what constitutes a point of law for the purposes of section
1(3), and I start reading from his judgment at p231 in the right-hand column,
the last paragraph on that page, where he says:
The search
for a plausible question of law proved elusive. Mr Goldsmith suggested at one
stage that the appropriate question of law might be that there was no evidence
to support the finding of fact that there was a loss. Mr Goldsmith displayed
little enthusiasm for this submission but he never formally abandoned it. And
Mr Rokison QC found it necessary to make a contrary submission in reply. In
view of the economical way in which Counsel dealt with the point I will be
equally brief. One difficulty in Mr Goldsmith’s way was that the arbitrators
had never been asked to state in their award the evidence on the relevant
finding of loss: see Mondial Trading Co GmbH v Duffus
Zuckerhandelsgesellschaft [1980] 2 Lloyd’s Rep 376, at p379, col 1. But it
seems to me that the difficulty is more fundamental. After a careful analysis
of the history and purpose of the Arbitration Act 1979 Mustill & Boyd
concluded in the first edition of their book, at p541, that this rule should no
longer be recognised. In Universal Petroleum Co Ltd v Handels &
Transport GmbH [1987] 1 Lloyd’s Rep 517 Lord Justice Kerr tentatively
commented that it may be going too far to say that the jurisdiction no longer
exists. He thought that the way to deal with the matter is for the Commercial
Judge to refuse leave to appeal on such a ground. In the second edition of
their book, at p596, Mustill & Boyd maintain their view. I
respectfully agree with their view. The concept of a jurisdiction which ought
never to be exercised is not attractive. Moreover, the problem cannot be solved
by the Commercial Judges stifling such applications at the leave to appeal
stage. More often than not the Commercial Judge’s order giving leave to appeal
will not exclude the possibility of an argument that there is no evidence to
support a particular finding of fact. The order will be in general terms. If
leave is given on one discrete point of law it will then be possible also to
argue that there is no evidence to support a finding of fact thereby compelling
the court to review the relevance and weight of the evidence before the
arbitrators. The power to review a finding of fact of a tribunal on the ground
that there is no evidence to support it, and that there is therefore an error
of law, is a useful one in certain areas of the law, notably in the
administrative law field. But in the limitation appellate jurisdiction of the
Court under s1 of the Arbitration Act 1979 this concept has no useful role to
play. It is inconsistent with the filtering system for the granting of leave to
appeal which was created by the Arbitration Act 1979. In my judgment it has not
survived the changes introduced by the reforming measure of 1979.
In his
judgment in this case Neill LJ said at p227:
In conclusion
I should make a brief reference to the question discussed by Lord Justice
Steyn: Is it still permissible to review as an error of law a finding of fact
by arbitrators which is challenged on the ground that there was no evidence to
support it. Lord Justice Steyn has concluded in his judgment that such an
‘error of law’ has not survived the coming into force of the Arbitration Act
1979. For my part I do not feel able without further argument to reach a final
conclusion on this point, but I am impressed by the argument that it is
inconsistent with the thrust and purpose of the 1979 Act to allow findings of
fact to be reviewed by means of any examination which involves reference being
made to the evidence which was before the arbitrators, where the object of the
examination is to establish that there was no or no sufficient evidence to
support the finding.
Ralph Gibson
LJ agreed with the judgment of Neill LJ.
In my
judgment, I should be guided by what Steyn LJ has said and I find that the
basis of the application for leave, namely on the submission that there was no
evidence to support the arbitrator’s findings on uplift, is insufficient for
this court to grant leave. If I am wrong in that, it seems to me that there was
in fact evidence upon which the arbitrator could have based his conclusion.
There are really three aspects to that evidence. The fact that the department
was in occupation of adjacent premises which was admitted, the nature of those
premises or the two sets of premises and their proximity to each other and the
apparent ability, according to the arbitrator, to communicate easily between
the two and the fact that the department was looking for premises elsewhere in
London, if not in this area. So it seems to me that, even if my reliance on
what must be treated as obiter dicta by Steyn LJ is wrong, there was
evidence before the arbitrator upon which he could have based his findings.
So I turn to
the application to remit under section 22. It was submitted for the department
again that there was no evidence to support the conclusion as to uplift. In the
light of what I have already said when I dealt with the application for leave
to appeal, in my judgment this cannot be a matter which could support an
application to remit.
It was further
submitted that neither party in their written submissions, from which I have
quoted extensively, suggested that
was submitted that not only did he find his own route to that uplift but he did
not warn them that he was proposing to do so, and that he should have done so
as to enable the parties and, in particular, the department to make submissions
that that approach was wrong.
I turn to the
notes in the White Book vol 2, p1772 under para 5793, and the latter part of
that paragraph where reference is made to the decision in King v Thomas
McKenna Ltd [1991] 1 All ER 653:
The
jurisdiction of the court under s22 is unlimited and extends beyond the
traditional categories to any case where, notwithstanding the arbitrator has
acted with complete propriety, due to mishap or misunderstanding some aspect of
the dispute the subject of the reference has not been considered or adjudicated
upon fully or in the manner the parties are entitled to accept, and where it
would be inequitable to allow any award to take effect without some further
consideration by the arbitrator.
This part of
these two applications is the only part which has caused me any very great
difficulty, but I have finally concluded that I should not remit this award. It
seems to me that what the arbitrator was here doing was the exercise of pure
valuation experience on his part. The point with which he was dealing was a
pure valuation point, and what the arbitrator was doing was really partially
accepting the submission of Reed that there should be an uplift, but not
accepting it in full. It also seems to me that to remit the award for
reconsideration at this point to this arbitrator would be highly unlikely to
serve any useful purpose. The arbitrator has come to this conclusion. It is
hard to see how the parties can, on the basis of the current evidence, submit
other than that his approach was technically wrong, which is likely to be a
submission that the arbitrator will reject. I also bear in mind the submissions
made to me relating to the modern trend in the legislation and the purpose
behind that legislation dealing with arbitration procedure. The modern trend
is, where possible, to require parties who have elected to accept arbitration
to treat any award made by an arbitrator as final — the trend towards finality,
as it has been described to me. It seems to me in these circumstances that,
where I am in doubt as to whether one of the parties can justly complain that
he has not had an opportunity to make submissions with relation to a particular
and not very important point in the arbitration, I should resolve that doubt by
leaving the arbitrator’s award to stand. Accordingly, I propose to take that
course. It follows, therefore, that each of these applications fails.
