Landlord and tenant — Rent review clause — Arbitrator’s award of increased rent — Issue as to landlords’ claim to|page:113| interest on the shortfall of rent from the date of review — Court’s warning to draftsmen of rent review clauses — Arbitrator at first determined a review rent of £251,000 per annum as compared with the rent of £50,000 under the lease — Award was challenged by tenants and was remitted to the arbitrator by Bingham J for further consideration on the ground that there had been a ‘procedural mishap’ (not amounting to misconduct and not reflecting on the arbitrator’s professional character or competence) — As a result, the arbitrator revised the award by substituting the figure of £221,000 for £251,000 — It was clear from the decision in South Tottenham Land Securities Ltd v R & A Millett (Shops) Ltd that the amended increase of rent did not become payable until December 25 1984, the quarter day next following the date of the revised award — The shortfall in rent was in fact paid on that date — It followed that the landlords’ claim to interest on the shortfall in rent between December 25 1982 (the review date) and December 25 1984 must fail — This was because the lease did not make provision for any such interest — ‘The question of interest in rent review cases where an increased rent may not finally be determined for a considerable time is clearly one to which the draftsmen of such clauses could usefully and urgently give their attention’ — Landlords’ claim dismissed
The following case is referred to in this report.
South Tottenham Land Securities Ltd v R&A Millett (Shops) Ltd [1984] 1 WLR 710; [1984] 2 All ER 614; [1984] EGD 96; (1983) 269 EG 630, [1984] 1 EGLR 115, CA
In these proceedings the landlords, Shield Properties & Investments Ltd, claimed a substantial sum by way of interest following a revised rent award by the arbitrator, Mr Peter Brian Giles MA FRICS, in respect of Shield House, New Street, London EC2. The motion before Bingham J, as a result of which the original award was remitted to the arbitrator, was reported at [1985] 1 EGLR 7; (1984) 273 EG 69.
Leolin Price QC and Jonathan Gaunt (instructed by D J Freeman & Co) appeared on behalf of the plaintiff landlords; David Neuberger (instructed by Masons) represented the defendants.
Giving judgment, MR MICHAEL WHEELER QC said: In these proceedings, the landlords claim a substantial sum of interest arising from an arbitrator’s award under a rent review clause.
The facts are as follows:
(1) By an underlease of premises known as Shield House, 16 New Street in the City of London, dated December 19 1968 and made between the landlords and the tenants, the demised premises were let to the tenants for a term of 42 years at a rent of £50,000 per annum (‘variable as hereinafter mentioned’) to be paid in advance on the four usual quarter days. Under clause 2(1) of the underlease the tenants covenanted during the continuance of the underlease:
to pay the yearly rent hereinbefore reserved and made payable at the times and in the manner at and in which the same is hereinbefore reserved and made payable . . .
Clause 2(20) of the tenants’ covenants in the underlease provided as follows:
If the Lessee shall make default in effecting payment to the Lessor forthwith on demand of any moneys becoming payable by the Lessee to the Lessor pursuant to any of the Lessee’s covenants hereinbefore contained the amount owing may be recovered by the Lessor . . . together with interest (at a rate there specified) calculated from the date of demand until actual payment thereof by the Lessee.
The emphasis is mine.
Finally by way of quotation from the underlease, clause 4(4) provided for rent reviews at, inter alia, the end of the 14th year. The subclause sets out the procedure of notice and counternotice and, in the last resort, arbitration in some detail, and a summary of it is to be found in the judgment of Bingham J to which I shall refer later. For present purposes, it is only necessary to refer to two brief passages:
the question of whether any and if so what increased rent should be payable hereunder shall be referred to the arbitration of a single arbitrator
and a little later on:
such arbitrator shall determine the question so referred to him by ascertaining the annual rack rental value of the demised premises at the review date.
The subclause then goes on to set out the method to be adopted for ascertaining the annual rack rental value. The review date is, for present purposes, agreed to be December 25 1982.
(2) So much for the terms of the underlease. It is not disputed that the provisions of clause 4(4) were duly complied with by both sides, so that, at the end of the day, failing agreement, the question of the new rent was referred to arbitration.
I have not seen the precise terms of the reference to arbitration, but they appear, I think, sufficiently from the preamble and finding as set out in the arbitrator’s subsequent award and supplement dated May 4 1983:
The preamble to the award includes the following:
And whereas . . . I was . . . appointed to determine that amount (ie the amount of the revised or increased rent) in accordance with the relevant provisions of the said underlease . . .
The award concluded:
that the annual rack rental value of the said premises . . . effective from 25th December, 1982 shall be £251,000.
This the arbitrator attributed as to £220,000 per annum to offices and as to £31,000 per annum to non-office user.
The arbitrator’s award (with a supplement setting out his reasons) was published on May 4 1983 and on May 10 1983 the plaintiffs demanded payment of the difference between the new rate (£62,750 per quarter) and the original rate (£12,500 per quarter). It is, however, clear (as the parties agreed) that for my purposes the payment of any difference (whether for the broken period to May 14 1983 or in respect of any earlier quarter) would not become payable until the next following quarter day (ie the 1983 June quarter day): see South Tottenham Land Securities Ltd v R & A Millett (Shops) Ltd [1984] 1 WLR 710.
Continuing the factual history:
(3) On May 24 1983 the tenants issued a notice of motion in which they applied to set aside or remit the arbitrator’s award on the grounds of misconduct or procedural irregularity under sections 23 of 22 or the Arbitration Act 1950. I should here make it clear that the word ‘misconduct’ was used solely because it was the expression used in section 23 of the above Act in relation to the setting aside of an award. In the present case it involved no reflection of any kind on the professional character or competence of the arbitrator.
(4) This motion eventually came before Bingham J, but it was not until April 3 1984 that he delivered judgment*. From this it appears that the award had been challenged on three grounds: first, that the arbitrator had wrongly received evidence of without prejudice discussions; second, that he had improperly admitted hearsay evidence from the landlords on the subject of comparables; and, third, that he had wrongly failed to disclose to the tenants a letter written to him by the landlords on March 30 1983. As to the first of these grounds, the judge found that there might well have been a misunderstanding between the parties as to whether or not the discussions were without prejudice; that the tenants had in those circumstances a clear option as to how they should proceed, either to seek to halt the arbitration proceedings entirely or to allow the matter to continue; that it was up to the tenants to make their position plain; that they had failed to do so and had allowed the arbitration to proceed; and accordingly that this first ground of complaint failed.
*Editor’s note: See [1985] 1 EGLR 7; (1984) 273 EG 69.
As to the second and third grounds, the landlords acknowledged that there had been an irregularity (the judge’s word) in the way that the question of comparables had been handled because the landlords had failed to comply with directions which the arbitrator had given regarding verification of comparables evidence; though the judge pointed out that in receiving the letter of March 30 1983 the arbitrator did not in any real sense receive evidence; he merely received an offer from one party which, in the event, he did not take up and did not communicate to the other party; and he added:
Even allowing for the fact that misconduct, denotes no more than procedural irregularity, nonetheless it seems to me that it would be stretching even the watered down interpretation of that language to describe what happened here as misconduct.
He continued, however:
It is necessary to consider whether, even in the absence of misconduct, there has been any mishap or misunderstanding or error in procedure in the course of this arbitration which could lead, or might have led, to an unjust result. By
an unjust result, of course, one must include the possibility that the same result has been achieved as would have been achieved but nevertheless in circumstances in which one party has a justified sense that he may have been prejudiced by the procedural course which the arbitration took. This seems to me such a case.
The judge summarised his conclusion as follows:
I have no doubt that when the matter is drawn to his [ie the arbitrator’s] attention he will be able to approach the matter on an entirely scrupulous basis, putting out of his mind anything which should properly not be within it. Whether he orders that the material proffered by Mr Toye [in the letter of March 30] be produced to him and copied to the other party or whether he approaches the matter on the basis of ignoring completely the comparable transactions for which no adequate verification has been produced is, I think, a matter very much for his judgment in the light of any representations made by one party or the other. His overall obligation is to be scrupulously fair in dealing with this matter and no suggestion has been made that anything in his conduct disables him from acting in that way.
Accordingly, this seems to me a case in which there has been a procedural mishap and in which, in all the circumstances, it would be right that the matter should be remitted to the arbitrator for his further consideration having regard to the terms in which I have given judgment.
(5) Thus the judge expressly declined to treat the irregularity as misconduct which would have entitled the court to set aside the award under section 23(2) of the Arbitration Act 1950 and merely remitted the matter to the arbitrator for further consideration in the light — as I read the judgment — of the matters raised under the second and third of the tenants’ grounds of complaint, leaving it entirely to the arbitrator to decide what course the reconsideration — and its result — should take. The judge clearly did not consider it appropriate for him to express any view of his own as to the likely outcome of the further consideration: he was in truth in no position to do so. I merely note in passing that he did not rule out the possibility that reconsideration of the matters to which he had drawn attention might achieve the same result as the arbitrator had reached in making his original award.
(6) In the event, the arbitrator did receive confirmatory evidence of all the comparables which had been referred to in the letter of March 30 and found nothing which would cause him to ‘adjust my award’ (see para 4 of his determination of November 20 1984), with the possible exception of one of the landlords’ comparables, namely, 21 New Street. Having heard further evidence regarding this property and having himself inspected it, the arbitrator stated:
I have come to the conclusion that had the full facts of the letting on 21 New Street been available to me when I made my award I would have reached the conclusion that the substantial difference in the quality of the two buildings would not be adequately reflected by a difference of £2-£2.25 per sq ft in the rent.
He continued:
I therefore now determine:
(i) that the annual rack rental value of 16 New Street . . . effective from 25th December, 1982 shall be £221,000 made up as follows:
|
Offices |
£190,000 per annum |
|
Non-office user |
£31,000 per annum |
and that this determination shall be substituted for the determination in my Award dated 4th May, 1983.
The emphasis is mine.
It is clear from the South Tottenham decision to which I have already briefly referred that where, in a case such as the present, an award of an increased rent is made in the middle of a quarter (even when the increase also covers quarters which are already past) the increase does not become payable until the quarter day next following the date of the award.
In the South Tottenham case, the award of an increased rent was made on October 31 but operated, in a sense, retrospectively so as to cover the June and September quarters. The court held (and this, I think was the only point before them) that the increased rent for the broken period from the end of September to October 31 did not become payable until the next quarter day, ie December 25. But it is quite clear that they regarded their decision as equally applicable to the ‘arrears’ (ie the shortfall) in respect of the June and September quarters, because otherwise:
immediately the rent was assessed by the arbitrator and his award published, the lessees would be in breach, because in the nature of things they could not have paid the arrears on the dates (note the plural) when they notionally became due.
There appears to be no direct authority on the point which I have to decide. But in presenting the case for the landlords, Mr Price laid great stress upon the difference between setting aside an award on the one hand and remitting it on the other: and in the course of argument, both he and Mr Neuberger (who appeared for the tenants) referred me, very helpfully, to a recent work on Commercial Arbitration by Sir Michael Mustill and Mr Stewart Boyd QC. Strictly, I am happy to say, this is not a citable work of reference, but any views on this subject expressed by these experienced authors clearly command respect. I have no hesitation, therefore, in quoting the following extracts from pp 505 to 509 of their work:
FIRST:
In most cases, the court will have a discretion whether to order the setting-aside of the award or to remit some or all of the matters in issue. This discretion must be exercised with regard to all the circumstances of the case. (p 505)
(I should here emphasise that in the present case the only ‘issue’ was the question of the amount of the new rack rent.)
SECOND:
Plainly, the nature of the arbitrator’s default will be an important consideration. A serious error or miscarriage of justice will lead to setting-aside. Conversely, where further findings are required, it will almost always be sensible to send a case back to the arbitrator who is already seized of the evidence: so also where the error is due to inadvertence. (p 506)
(In the present case, the only ‘further finding’ (if it can be so described) is the possible effect on quantum of the comparable at 21 New Street.)
THIRD:
It appears that so far as the courts have given any consideration to the consequence of setting-aside, they have assumed that the Order not only annuls the award, but also desseizes the arbitrator of the reference, so that the whole of the arbitral process has to be recommenced. The dispute is, however, still susceptible of arbitration, albeit with a freshly constituted tribunal. . . . Where the award is severable, and part is set aside, the valid part remains as an effective adjudication. The remainder disappears. (p 508)
(In the present case, an order setting aside would have to have been of the whole award. The question which the arbitrator had answered was clearly not capable of severance even though he also set out the make-up of the rent as between office and non-office user. It was one single finding of the new rack rent for the demised premises.)
FOURTH:
The courts have worked out the effect of a remission rather more fully. It appears that where the Order embraces all the matters referred, the arbitrator resumes all his authority over the dispute, and the original award completely falls away. When the remission applies to only some of the matters referred, the arbitrator no longer has power to vary his award in respect of those matters which the Court has left untouched. He must, as a matter of form, make a fresh award covering the whole of the matters submitted to him; but as regards those not remitted he must simply repeat his original decision. Until this new award is published, there is no binding adjudication on any of the matters referred: so that, apparently, the successful party could not proceed to enforcement even on the parts of the original award which were irreproachable. (p 508)
(I am not wholly convinced that the words which I have underlined in the above extract are entirely supported by the two authorities cited in note 13 to p 508: be that as it may, whether or not the successful party would be allowed to enforce part of the original award would clearly depend on the facts of the particular case and the nature of the award. In the present case, the court in my view would not have allowed the landlords to enforce the original award, at all events once the tenants had properly invoked the appeal procedure: but it might be that in that case the court would only have granted an injunction on terms.)
Clearly the authors of Mustill & Boyd are of the opinion that ‘remission automatically annuls that part of the award which relates to the matters remitted’ (p 507). In the present case, the only question originally referred to the arbitrator was the quantum of the revised rack rent: and in one sense, this was the question which Bingham J remitted to him, albeit only on one aspect of the evidence and its bearing on the one question which had been referred to arbitration.
I need not pause to consider whether, on the remittance, the arbitrator could have reviewed other aspects of the evidence which were not connected, directly or indirectly, with the matters specifically referred to in Bingham J’s judgment. I will assume that he could not. He did not, in fact, attempt to do so.
The short point which I have to consider is the status of the original|page:114| award following the remittance by Bingham J and what I will call the arbitrator’s ‘second award’, although I suspect that Mr Price would prefer it to be called the ‘revised’ award. The reality of the matter is that the remittance in fact put the original award completely in the melting pot because it would (or might) affect the one question at issue in the arbitration, namely, the amount of the revised rack rent. In that sense, therefore, it was the whole of the original award which was remitted, albeit in the light of some only of the evidence on which it has been based. The result of the remittance, therefore, in my judgment was, at the very least, to suspend the original award and, so to speak, put it ‘on ice’: whether it is necessary to go so far as the learned authors of Mustill & Boyd and say that remission ‘automatically annulled’ the original award I need not decide. But it seems to me that once the second award was given, it completely replaced the original award, and from that time onwards the original award ceased to have any effect.
If that be so, and since, by analogy with the South Tottenham decision, the shortfall between the original rent of £50,000 per annum and the new annual rack rent of £221,000 did not become payable until December 25 1984 when it was in fact paid, the landlords’ claim to interest must fail. In so far as the claim is based on the covenant in clause 2(20) of the underlease (which I have already quoted in full earlier in this judgment) I cannot see that the tenants could be said to have ‘made default’ in not paying a sum the amount of which had not yet been finally determined in accordance with the contractual machinery agreed by the parties or that the landlords could effectively have ‘demanded’ such a sum or that it had become ‘payable’ until December 25 1984. Nor can I see any grounds upon which the landlords could claim interest under section 35A of the Supreme Court Act 1981.
I would add one last word. It is true that my decision means that the landlords obtained no interest on the shortfall in rent during the period December 25 1982 to December 24 1984. Basically, however, this is because the terms of the underlease failed to provide for such interest. Moreover, it is possible — I put it no higher — that if, when the tenants issued their notice of motion in May 1983, the landlords had asked for the tenants to be put on terms as to interest, the court might have given them some protection at all events as regards interest on rent becoming due thereafter. But the question of interest in rent review cases where an increased rent may not finally be determined for a considerable time is clearly one to which the draftsmen of such clauses could usefully and urgently give their attention.
In the result, I dismiss the landlords’ claim with costs.
