Rent review — Parties agreeing on basis of valuation — Whether arbitrator departing from agreed basis — Whether serious irregularity causing substantial injustice — Claim allowed
The claimant was the landlord and the defendant was the tenant of ground-floor office premises in Knightsbridge, under a lease dated May 1997 for a term expiring in December 2008. The third floor of the building was also let to the defendant by a separate lease in similar terms.
The first rent review under the ground-floor lease fell due in December 2001. The parties failed to agree a revised rent and the matter was referred to arbitration, to be conducted by way of written representations. By that time, a revised rent had also been set by an arbitrator for the third-floor lease. Both parties 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. Although other comparables were put forward, both parties agreed that these were of little value. The tenant’s expert pointed out that the terms of the lease were, in various respects, more onerous than the equivalent terms in the comparable evidence.
The arbitrator accepted the third-floor discount approach and determined that the appropriate discount was 40% from the third-floor rent. He then went on to apply a further discount to adjust for the onerous features of the lease.
The landlord applied to the court to have the award remitted to the arbitrator for reconsideration under section 68(1) on the ground of serious irregularity leading to substantial injustice. It contended that, in having regard to the other comparables, and in making a further discount by reference to them, the arbitrator had departed from the agreed basis upon which the case was put to him, thereby producing a result that had not been the subject of submission before him, and which the landlord had had no opportunity to answer.
Held: The claim was allowed.
Both parties’ experts had submitted that the market norm was to apply a discount rate to the upper-floor rent. The discount for onerous lease terms was not to be applied in determining the discount between an upper floor and a lower-ground floor. Accordingly it had not been “put into the arena” by the parties because they had made representations to the arbitrator on a totally different basis. It followed that, in applying a discount for onerous lease terms, the arbitrator had made his calculations on a basis that was contrary to the agreed assumptions between the parties, and this amounted to a serious irregularity: Warborough Investments Ltd v S Robinson & Sons (Holdings) Ltd [2003] EWCA Civ 751; [2003] 2 EGLR 149 and Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14 applied. Since the application of an onerous terms discount, on top of the third-floor discount method, would result in double counting, the landlord had substantial injustice. Accordingly, the award would be remitted for reconsideration.
Edwin Johnson (instructed by Simmons & Simmons) appeared for the claimant; Stephen Jourdan (instructed by Oxley & Coward, of Rotherham) appeared for the defendant.
Sally Dobson, barrister
