Arbitration — Arbitration Act 1979, section 2 — Application for determination of preliminary question of law — Covenant in lease not to make any alterations or additions to the demised premises — Meaning of ‘alterations’ and ‘demised premises’ — Question of estoppel, the same point having arisen in 1988 in relation to an arbitration affecting neighbouring premises — Whether a declaration on construction appropriate — Covenant plain in itself — Application dismissed
preliminary question arose in an arbitration to determine the value of a
leasehold interest for a 999-year term which was subject to repurchase under an
option agreement — The value in the open market could be affected by the
covenant against alterations — The subject-matter of the demise was a flat
consisting of a particular floor in a building and was described as an ‘inner
skin’ only, no part of the structure of the building being included in the
demise — A matter which gave rise to some debate was the possible effect of a
recent arbitration raising the same point in relation to another flat in the
building held under a similar lease
point on which the court’s determination was sought was as to the entitlement
of the lessee to make certain alterations or additions to the premises, having
regard to the absolute prohibition in the covenant ‘not to make any alterations
or additions to the demised premises’ — The proposed alterations or additions
were expressed in rather general terms in the notice of motion to be ‘such as
are usually and conveniently made to residential premises in order to
facilitate their residential user’ and not to involve ‘materially altering the
form, character or structure of the premises’
dealt first of all with the question which had been raised as to estoppel — It
had been suggested that the previous arbitration decision on the same point, in
relation to a different floor (and, of course, a different contract) raised an
estoppel affecting the determination of the present question — Morritt J
rejected this suggestion, citing the decision of the House of Lords in New
Brunswick Railway Co v British & French Trust Corporation Ltd as authority for the
proposition that a decision on one contract does not operate as an estoppel in
relation to a second contract, even on identical terms
question was whether the absolute covenant in the lease against alterations
permitted, despite its uncompromising expression, some modest qualifications —
If so, was it appropriate to grant a declaration, and in what terms? — Reference was made by both parties to the
judgments in the Court of Appeal in Bickmore v Dimmer (the case of the
large clock fixed to the outside wall), where the Court of Appeal appeared to
have taken a relatively lenient view — Morritt J, however, was concerned that
he was being invited to put a judicial gloss on an apparently clear and
straightforward covenant, without being supplied with particulars of any
suggested alteration or addition — There was a risk that, if a declaration were
granted, the words of the declaration would be fastened on instead of the words
of the covenant itself — The plain words of the covenant should be construed in
the light of the definition of ‘the demised premises’ — The judge therefore
came to the conclusion that it was better to let the words of the covenant
stand by themselves and that no declaration should be granted — Application
accordingly dismissed
The following
cases are referred to in this report.
Bickmore v Dimmer [1903] 1 Ch 158; (1903) 72 LJ Ch 96; 88 LT 78; 51
WR 180; 19 TLR 96
Hoystead v Commissioner of Taxation [1926] AC 155, PC
New
Brunswick Railway Co v British and French Trust
Corporation [1939] AC 1
This was an
application by originating notice of motion, pursuant to section 2 of the
Arbitration Act 1979, to determine a preliminary question of law arising in an
arbitration concerning the valuation of leasehold premises at 21 and 22
Henrietta Street, Bath. The applicants were David Guy Taylor and Elfrieda
Wilhelmine Taylor and the respondents were Vectapike Ltd.
Peter Harvey
(instructed by Stuart Brown & Warboys, of Bath) appeared on behalf of the
applicants; Michael King (instructed by Russell Jones & Walker, of Bristol)
represented the respondents.
Giving
judgment, MORRITT J said: This is an application pursuant to section 2
of the Arbitration Act 1979, seeking the determination of a point of law, to
enable the arbitrator to fix the value of certain leasehold premises. The
matter arises in this way, that on April 5 1984 there was an agreement whereby
the respondent was given an option to purchase 21 and 22 Henrietta Street,
Bath, those premises then being subject to statutory tenancies in favour of a
number of occupiers on different floors. The option to purchase was subject to
an obligation to grant back to the applicants leases for 999 years. The
agreement also contained an option to the respondent to reacquire the leases,
in the event of the statutory tenants vacating the property so that vacant
possession could be given. The form of the re-acquisition could, at their
option, be either a surrender or a purchase not involving a merger. It is that
repurchase of the leasehold interest of a particular floor, which requires the
arbitrator to determine the price, as between a willing vendor and a willing
purchaser, at an open market value on the date the option was exercised.
There were at
least three floors in the property and in the case of one of them the same
point arose in an arbitration which culminated in an award dated February 9
1988. This current application therefore relates to the second arbitration on
the acquisition of leases of particular floors within the building. There is no
material difference in the form of the lease of the premises subject to the
earlier arbitration and this one, save, of course, in respect to the
description of the particular floor in question.
The lease
starts off by referring to the term as being 999 years, from March 25 1984.
There is then a definition of the maintained property, which I will not read in
full but it is the converse of the definition I will read subsequently of the
demised premises. That is contained in clause 1 of the lease and reads as
follows:
. . . the
Flats including the Landlords fixtures and fittings which are now or may be
from time to time during the term hereby granted in the Flat with its windows
(including the glass) non-structural walls within the Flat floors above joist
level and ceilings below joist level within the Flat interior plaster
plasterboard plasterwork tiling and other surfaces of structural walls within
the Flat and all flues cisterns tanks sewers drains pipes aerials wires ducts
and conduits used solely for the purpose of the Flat and no others wherever
situate and EXCEPTING AND RESERVING from the demise and excluding the matters
secondly and thirdly described as the maintained property and all the flues
cisterns tanks sewers drains pipes aerials wires ducts and conduits within the
Flat but exclusively used individually by other Flats (hereinafter referred to
as ‘the demised premises’) . . .
The parties
described the demised premises as being effectively the inner skin of the flat,
a description which seems to me to be wholly apt. In clause 2.11 there is the
following covenant by the tenant:
Not to make
any alterations or additions to the demised premises.
There is a
further tenant’s covenant in clause 2.13:
To do all
such works as under any Act of Parliament or rule of Law are directed as
necessary to be done on or in respect of the demised premises whether by
landlord tenant or occupier and to keep the Lessor indemnified against all
claims demands and liabilities in respect thereof.
And in clause
2.16.1 the tenant covenants to
. . . use the
same
— that is the
flat —
for the
purpose of a single private Flat.
There are no
other provisions in the lease which appear to have any relevance to the point
that has been raised by this application.
On the earlier
arbitration in relation to the second floor, the point was taken that the
effect of the covenant in clause 2.11 was that a tenant of the property would
be unable, without the landlord’s consent, to carry out a number of
improvements to the flat which a purchaser wishing to reside in it would be
likely to require. They were described as, for example:
the
re-planning of the internal layout, the installation of a central heating hot
water system, the installation of a further wc, cloakroom or second bathroom,
reappointing the kitchen and bathroom, extending the electrical system,
provision of built-in and/or fitted cupboards, the reproduction of plaster
mouldings and the installation of period fireplaces.
It was
contended in that arbitration that clause 2.11 was a major encumbrance, which
must reflect very adversely on the open market value of the flat. The valuer,
who based his evidence on that proposition, put a value on the property in the
open market at some £30,000. The other valuer disagreed with the effect of
clause 2.11 and there was a further exchange of written evidence before the
arbitrator concluded, in February 1988, that he considered the valuation to be
£63,000. This was within £4,000 of the price suggested by the surveyor for the
party who said that clause 2.11 did not have such an adverse effect. It is
therefore contended by the applicant in this case that the arbitrator in the
earlier arbitration must necessarily have concluded that the effect of clause
2.11 was not as now submitted, and it is suggested that the arbitrator’s award
in the earlier arbitration is binding on the parties to this arbitration and
conclusive as to what the arbitrator should decide.
The effective
relief sought by the notice of motion is:
Whether on
the true construction of a lease
— and it is
then described —
the lessees
or any assignee of the lessees would be entitled to make such alterations or
additions to the premises (falling short of alterations or additions materially
altering the form character or structure of the premises) as are usually and
conveniently made to residential premises in order to facilitate their
residential user, without seeking and obtaining a waiver by the lessor of any
breach of the covenant contained in clause 2.11 of the said lease.
Para 2 I need
not trouble with (neither party was concerned with it) and para 3 raises the
question of estoppel.
Like the
parties, I will deal first with the question of estoppel. I am prepared to
assume, for the purposes of this point, that in reaching the valuation the
arbitrator arrived at he must have decided that the effect of clause 2.11 was
not that which the surveyor who had suggested a price of £30,000 was contending
for. I also accept, as the parties did, that the principle of issue estoppel or
res judicata applies alike to arbitration proceedings as it does to
judicial proceedings. But it does not follow from that that the effect of an
arbitration in respect of the lease of the second floor has any effect by way
of estoppel on the valuation of a lease in respect of another floor, even if
the lease is in substantially or indeed identical terms, except for the
identification of the property.
In New
Brunswick Railway Co v British & French Trust Corporation Ltd
[1939] AC 1, the House of Lords was considering the construction of certain
bonds issued by the appellant railway company in 1884. The respondent, British
& French Trust Corporation Ltd, had previously acquired one bond of the
series and had obtained a default judgment on a question of construction. The
proceedings before the House of Lords concerned a second action, in which the
respondents, who had acquired 992 bonds of the same series, were contending for
points of construction, and the question was whether the judgment in default in
the earlier action operated as an estoppel in respect of the second. At [1939]
AC 2, in the headnote, it is stated:
In a previous
action on one bond of the same series by the respondents against the
appellants, the latter did not enter an appearance and judgment was obtained
against them by default.
Held, that
such a judgment did not operate an estoppel to prevent the appellants raising
as a defence to the present action questions as to the construction of the
bonds, though these were couched in the same terms as the bond upon which
judgment was obtained by default.
Counsel for
the applicant has suggested that that case is distinguishable from the present
on the basis that the first judgment was a default judgment and not the
equivalent of a judgment on the merits, as the arbitration, after argument on
both sides, might be treated. But at pp 41-43, Lord Romer quite plainly did not
regard that as the relevant distinction. At p 41 he set out the question
whether a judgment by default can ever be relied on as res judicata and,
if it can, whether the judgment alone is to be regarded or whether the whole
record of the proceedings may be looked at. Those were questions upon which he
did not find it necessary to express an opinion. He then went on to consider
the effect of the earlier action in relation to one bond, whether it could
amount to an estoppel in the later action relating to 992 bonds. He said:
In the
earlier action the only question of construction mentioned in the writ or in
the statement of claim was one as to the construction of the bond then being
sued upon, and the judgment pronounced in default of appearance cannot, in my
opinion, be regarded as having determined the question of the construction of
the other bonds possessed by the respondents. For that question was never a
traversable issue in the action and would not have been a traversable issue
even if the action had been fought out upon a defence that merely put in issue the
allegations contained in the statement of claim. Had the question of
construction then been determined by the Court after argument, the decision
would no doubt have been followed in any action brought subsequently upon any
other bonds in the same form; and would necessarily have been followed had the
decision been that of this House. But this would have happened whoever might
have been the plaintiff in the action subsequently brought. It would have
resulted however from the respect paid to authority and not from an application
of the doctrine of res judicata.
And then on
the next page, having cited the well-known passage from Hoystead v Commissioner
of Taxation [1926] AC 155 (PC), he concluded:
. . . He is
not estopped from subsequently litigating the question of construction of
another document even though the second one be in substantially identical
words. For the documents are two distinct documents, and the questions of their
construction are two distinct questions.
A similar
passage appears at p 28 in the speech of Lord Russell of Killowen. The other
law lords did not distinguish expressly between judgment in default and the
transaction being a different contract — both reasons seem to have been given.
Therefore, I regard the case as authority for the proposition that you cannot
have an estoppel arising from a decision on one contract, in relation to a
second contract, albeit the second contract is in identical terms to the first.
You may well reach the same answer because of the respect paid to authority,
but it does not arise by means of an estoppel. Accordingly, in my judgment, the
earlier arbitration award has no effect by estoppel on the questions that arise
in the current arbitration award.
The next
question, therefore, is whether there is any justification for treating the
covenant in the lease as meaning something different from what it says and, if
there is, whether it would be appropriate to grant a declaration in the form
sought or indeed in any other more limited form.
Both parties
relied upon the judgments of the Court of Appeal in the case of Bickmore
v Dimmer [1903] 1 Ch 158. In that case a shop, including the structure,
had been let for occupation by a jeweller and watchmaker, and contained a
covenant that the tenant would not make, or suffer to be made, any alteration
to the demised premises without the previous written consent of the lessor.
Without such consent, he put up a large clock on the outside wall, affixed to
the exterior of the wall by means of bolts driven into it. The matter came
before Farwell J, who considered that to be a breach of covenant and granted a
mandatory injunction to compel the removal of the clock. His decision was
reversed by the Court of Appeal, on the basis that the covenant, when construed
in the context of the lease as a whole, had not been broken by the fixing of
the clock. The judgment of Vaughan Williams LJ, at p 166, indicates the grounds
on which he concluded that the judge below had been wrong. He said this:
It is true
that we are not entitled to make a new agreement for the parties, but in
construing the covenant a line must be drawn somewhere. I am not sure that it
is our duty to draw the line with reference to questions which do not arise in
this case; and when we have to say whether the erection of this clock comes
within the word ‘alteration’ in the covenant, we might be content with saying
that, wherever the line is drawn, this clock does not come within the word
‘alteration’. But I prefer, if I can, to draw the line more definitely. I was
much struck by what Mr Butcher said, namely, that the plaintiffs could not
complain of the clock itself, but that what they complained of was the holes
made in one of the stones of the wall for driving in the iron bolts, as to
which the plaintiff’s surveyor said that in order to restore the structure to
its former condition it would not be sufficient to plug the holes, but it would
be necessary to put in fresh stone . . .
And then he
referred to a provision for spending £400 on alterations and continued:
In my
opinion, the words ‘alteration to the said premises’ apply only to alterations
which would affect the form or structure of the premises. But, whether I am
right or wrong in so drawing the line, I desire to add that, in my opinion, we
ought so to draw the line as that the covenant will not operate to prevent a
tenant who was entitled to carry on his business from doing those acts which
are convenient and usual for a tradesman to do in the ordinary conduct of his
business.
The judgment
of Stirling LJ was to the like effect. At p 168 he said:
I think Mr
Butcher was right in admitting that it could not have been in the contemplation
of the parties that the tenant should be bound to obtain the written consent of
the lessors to the addition and fixing of anything necessary for the enjoyment
of the premises as a jeweller’s shop. But in my opinion that limitation does
not go far enough. I think the exception ought not to be limited to such
alterations as are absolutely essential to carrying on the business . . . but
it ought to extend to all things fixed to the premises and convenient for the
carrying on the business in a reasonable, ordinary, and proper way.
And in the
judgment of Cozens-Hardy LJ, at the foot of the same page, he said:
But as
regards the construction of the covenant, I regret that I am unable to agree
with Farwell J. It is plain that some limitation must be put on the word
‘alteration’. It could not apply to a change of the paper of a room, to the
putting up of a gas bracket, or the fixing of an electric bell . . . The
argument comes in substance to this, that the abstraction of a few cubic inches
from the wall of the house is an ‘alteration’ within the meaning of the
covenant. I cannot take that view. In my opinion the covenant ought to be
limited in the way put by my brother Vaughan Williams — that is, it should be
limited to something which alters the form or structure of the building.
Both parties
rely on that case for different propositions. For the applicant it is contended
that it is authority for the proposition that alterations or additions, which
are reasonable or ordinary or usual for occupying the premises for residential
purposes, are permitted by the covenant, which appears to be in absolute form.
For the respondent, it is pointed out that the court there was concerned with
the form or structure of the building and therefore implied some limitation to
what could be done to the form and structure, whereas, in the present case, the
structure of the building is not part of the demised premises at all. The
matter becomes yet more obscure when one remembers the sort of improvement or
addition that was suggested by the surveyors in the earlier arbitration, such
as the installation of central heating, the reappointing of the kitchen and the
bathroom. These were matters which, it seems to me on any view, the tenant
under this lease could not carry out without the consent of the landlord,
because it would involve going outside the demised premises, as strictly construed.
I have been
concerned throughout that here is an apparently straightforward covenant
contained in the lease and the relief sought in this application is one which
invites me to put a gloss on those words without reference to any particular
suggested alteration or particular addition. The danger, as pointed out by
counsel for the respondent, is that the arbitrator then fastens on, and perhaps
subsequent tenants fasten on, what is stated in the declaration rather than
what is said in the covenant itself.
It seems to me
that this is not in any form a declaration that I should make. First, the
covenant is plain in itself. It has to be read in the light of what is defined
as ‘the demised premises’ and, subject to the de minimis rule, the
identification of what is an alteration or an addition to the skin (as it has
been described) of the flat. I do not think it would be right to make any
qualification on that, such as is suggested in the notice of motion. For
example, it would not be right to buttress the existing covenant by reference
to the form, character or structure of the premises, because the structural
aspects of the flat are not included in the demised premises. Likewise, it
would be quite wrong to put a gloss on the covenant, to permit matters which
were not covered by the de minimis rule but might be comprehended by the
words ‘usually and conveniently made to residential premises in order to
facilitate their residential user’, because the type of matter referred to in
the evidence in the earlier arbitration would not, even if that gloss were
added, be permitted by clause 2.11, in the light of the definition of the
demised premises.
It seems to me
that this covenant stands as it is in the lease. There is no actual threat or
proposal to make any alteration or addition which can be considered
specifically in deciding whether or not it is permitted by the covenant. The
questions, raised in the form that they are, are not appropriate for the making
of a declaration in matters where there is no issue between the parties except
one of value. In this context I would refer to Note 15/16/2 in the Supreme
Court Practice:
A declaration
will not be granted where there is no breach and no threat or intention to
commit a breach of agreement.
It was
suggested by me, and the suggestion was adopted by counsel for the applicant,
that that objection might be surmounted by limiting the declaration to what the
arbitrator might or might not be entitled to take into account. But it seems to
me on further reflection that that does not cure the objection, which is
basically that here is a covenant in clear words, and no particular activity
which is being suggested. It would not be right for the arbitrator to be
invited, effectively, to value not this lease but this lease with a gloss put
upon it by the court. The covenant is the covenant as it stands, and I do not
think it would be right to grant the relief sought in either the extended form
in the notice of motion or in the more limited form which I suggested. It will
be up to the arbitrator to make his decision on the question of value. He may
or may not be asked to make alternative awards, depending on his view as to
what sort of things a tenant might be able to do, and it may or may not be that
such an award will be subject to an appeal later. But I will not make the
declaration sought, in either the wider or the more narrow form.
In those
circumstances, it seems that the only thing I can do is to dismiss the
originating notice of motion.
The
application was dismissed with costs.
