Arbitration Act 1979, section 1(3)(b)–Application for leave to appeal from arbitrator’s award–Rent review clause in lease of site now occupied by supermarket–Question of law not on construction but on manner in which arbitrator dealt with valuation evidence–Whether award disclosed any question of law
question was made in 1973 between the predecessors in title of the present
landlords and Tesco Holdings Ltd as tenants for a term of 125 years with an
upward review every 14 years–The initial rent was £9,000 per annum–The
supermarket buildings now on the site had been erected by the tenants at their
own expense–This explains why the rent review clause provided for the open
market rental value to be assessed on the basis of a lease of the site only, a
provision which gave rise to certain valuation problems–The parties were unable
to agree on the open market rental value and the matter was referred to
arbitration–The award assessed the rent at £184,448–The tenants had contended
for a rent of £68,000–The tenants applied under section 1(3)(b) of the 1979 Act
for leave to appeal on a question of law arising out of the award
difficulty in this case was that there were no direct comparables for
ascertaining the current rental value of the site on which the tenants’
supermarket now stood–The landlords’ valuer produced evidence of the capital
values of freehold sites and sought by a process of adjustment and
decapitalisation to arrive at the open market rental value–The tenants’ valuer,
on the other hand, had taken the open market rental values of sites with
buildings and had then sought to apply a ‘gearing ratio’, ie the percentage of
the overall rent attributable to the site alone–The arbitrator rejected a
submission that the landlords’ approach was wrong in principle because it was
not comparing like with like, that is the capital value of a freehold with the
rental value of a leasehold–The landlords’ valuer produced evidence of 10
transactions to support his freehold valuation–The arbitrator considered these
and also the tenants’ valuer’s evidence on that point–He preferred the evidence
of the landlords’ valuer and valued the site at £575,000 per acre–Again
preferring the evidence of the landlords’ valuer, the arbitrator deducted
£100,000 per acre to reflect abnormal site costs–To the resulting figure of
£475,000 the arbitrator, at the suggestion of the landlords’ valuer, applied a
decapitalisation rate of 7.5% to allow for ‘tenant’s resistance’: the
arbitrator then applied a rate of 9% for overage income–On these bases he
determined a capital value of £2.25m and an annual rental value of £184,448
arbitrator found the evidence of the tenants’ valuer on gearing ratios
unsatisfactory and was also unhappy about his figure of £6.50 per sq ft, based
on his comparables for the rack-rent of the site and buildings; on a residual
approach this level of rack-rent made the project unviable–The arbitrator
preferred the evidence of the landlords’ valuer and this he was fully entitled
to do–The court did not accept the submission that the arbitrator had gone
wrong in principle–The case was essentially one of weighing the evidence and
coming to a conclusion–No question of law arose–Accordingly, section 1(2) of
the 1979 Act was not satisfied and the judge had no jurisdiction to give leave
to appeal–Other questions, such as tests for considering whether the arbitrator
was in error and
but leave given to appeal to the Court of Appeal
The following case
is referred to in this report.
Warrington
and Runcorn Development Corporation v Greggs plc
[1987] 1 EGLR 9; (1986) 281 EG 1075
This was an
application by the tenants, Tesco Holdings Ltd, for leave to appeal from the
award of an arbitrator in relation to the operation of the rent review clause
of the lease of a supermarket site at Silk Street/Manchester Road, Rochdale.
The respondents were Lawrence Stewart Jackson and Basil Hamblett, the
landlords. The arbitrator was Mr K J Alford OBE FRICS.
Robert Pryor
QC and Kirk Reynolds (instructed by Berwin Leighton) appeared on behalf of the
applicant; Michael Rich QC and David Elvin (instructed by Slater Heelis, of
Manchester) represented the respondents.
Giving
judgment, MORRITT J said: This is an application by the tenant, Tesco
Holdings Ltd, pursuant to section 1(3)(b) of the Arbitration Act 1979,
for leave to appeal from the award of an arbitrator in respect of the operation
of a rent review clause. The lease in question was made on April 16 1973
between Tesco Holdings Ltd and the predecessors in title of the respondents to
the reversion. The demise was of an area of 4.75 acres for a term of 125 years
with an upward review every 14 years. The initial rent was £9,000 per annum.
By clause 6 of
the lease the reviewed rent was to be the higher of the initial rent or the
open market rental value. Clause 6(1) of the lease provided:
The
expression the open market rental value as aforesaid means a sum in relation to
each review period determined in manner hereinafter provided as being at the
time of such determination the annual rental value of the demised property (in
its state on 14th March 1972 and without any buildings thereon) in the open
market on a lease for such residue of the term of 125 years hereby granted as shall
remain at the date of commencement of each such review period with vacant
possession at the commencement of such residue of the term but upon the
supposition (if not a fact) that the tenants have complied with the obligations
as to repair land but not buildings herein imposed on the tenants and such
lease being on the same terms and conditions (other than as to the amount of
rent and the length of term) as are herein contained without the payment of any
fine or premium and disregarding (if applicable) those matters set out in
paragraphs (a), (b) and (c) of section 34 of the Landlord
and Tenant Act 1954.
The reference
to the state of the premises on March 14 1972 is a reference to the fact that
the buildings now on the site were erected by the tenant at its own expense, so
that the open market rental value was to be assessed on the basis of a lease of
the site only. The parties were unable to agree on the open market rental value
and the question was referred to arbitration. The award, dated December 1 1988,
assessed the reviewed rent at £184,448 per annum. The tenant had been
contending for a rent of £68,000.
The
Arbitration Act 1979 provides in section 1(2):
(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; . . .
Subsections
(3) and (4):
(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.
(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.
Three points
arise. First, do the alleged errors on the part of the arbitrator give rise to
questions of law? Second, if they do,
what test should I apply in considering whether the arbitrator was in error? Third, is subsection (4) satisfied?
The questions
of law said to arise are not on the construction of the lease but on how the
arbitrator dealt with the evidence given by the tenant’s expert surveyor.
I have been
referred to the decision of Warner J in Warrington and Runcorn Development
Corporation v Greggs plc [1987] 1 EGLR 9. In that case, the landlord
had sought to rely on a comparable where the tenant had paid a premium. The
premium was assumed to have been paid in lieu of rent and was taken into
account. The tenant’s surveyor contended that premiums are paid for a number of
reasons, that the particular premium was not paid in lieu of rent, so that the
arbitrator could not treat that transaction as a comparable at all. But the
arbitrator treated the transaction as a comparable but ignored the premium. The
point of law was identified in the following terms. At p 10, in the left-hand
column at letter F:
The point of
law that the corporation wishes to take is that there was, in the
circumstances, no justification for Mr Fifield’s [the arbitrator] ignoring the
premium paid in respect of no 19, or at all events no justification for his
ignoring it completely. Mr Male, who appears for the corporation, submits that,
moreover, in so doing Mr Fifield went outside the evidence because Greggs’
surveyor had not said that the premium should be ignored but that, because of
the uncertainties concerning the premium, no 19 should not be used as a
‘comparable’ at all. Mr Male concedes that that point of law is not accurately
formulated in the notice of motion that is before me and that if I grant leave
to appeal he will need leave to amend it.
Then later on
p 10, in the right-hand column at letter H:
. . . it
seems to me that the question whether Mr Fifield was entitled, as a matter of
law, to deal with the premium here in the way that he did is the very question
that, if I give leave to appeal, the judge who hears the appeal will have to
determine. So I turn to the question what is the test that I should apply in
deciding whether to give leave to appeal.
In this case
the tenant contends that by parity of reasoning with that case a question of
law arises in this. The problem facing the arbitrator and the expert surveyors
in this case was that there were no direct comparables for ascertaining the
rent of the site on which the tenant’s supermarket building stood. Mr C H
Davies [FRICS], the landlord’s surveyor, produced evidence of the capital value
of freehold sites and sought by a process of adjustment and decapitalisation to
arrive at the open market rental value. The tenant’s surveyor, Mr M S French
[FSVA], took the open market rental of sites with buildings and then applied to
it ‘a gearing ratio’. The gearing ratio was the percentage of the overall rent
attributable in other transactions to the site alone.
Counsel for
the tenant submitted to the arbitrator that Mr Davies’ approach was wrong in
principle because he was not comparing like with like, that is the capital
value of a freehold with the rental value of a leasehold. The arbitrator
rejected this submission, and in his award considered the evidence of Mr
Davies.
Mr Davies
produced evidence of 10 transactions to support his freehold valuation. The
arbitrator considered those and the evidence of Mr French on that point. He
preferred the evidence of Mr Davies and valued the site at £575,000 per acre.
Again preferring the evidence of Mr Davies to that of Mr French, he deducted
£100,000 per acre to reflect abnormal site costs.
To the
resulting figure of £475,000 per acre, Mr Davies suggested, and the arbitrator
accepted, a decapitalisation rate of 7.5% to allow for ‘tenant’s resistance’,
although a landlord would require a 12 1/2% return. The arbitrator then applied
a rate of 9% for overage. On these bases he determined a capital value of
£2.25m and an annual rental value of £184,448 on the basis of Mr Davies’
procedures.
The arbitrator
then turned to consider Mr French’s approach. He dealt first with Mr French’s
comparables on the rack-rent for the site and the buildings. Mr French was
submitting that £6.50 per sq ft was appropriate. He referred to Mr Davies’
evidence to the effect that there was little or no evidence of rents for retail
stores in the North West in excess of £7.50 per sq ft, that developments of
sites to achieve that rent would not be financially viable and that the
evidence of rental values was either historic or based on rent reviews.
The award then
states at p 17:
I find
difficulty in reconciling the view expressed by Mr French that the subject site
if available on a leasehold basis has a negative value but was worth £480,000
per acre (less abnormals) on a freehold basis. Indeed on Mr French’s own
approach he arrives at a revised ground rent of £68,750 per annum (some 7.6
times the passing rent), adopting a rack rental value of £6.50 whilst
acknowledging that on a residual approach this level of rack rent made the
project unviable. In response to his own counsel’s comment on the 7.6 proposed
increase in the ground rent, Mr French said he thought rents should have gone up
more than they have. Whilst under cross-examination he agreed that ‘book’ rents
— viz rents used for internal accounting purposes in freehold cases were
higher than market rents, although to what extent was not established.
The arbitrator
then considered Mr French’s evidence on gearing ratios, which he evidently
found unsatisfactory, and returned to the problem of the rack-rental value. He
stated at p 18:
However, the
problem of the rack rental value remains. In the light of Mr French’s responses
on Spring Street the true rental value is clearly in excess of £6.50 per sq ft.
If one adopts, say, £8 per sq ft, although the true rental value has not been
established, then the development is clearly still not viable on a residual
basis, and as regards the ground landlord would give him only
43,400 x £8 x
26.84% = £93,188 per annum
in respect of
a site worth in excess of £2 million.
The tenant
contends that this passage discloses an error of law. It is argued that either
the rent was wrong or the capital value was wrong but the arbitrator wrongly
assumed the capital value was right and it was the rent that was wrong. It is
said that this discloses an error of principle and therefore a question of law
because the capital value of the freehold is quite different from the rental
value. It is, however, accepted that an arbitrator may have recourse to
freehold values in the absence of other evidence.
I do not think
that this criticism raises any question of law at all. It is evident that the
arbitrator did not accept Mr French’s evidence with regard to the rack-rental.
He stated in terms that on Mr French’s own evidence the true rental value was
in excess of £6.50 but the actual figure had not been established. Accordingly,
the only remaining evidence was Mr Davies’ evidence on capital values with the
decapitalisation rate of 7.5% rather than 12.5%. In my view, the arbitrator was
entitled to accept this evidence if he wished. It was essentially a matter for
him and raises no question of law.
The award then
states:
I now turn
back to the cases quoted earlier. In the case of Basingstoke & Deane
etc etc, it is stated that the purposes behind the rent review is to reflect
changes in the value of money and real increases in the value of property
during a long term. Mr French’s proposed rental clearly does not achieve that
purpose.
The tenant
argues that Mr French’s proposed rental did achieve that purpose. Mr French’s
suggested figures, as the arbitrator recorded, did show an annual compound
growth of 15% since 1973. As there was no evidence of the value of the freehold
in 1973, it could not be said, it was argued, that Mr French’s figures did not
reflect increases in the value of the property. It is suggested, therefore,
that the arbitrator rejected Mr French’s evidence for a fallacious reason.
But again it
seems to me that this was essentially a matter for the arbitrator. Whether a
15% per annum compound increase reflected changes in the value of money and
property or not is a question of fact not of law. The arbitrator may or may not
have been right. I would have thought that, if Mr French’s rental figure could
not give rise to a profitable development on a residual basis in 1987, that was
a powerful indication that his figures did not reflect the increase in real
value since 1973. But the question was one of fact for the arbitrator, it is
not a question of law for this court.
The award then
continues:
It further
says to update the ground rent the valuer is to disregard the value of the
buildings on the site — Mr French’s approach clearly does not do that.
The tenant
submits that the whole object of Mr French’s gearing ratio was to separate the
value of the site from the value of the buildings. Thus, it is argued, the
arbitrator rejected Mr French’s approach for a bad reason. But again, I discern
no question of law. Mr French’s approach was to ascertain the rental value of
the site plus the buildings and to apply a gearing ratio. In that respect the
award states:
We then have
to consider the question of gearing. Mr French submits a basket of comparables
ranging over the years 1974 to 1983 and one in 1986. Percentages range from
16.5% in Hastings in 1980 to 32.64% in Darlington in 1977. Mr French’s approach
is to add up the gearings irrespective of time, location, presence of petrol
station or other distinguishing features and divide by the number of cases to
produce 24.38%. He re-runs the figures excluding highest and lowest and arrives
at 24.34%, and taking the mean of the results adopts 24.36% as being fair and
reasonable. I find it difficult to know just where to start on a submission of
this nature and I turn initially to some responses by Mr French. Firstly he
accepted that any abnormal costs were not reflected in his averaging, that
gearing might vary both as regards time and place and that the ratio of site
value to building costs was not constant. He accepted that building costs were
fairly comparable irrespective of location but that land prices have a wider
variation, therefore gearings in one place may be misleading for gearings
elsewhere. He accepted that his approach was an exercise in arithmetic rather
than valuation. He could produce no evidence that the relationship between
building cost and land values remained constant.
It seems to me
that the evidence there recorded clearly entitled the arbitrator to reject Mr
French’s approach for the reasons he gave. Those reasons show that Mr French’s
gearing-ratio comparables did not separate the value of these buildings from
the site. It was a question of considering and weighing the evidence and that
is a question of fact for the arbitrator and not a question of law for the
court.
Finally, the
arbitrator stated:
As I
understand it, one is required to assume a market, but the strength of that
market has to be ascertained. It is common ground in this case that neither
party has been able to produce evidence of current ground rents for the type of
property with which we are concerned. I was told that this type of transaction
was unattractive to the food store operators but the reasons were more
difficult to come by. It may be the conservative funding policies of financial institutions,
taxation measures, a desire to have full control, or other unknown reasons.
However, what is clear is that there is a good demand for
supermarket/superstore sites and I do not think market interest would be
lacking for the subject site merely because the basis on which it is offered is
unusual. Having carefully considered the evidence/opinions expressed by the
respective expert witnesses I come to the conclusion that in adopting 7.5% Mr
Davies has sufficiently discounted ‘tenant resistance’ and I find the
appropriate figure for the reviewed rent to be £184,448.
It is
suggested that this passage discloses an error of principle in that the
landlord would not for the purposes of a rent review have the ability to sell
the freehold. This is really the same point that was made to the arbitrator and
which he rejected, namely that the value of the freehold cannot be comparable
to the rental value. But it is accepted that if there is no other evidence the
freehold value can be considered. Having rejected Mr French’s evidence, there
was no other evidence, and in considering the freehold value the arbitrator did
not use it as a direct comparable because he used a decapitalisation rate of
7.5% to discount tenant resistance rather than the full yield rate of 12.5%.
Again, this seems to me to be essentially a matter for the arbitrator in
weighing the evidence and no question of law arises.
Thus neither
individually nor collectively does the award disclose any question of law such
as in the case before Warner J. The arbitrator did not ‘go outside the
evidence’. Accordingly, section 1(2) of the 1979 Act is not satisfied. I have
no jurisdiction to give leave to appeal and the other two questions do not
arise. Therefore, I refuse this application.
The
application was dismissed with costs, but leave was given to appeal to the
Court of Appeal.
