Arbitration — Rent review — Whether arbitrator misconducted himself
The applicant
held a lease from the respondent dated October 10 1986 of a cinema at 55 Bolton
Road, Arndale Centre, Walkden, for a term of 21 years from January 15 1986 at
an initial rent of £12,700, subject to review. In respect of the first review
in January 1991, Ronald Newbury FRICS was appointed the arbitrator and, in
consequence of his directions, Mr Graham Birch FRICS, for the applicant, and Mr
Geoffrey Mason FRICS, for the respondent, submitted and exchanged written
submissions and countersubmissions. Mr Birch advancing a valuation based on
turnover; and Mr Mason, a valuation based on a comparison on a floor area basis
and a value-per-seat basis with lettings of other cinemas. In his award the
arbitrator stated that he reached his determination by considering an estimated
maintainable profit for the property to which he applied a rental bid and
checked this by reference to a rate per seat. The applicant applied to set
aside or remit the award on the ground that the arbitrator had misconducted
himself in going outside the evidence in the submissions before him.
reconsideration of the arbitrator. The arbitrator had misconducted himself in,
in effect, giving evidence to himself. The arbitrator used an estimated
maintainable profit, but that was something which essentially had to be the
subject of evidence. There was no such evidence, nor were there submissions on
the matter. Although the applicant’s valuer espoused a valuation based on
turnover, that was something very different from the estimated maintainable
profit on which the award was based.
The following
cases are referred to in this report.
Fox v PG Wellfair Ltd [1981] 2 Lloyd’s Rep 514; (1982) 263 EG
589, CA
Handley v Nationwide Anglia Building Society [1992] 2 EGLR 114;
[1992] 29 EG 123
Zermalt
Holdings SA v Nu-Life Upholstery Repairs Ltd [1985]
2 EGLR 14; (1985) 275 EG 1134
This was an
application by the applicant, Unit Four Cinemas Ltd, by notice of motion under
sections 22 and 23 of the Arbitration Act to remit or set aside the award of Mr
Ronald Newbury FRICS, an arbitrator appointed to determine a rent in a lease
dated October 10 1986 held from the respondent, Tosara Investment Ltd.
Barry Denyer-Green
(instructed by Fremont & Co) appeared for the applicant; Ann McAllister
(instructed by Lee Pomeranc) represented the respondent.
Giving
judgment, FERRIS J said: The matter which is before me is an application
by a tenant named Unit Four Cinemas Ltd for the setting aside or remission for
reconsideration by an arbitrator of an award fixing the amount of rent payable
by the tenant under a rent review clause. The respondent to the application is
the landlord, which is now a company named Tosara Investments Ltd. The tenant
holds a property consisting of a cinema on the ground and first floors of 55
Bolton Road, Arndale Centre, Walkden, which is, I believe, a suburb of
Manchester.
The tenancy
was created by a lease dated October 10 1986 whereby the property was demised
for a term of 21 years from January 15 1986 at an initial rent of £12,700 pa.
The lease provided for a rent review on January 15 1991 and every five years
thereafter. There is nothing particularly remarkable about the rent review
clause. It provided that, in default of agreement between the landlord and the
tenant, the new rent should be fixed at the relevant review date by an
independent valuer as arbitrator. The amount of the rent was to be such amount
as the valuer should decide, having regard to current open market rental value
at the review date. The lease provides for the usual assumptions and
disregards, including in particular a requirement for disregard of the fact
that the premises have been in the occupation of the tenant or its subtenants
and a disregard of any goodwill attached to the property by reason of the
carrying on of the tenant’s business upon it.
When the first
review date arrived in January 1991, the parties did not reach agreement about
the new rent and in due course an arbitrator, Mr Ronald Newbury FRICS, of Grant
& Partners, surveyors and estate agents, was appointed to be the arbitrator
by the president of the Royal Institution of Chartered Surveyors.
On March 5
1992, after an initial meeting, the arbitrator gave various directions,
including a direction that the arbitration should proceed by means of written
representations, but he reserved his right to adjourn the reference to an oral
hearing if he deemed it necessary. Although by that direction he anticipated
that his award would not contain reasons, after hearing other further
representations from the parties he gave supplemental directions under which he
agreed that the award would contain reasons and that it would take the form
initially of an interim award containing his decision as to value — the final
award to embrace that decision and his decision as to costs.
In accordance
with the direction that the procedure should be by way of written submissions,
each party instructed surveyors to make submissions to the arbitrator. On
behalf of the tenant, Mr Graham Birch FRICS on March 26 1992 made a detailed
written submission. In that submission he referred to his experience in the
valuation of cinemas (particularly his experience in connection with the 1973
rating valuation list) and he remarked that all the cinemas and theaters which
he had valued for rent review and rating purposes had been valued either on a
profits’ approach or a quasi-profits’ approach, that is, an appropriate
percentage of gross receipts as is taken as being the rental value. Later in
his submissions he developed this point. I will return in more detail to what
Mr Birch said. For the moment it is suffice to say that Mr Birch adopted a
basis of valuation which proceeded by reference to the turnover of the cinema.
On that basis, and having taken account of two other cases involving cinemas in
the North West the rent of which had recently remained unchanged on a rent
review, he came to the conclusion and urged upon the arbitrator that the same
should apply for this property.
On behalf of
the landlord Mr Geoffrey Mason FRICS, of the firm of Mason, Owen &
Partners, rejected a valuation on the basis put
seen Mr Birch’s submission, but in para 4(1) Mr Mason said:
Cinemas are
traditionally valued on a turnover basis. However, the tenant’s agents have not
been willing to provide such figures and it is therefore impossible to comment
upon the turnover of the property.
He went on in
para 4.1: ‘However, the cinemas I have been involved with have been let on a
floor area basis’
and then he
recognised that they applied to single-storey buildings, let as a shell, with
the appropriate car parking and prominence. He then proceeded to analyse four
recent transactions which he claimed to be reasonably comparable in the North
West of England for the letting of cinemas as a shell in multi-screen layout as
parts of larger developments. On the basis of that evaluation he put forward
figures on a floor area basis and a value-per-seat basis, which led him to a
conclusion that the rent should be £50,000 pa.
Thereafter Mr
Birch commented on Mr Mason’s submissions and Mr Mason commented on Mr Birch’s
submissions. Each of them adhered to his own previous basis of valuation. In
particular, Mr Mason criticised Mr Birch’s approach as being inaccurate for not
taking into account the differing abilities of individual tenants to run a
business.
In the light
of those written submissions the arbitrator made his interim award on June 30
1992. He determined that the rent for the property should be £22,500 pa. In
giving his reasons he referred to the differing approaches to valuation of the
surveyors instructed by each party and he said in para (g) of his reasons:
On the
evidence before me I conclude that in valuing this type of property neither of
the two methods referred to me can be categorically stated as being correct or
incorrect. Both methods are used from time to time.
He then went
on to consider the evidence of comparables put forward by Mr Mason and Mr
Birch’s criticism of those comparables, and he concluded that he agreed with Mr
Birch’s view that ‘the subject property is not easily compared with the three
multiplex comparables referred to me by Mr Mason at Chester, Liverpool and
Salford’. He then referred to Mr Birch’s approach of fixing the rent at 6% of
the average turnover during the last two financial years. He referred to the
two comparables put forward by Mr Birch as a check and said:
Whilst these
were not of the multiplex variety, I still found it very difficult to compare
them with the subject property as they are both very different in design,
character and type of location.
He concluded
his reasons as follows:
(i) I make no criticism of the parties for the
conclusions I have come to regarding the comparable evidence, as I accept what
both surveyors have said, in that it is very difficult to find true comparable
evidence for this type of property.
(j) Mr Birch relies on the trading figures of the
subject property. While such evidence is not inadmissible, the rent review
clause is not expressly turnover-related and had this been the intention of the
parties then it would have been possible to draft such a rent review clause
simply by applying a rent based on turnover. I have already referred to Mr
Mason’s comment on the profits method of valuation being affected by the
ability or otherwise of individual tenants. I accept this in so far as the
actual accounts are concerned, but this does not discredit the profits method
entirely. Such a method of valuation is frequently used where no profit figures
are available for a particular property and even where trading has never
occurred.
For the
reasons expressed by Mr Mason, I find it would be wrong to rely solely on the
actual profits or turnover of a particular property and I agree with Mr Birch’s
own statement that it is necessary for the valuer to estimate the profitability
of the business and then arrive at his assessment of value. Mr Birch has relied
solely on the accounts of the subject property and has not considered a
hypothetical set of accounts which a prospective tenant might prepare in order
to estimate the fair maintainable profit. For these reasons I find that I am
not able to rely solely on the accounts of the subject property and have
therefore reached my determination in this matter by considering an estimated
maintainable profit for this property to which I have then applied a rental
bid. I have then checked this calculation by reference to a rate per seat. My
final figure is arrived at after looking at the results of both calculations in
connection with the assumptions to be made in the rent review clause.
That reasoning
of the arbitrator is attacked, on behalf of the tenant, on the ground that the
arbitrator, so the tenant submits, has gone outside the submissions made to him
by the parties and, instead of evaluating the evidence which they put before
him, has adopted evidential material of his own in the form of what he
describes as ‘an estimated maintainable profit for this property’ and also, in
applying to it the factor which he describes as ‘a rental bid’ and checking it
by reference to another factor, that is to say, ‘rent per seat’, the concept of
which was familiar to the parties, but the rate of which, as used by the
arbitrator, is not known to the parties. This, it is said, is misconduct on the
part of the arbitrator which justifies the court in setting aside the award,
although it is agreed that, if I accept the submissions of the tenant in this
case, remission would be more appropriate than setting aside.
The use of the
expression ‘misconduct’ in this context, as has been recognised before in this
type of case, is unfortunate, although it is hallowed by time. Lest there be
any doubt about it, I reiterate what was said by Bingham J in Zermalt
Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14*. What
Bingham J said was:
The
jurisdiction of the court under section 23 rests on what is, most
unfortunately, called ‘misconduct’. That gives the impression that some
impropriety or breach of professional conduct or lack of integrity or
competence is involved. In 99 cases out of 100 an application under section 23
involves nothing of the kind. It involves, usually, merely a procedural lapse
of a kind that any arbitrator or magistrate or judge may be guilty of.
*Editor’s
note: Also reported at (1985) 275 EG 1134.
Those words
apply to this case. No impropriety on the part of the arbitrator is suggested
on behalf of the tenant. What I have to consider is misconduct only in the
technical sense. That it may be misconduct within the meaning of the section
for an arbitrator to rely upon factual material of which he received no evidence
appears from a number of cases. Thus in Fox v PG Wellfair Ltd
[1981] 2 Lloyd’s Rep 514† Dunn J said at
p 528:
It is well
established that where an arbitrator hears evidence in the absence of either or
both parties, his award will be set aside on the ground of misconduct, unless
perhaps it can be shown that the evidence would not have affected the award.
† Editor’s
note: Also reported at (1982) 263 EG 589.
Dunn LJ then
referred to a number of authorities, and continued:
On the
analogy of those cases it seems to me that an expert arbitrator should not in
effect give evidence to himself without disclosing the evidence on which he
relies to the parties or, if only one to that party. He should not act on his
own private opinion without disclosing it. It is undoubtedly true that an
expert arbitrator can use his own expert knowledge. But a distinction is made
in the cases between general expert knowledge and knowledge of special facts
relevant to the particular case.
Likewise in
the Zermalt Holdings case, to which I have already referred, Bingham J
said at p15:
I fully
accept and understand the difficulties in which an expert finds himself when
acting as an arbitrator. There is an unavoidable inclination to rely on one’s
own expertise and in respect of general matters that is only not objectionable,
but is desirable and a very large part of the reason why an arbitrator with
expert qualifications is chosen. Nevertheless, the rules of natural justice do
require, even in an arbitration conducted by an expert, that matters which are
likely to form the subject of decision, in so far as they are specific matters,
should be exposed for the comments and submissions of the parties. If an
arbitrator is impressed by a point that has never been raised by either side,
then it is his duty to put it to them so that they have an opportunity to
comment. If he feels that the proper approach is one that has not been explored
or advanced in evidence or submission then again it is his duty to give the
parties a chance to comment. If he is to any extent relying on his own personal
experience in a specific way then that again is something that he should
mention so that it can be explored. It is not right that a decision should be
based on specific matters which the parties have never had the chance to deal
with, nor is it right that a party should first learn of adverse points in the
decision against him. That is contrary both to the substance of justice and
to its appearance. On the facts of this case I think that the landlord’s case
is made out.
The same
appears from the decision of Gatehouse J in Handley v Nationwide
Anglia Building Society [1992] 2 EGLR 114*. At p115 Gatehouse J said:
It is clear
that the arbitrator took account of factors which he saw in his own detailed
and expert view of the whole area and he held that the Broad Street property
was in a less favourable trading area than 83 and 85, because they apparently
had the benefit of a substantial residential area close to them, and on that
account he made a further reduction of 10% to the prima facie rent of
£25 a week in each case. Here again, it is clear that the arbitrator acted on
his own initiative. He, so to speak, gave evidence to himself and I agree with
Mr Fancourt that this is not a matter on which a professional arbitrator is
entitled to come to his conclusion in the absence of any evidence and without
giving the parties an opportunity to comment. So on that ground, too, I think
the arbitrator was mistaken. I say this at once: it may very well be that the
figures that he came up with are the right figures, but in the circumstances it
seems to me that this case is very much on all fours with the decision of
Bingham J in the Zermalt Holdings . . . [case]. He took the applicant,
in other words, by surprise. The first the applicant knew of the figures that
would be suggested for these reductions was when the award was published.
*Editor’s
note: Also reported at [1992] 29 EG 123, [1992] 2 EGLR 114.
It seems to me
that this, too, is a case in which the arbitrator has, in effect, given
evidence to himself. As he says, he has based his determination upon an
estimated maintainable profit for the property. As I have already remarked, he
then applies to that a rental bid and checks it by reference to a rate per
seat. It seems to me that an estimated maintainable profit for the property is
something which essentially had to be the subject-matter of evidence. But there
was no such evidence before the arbitrator, nor were there any submissions
before him about this matter. Mr Mason gave no such evidence and made no such
submissions, because his position was that it was wrong in principle to proceed
by way of a valuation based upon turnover or profits. Mr Birch espoused a
valuation based on turnover, but that is, or certainly appears to be, something
very different from the estimated maintainable profit which the arbitrator used
as the basis of his own decision. Indeed, the arbitrator himself expressed
himself to be doing something different from what had been contemplated by
either valuer.
In my view,
this would be justifiable only if what the arbitrator has done is squarely
within his own general expertise or if he has carried out an exercise which the
party, which now complains of his conduct, in effect asked him to carry out. As
to the arbitrator’s expertise, he is it seems a valuation surveyor and,
although he was undoubtedly appointed for his expertise, it was presumably for
his general expertise in valuation — not for any expertise in assessing
maintainable profits of a cinema business. In my view, that matter was a
specific matter relating to this property which could be taken into account
only in so far as there was evidence to support it and the parties had had an
opportunity to comment on such evidence.
As to the
question of whether the exercise which the arbitrator has carried out was one
which he was invited to carry out by Mr Birch, I have been treated to a close
analysis of Mr Birch’s submissions. Mr Birch in para 4.1 of his initial
submissions said:
In my
experience in valuing cinemas and theatres, the classical approach is to
firstly examine the accounts relating to the business established at the
particular property and, using one’s judgment, arrive at a view as to whether
or not the business is being conducted at an optimum level.
Pausing there,
Mr Birch refers to accounts generally and that paragraph standing by itself is,
I think, equivocal as to whether Mr Birch is talking about turnover or profits.
In para 4.2 he refers to the necessity to investigate in some detail overheads
and in this context he must, I think, be talking about profits. He then makes
observations in para 4.3 which do not matter for present purposes. In para 4.4
he refers to situations in which a valuer is denied access to both accounts and
turnover. He says:
In these
situations it may be necessary for the valuer to estimate the profitability of
the business and then arrive at his assessment of value.
In para 4.5 he
points out some of the difficulties in attempting to value cinemas and theatres
on the basis of a value per square foot or on a value-per-seat basis; and in
para 4.6 he says:
In my view
cinemas and theatres fall into the general category of leisure properties,
where the initial assessment of value was conducted by a reference to either
estimated or actual turnover and/or profits.
In para 4.7 he
goes on:
The
experience and judgment of the valuer is then required to produce a valuation
having regard to the level of turnover and/or profitability. In the ideal world
the approach would be to prepare a detailed profits test valuation where the
rental value is assessed as a proportion of the annual profit achieved having
made due allowance for proprietor’s remuneration. The disadvantage of this
method is that certain extraordinary items, either by way of turnover or
expenditure, could have a marked effect on profitability and a consequent
effect on valuation.
Pausing there,
I have to say that on analysis Mr Birch could, I think, have expressed himself
somewhat more clearly. He seems, if I may say so, to shift from pure turnover
to profits, and undoubtedly at the beginning of para 4.7 refers to the need for
the valuer to apply his experience and judgment to the figures. However, from
this point onward Mr Birch, I think, clearly comes down on the side of
turnover. Para 4.7 continues:
For this
reason a quasi-profits method is often used. This entails assessing the actual
or estimated turnover of the property and then calculating the rental value by
taking a proportion of turnover. In my experience this is the approach most
often used by valuers in determining rental valuations of cinemas and theatres.
Certainly, in so far as my experience of rating valuations is concerned, all
the cinema and theatre appeals with which I was involved during the course of
the 1973 valuation list were dealt with in this matter and the question to
which the valuer needed to address was the actual percentage of gross receipts
which were to be taken as representing rental value.
He then goes
on to refer to the fact that theatres were valued at a rather lower rate than
cinemas and that, in respect of the major city centres and London, cinemas were
valued for 1973 valuation list rating purposes at approximately 10% of gross
receipts and the smaller town cinemas were valued at approximately 6% of gross
receipts. He then in para 4.10 refers to the turnover figures produced by the
cinema carried on upon the property in question by the tenant.
The next stage
is to refer to his two comparables and, after doing this, he comes back in para
4.20 to the turnovers for the particular cinema in question. He produces a
letter from his clients giving the turnover figures for the years 1989 and 1990
showing that the turnover had dropped from some £214,000 in the first of these
years to some £204,000 in the second year. On the basis of that he expressed
the conclusion that the rental value of the property at the review date did not
exceed the then current rent of £12,700 pa. He went on to refer to certain
matters concerning the physical characteristics of the property and competition
and expressed his overall conclusion towards the end of his report in para 4.30
where he says:
In dealing
with the valuation approach based on the receipts basis, in my judgment it
would be appropriate to apply a 6% rate to the annual turnover generated at the
time of the review date. Taking an average of the turnover generated for the
two financial years involved produces a figure of £207,000 and, applying a 6%
rate, would then produce a rental value of some £12,500.
Then he refers
to the fact that that is less than the rent currently payable, but he thinks
that it is approximately correct and notes that it is equivalent to about £30
per seat, which was higher than the price per seat in one of his comparables,
and he said that that matched up with his experience.
Looking at Mr
Birch’s submissions as a whole, it seems to me that in the initial part of para
4 down to the end of para 4.9 he is dealing with valuation as a general matter
and is canvassing a number
middle of para 4.7 onwards he departs, it seems to me, from any question of
valuation by reference to profits and fixes himself firmly to valuation by
reference to turnover, a course to which he adheres throughout the rest of his
submissions. Although, as I have remarked, in para 4.7 he indicated that the
experience and judgment of the valuer would be required to produce a valuation
having regard to the level of turnover and/or profitability, it seems to me
that what he was speaking about was, so far as turnover is concerned, a case
where he had no actual turnover figures and, so far as profits were concerned,
a case in which the profits called for adjustment to meet particular
circumstances, but that these considerations did not, in his view, affect the
matter if his preferred view of turnover was adopted. It may well be that Mr
Birch rather expected that Mr Mason would attack his turnover figures as
requiring adjustment on the basis that perhaps the tenant could carry on a more
prosperous business on the property. In the event that did not happen.
It seems to me
that in these circumstances the arbitrator was not entitled to embark upon an
attempt to estimate maintainable profits for himself and that the tenant is
entitled to complain of his having done so and, on that basis, to ask the court
to remit the award, which is what I shall do. I think that the form of order
should simply be that I remit the interim reward for further consideration by
the arbitrator of the rental value expressed to be determined by him in the
light of further submissions by the parties and in the light, in so far as
light is cast thereon, of what I have said in this judgment.