England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		8th November 2005

1. MR JUSTICE LEWISON: This is an application for permission to appeal under the Arbitration Act 1996. The application is made under section 69(3) of that Act. Section 69(3) provides as follows:PRIVATE 

"Leave to appeal shall be given only if the court is satisfied:

(a) that the determination of the question will substantially affect the rights of one or more of the parties;

(b) that the question is one which the tribunal was asked to determine;

(c) that on the basis of the findings of fact in the award ...

(i) the decision of the tribunal on the question is obviously wrong; or

(ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt; and

(d) that despite the agreement of the parties to resolve the matter by arbitration it is just and proper in all the circumstances for the court to determine the question."

2. The application arises out of a rent review arbitration. The rent review was due under the terms of an underlease, dated 27th November 1973. The property comprised in the underlease was a security centre at First Avenue Millbrook Trading Estate, Southampton. The demised premises were defined by clause 1 of the underlease as including both the parcel of land comprised in the underlease and also the security centre erected on the piece or parcel of land. The term of the lease ran from 1st January 1973 and is due to expire on 21st March 2054. Clause 2(a) of the lease divided the term into a number of periods for the purposes of rental value. Despite a discrepancy in dates it is common ground that the periods run for five years each, and that the relevant review date for the purposes of the arbitration I am considering was 1st January 2003.
3. Clause 2(b) dealt with the rent payable in respect of period one. It was £12,200 per annum, payable by equal quarterly payments in advance. It may be, although the arbitrator made no findings about this, that that rent did not reflect the market rental value of the property, but was in some way related to the costs of building the property. Clause 2(c) provided that the rent payable in respect of each subsequent period should be the market rent as defined.
4. Clause 2(d) contains the critical definition of market rent, which reads:

"The market rent means the rent at which the demised premises, assuming the same to be a warehouse with all necessary consents for use as a warehouse, might at the commencement of the period in question reasonably be expected to be let in the open market by a willing landlord by a lease for a term equivalent to the then unexpired residue of the term hereby created with vacant possession, and subject to the same incidents as are applicable to this lease and upon the supposition if not a fact that the lessee has complied with the lessee's covenants and obligations hereunder, but without affecting the landlord's remedies in respect of them disregarding, if they apply, the matters set out in paragraphs (a), (b) and (c) of section 34(1) of the Landlord and Tenant Act 1954, but the market rent shall not be less than the rent payable in respect of the immediately preceding period."

5. Clause 2(e) dealt with the reference to arbitration. Clause 2 (f) dealt with the payment of an interim rent. Then clause 2(g) provided:

"In addition to the initial rent and to the market rent before defined, the lessee shall pay to the lessor a supplementary rent of £11,230 per annum during the first 15 years of the term hereby demised, such supplementary rent not to be subject to the reviews referred to in this clause."

6. The first 15 years of the term expired at the beginning of 1988, and consequently, by the time the matter came to be referred to arbitration in this case, the supplementary rent had long since ceased to be payable.
7. The arbitrator who was appointed to determine the rent was Mr Peter Cliff Roberts FRICS, MCI Arb. There were two relevant questions before him for present purposes. The first was whether the property to be valued consisted of the site alone, or the site plus the security centre initially erected upon it. The arbitrator held that, in view of the description of the demised premises, which included an express reference to the security centre erected on the piece or parcel of land, he was required to value both the site and the security centre. There is no appeal against that decision, and in my judgment the arbitrator was plainly correct.
8. The second question before the arbitrator against which the landlord seeks permission to appeal is whether the hypothetical lease should be assumed to contain an obligation to pay a supplementary rent of £11,230 per annum for the first 15 years of the hypothetical term. The arbitrator answered that question in the affirmative. He said:

"I agree, however, with Mr Brock that if the premises to be valued do conclude the building, then the provision within the actual lease for the supplemental rent must be included in the hypothetical lease, and I am grateful to Mr Brock for setting out the case law in support of this view. The hypothetical lease must therefore contain provision for the payment of the supplemental rent for the first 15 years of the term."

The arbitrator then arrived at his valuation. Having decided that the rental value of the land plus the buildings was £58,278, he deducted the supplementary rent of £11,230, leaving him with a total of £47,048.

9. The arbitrator made no express findings of fact which underpinned the reasons for the supplemental rent, but it is I think common ground that in some way the supplemental rent is tied to contributions which the landlord made towards the initial costs either of constructing or of fitting out the building.
10. The tenant says that whether the arbitrator was right or wrong his decision cannot substantially affect the rights of the parties. This submission is based on two grounds. First, it is said that the amounts actually in dispute are too small to be properly classified as substantial. Secondly, it is said that in any event if the appeal is allowed the matter should be remitted to the arbitrator and the arbitrator may then decide that some or all of the physical property comprised in the lease is to be disregarded as a tenant's improvement. Therefore, the permission to appeal should be refused on that ground.
11. So far as the quantum of the difference is concerned, the deduction made by the arbitrator amounts to more than 19 per cent of the rent. Over the next five years to the next review the aggregate deduction will be over £50,000 and if there is an issue estoppel between the parties the aggregate deduction over the remaining term of lease might well be more than £0.5m.
12. So far as remission is concerned I am not persuaded that this is a case which ought to be remitted to the arbitrator for reasons which I will come to later. I therefore consider that this is a question which will substantially affect the rights of the parties.
13. The provisions of section 69 envisage the application of two alternative tests. Either that the decision of the tribunal on the question is obviously wrong, or alternatively that the question is one of general public importance and the decision of the tribunal is at least open to serious doubt. Although Miss Jackson QC, who appears on behalf of the landlord, did submit that this is a case of general public importance I do not, I regret, agree. This is the question of the interpretation of a one-off lease. Although there are other such leases which are encountered from time to time, I do not think that this gets near to being a question of general public importance. So the test which I must apply is: was the arbitrator obviously wrong on the basis of the facts found in his award?
14. I have already quoted the arbitrator's conclusion and it is apparent from that, that in substance he adopted the reasoning of Mr Brock QC, who appears on behalf of the tenant, having been shown an opinion prepared by Mr Brock for the purposes of the arbitration. Mr Brock's reasoning, which was adopted by the arbitrator, appears in paragraphs 29 and 30 of his opinion, which read as follows:

"29. There is every reason as a matter of construction for the provisions in respect of the supplementary rent to be included in the hypothetical lease. Clause 2(d) provides for the hypothetical letting to be subject to the same incidents as are applicable to this lease. On the principles laid down in Law Land v Consumers Association [1982] EGLR 109, the hypothetical lease will contain all the provisions of the actual lease other than the parties, the term, the commencing rent and other necessary amendments. If, as appears to be accepted, the principal provisions for rent review in clause 2(a) to (f) will be contained in the hypothetical lease, why should the provision for the payment of supplementary rent in clause 2(g) not also be contained in the hypothetical lease? There is no necessity as there was in Law Land to remove the provision. The hypothetical lease will operate perfectly well with such a provision. It corresponds to the reality of the position at the commencement of the lease. There is no reason as a matters of language for it to be excised. Compare Norwich Union v BT [1995] Estate Gazette Summaries, case 148.

30. The landlord may seek to rely on such decisions as Lister Locks v TEI [1982] 2EGLR 124 where a term was implied to exclude the relevant provision, but in this case the context in which the building was constructed militates strongly against the implication of the term, which as is well known, will be only be implied where it is necessary to give business efficacy to the contract. In this case the tenant builds and partially paid for the building. In addition, the landlord required rental compensation for its contribution to the costs. The supplementary rent will only be payable during the first 15 years, or the hypothetical term, and not be subject to review. The initial rent was no doubt adjusted to reflect payment of the supplementary rent; however the supplementary rent was not payable only for the first five years of the term, but for the first 15 years of the term. Was it seriously intended that payment of the supplementary rent should be ignored for the purposes of the review as at 1st January 1978 and 1st January 1983? That seems extraordinary unlikely. If that is so, then the provision for the supplementary rent would presumably have had to be incorporated into the hypothetical lease for the purposes of those reviews. If so, what justification can there be for excising it during subsequent reviews. I can see a very powerful argument for saying that the existence of a supplementary rent should not be taken into account if the rent on review is to be a ground rent. That would introduce double counting in the tenant's favour. However, if the rent is to be a rack rent reflecting the value of the building, commercial common sense dictates that the construction of the lease should reflect reality as well as the language of the instrument and provide for payment of the supplemental rent for the first 15 years of the term at each review."

This, in substance, was the reasoning which the arbitrator adopted. There are, in my judgment, a number of flaws in this reasoning. First, the rent review clause speaks as at the rent review date. The market rent is to be the rent at which the demised premises are to be let at the beginning of the period. The residue of the term is to be the residue then unexpired. One would therefore expect the incidents of the hypothetical term to be those that are then applicable. The supplementary rent was not longer applicable because it had long since ceased to be paid.

15. The general principle applicable to the construction of clauses such as these is that in the absence of clear words to the contrary the terms of the rent review should be assessed on the basis of those terms which are still subsisting as between the parties. That is the effect of the decisions of the Court of Appeal on this topic. At the rent review date the supplemental rent was no longer a subsisting term as between the parties. It had been discharged by the performance.
16. Moreover, the effect to be given to actual terms of the lease if replicated in the hypothetical lease are those which the terms had in reality. To transpose obligation to pay supplemental rent from an obligation to pay during the first 15 years of the actual lease into an obligation to pay supplemental rent for the first 15 years of the hypothetical lease is to rewrite the parties bargain.
17. The premise in paragraph 30 of Mr Brock's opinion, namely that it was unlikely that the parties intended a supplemental rent to be ignored on the first two reviews, is in my judgment incorrect. It cannot have been the parties' intention that the supplementary rent would effectively disappear on the first rent review when it is expressly made payable for 15 years, and moreover is made payable in addition to the market rent. Yet, if Mr Brock's premise is correct that is precisely what would happen. If the supplemental rent were included as an obligation in the hypothetical lease, it is wholly self-cancelling while it remains payable as the arbitrator's decision itself shows. There is a consistent line of cases of which Guys & Dolls Ltd v Sade Brothers Catering Ltd [1984] 1EGLR 103 is the best example, which shows that a lease will not be interpreted so as to produce this absurd result.
18. Moreover, even if the premise is right there is in my judgment a non sequitur in paragraph 30 of the opinion. Assuming for argument's sake that there was a justification for including the obligation to pay a supplemental rent in the first and second reviews, by the time of the third review it had ceased to be payable, so there was a change of circumstance which was an extremely important change. Accepting, therefore, as Mr Brock said in paragraph 30 of his opinion, that the lease should reflect reality as well as a language of the instrument, the reality by the time of the rent review in question is that the supplemental rent was no longer payable.
19. Thus, the position in the present case is even worse than that considered in the previous cases. Once the supplemental rent ceases to be payable, it appears merely as a deduction without even the corresponding benefit to the landlord of actually receiving the supplemental rent. The effect of the construction abducted by the arbitrator is that the historic echo of a spent liability to pay a supplemental rent until 1988 persists throughout the whole of the 81 year term.
20. The statutory question for me to answer is whether the arbitrator was obviously wrong. When I was pre-reading the papers before coming into court I started with Miss Jackson's skeleton argument. She set out in paragraph 2 of her skeleton argument the relevant terms of the lease, and in paragraph 3 she posed the question of law, whether the arbitrator was required to deduct the supplemental rent from a yearly rental value so as to produce the market rent. As soon as I read the question my instinctive answer was, "of course not". I have not changed that answer. I have no hesitation in concluding that the arbitrator was obviously wrong.
21. Is it just and proper for the court to decide the question? Mr Brock argues that the landlord had the opportunity to comment on the opinion which was submitted to the arbitrator. He submits that the landlords were, in effect, the authors of their own misfortune and that having eschewed the opportunity to put in legal submissions of their own dealing with the points that he had raised, it is wrong for the court now to correct the arbitrator's error.
22. The point as I see it is that it is on the face of it unjust for the landlord to be bound by a decision that is obviously wrong, and, moreover, one that will continue to bind the landlord for the remainder of the lease. This is not, so far as I know, a case where the arbitrator was personally chosen by the parties, and I can in my judgment take into account the fact that the arbitrator was not himself legally qualified and despite having been invited to do so by the landlord did not take his own independent legal advice. If the question remains answered in the way in which the arbitrator answered it there is the spectre of issue estoppel persisting throughout the term of the lease. In my judgment, it is just and proper for the court to determine the question.
23. Mr Brock also argues that it is open to the arbitrator, if the question is remitted to him, to decide what is to be valued is site value alone, or alternatively that a substantial part of work should be disregarded as being tenant's improvements. The remedies available to the court on appeal are set out in section 69(7) of the Arbitration Act 1996 as follows:

"On an appeal under this section the court may by order:

(a) confirm the award;

(b) vary the award;

(c) remit the award to the tribunal in whole or in part for reconsideration in the light of the court's determination; or

(d) set aside the award in favour or in part.

The court shall not exercise its power to set aside an award, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration."

24. I do not consider that I am being invited to set aside the award. I am being invited to vary it by removing from the award the amount of the arbitrator's deduction. It is plain to me that the arbitrator was wrong to make that deduction. It was a discrete issue raised before him. He came to the wrong decision. Without the deduction his award will stand.
25. I will, therefore, grant permission to appeal and allow the appeal, and vary the arbitrator's award in the manner I have indicated.