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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Cordoba Holdings Ltd v Ballymore Properties Ltd [2011] EWHC 1636 (Ch) (30 June 2011)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/1636.html
Cite as: [2011] EWHC 1636 (Ch)
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| Cordoba Holdings Ltd |
Claimant |
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| - and - |
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| Ballymore Properties Ltd |
Defendant |
____________________
Mr John Male QC (instructed by Wragge & Co) for the Defendant
Hearing dates: 8 - 9 June 2011
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Crown Copyright ©
- By three leases dated 2nd February 2000, containing in all material respects the same terms, floors 1 to 9 of the Paragon Building, Greenwich View Place, London, E14 were let by Ballymore Ltd to Cordoba Holdings Ltd for a term of 25 years at an initial aggregate rent of £1,770,100 but subject to upward only quinquennial rent reviews. At the first review date, 8th July 2003, the initial rents were increased to the aggregate amount of £1,803,300. The issues with which I am concerned relate to the rent review as at the second review date of 8th July 2008. As the parties to the leases were unable to agree, on 12th May 2009 Mr Hugh Kemsley OBE, MA, FRICS was duly appointed as arbitrator under the rent review provisions contained in Schedule 2 to the Leases. His task, as specified in paragraph 2.3 of that schedule, was to determine:
- On 1st April 2010 the Arbitrator made his awards. He considered that the aggregate rental value he was required to determine was £2,848,000. This was on the footing that the existing use of the demised premises as a data centre, as opposed to an ordinary office building, was also a use available to the hypothetical open market tenant. Cordoba contends that such a conclusion reflects an error of law on the part of the Arbitrator. They contend that he failed to disregard the works Cordoba had carried out otherwise than in the demised premises to enhance the power supply to the demised premises. Accordingly he failed to recognise that without those improvements the actual use of the demised premises as a data centre could not be continued. Consequently, he necessarily accepted the submission of Ballymore that paragraph 1.4.3 requiring tenant's improvements to be disregarded did not apply to works or improvements carried out otherwise that in the demised premises. On 27th April 2010 Cordoba issued a claim form seeking permission to appeal under s.69 Arbitration Act 1996 in respect of that question. That application, as a paper application, was put before Mann J. He concluded on 6th October 2010 that the awards contained no express identification or determination of the relevant point of law nor any clearly implicit determination of it. He directed that the application before him should be renewed, if at all, with an application to be made by Cordoba for an extension of time within which to challenge the awards under s.68 Arbitration Act 1996 on the ground that the failure of the Arbitrator to deal with that issue was a serious irregularity within s.68(2)(d).
- On 26th August 2010 Cordoba issued the further claim form seeking relief under s.68 Arbitration Act 1996 and an extension of time within which to do so under s.80(5) thereof as suggested by the order of Mann J. Both claims are now before me for decision in the light of voluminous witness statements made by the respective parties. For completeness I should add that on 4th October 2010 Mann J rejected the submission made to him by Ballymore that he had had no jurisdiction to make the order he made on 6th August 2010. On 8th April 2011 Ballymore issued a further claim form to set such order aside as made without jurisdiction. That claim is also before me but it was agreed that its consideration should be deferred until after I had given judgment on the other two. Accordingly the issues now before me are:
- As Park J noted in Checkpoint Ltd v Strathclyde Pension Fund [2002] 2 EGLR 97 para 17 this act was designed to restrict the opportunity for the court to intervene in disputes which the parties had committed to arbitration. Such opportunities are limited to those for which ss.67 to 69 provide. S.67 is not in point. S.68 enables challenges to an arbitrator's award in cases of serious irregularity. S.69 entitles a party, but only with the leave of the court, to appeal on a question of law. Each hedges the right it confers with a number of restrictions.
- S.68, so far as material, provides:
- An application under s.68 must be brought within 28 days of the award, s.70(3), and although time may be extended under s.80(5) the exercise of the discretion conferred by that subsection is controlled by the principles established in various authorities. The issues which may arise in this case are whether (1) the issue which the arbitrator is alleged not to have dealt with was "put to him", (2) such irregularity has caused or is likely to cause substantial injustice to Cordoba, (3) an extension of time should be granted.
- So far as material s.69 provides:
- The issues which may arise in this case are whether (1) the question of law relied on "arises out of the award", (2) on the basis of the findings of fact in the award the decision of the arbitrator on the question of law is either (a) obviously wrong or, (b) being a question of general public importance, is at least open to serious doubt, (3) it is in all the circumstances just and proper for the court to determine the question. It appeared from the skeleton arguments of counsel for the parties that the provisions of ss.57(3) and 70(2) and(4) might also have been relevant. In the event no one sought to rely on any of them. Accordingly, I do not consider them further.
- As I have already indicated, the arbitrator was appointed on 12th May 2009. This was on the application of Ballymore. Accordingly references in the documents leading to the award and the award itself to the applicant or respondent are to Ballymore and Cordoba respectively; by contrast in these proceedings Cordoba is the claimant and Ballymore the defendant. On 23rd July 2009 the arbitrator issued formal directions to the parties. They included the consolidation of the three cases and a direction that they proceed by way of written expert's reports and replies only, but subject to the right of the arbitrator or either party at any stage to request an oral hearing. The directions also included the following:
- On 16th November 2009 the agreed statement of facts was provided to the arbitrator as directed. Paragraph 13 headed Tenant's Works states:
- The experts' reports were delivered to the arbitrator on 18th December 2009. The experts were Mr S.T.Kirby of DTZ for Ballymore and Mr R.E.Lown of GVA Grimley for Cordoba. Neither was prepared in response to the other. There are a number of paragraphs of the report of Mr Kirby to which I should refer. In paragraph 3 he described the property. He included the following passages:
- In paragraph 5 Mr Kirby considered in some detail the requirements for a data centre. In that connection, in paragraph 5.6 he said:
- The report of Mr Lown for Cordoba contained his description of the property in chapter 4. In paragraph 4.4 he noted that Cordoba had carried out substantial works to the property which could be divided into three broad categories, namely:
- In paragraphs 4.10 and 4.11 Mr Lown added:
- In paragraph 10 of his report Mr Lown returned to the subject of improvements. He described again in paragraph 10.10.1 the improvements referred to in paragraph 4.10. In paragraph 10.10.2 he referred to electrical works undertaken within the demised premises. In paragraph 10.10.3 he described that cost of all those works to be of the order of £250 per sq ft at 2008 prices. In paragraphs 10.11 he described certain fit out works to the demised premises to enable it to be used as a data centre. He made no reference to the works involved in enhancing the power supply and gave no detail as to what was involved in such enhancement, who carried it out, at what cost and when.
- On 15th January 2010 the parties' experts delivered to the arbitrator their counter submissions or representations to the other expert's original report. Thus Mr Kirby's Counter-submissions were in response to the original report submitted by Mr Lown. In relation to paragraphs 4.4.1 to 4.4.3 quoted in paragraph 13 above, so far as material, Mr Kirby said:
- In relation to the matters covered by Mr Lown in paragraph 10.10 and 10.11 Mr Kirby merely noted them. In paragraph 3 of his counter-submissions Mr Kirby observed:
- The counter-representation of Mr Lown starts with a summary of his contentions in six numbered paragraphs. Paragraphs 1, 2 and 6 are as follows:
- Following the delivery of the counter-submissions there was correspondence between the parties and the arbitrator. In particular on 28th January 2010 the arbitrator wrote to both parties suggesting that they might accompany him on his inspection of the demised premises in the hope that outstanding matters of fact might be then resolved. All Cordoba managed to do was produce some electricity bills showing the available capacity to be 7 MW and an email from EDF Energy indicating the number of substations from which the power to the building was supplied. Cordoba did not through Mr Lown or otherwise ever produce any documents dealing with the enhancement of the power supply to the building by works carried out externally, nor did it, as required by the directions given on 23rd July 2009 (see paragraph 9.2 above), ever provide any schedule of improvements relating to such enhancement indicating that they were to be disregarded.
- The arbitrator's three awards were made on 1st April 2010. For present purposes they are in the same form. It is sufficient to refer to that relating to the lease of floors 1 to 3. In paragraph 7.3 the arbitrator noted that an increase in rental value attributable to any improvement to the premises carried out by the tenant was to be disregarded. In paragraph 9.4.1 in relation to Tenant's improvements he noted:
- In paragraph 10 he dealt under the general heading of "Issues Which Are Not Agreed Between the Parties" with three particular matters, namely the use to be adopted for the purposes of the valuation, the supply of power to the building and the merits of the location. In relation to the first the arbitrator concluded that it was correct to look at value on the basis of use both as a data centre and an office building and then adopt the higher for the purpose of his valuation. The third particular matter is not relevant, but the second is. The arbitrator dealt with the power supply to the building in paragraph 10.2. It too falls into a number of parts.
- In paragraph 10.2.1 the arbitrator noted that there was clearly a lack of agreement on the power supply to the building. In paragraph 10.2.2 he summarised the evidence of Mr Kirby and in paragraphs 10.2.3 and 10.2.4 that of Mr Lown as to whether the power supply was 9 or 7 MW and the number of substations. He then continued in paragraphs 102.5 and 10.2.6:
- In paragraphs 10.2.8 the arbitrator referred to what he described as an additional point made by Mr Lown for Cordoba namely that the power supply to the particular floors was unlikely to be more than a minimum allocation of what was left after use by the other floors "and certainly not sufficient for a hypothetical tenant to consider a data centre operation". In that context he concluded:
- I have quoted at length from the four reports from the experts and from the arbitrator's award as an essential preliminary to the fundamental issue which divides the parties, namely, what, so far as relevant, did the arbitrator decide? For Cordoba counsel submits that it is clear from paragraph 10.2.5 that the Arbitrator accepted that the demised premises had been improved by external works enhancing the power supply to the demised premises. She also submits that it is plain from paragraph 10.2.9 that the arbitrator had accepted that those external works had been carried out by or on behalf of the tenant. Accordingly, so she submits, the effect of those improvements should be disregarded in accordance with both the terms of paragraph 1.4.3 of Schedule 2 to the Leases and the terms of the consent award made on 17th November 2009. But, and this is the error of law relied on, it is, she submits, necessarily implicit in paragraph 10.2.6 that the arbitrator had accepted the submission of Mr Kirby to the effect that that disregard applied only to improvements to the demised premises carried out on the demised premises; otherwise the actual power supply could not properly be treated as the hypothetical power supply available to the hypothetical open market tenant.
- This is disputed by counsel for Ballymore. He points out that it was incumbent on Cordoba to establish any disregard on which he relied, see Euripides v Gascoyne Holdings Ltd (1996) 72 P&CR 301. He submits that Mr Lown failed to do so in his first statement, as pointed out by Mr Kirby in paragraphs 4.4.2 and 4.11 and paragraph 3 of his counterstatement quoted in paragraphs 16 and 17 above. In addition Mr Lown was unable to provide any of the necessary evidence as indicated in paragraphs 3.12 and 3.17 of his second statement either then or thereafter. By contrast the two issues of fact with which the arbitrator was faced were whether the electricity supplied was 9 or 7 MW and from one or two substations. In addition there was the plurality of premises/users point referred to in paragraph 1 of the opening summary and in paragraph 8.6 of Mr Lown's counterstatement. Counsel for Ballymore submits that in these circumstances paragraph 10.2 of the awards cannot be read in the sense for which counsel for Cordoba contends. Thus, he submits, in paragraphs 10.2.1-10.2.5 the arbitrator was expressing his conclusion on the two issues previously identified and in 10.2.6 summarising and recording the basis on which he was proceeding, as explained in paragraph 10.1. He contends that in paragraphs 10.2.8-10.2.10 the arbitrator was dealing with the plurality of premises/users point. He explains the reference to the benefits of the significant expenditure by the tenant in paragraph 10.2.9 as being the improvements made to the internal structures the arbitrator saw on his visit previously referred to in clause 9.4.1 of the award and referred to in paragraph 4.10 of Mr Lown's original statement.
- I prefer the submissions of counsel for Ballymore. First, it is incumbent on the tenant to establish that the improvements he contends should be disregarded were carried out by him. Not only was that decided by the Court of Appeal in Euripides v Gascoyne Holdings Ltd (1996) 72 P&CR 301 but it is also required by the directions given by the arbitrator on 23rd July 2009 (see paragraph 9.2 above) and the terms of the disregard itself. It is not possible to disregard any increase in rental attributable to an improvement to the premises carried out by the tenant if there is no evidence as to the nature of the improvement, who carried it out, when and at what cost.
- Second, paragraph 4.4.2 of Mr Lown's first statement failed to meet those requirements. Indeed the terms of paragraphs 4.10 and 4.11 of Mr Lown's first statement appear to accept that the 'upgraded power supply' not forming part of the works specified in paragraph 4.10 were not subject to any disregard. Similarly, in paragraphs 10.10 and 10.11 of his first statement Mr Lown described in some detail the internal improvements and their cost and the fit out works and their costs. Indeed the terms of paragraph 10.11.4 seem to suggest that there had been no or no sufficient enhancement of the power supply anyway.
- Third, the deficiencies in Mr Lown's first statement were pointed out with commendable clarity in Mr Kirby's counterstatement, in particular paragraphs 4.4.2, 4.11 and 3. Mr Lown would not have seen those paragraphs when he prepared his counterstatement, but he had ample opportunity to apply to the arbitrator for permission to adduce further evidence. There is no indication that Mr Lown ever considered doing so.
- Fourth, the context in which the arbitrator came to write his awards was that there was the agreement as to tenant's improvements to be disregarded as expressed in paragraph 9.4.1 and the two issues of fact summarised in paragraphs 10.2.1-10.2.5. In addition there was the counterstatement of Mr Kirby indicating clearly that, in the absence of further evidence from Cordoba, there were no external enhancements to the power supply to be considered for the application of the disregard set out in paragraph 1.4.3 of Schedule 2 to the leases.
- Fifth, even without that context I do not consider that the terms of the award can be read as counsel for Cordoba invites me to do. Having recorded the agreement in relation to tenant's improvements in paragraph 9.4.1, the arbitrator went to some lengths in paragraph 10.1 to explain why he considered that it was appropriate to value the building both as a data centre and as an ordinary office building and then take the higher value. Some reference is made to tenant's works in 10.1.4 and 10.1.5 but, in context, they clearly refer to internal works. The arbitrator could not have dealt with the issue of user in the way in which he did if there had been an issue in relation to external works to enhance the power supply.
- Similarly in paragraph 10.2, the first five subparagraphs evidently refer and refer only to the disagreement between Mr Kirby and Mr Lown as to whether the supply was 9 or 7 MW and how many substations were involved. Subparagraphs 8 to 10 plainly deal with the plurality of premises/users point. The terms of subparagraph 6 "I have accepted…" can only be read as referring back to paragraph 10.1 and the conclusion there reached. The passing reference in 10.2.9 cannot in my judgment be read as accepting the existence of wholly unspecified external works.
- For all these reasons I reject the submissions of counsel for Cordoba. In my judgment the arbitrator made no finding as to the existence of any external works of enhancement to the power supply carried out by Cordoba capable of affecting the rental value of the building. It follows that the point of law raised by Mr Kirby as to the proper construction and application of paragraph 1.4.3 of Schedule 2 to the Leases never arose as a matter of fact.
- It follows from my conclusion as to the decision of the arbitrator that this application must be dismissed. First, the arbitrator's decision on the point of law which Cordoba seeks to appeal, even if made, did not arise out of the award as required by s.69(1). Second, the decision on the point of law was not made on the basis of any findings of fact in the award as to any relevant improvements as required by s.69(3)(c). Third and fourth, nor could its determination substantially affect the rights of any party, as required by s.69(3)(a), or be just and proper for the court to determine as required by s.69(3)(d).
- For these reasons I dismiss the claim issued by Cordoba on 27th April 2010. It would appear to follow, though I have heard no argument on the matter, that the order of Mann J is now spent in the sense that it can have no continuing effect. Subject to any contrary submissions I will therefore make no order on the application notice issued by Ballymore on 8th April 2011.
- In my view this application must be dismissed for similar reasons. The relevant failure on the part of the arbitrator must be to 'fail to deal with all the issues which were put to [him]'. Whether the relevant issue is regarded as the question of fact as to the existence of external works enhancing the power supply to be disregarded and/or the conclusion of a question of law that paragraph 1.4.3 of the Second Schedule does not apply to such works it was never put to the Tribunal. The question of fact was never supported by any evidence sufficient to require a conclusion and without a relevant factual finding the point of law was of hypothetical interest only. Even if there was a technical failure within subsection s.68(2)(d) in the circumstances it could not cause or have caused substantial injustice to any party.
- In these circumstances the question whether leave should be granted as a matter of discretion does not arise. As no findings of fact are required from me I need not deal with the issues on delay and prejudice advanced before me by counsel.
- For all these reasons I dismiss the claims issued by Cordoba on 27th April and 26th August 2010 and I make no order on the application made by Ballymore on 8th April 2011. I will hear argument in relation to the application if either counsel suggests that I should make some order and on other issues arising from my judgment. I invite counsel to agree a minute of order to give effect to my conclusions.
The Chancellor:
"the rent at which the Premises might reasonably be expected to be let on the open market at [8th July 2008] making the Assumptions but disregarding the Disregarded Matters."
The Disregarded Matters, as defined in paragraph 1.4 of that schedule, included (1.4.3):
"Any increase in rental value of the Premises attributable to the existence at the relevant Review Date of any improvement to the Premises....carried out...1.4.3.1 by the Tenant its sub-tenants or their predecessors in title or by any lawful occupiers during the Term..."
(1) whether I should give permission to appeal under s.69 in accordance with the provisions of s.69(3); and/or
(2) whether I should extend time under s.80(5) for an application by Cordoba to challenge the awards under s.68.
I will deal with those issues in that order in due course. First it is necessary to set out the relevant provisions of the Arbitration Act 1996, consider in considerable detail the course of the arbitration, the submissions made to the arbitrator and his awards and reach a conclusion as to what were his relevant conclusions.
"68 Challenging the award: serious irregularity
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award.
A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant–
[(a) - (c)]
(d) failure by the tribunal to deal with all the issues that were put to it;
[(e) - (i)]
(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may–
(a) remit the award to the tribunal, in whole or in part, for reconsideration,
(b) set the award aside in whole or in part, or
(c) declare the award to be of no effect, in whole or in part.
The court shall not exercise its power to set aside or to declare an award to be of no effect, 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.
(4) The leave of the court is required for any appeal from a decision of the court under this section."
"Appeal on point of law
(1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings.
An agreement to dispense with reasons for the tribunal´s award shall be considered an agreement to exclude the court´s jurisdiction under this section.
(2) An appeal shall not be brought under this section except–
(a) with the agreement of all the other parties to the proceedings, or
(b) with the leave of the court.
The right to appeal is also subject to the restrictions in section 70(2) and (3).
(3) 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.
(4) An application for leave to appeal under this section shall identify the question of law to be determined and state the grounds on which it is alleged that leave to appeal should be granted.
(5)....
(6)....
(7) 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 whole 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.
(8)....."
(1) a requirement that if, contrary to the arbitrator's then understanding, any point of law arose for decision then the party raising the issue should notify the arbitrator in writing together with the agreement of both parties as to how they wished the arbitrator to deal with it (para 2.4);
(2) the parties were to produce an agreed statement of facts to include (a) a schedule of tenant's improvements with a clear note as to whether such improvements are to be regarded or disregarded for review purposes (para 3.1.8) and (b) any other relevant facts which can be agreed (para 3.1.13).
"13.1 For the purposes of the rent reviews, it has been agreed that all works and improvements undertaken to the property by either the tenant or the tenant's predecessors in title are to be disregarded
13.2 For the avoidance of doubt, it is agreed that the works specified within Annexure 1 of the Lease (Appendix 4) are to be regarded as landlord's works and valued in accordance with the terms of the lease."
"3.11....The power supply allocated to the property is 9.0 MW, far in excess of the amount of power that an office building would normally require.
3.12 The power supply to the subject property is delivered by way of two separate power feed routes, each power feed originating from a separate substation....It is rare for a building to have a dual feed and unusual for each feed to be from a separate substation."
Mr Kirby noted in paragraph 3.16 that the tenants had undertaken undocumented works to the inside of the property. In paragraph 3.17 he stated that:
"The property provides a fully fitted data centre environment."
He then gave a synopsis of what that included. In paragraph 3.20 he noted that the category A works listed in annexure 1 of the Lease, to be regarded as Landlord's works by the terms of paragraph 13.2 of the agreed statement of facts, constituted a specification superior to that of a standard office but providing the framework from which a fully fitted data centre might be created.
"I am aware that there is limited available power capacity in the Docklands area. In other areas of London where there is no current latent power capacity in the system, occupiers or landlords have had to invest heavily in order to deliver the additional power required. On application, power providers do not state that there is no power in a particular area, rather they simply state:-
(a) the cost associated to ring fence/reserve the amount of power requested.
(b) the cost that the power provider will incur in upgrading the current grid system in order to provide the amount of power requested (to include – new power cables, new/upgrades to transformers, new substations etc). The cost of these adaptations can be considerable and is passed on by the power companies directly to the applicant."
In paragraph 5.10 he added that the property had the appropriate power from the grid, power feeds, substation connections and areas to house back-up generators enabling it to be operated as a data centre. In paragraph 9.5 Mr Kirby concluded:
"The property is currently used as a data centre and, therefore, it is reasonable to assume that there would be a hypothetical tenant in the market who would also adopt the same use at the property. Similarly there may be a hypothetical willing tenant for an office use. However, we are to assume a willing landlord and it is self evident that a willing landlord would want to achieve the highest rent possible. I have proved that data centre operators pay higher rents. Therefore, the knowledgeable and well advised willing landlord would let the building for this use (the current use) as it would provide a higher return."
"4.4.1 Upgrade and enhancements to the air conditioning system to allow for the excessive heat generated by equipment installed in connection with their business operations as a hosting centre.
4.4.2 Upgrades to the power supply. The original power supply to the building was insufficient to cope with the power requirements necessary for my client's business as a hosting centre. Accordingly, my clients and their predecessors in title have carried out various works since the start of the lease to upgrade the power supply to the building.
4.4.3 The building as originally demised had very limited capacity for uninterrupted power supply. My clients have significantly upgraded the UPS system to the building and also installed 5 back-up generators to ensure that the services which my clients can offer to their customers meets the minimum requirement expected of a hosting centre."
"4.10 The various works undertaken by the tenants which are to be ignored for the purposes of the reviews are identified in the document prepared by Spire Consulting. This document is attached at Appendix IV to this report. The works installed by the tenant can be summarised under the following headings:
a) Main HV transformers and distribution cables
b) LV electrical switch gear panels
c) Emergency generators and oil tanks
d) Electrical distribution
e) Lighting and power to offices
f) UPS system
g) Standby batteries
h) Air conditioning units
i) Chillers
4.11 The tenant installed at their own cost an upgraded power supply to the building."
Seemingly Mr Lown did not consider that the costs referred to in paragraph 4.11 were to be disregarded for rent review purposes. Had he done so he would not have referred to them separately from those described in paragraph 4.10. He gave no detail as to what was involved in such enhancement, who carried it out, at what cost and when.
"4.4.2 I have been unable to ascertain by whom and when the power supply was installed to the property. Therefore, I am unable to confirm the validity of this comment. However, this comment is irrelevant when considering value, as improvements to power fall outside the red line demise stated on the plans within the leases."
In respect of paragraphs 4.10 and 4.11 he added:
"4.10 Comments noted.
4.11 There is no documentation to state that the tenant, or their predecessors in title, acquired any upgraded power to the property. In any event, I see this as an irrelevant matter given that the power supply does not fall within the demises of the lease and therefore cannot be disregarded under the terms of the lease.
As discussed in my Submission (Section 5.4-5.10), power is one of the key differentials between a data centre and an office. The subject property has a current power supply from the national grid of ten times that which would normally be expected to be provided to an office building.
There are two fundamental issues to consider in respect of power. The first is whether the power grid in that location has the appropriate availability of power and the second is whether the power grid system can physically deliver that power.
Assuming that power is available, if a property wishes to improve its power supply, then the power supplier (i.e. EDF or Scottish & Southern) will normally quote a price for that power to be delivered to the property. This price will reflect –
i) The cost associated in reserving the amount of power requested.
ii) The cost associated with undertaking works to the electrical infrastructure (i.e. new/improvements to substations, transformers, switch gear, power cables etc) in order to provide that property with that power.
This can be at considerable cost to the applicant (landlord/tenant alike) and will fundamentally improve the property.
The vast majority of these improvements will be situated off site, of direct benefit to the power company, and certainly outside the demise of the lease (i.e. as they take the form of substation construction, pylon construction, laying of power cables within streets etc). Therefore, these items cannot be considered as a tenant's improvement under the terms of the lease.
The power supplied to the property should be taken into full consideration for the purposes of this review."
"Statement of Case
Mr Lown does not appear to appreciate the value of the power provision supplied to the property. The power element, as discussed, does not fall within the demise of the lease (as the red line on the demise plans runs along the edge of the `net area') and therefore cannot be disregarded as a tenants' improvement (should the tenant have acquired it). As discussed at length within my Submission, power is the key driving attribute behind the operation of a data centre. The property has an appropriate power supply to be used as a data centre, as seen in practice with the facility currently operating as a Tier III data centre. The property has a power supply 10 times superior to that of a standard office building.
The structure of the leases (to include the user clause, permitted use classes, amenable alienation provisions for a data centre operation and inclusion of template sublease documents) points to the fact that it is appropriate to value the property on a data centre basis. In addition, the inclusion of the `Category A Works' to be assumed also point to a specification superior to that of a standard office building and more akin to a shell & core data centre, ready for further fit-out to a Tier III data centre facility."
In making his comments on paragraphs 4.4.2 and 4.11 Mr Kirby did not comply with the directions of the arbitrator in relation to points of law I have quoted in paragraph 9(1) above. Accordingly this point was not flagged up as a potential point of law and the arbitrator was given no indication as to whether or how the parties wished him to deal with it if it arose.
"1. You have been appointed in respect of three separate rent reviews which the parties have agreed should be consolidated. However, it is important to remember that for each individual lease, the hypothetical tenant at rent review is making his rental bid on the relevant demise on the basis that the other two leases which are also subject to rent review are in the occupation of Telstra as a tenant in the building. I believe that Mr Kirby in his representations has mistakenly approached the rent reviews as they were a review on a single demise.
2. The leases quite clearly state the assumed specification for the purposes of rent review. The rent which we are trying to establish is the rent for the hypothetical demise and not the actual building which has been fitted out by my clients in accordance with their business as a hosting centre. All the tenants works are to be disregarded.
[3 - 5]
6. Mr Kirby has incorrectly interpreted the position regarding power to the building. The existing power of 7 MW is a contractual position between Telstra and Southern Electricity. The original provision to the building was much less and must be shared between the hypothetical tenant and two other lessees."
These submissions were developed in subsequent paragraphs of his counter-representation, in particular paragraphs 3.12, 3.16, 3.17 and 8.6. It is sufficient to quote the following passages:
"3.12....At the time of writing, we have been unable to retrieve original documentation relating to the electrical supply to the building and enhancements made to this since the lease was originally granted. However, my client has advised that their predecessors, PSI Net and Cordoba Holdings did upgrade the electrical supply into the building after the lease was originally entered into. I believe, that this is supported by the fact that the rent review specification assumes back up capacity of only 1,000 KVA. Logically, if the building had a greater capacity when originally let the back up facility would have matched this. It would have been a relatively simple matter to change the specification to reflect the actual capacity at the time of the original letting.
"3.17...At the time of entering into the lease, my clients also enhanced the power supply to the building by way of an agreement with Southern Electricity. I am awaiting documentation to support this from my clients. However, I would refer you to the Spire Consulting Document which makes reference to a number of items which would only have been provided by the tenant in connection with an upgrade of the power supply to the building. Therefore, for the purposes of the rent review, we must assume that there is a power supply of less than 7 MW to the property."
"8.6 The power available to this property is in a large part subject to the result of my client's works and improvements which are to be disregarded for the purposes of these reviews. It should also be noted that for each individual rent review, we must assume that Telstra are in occupation of the remaining 2 demised areas. As such, the power availability is likely to be extremely limited and insufficient for a data centre. The power requirements available would be sufficient for a normal commercial office user."
"9.4.1 The parties are agreed that a significant amount of tenant's works have been undertaken since the grant of the lease and in particular those works carried out in the period by to February 2007 were outlined in a report prepared by Spire Consulting Ltd. The parties are agreed that these tenants' works, which were not documented by way of a formal licence, are to be disregarded for the purposes of this review."
"10.2.5 On my inspection of the subject demise I was accompanied by Mr Kirby and Mr Lown in the presence of Mr Kevin Sell, Head of Technical Facilities at the property. During this inspection we were able, with the assistance of Mr Sell to establish the following:-
a. The power supply which the tenant contracts to take from Southern Electricity is 7 MVA. However, it would be possible for this supply to be increased to 9 MVA, but such increase would involve a further significant upgrade in the electrical distribution system within the building.
b. The power is sourced from the prime substation at West Ferry from which there are two lines leading to the basement of The Paragon Building, with one line leading to three breakers and the second line leading to one breaker.
10.2.6 I have accepted this to be the position for the purposes of assessing any rental value of the subject premises for data centre use."
"10.2.9 On my inspection, I was satisfied from the statements made by Mr Sell that the whole building was operating satisfactorily as a data centre with the benefits of the significant expenditure undertaken by the tenant but based on the overall contracted supply to the building of 7 MVA.
10.2.10 Whilst I accept Mr Lown's contention that it is correct to assume for the purposes of this review that the actual tenant is in occupation of the remainder of the building and using it as a data centre, I do not think one can draw from this any conclusion that the power consumption in the remainder of the building would be any higher than it is at present. I therefore, believe it is correct to assume that there would be sufficient power for the subject demise to be used as a data centre."